What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 104 added, 80 removed, 145 unchanged (56% of the section changed)

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Nonsense mutations have been identified in over 1,800 rare and ultra-rare diseases.

Read-through therapeutic development is focused on increasing mRNA stability and enabling functional protein synthesis.

Read-through therapeutic development is focused on increasing functional protein synthesis by enabling the cytoplasmic ribosome to read through premature stop codons to produce full-length proteins.

As opposed to a typical gene therapy approach of targeting a single, unique mutation in a target disease, this small molecule strategy enables targeting an entire class of mutations across the rare disease landscape.

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ELX-02 is an investigational drug that has not been approved by any global regulatory body.

In addition, during 2019 we announced new programs studying ERSG compounds for autosomal dominant polycystic kidney disease (ADPKD) and in rare inherited retinal disorders (IRDs) by intravitreal administration with an initial focus on Usher Syndrome.

We are also conducting IND-enabling preclinical studies of ERSG compounds for autosomal dominant polycystic kidney disease (ADPKD) and in rare inherited retinal disorders (IRDs) by intravitreal administration with an initial focus on Usher Syndrome.

We hold worldwide development and commercialization rights to ELX-02 and other novel compounds in our read-through library, for all indications, in all territories, under a license from the Technion Research and Development Foundation Ltd.

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We also completed a renal impairment study with ELX-02 in subjects with mild, moderate, and severe renal impairment.

The results from the renal impairment study provide support for both continuing our clinical development programs and evaluating the suitability of our ERSG library for development in additional renal diseases, including ADPKD .

The results from the renal impairment study provided support for both continuing our clinical development programs and evaluating the suitability of our ERSG library for development in additional renal diseases, including ADPKD .

Our preclinical candidate pool consists of a library of novel ERSG drug candidates identified based on read-through potential and cytoplasmic ribosomal selectivity.

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Our subcutaneously injected ERSG molecules have the potential to be self-administered for systemic disease and to be active across many of the body’s tissues.

We believe that our library of related novel small molecules holds the potential to be disease-modifying therapies that may change the course of numerous of genetic diseases and improve the lives of patients.

We believe that our library of related novel small molecules holds the potential to be disease-modifying therapies that may change the course of numerous genetic diseases and improve the lives of patients.

Our early preclinical data in animal models of nonsense mutations suggests that drug product candidates from our read-through compound ERSG library may have potential beneficial effects for each of the following diseases:

cystic fibrosis, nephropathic cystinosis, ADPKD, a variety of IRDs (including Usher Syndrome), primary ciliary dyskinesia, mucopolysaccharidosis type 1, Duchenne muscular dystrophy and Rett syndrome, and have demonstrated the potential for beneficial effects in multiple organs such as the brain, eye, kidney, muscles and others.

Of the novel compounds in our ERSG Library, approximately 30 compounds have been selected, based on read-through activity, for continued preclinical research and we anticipate additional compounds advancing toward Investigational New Drug (IND) filings.

Our scientific manuscript titled “ELX-02 generates protein via premature stop codon read-through without inducing native stop codon read-through protein” has been accepted for publication by the Journal of Pharmacology and Experimental Therapeutics (JPET).

Our scientific manuscript titled “ELX-02 generates protein via premature stop codon read-through without inducing native stop codon read-through protein” was published in the August 2020 issue of the Journal of Pharmacology and Experimental Therapeutics (JPET).

This manuscript demonstrates that while ELX-02 mediates read-through of premature stop codons, the fidelity of stop codons found at the end of healthy transcripts is maintained.

This indicates that translation integrity is preserved with target-therapeutic exposure of ELX-02, consistent with the favorable tolerability profile across our preclinical and clinical data sets.

The pre-publication version of the manuscript can be found in the “Fast Forward” section of JPET’s website.

Currently, the clinical programs for our lead investigational drug candidate, ELX-02, are focused on development for cystic fibrosis patients with diagnosed nonsense mutations.

We have completed a Phase 1 single ascending dose (SAD) trial at sites in Israel and Belgium, a multiple ascending dose (MAD) trial in Belgium and the United States, and a renal impairment study in the U.S.

with subjects having mild, moderate and severe renal impairment.

The results of the SAD study were published in Clinical Pharmacology in Drug Development in January 2019.

The results from the MAD trial were presented in 2019 at both the European Cystic Fibrosis Society clinical meeting and the North American Cystic Fibrosis Conference (NACFC).

The results from the MAD study were presented in 2019 at both the European Cystic Fibrosis Society clinical meeting and the North American Cystic Fibrosis Conference (NACFC).

Additionally, the results from the renal impairment study were presented at the 2019 American Society of Nephrology (ASN) Kidney Week in November 2019.

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Our Phase 2 c ystic f ibrosis clinical trial program for ELX-02 is being conducted at leading global investigator sites in Europe, Israel and the United States .

On March 25, 2020, we announced that enrollment in these trials has been paused temporarily in response to the global COVID-19 pandemic in order to avoid unnecessary exposure in at-risk populations, to maintain the integrity of our study data and to support global healthcare providers in their commitment to ensure patient safety.

COV ID-19 is rapidly evolving and we continue to work closely with our clinical sites and investigators.

On March 25, 2020, we announced that enrollment in these trials ha d been paused temporarily in response to the global COVID-19 pandemic in order to avoid unnecessary exposure in at-risk populations, to maintain the integrity of our study data and to support global healthcare providers in their commitment to ensure patient safety.

On June 17, 2020, we announced that enrollment in our Phase 2 clinical trial in cystic fibrosis ha d been resumed in Israel and Europe, and that our U.S.

trial remains temporarily paused due to the COVID-19 pandemic.

COVID-19 is rapidly evolving and we continue to work closely with our clinical sites and investigators.

We remain committed to completing enrollment in these Phase 2 proof of concept clinical trials and reporting top line data as soon as feasible.

, the Cystic Fibrosis Foundation (“CF Foundation”) is providing funding for a portion of the trial and we have form ed a joint program advisory group with the CF Foundation focused on the development of ELX-02 for cystic fibrosis.

The Cystic Fibrosis Therap eutics Development Network (“TDN”) has sanctioned the Phase 2 study protocol (ClinicalTrials.gov Identifiers:

The Cystic Fibrosis Therapeutics Development Network (“TDN”) has sanctioned the Phase 2 study protocol (ClinicalTrials.gov Identifiers:

NCT04126473 and NCT04135495) , which is being conducted at TDN member sites.

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Food and Drug Administration (the “FDA”) and we have gained alignment with the agency on our manufacturing formulation and process, which we believe will be suitable for our expected drug supply needs through completion of our pivotal trials.

The in-person European Cystic Fibrosis Society conference in Lyon, France scheduled for June 2020 has been cancelled, and we have withdrawn our abstract.

We plan to present data for ELX-02 in cystic fibrosis at the North American Cystic Fibrosis Conference in late October.

The in-person European Cystic Fibrosis Society conference in Lyon, France scheduled for June 2020 was cancelled, and we withdrew our abstract.

We plan to present data for ELX-02 in cystic fibrosis at the North American Cystic Fibrosis Conference, which will be conducted virtually in late October.

We are also evaluating the suitability of our ERSG library for development in rare renal diseases associated with nonsense mutations, such as ADPKD.

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and Europe, including the Rare Pediatric Disease Priority Review Voucher in the U.S.

Currently, the European Medicines Agency (the “EMA”) has designated ELX-02 as an orphan medicine for the treatment of cystic fibrosis and mucopolysaccharidosis type I (MPS I), and the FDA has granted orphan drug designation to ELX-02 for the treatment of nephropathic cystinosis, MPS I, and Rett syndrome.

Currently, the European Medicines Agency (the “EMA”) has designated ELX-02 as an orphan medicine for the treatment of cystic fibrosis and mucopolysaccharidosis type I (MPS I).

The FDA had previously granted orphan drug designation to ELX-02 for the treatment of nephropathic cystinosis, MPS I, and Rett syndrome, and on August 4, 2020, we announced that the FDA has granted orphan drug designation for ELX-02 for the treatment of cystic fibrosis.

The FDA’s Office of Orphan Drug Products grants orphan status to support the development of medicines for underserved patient populations, or rare disorders, that affect fewer than 200,000 people in the U.S.

Orphan drug designation qualifies Eloxx for certain benefits, including seven years of market exclusivity upon regulatory approval (if received), exemption from FDA application fees, tax credits on qualified U.S.

clinical trials and eligibility for grant funding opportunities that can be used for clinical trial costs.

On February 24, 2020, our Board of Directors approved a leadership and organizational realignment aimed at supporting our efforts to improve operating performance and concentrate development efforts on our core programs.

The organizational realignment reduced managerial layers and consolidated roles across the organization, resulting in the elimination of 13 full-time positions during the three months ended March 31, 2020.

We incurred a resulting one-time pre-tax charge of $4.0 million during the first quarter of 2020.

The outbreak of COVID-19 and the preventative or protective actions that we, our employees, consultants, suppliers, CROs, and other partners or governments may take may significantly disrupt our business operations.

We are diligently working to ensure that we can operate with minimal disruption, and to mitigate the impact of the pandemic on our employees’ health and safety and that of the patients in our clinical trials.

However, there remains a risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to a substantial percentage of personnel contracting the virus or due to shutdowns that may be requested or mandated by governmental authorities.

Given the interconnectivity of the global economy and the possible rate of future global transmission, the full extent to which the pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known by us to be impacted.

We continue to monitor our operations and applicable government recommendations, and we have made modifications to our normal operations as a result of the COVID-19 pandemic, including requiring employees to work remotely.

organizational realignment reduce d managerial layers and consolidate d roles across the organization, resulting in the elimination of 13 full-time positions during the first quarter of 2020 .

We incur red a resulting one-time pre-tax charge of $ 4.0 million during the first quarter of 2020.

The outbreak of COVID-19 and the preventative or protective actions that we, our employees, consultants, suppliers, contract research organizations (CROs), and other partners or governments may take may significantly disrupt our business operations.

However, given the significant uncertainty regarding the ongoing impact of the COVID-19 outbreak, there remains a risk that we or our employees, contractors, suppliers, and other partners may be prevented from conducting business activities for indefinite periods of time, including due to a substantial percentage of personnel contracting the virus or due to shutdowns that may be requested or mandated by governmental authorities.

Given the interconnectivity of the global economy and the possible rate of future global transmission of the virus, the full extent to which the pandemic could affect the global economy is unknown and its impact may extend beyond the areas which are currently known by us to be affected.

Our management and Board of Directors are focused on the operational challenges resulting from the COVID-19 pandemic.

To date, the pandemic has not had a material adverse impact on our financial condition, and we have not had to lay off or furlough any employees.

Operations continued even though our clinical trials were temporarily paused.

We are evaluating various alternatives to remain flexible and adapt to changing circumstances that may arise in the near and long term.

We continue to monitor our operations, states of affairs in the regions in which we and our business partners operate and conduct research and clinical trial activities and applicable government recommendations.

As a result, we have made modifications to our normal operations, including prohibitions on business travel and meetings, permitting employees to work remotely and the implementation of COVID-19 workplace safety guidelines to screen employees and office visitors for COVID-19 symptoms upon entering our offices.

We have also implemented one-way traffic flows, social-distanced workspaces, additional cleaning requirements and mandatory face coverings for common spaces and provided components of Personal Protective Equipment (PPE) for all employees working out of our various office locations.

Notwithstanding these measures, the COVID-19 pandemic could affect the health and availability of our workforce as well as those of the third parties we rely on.

If members of our management and other key personnel in critical functions across our organization are unable to perform their duties or have limited availability due to COVID-19, we may not be able to execute on our business strategy and our operations may be adversely impacted.

We may also experience limitations in employee resources, including because of illness of employees or their families or the desire of employees to avoid contact with individuals or large groups of people.

We may also experience limitations in employee resources, including due to illness of employees or their families or the desire of employees to avoid contact with individuals or large groups of people.

In addition, we have experienced and will continue to experience disruptions to our business operations resulting from quarantines, self-isolations and travel and other restrictions on our employees which may impact their ability to perform their job responsibilities.

The extent and severity of the impact of the current global crisis on our business and clinical trials will be determined largely by the ability of patients in our clinical trials to access trial sites, CRO personnel to administer our drug in accordance with our protocols and our ability to monitor and communicate effectively with the CROs, trial sites and principal investigators.

The extent and severity of the impact of the current global health crisis on our business and clinical trials will be determined largely by the ability of patients and prospective patients in our clinical trials to access trial sites, the ability of personnel from our CROs to administer our drug in accordance with trial protocols and our ability to monitor and communicate effectively with our CROs, staff at clinical trial sites and principal investigators.

In addition, the impact of the COVID-19 pandemic on the operations of the FDA and other health authorities may delay potential advancement of our product candidates.

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The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this Report are described in “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” in our 2019 Annual Report on Form 10-K .

There have been no material changes to our critical accounting policies through March 31, 2020, from those discussed in our Annual Report on Form 10-K filed with the SEC on March 6, 2020.

There have been no material changes to our critical accounting p o licies through June 30, 2020 , from those discussed in our Annual Report on Form 10-K filed with the SEC on March 6 , 20 20 .

Results of Operations

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Three Months Ended

Six Months Ended

Operating expenses:

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Research and development expense

Research and development expenses were $4.5 million for the three months ended March 31, 2020 compared to $6.0 million for the same period in 2019, a decrease of $1.5 million.

Research and development expenses decreased $1.6 million primarily related to reduced fees incurred for subcontractors, consultants and advisors in connection with ongoing clinical trials and research and development activities and $0.3 million of reduced stock based compensation, offset by an increase of $0.4 million due to an increase in headcount and related salaries for a portion of the 2020 period, and other personnel related costs.

Research and development expenses for the three months ended March 31, 2020 and 2019 included non-cash stock-based compensation expense totaling $0.2 million and $0.5 million, respectively.

Research and development expenses were $3.5 million for the three months ended June 30, 2020 compared to $7.3 million for the same period in 2019, a decrease of $3.8 million.

The decrease in research and development expenses was primarily related to $2.9 million in reduced fees incurred for subcontractors, consultants and advisors in connection with ongoing clinical trials and research and development activities, due to delays in enrollment, $0.5 million decrease in stock based compensation and a $0.4 million decrease due to a reduction in headcount and related salaries for a portion of the 2020 period, and reduction in other personnel related costs.

Research and development expenses for the three months ended June 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $0.3 million and $0.7 million, respectively.

Research and development expenses were $8.1 million for the six months ended June 30, 2020 compared to $13.4 million for the same period in 2019, a decrease of $5.3 million.

The decrease in research and development expenses was primarily related to $4.5 million in reduced fees incurred for subcontractors, consultants and advisors in connection with ongoing clinical trials and research and development activities, due to delays in enrollment and a $0.8 million decrease in stock based compensation.

Research and development expenses for the six months ended June 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $0.5 million and $1.3 million, respectively.

General and administrative expenses

General and administrative expenses were $5.2 million for the three months ended March 31, 2020, compared to $6.0 million for the same period in 2019, a decrease of $0.7 million.

The decrease in general and administrative expenses was primarily due to a decrease in stock-based compensation of $0.5 million and other infrastructure-related costs of $0.2 million.

General and administrative expenses for the three months ended March 31, 2020 and 2019 included non-cash stock-based compensation expense totaling $1.7 million and $2.1 million, respectively.

Restructuring charges

Restructuring charges of $4.0 million for the three months ended March 31, 2020 resulted from the leadership and organizational realignment during the period.

General and administrative expenses were $4.1 million for the three months ended June 30, 2020, compared to $7.0 million for the same period in 2019, a decrease of $2.9 million.

The decrease in general and administrative expenses was primarily due to decreases of $0.8 million in personnel and related costs due to a reduction in headcount and related salaries for a portion of the 2020 period, $0.6 million in stock-based compensation and $1.5 million in professional services and other infrastructure-related costs.

General and administrative expenses for the three months ended June 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $1.7 million and $2.3 million, respectively.

General and administrative expenses were $9.3 million for the six months ended June 30, 2020, compared to $12.9 million for the same period in 2019, a decrease of $3.6 million.

The decrease in general and administrative expenses was primarily due to decreases of $0.8 million in personnel and related costs due to a reduction in headcount and related salaries for a portion of the 2020 period, $1.0 million in stock-based compensation and $1.7 million in professional services and other infrastructure-related costs.

General and administrative expenses for the six months ended June 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $3.4 million and $4.4 million, respectively.

Restructuring ch arges

Restructuring charges of $4.0 million for the six months ended June 30, 2020 resulted from the leadership and organizational realignment during the first quarter of 2020.

The total included $1.9 million related to contract termination and employee separation costs (primarily severance and benefits) and $2.1 million of non-cash stock compensation, relating to accelerated vesting of executive stock awards.

There were no similar charges during the three months ended March 31, 2019.

There were no similar charges during the three months ended June 30, 2020.

Other expense (income), net

We recorded $0.2 million in other expense, net for the three months ended March 31, 2020, compared to $0.1 million in other income, net for the same period in 2019.

The change in other expense, net was primarily due to higher interest expense associated with our bank debt, which was issued in the first quarter of 2019.

We recorded $0.3 million in other expense, net for the three months ended June 30, 2020, compared to $0.1 million for the same period in 2019.

The increase in other expense, net was primarily due to lower interest income.

We recorded $0.5 million in other expense, net for the six months ended June 30, 2020, compared to $0.1 million for the same period in 2019.

The increase in other expense, net was primarily due to lower interest income.

Liquidity and Capital Resources

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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 March 31, 2020, we have funded our operations primarily through equity capital investments, and to a lesser extent, from loans and grants.

Although the impact of the COVID-19 pandemic on clinical operations and enrollment cannot fully be determined, we believe that our cash, cash equivalents, and marketable securities of $44.0 million at March 31, 2020, will enable us to meet the anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and maintain our current and planned

operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q.

Since our inception, we have incurred significant op erating losses.

Our net losses were $(13.9) million for the three months ended March 31, 2020, and $(50.9) million for the year ended December 31, 2019.

As of March 31, 2020 , we had an accumulated deficit of $(151.0) 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 a nd efforts to research and development.

We expect that it will be several years, if ever, before we receive regulatory approval and have a product candidate ready for commercialization.

To date, we have not generated revenue from sales of any product or service.

Although the impact of the COVID-19 pandemic on clinical operations and trial enrollment cannot fully be determined, we believe that our cash, cash equivalents, and marketable securities of $37.1 million at June 30, 2020, will enable us to meet the anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and maintain our current and planned operations through at least the next 12 months from the issuance of this Report.

Since our inception, we have incurred significant operating losses.

Our net losses were $(21.8) million for the six months ended June 30, 2020, and $(50.9) million for the year ended December 31, 2019.

As of June 30, 2020, we had an accumulated deficit of $(158.9) million.

To date, we have financed our operations primarily through equity capital investments, and to a lesser extent, from loans and grants.

We have devoted substantially all of our financial resources and efforts to research and development.

We expect that it may be several 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 operating losses for the foreseeable future.

A successful transition to profitable oper ations is dependent upon achieving a level of revenue adequate to support our cost structure.

A successful transition to profitable operations is dependent upon achieving a level of revenue adequate to support our cost structure.

Our net losses may fluctuate significantly from quarter to quarter and year to year.

We anticipate that our expenses may increase if, and as, we:

advance ELX-02 further into clinical trials;

advance ELX-02 and/or other product candidates further into clinical development;

continue to experience delays in enrollment and completion of our clinical trials due to the COVID-19 pandemic or otherwise;

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;

seek marketing approvals for our product candidates;

establish a sales, marketing and distribution infrastructure to commercialize any product candidates for which we obtain marketing approval;

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hire additional clinical, regulatory, management and scientific personnel;

add operational, financial and management information systems and personnel, including personnel to support product development;

add operational, financial and management information systems and personnel;

acquire or in-license other product candidates and technologies;

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We may never achieve profitability, and unless and until we do, we will continue to need to raise additional cash to fund our operations.

On February 24, 2020, our Board of Directors approved a leadership and organizational re-alignment, which is expected to achieve annual cost savings of approximately $4.9 million primarily related to salaries and benefits, with anticipated fiscal year 2020 savings of approximately $2.4 million, net of severance costs.

We believe that our cash, cash equivalents, and marketable securities of $44.0 million at March 31, 2020 will enable us to meet the anticipated cash needs required to maintain our current and planned operations through at least the next 12 months from the issuance of this Quarterly Report on Form 10-Q.

anticipated fiscal year 2020 savings of approximately $2.4 million, net of severance costs.

Our cash, cash equivalents, and marketable securities are highly liquid investments with original maturities of one year or less at the date of purchase and consist of cash in operating accounts and secured investments, primarily U.S.

Management intends to fund future operations through private or public debt or equity financing transactions and may seek additional capital through arrangements with strategic partners or from other sources.

If we are unable to obtain financing, we will evaluate options which may include reducing or deferring operating expenses, which may have a material adverse effect on our operations and future prospects.

If we are unable to obtain adequate financing, we will evaluate alternatives which may include reducing or deferring operating expenses, which may have a material adverse effect on our operations and future prospects.

Principal Financing Activities

On January 30, 2019, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), in its capacity as administrative agent, collateral agent and lender, and WestRiver Innovation Lending Fund VIII, L.P.

On January 30, 2019, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Silicon Valley Bank (“SVB”), and WestRiver Innovation Lending Fund VIII, L.P.

( together with SVB, the “Lenders”) .

Pursuant to the terms and conditions of the Loan Agreement, the Lenders extended a term loan to us of $15.0 million on the Loan Agreement date.

On June 24, 2019, we completed an underwritten public offering of 3,833,334 shares of common stock at the public offering price of $9.00 per share and received gross proceeds of approximately $34.5 million, before deducting underwriting discounts and commissions of $2.1 million and estimated offering expenses of $0.2 million.

On April 21, 2020, we entered into a loan agreement with SVB under the U.S.

Small Business Administration (the “SBA”) Paycheck Protection Program (the “PPP”) pursuant to the Coronavirus Aid, Relief and Ec onomic Security Act of 2020 (the “CARES Act”) for a loan of $0.8 million (the “PPP Loan”).

On April 22, 2020, we received the PPP Loan proceeds, which we expect to use for payroll and other covered costs in accordance with the relevant terms and condition s of the CARES Act.

We issued a promissory note for the PPP Loan with a maturity date of April 21, 2022 and an interest rate of 1.0% per annum, subject to the terms and conditions applicable to loans administered by the SBA under the CARES Act.

No paymen ts will be due during the six-month period beginning on April 21, 2020;

however, interest will accrue during this period.

Monthly payments of principal and interest will be due beginning on November 21, 2020.

Pursuant to the terms and conditions of the Loan Agreement, the Lenders extended a term loan to us of $15.0 million.

Outstanding principal on the loan accrues interest at a floating rate equal to the greater of (i) 5.25% per annum and (ii) the sum of 2.5% plus the prime rate, as published in the Wall Street Journal.

Interest payments are payable monthly following the funding of the loan.

On June 30, 2020, the interest rate was 5.75%.

We commenced making principal and interest payments on the outstanding balance of the loan on February 1, 2020, which is payable in 36 equal monthly installments.

Amounts outstanding under the loan are due and payable on January 1, 2023.

In conjunction with the initial loan advance, we issued warrants (the “Warrants”) to the Lenders to purchase an aggregate of 40,834 shares of our common stock at a warrant exercise price of $11.02 (subject to certain adjustments), which price was calculated using the 10-day average bid price of our common stock prior to the date of the Loan Agreement.

We may prepay the outstanding principal balance of the loans advanced by the Lenders in whole but not in part, subject to a prepayment fee ranging from 1% to 3% of any amount prepaid, depending upon when the prepayment occurs.

We will also pay a final payment fee equal to 6% of the total loans advanced, due upon the earlier of maturity or termination of the Loan Agreement.

Under the terms of the Loan Agreement, we granted first priority liens and security interests in substantially all of our assets (excluding all of its intellectual property, which is subject to a negative pledge) and a pledge by us of the shares of one of our wholly-owned subsidiaries as collateral for the obligations thereunder.

The Loan Agreement also contains representations and warranties by us and the Lenders and indemnification provisions in favor of the Lenders and customary covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends, but no financial covenants), and events of default (including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of the Lenders’ security interest in the collateral, and events relating to bankruptcy or insolvency).

In April 2020, we entered into a loan agreement with Silicon Valley Bank (“SVB”) under the U.S.

Small Business Administration (the “SBA”) Paycheck Protection Program (the “PPP”) pursuant to the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”) and received loan proceeds of $0.8 million (the “PPP Loan”).

We expect to use the loan proceeds for payroll and other covered costs in accordance with the relevant terms and conditions of the CARES Act.

We issued a promissory note for the PPP Loan with a maturity date of April 21, 2022 and an interest rate of 1.0% per annum.

Monthly payments of principal and interest will be due beginning on November 21, 2020, although interest accrues from the issuance date.

We may prepay the PPP Loan without penalty or premium, and the promissory note provides for customary events of default.

A PPP loan may be partially forgiven based on employee retention for the eight-week period starting on the loan date and the use of loan proceeds for payroll or other specified co sts during the same period.

A PPP loan may be partially or entirely forgiven based on employee retention for the 24-week period starting on the loan date through September 2020, and the use of loan proceeds for payroll or other specified costs during the same period.

Forgiveness is also based on the employer maintaining or restoring headcount and maintaining salary levels.

Forgiveness is reduced if headcount declines or if salaries decrease.

Any loan forgiveness will be made in accordance with SBA requirements and subject to the approval of SVB.

Any loan forgiveness will be made subject to SVB approval in accordance with SBA requirements.

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

Three Months Ended

Six Months Ended

Net cash used in operating activities

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Net cash (used in) provided by financing activities

Our operating activities used cash of $11.9 million and $9.2 million during the three months ended March 31, 2020 and 2019, respectively.

For the three months ended March 31, 2020, net cash used in operating activities resulted primarily from our net loss of $(13.9) million and total changes in working capital of $(2.2) million partially offset by total non-cash charges of $4.3 million.

Our operating activities used cash of $18.2 million and $18.8 million during the six months ended June 30, 2020 and 2019, respectively.

For the six months ended June 30, 2020, net cash used in operating activities resulted primarily from our net loss of $(21.8) million and total changes in working capital of $(3.0) million partially offset by total non-cash charges of $6.6 million.

Non-cash charges primarily related to $6.0 million of stock-based compensation, $0.3 million of amortization of lease assets, and $0.3 million of debt discount amortization.

Changes in working capital were primarily related to decreases in accrued expenses and accounts payable of $1.1 million and $0.5 million, respectively, and an increase in prepaid expenses and other current assets of $0.6 million.

For the three months ended March 31, 2019, net cash used in operating activities resulted primarily from our net loss of $(11.9) million partially offset by non-cash charges of $2.7 million related to stock-based compensation, $33 thousand of depreciation expense and $0.1 million of debt discount amortization.

Our investing activities provided cash of $15.8 million and used cash of $8.9 million during the three months ended March 31, 2020 and 2019, respectively.

For the three months ended March 31, 2020, cash provided in investing activities was primarily related to $15.8 million of proceeds from the maturity of marketable securities.

For the three months ended March 31, 2019, cash used in investing activities consisted primarily of $8.9 million in purchases of marketable securities .

Our financing activities used cash of $0.5 million during the three months ended March 31, 2020 and provided cash of $14.1 million during the three months ended March 31, 2019.

For the three months ended March 31, 2020, net cash used in financing activities consisted primarily of $0.8 million in term loan principal repayments, net of $0.4 million in advances received from collaboration partners.

Cash provided by financing activities for the three months ended March 31, 2019 resulted primarily from the issuance of debt of $15.0 million in January 2019 and proceeds of $0.5 million from the sale of common stock offset by the payment of taxes of $1.1 million associated with the vesting of restricted stock units.

Changes in working capital were primarily related to decreases of $1.2 million in accrued expenses, $1.1 million in accounts payable and $0.3 million in operating lease liabilities, and in increase of $0.4 million in prepaid expenses and other current assets.

For the six months ended June 30, 2019, net cash used in operating activities resulted primarily from our net loss of $26.4 million partially offset by non-cash charges of $5.7 million related to stock-based compensation, $50 thousand of depreciation expense and $0.2 million of debt discount amortization;

and total changes in working capital of $1.5 million.

Our investing activities provided cash of $27.0 million and used cash of $26.9 million during the six months ended June 30, 2020 and 2019, respectively.

For the six months ended June 30, 2020, cash provided by investing activities was primarily related to $27.0 million of proceeds from the maturity of marketable securities.

For the six months ended June 30, 2019, net cash used in investing activities consisted primarily of $33.6 million in purchases of marketable securities, offset by $6.8 million of proceeds from the maturity of marketable securities .

Our financing activities used cash of $0.9 million during the six months ended June 30, 2020 and provided cash of $46.4 million during the six months ended June 30, 2019.

For the six months ended June 30, 2020, net cash used in financing activities consisted primarily of $2.1 million in term loan principal repayments, offset by $0.8 million received from the PPP Loan and $0.4 million in advances received from collaboration partners.

Net cash provided by financing activities for the six months ended June 30, 2019 resulted primarily from the issuance of debt of $14.7 million in January 2019 and proceeds of $32.7 million from sales of common stock offset by $1.1 million of taxes paid upon the vesting of restricted stock units.

Equity Sales Agreement

3 unchanged sentences

The shares were offered pursuant to a registered shelf offering.

We agreed to pay the Sales Agents a commission of up to 3% of the gross proceeds of any sales of common stock pursuant to the Agreement.

We incurred approximately $0.3 million related to legal, accounting and other fees in connection with the Agreement.

For the year ended December 31, 2018, under the Agreement, we sold 201,100 shares of common stock and received net proceeds of $2.2 million.

2 unchanged sentences

During the periods presented, we did not have, 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, revenue or expense, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Quantitative and Qualitati ve Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

Not applicable to a “smaller reporting company”, as defined in Item 10(f)(1) of SEC Regulation S-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis