Eloxx Pharmaceuticals, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed under the caption “Risk Factors” in this Quarterly Report on Form 10-Q. These and other factors could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Reverse Merger On December 19, 2017, Sevion Therapeutics, Inc. (“Sevion”) acquired Eloxx Pharmaceuticals, Limited (“Eloxx Limited”) pursuant to a merger between the companies (the “Transaction” or “Reverse Merger”). Upon consummation of the Transaction (the “Closing”), Sevion adopted the business plan of Eloxx Limited and discontinued the pursuit of Sevion’s business plan. In connection with the Transaction, Sevion acquired all of the outstanding capital stock of Eloxx Limited in exchange for the issuance of an aggregate 20,316,656 shares of Sevion’s common stock, par value $0.01 per share (the “Common Stock”), after giving effect to a 1-for-20 reverse split effected immediately prior to the Transaction. As a result of the Transaction, Eloxx Limited became a wholly-owned subsidiary of Sevion. While Sevion was the legal acquirer in the transaction, Eloxx Limited was deemed the accounting acquirer. Immediately after giving effect to the Transaction, on December 19, 2017, Sevion changed its name to Eloxx Pharmaceuticals, Inc. (collectively “we”, “our”, “us”, “Eloxx” or the “Company”). The unaudited consolidated financial statements of the Company, included elsewhere in this Quarterly Report on Form 10-Q, reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization at the equity of the accounting acquirer. The annual consolidated financial statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of Eloxx Limited since inception. Company Overview We are a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates (designed to be eukaryotic ribosomal selective glycosides) that are formulated to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt protein synthesis from messenger RNA. As a consequence, patients with premature stop codon diseases have reduced levels of, or no, critical functional proteins from the mutation bearing allele accounting for some of the most severe phenotypes in these genetic diseases. These premature stop codons have been identified in over 1,800 rare and ultra-rare diseases. Read-through therapeutic development is focused on extending mRNA (messenger RNA) half-life and increasing functional protein synthesis by enabling the cytoplasmic ribosome to read-through premature stop codons to produce full-length proteins. Eloxx’s lead investigational drug product candidate, ELX-02, is a small molecule designed to restore production of full-length functional proteins. ELX-02 is in the early stages of clinical development focusing on cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. Eloxx’s preclinical candidate pool consists of a library of novel drug candidates designed to be eukaryotic ribosomal selective glycosides identified based on read-through potential. Eloxx recently announced a new program focused on rare ocular genetic disorders. Eloxx is headquartered in Waltham, MA, with R&D operations in Rehovot, Israel. Our research and development strategy is to target rare or ultra-rare diseases where a high unmet medical need, nonsense mutation bearing, patient population has been identified, there are established preclinical read-through or personalized medicine models that are predictive of clinical activity, and a definable path for Orphan Drug development, regulatory approval, patient access and commercialization. We believe patient advocacy to be an important element of patient focused drug development and seek opportunities to collaborate with patient advocacy groups throughout the discovery and development process. Our current clinical focus for our lead investigational drug product candidate, ELX-02, is on cystic fibrosis and cystinosis. We have initiated a new program focused on rare inherited retinal disease and are conducting IND enabling studies for several compounds from our library. We will identify an additional molecule later this year to advance into clinical development. Eloxx has entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to 16 support our inherited retinal degenerative disease registry and educational programs. FFB will provide ELX-02 with ongoing R&D consultation and support . We believe this partnership has the potential to accelerate Eloxx’s development programs and support patients with ocular disease and a high unmet medical need. We intend to be the global leader in the application of the science of translational read-through and the associated pathway of nonsense mediated messenger ribonucleic acid (“mRNA”) decay. We believe that expanding our expertise across these basic science areas of mRNA regulation, ribosomal function, and protein translation forms a solid foundation to support our discovery and development activities. Our ERSG compounds modulate the activity of the ribosome, a complex of RNAs and proteins, and therefore, a ribonucleoprotein, responsible for protein production, a process also known as translation. These novel small molecule compounds are designed to allow the ribosome to read-through a nonsense mutation in mRNA (which is transcribed from the DNA sequence), to restore the translation process to produce full length, functional proteins and increase the amount of mRNA that would otherwise be degraded as part of a cellular process called nonsense mediated mRNA decay. As our ERSG compounds target the general mechanism for protein production in the cell, we believe they have the potential to treat hundreds of genetic diseases where nonsense mutations have impaired gene function. Our subcutaneously injected small molecules have the potential to be self-administered and to be active at most tissue locations across the body. We believe that our library of related novel small molecules holds the potential to be disease-modifying therapies that may change the course of hundreds of genetic diseases and improve the lives of patients. Our early preclinical data in in vitro and in vivo models of nonsense mutations suggests that drug product candidates from our read-through compound library may have potential beneficial effects for the following diseases: cystic fibrosis, cystinosis, mucopolysaccharidosis type 1, Duchenne muscular dystrophy, Rett syndrome and a variety of rare ocular genetic diseases. We have demonstrated the potential for beneficial effects in multiple organs such as the brain, kidney, muscles, eye and others. Currently our lead program, ELX-02, is focused on development for cystic fibrosis and cystinosis patients with diagnosed nonsense mutations. Our pre-clinical trial application (“CTA”) has been approved by the Federal Agency for Medicines and Health Products (the "FAMHP") in Brussels and our IND submitted to the U.S. Food and Drug Administration (the “FDA”) is now open. We expect to initiate Phase 2 studies in cystic fibrosis and cystinosis following completion of our ongoing Phase 1 multiple ascending dose (“MAD”) study and report top line results in 2019. As part of our clinical program for ELX-02, we have completed a Phase 1 single ascending dose (“SAD”) study in a total of 60 healthy volunteers at sites in Israel (ClinicalTrials.gov Identifier: NCT02807961) and Belgium (ClinicalTrials.gov Identifier: NCT03292302). The results of the SAD study have been submitted for publication. Currently ongoing is the Phase 1 multiple ascending dose (“MAD”) study in Belgium (ClinicalTrials.gov Identifier: NCT03309605). We have completed the first four cohorts of the MAD study and have initiated the fifth cohort. We have initiated a new program focused on rare ocular genetic disorders and is conducting pre-IND enabling studies for several compounds from our library and will identify an additional molecule later this year to take into clinical development. We believe there is a significant unmet medical need in the treatment of cystic fibrosis patients carrying nonsense mutations on one or both alleles of the Cystic Fibrosis Transmembrane Conductance Regulator (“CFTR”) gene. Cystic fibrosis is the most prevalent genetic disease in the western world and there are no currently approved therapies that target the impairment associated with Class 1 CFTR mutations. Similarly, in cystinosis, we believe there is also a high unmet medical need as there are no currently approved therapeutics that target the nonsense mutation mediated impairment of cystinosin. Cystinosin is the cystine-selective transport channel in the lysosomal membrane that is attributed as the cause for the accumulation of cystine in this disease state. Given the high proportion of pediatric patients in each of these rare orphan diseases, we intend to apply for relevant Orphan Drug incentives in the US and Europe, including the Rare Pediatric Disease Priority Review Voucher in the U.S. The European Medicines Agency (the “EMA”) has granted ELX-02 an orphan drug designation for the treatment of cystic fibrosis and mucopolysaccharidosis type I (“MPS I”). The FDA has granted orphan drug designation to ELX-02 for the treatment of cystinosis, MPS I, and for the treatment of Rett Syndrome. We hold worldwide development and commercialization rights to ELX-02 and novel compounds in our read-through library, for all indications, in all territories, under a license from the Technion Research and Development Foundation Ltd. Professor Timor Baasov, the inventor of our compounds, has served as our senior consultant since our inception. On April 30, 2018 the Company completed an underwritten public offering of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. The Company received net proceeds of approximately 17 $53. 6 million after deducting underwriting discounts and commissions and estimated offering expenses. As of September 30, 2018, we had cash and cash equivalents of $ 55.3 million . We expect that our current cash and cash equivalents will be sufficient to fund our current operations to 2020. Since our inception, we have incurred significant operating losses. Our net losses were $33.2 million and $10.6 million for each of the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $72.1 million. To date, we have financed our operations primarily through equity capital investments, and to a lesser extent, from loans and grants from the Israeli Innovation Authority of the Ministry of Economy and Industry, or the IIA. We have devoted substantially all of our financial resources and efforts to research and development. We expect that it will be many years, if ever, before we receive regulatory approval and have a product candidate ready for commercialization. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we: • advance ELX-02 further into clinical trials; • continue the preclinical development of our research programs and advance candidates into clinical trials; • identify additional product candidates and advance them into preclinical development; • pursue regulatory authorization to conduct clinical trials of additional product candidates; • seek marketing approvals for our product candidates that successfully complete clinical trials; • establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval; • maintain, expand and protect our intellectual property portfolio; • hire additional clinical, regulatory, management and scientific personnel; • add operational, financial and management information systems and personnel, including personnel to support product development; • acquire or in-license other product candidates and technologies; and • operate as a public company. Results of Operations Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions. The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this Quarterly Report on Form 10-Q are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K. There have been no material changes to our critical accounting policies through September 30, 2018, from those discussed in our Annual Report on Form 10-K filed with the SEC on March 16, 2018. 18 Results of Operations The following table summarizes our results of operations for each of the periods presented (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2018 2017 2018 2017 Operating expenses: Research and development $ 5,415 $ 3,280 $ 13,959 $ 8,230 General and administrative 5,945 720 18,898 1,581 Reverse merger related expenses — — 594 — Total operating expenses 11,360 4,000 33,451 9,811 Loss from operations (11,360 ) (4,000 ) (33,451 ) (9,811 ) Other (income) expense, net (199 ) 40 (293 ) 785 Net loss $ (11,161 ) $ (4,040 ) $ (33,158 ) $ (10,596 ) Research and development expenses. Research and development expenses were $5.4 million for the three months ended September 30, 2018 compared to $3.3 million for the period ended September 30, 2017, an increase of $2.1 million. The increase in research and development expenses was primarily related to fees incurred to subcontractors, consultants and advisors in connection with research and development of ELX-02 of $1.6 million. Additionally, salaries and other personnel and occupancy related costs increased by $0.5 million. Research and development expenses were $14.0 million for the nine months ended September 30, 2018, compared to $8.2 million for the period ended September 30, 2017, an increase of $5.8 million. The increase in research and development expenses was primarily related to fees incurred to subcontractors, consultants and advisors in connection with research and development of ELX-02 of $4.5 million. Additionally, salaries and other personnel and occupancy related costs increased by $1.3 million. General and administrative expenses. General and administrative expenses were $5.9 million for the three months ended September 30, 2018, compared to $0.7 million for the period ended September 30, 2017, an increase of $5.2 million. The increase in general and administrative expenses was primarily due to an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $3.6 million, and professional service fees and other fees of $1.6 million. General and administrative expenses were $18.9 million for the nine months ended September 30, 2018, compared to $1.6 million for the period ended September 30, 2017, an increase of $17.3 million. The increase in general and administrative expenses was primarily due to stock-based compensation to a director of $5.0 million, an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $6.3 million, and professional service fees and other fees of $6.0 million. Reverse merger related expenses. We recorded professional service fees of $0.6 million for the nine months ended September 30, 2018 related to the reverse merger we completed on December 19, 2017. No professional service fees were recorded during the three months ended September 30, 2018. Other (income) expense, net. We recorded $0.2 million in other income, net of expense for the three months ended September 30, 2018, compared to $40,000 in other expense, net of income for the period ended September 30, 2017. The increase of $0.2 million was due to an increase in interest income. 19 We recorded $ 0. 3 million in other income , net of e xpense for the nine months ended September 30, 2018 , compared to $0. 8 million in other expense, net of income for the period e nded September 30, 2017. The increase of $1 . 1 million was primarily due to a n in crease in interest income of $0. 3 million and a $0.8 million decrease in interest expense on debt issuance costs . Liquidity and Capital Resources General Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. Since our inception and through September 30, 2018, we have funded our operations primarily through equity and convertible debt financings in private placements, as described below. As of September 30, 2018, we had cash and cash equivalents of $55.3 million. On April 30, 2018, the Company completed an underwritten public offering (“2018 Offering”) of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. The Company received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. We expect that our cash and cash equivalents will enable us to fund our current operations to 2020. Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Principal Financing Activities On April 30, 2018, the Company completed an underwritten public offering of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. The Company received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. On May 22, 2017, Eloxx Limited entered into a Share Purchase Agreement (the “2017 SPA”) (and subsequently joinder agreements) with certain existing and new investors, whereby, an aggregate gross amount of $21.5 million, which included the conversion of the loan as detailed in Note 6 to the unaudited condensed consolidated financial statements contained in this report, was received by Eloxx Limited in exchange for the issuance of 7,136,289 shares of Series C preferred stock with par value of $0.01 with the initial closing, of which 39,293 shares were issued as a result of the anti-dilution effect of the Reverse Merger. The related issuance costs were $0.6 million. In connection with the 2017 SPA, the Company granted 142,524 warrants to purchase 142,524 shares of Series C preferred stock as fees to certain service providers. Upon the closing of the Reverse Merger in December 2017, the Company issued 6,333,333 shares of common stock related to the closing of the 2017 SPA with a par value of $0.01 for an aggregate gross amount of $17.5 million. Additionally, Sevion raised $1.5 million prior to the Reverse Merger. The related issuance costs for these transactions was $0.5 million. For more information, see Note 9 to the unaudited condensed consolidated financial statements contained in this report. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Nine Months Ended September 30, 2018 2017 Net cash used in operating activities $ (22,307 ) $ (9,668 ) Net cash used in investing activities (138 ) (155 ) Net cash provided by financing activities 53,676 21,172 20 Operating Activities During the nine months ended September 30, 2018, net cash used in operating activities was $22.3 million, which resulted primarily from our net loss of $33.2 million partially offset by non-cash charges of $9.6 million related to stock-based compensation, $0.1 million of depreciation expense and $1.2 million related to changes in working capital primarily for accounts payables and accrued expenses. During the nine months ended September 30, 2017, the net cash used in operating activities was $9.7 million, primarily driven by our net loss of $10.6 million, partially offset by the amortization and revaluation of an embedded conversion feature of $0.6 million and $0.2 million related to changes in working capital primarily for other current assets and accrued expenses offset by decreases in accounts payables. Investing Activities During the nine months ended September 30, 2018, the net cash used in investing activities was $0.1 million, primarily driven by the net purchase of property and equipment and long-term deposits. During the nine months ended September 30, 2017, the net cash used in investing activities was $0.2 million, primarily driven by the purchase of property and equipment. Financing Activities During the nine months ended September 30, 2018, the net cash provided by financing activities was $53.7 million, primarily due to the net proceeds from the 2018 offering of $53.6 million. During the nine months ended September 30, 2017, the net cash provided by financing activities was $21.2 million, resulting from the proceeds from the issuance of Series C preferred stock of $18.7 million and proceeds from the issuance of convertible loan and financial derivatives relating to the Series C preferred stock of $2.5 million. Technion Research and Development Foundation Limited (“TRDF”) Agreement On August 29, 2013, the Company entered into the Technion Agreement with TRDF, with respect to certain technology relating to aminoglycosides and the redesign of aminoglycosides for the treatment of human genetic diseases caused by premature stop mutations and further results of the research of the technology, in order to develop and commercialize products based on such technology. Under the Technion Agreement, TRDF is obligated to provide the Company with research services for an estimated annual payment of $0.1 million, the precise amount to be agreed by the parties prior to the beginning of each year of the research period. For the three and nine months ended September 30, 2018, the Company recorded research and development expense of $0.1 million and $0.1 million, respectively, in relation to in relation to reimbursement for the preparation, filing, prosecution and maintenance of TRDF patent rights related to Eloxx Limited. For the three and nine months ended September 30, 2017, the Company recorded general and administrative expenses amounting to $0 and $7,000, respectively, and research and development expenses amounting to $24,000 in relation to the Technion Agreement. As of September 30, 2018 and December 31, 2017, amounts recorded in accrued expenses were $6,000 and $25,000, respectively. In addition, TRDF granted us a license to use, market, sell or sub-license the rights of the product developed under the TRDF research results (the “Licensed Product”), as fully defined in the Technion Agreement, for the following considerations: (a) milestone payments, to be transferred upon meeting certain milestones as defined in the Technion Agreement, up to total consideration of $6.1 million; (b) certain royalties on a low- to mid- single-digit percentage of net sales (subject to change in the case of (x) sublicensing to a big pharmaceutical or biotechnology company, or (y) payment of royalties to third parties, or (z) commercialization by a third party of an authorized generic to a licensed product), for a period until the later of (i) the expiration of a valid claim on the Licensed Product in each country the Licensed Product is sold to, or (ii) a certain amount of years from the date of the first commercial sale of the Licensed Product in such country, and (c) a low- to mid- double-digit percentage of any non-royalty sub-license income received by us from a sub-licensed entity. In addition, we will be required to pay a fee to TRDF upon an exit event as described in the Technion Agreement. Moreover, upon the closing of an Exit Event which is not Initial Public Offering ("IPO"), as defined in the Technion Agreement, TRDF shall be entitled to an amount equal to 3% of all non-refundable, non-contingent consideration, whether in cash or in kind, actually received by the Company and / or its shareholders. Upon the closing of an exit event which is IPO, as defined in the Technion Agreement, TRDF shall be entitled to a number of Ordinary Shares of the Company representing 3% of the Company's outstanding shares on a fully diluted basis immediately prior to the closing of such IPO. 21 On August 9, 2017 , we received a legal claims letter from TRDF regarding TRDF’s alleged entitlement to an exit fee in accordanc e with the Technion Agreement as a result of t he announced Reverse Merger . We recorded a $3.4 million research and development expense with an offsetting adjustment to additional paid-in capital for the year ended December 31, 2017 , related to the planned issuance of shares to TRDF at fair market valu e on the purported date of the exit event . On June 13, 2018, we issued 569,395 shares to TRDF in satisfaction of this claim. Contractual Obligations There have been no material changes to our contractual obligations during the nine months ended September 30, 2018. Please refer to our contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2017. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 22 Item 3. Quantitative and Qualitati ve Disclosures about Market Risk Not applicable to a “smaller reporting company”, as defined in Item 10(f)(1) of SEC Regulation S-K. Item 4. Cont rols and Procedures Management’s Evaluation of our Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. As of September 30, 2018, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of September 30, 2018, our disclosure controls and procedures were effective at the reasonable assurance level. Changes in Internal Control over Financial Reporting During the quarter ended September 30, 2018, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 23 PART II. OTHER INFORMATION