Eloxx Pharmaceuticals, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). Except for the historical information contained in this Report, the matters discussed herein may be deemed to be forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. In this Report, words such as “may,” “expect,” “anticipate,” “estimate,” “intend,” and similar expressions (as well as other words or expressions referencing future events, conditions or circumstances) are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ materially from the results discussed, projected, anticipated, or indicated in any forward-looking statements. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Report, they may not be predictive of results or developments in future periods. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Report, including those risks identified under Item 1A., Risk Factors. In many instances, dollar amounts contained in the narrative descriptions in the following section of this Report are stated in approximate values, pursuant to generally accepted rounding conventions. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the U.S. Securities and Exchange Commission (the “SEC”), to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Company Overview We are a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates, each designed to be a eukaryotic ribosomal selective glycoside (ERSG), formulated to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA (mRNA) and the protein synthesis from that mRNA. As a consequence, patients with premature stop codon diseases have reduced levels of, or no, protein from a gene whose product performs an essential function. This type of mutation accounts for some of the most severe phenotypes across genetic diseases. Nonsense mutations have been identified in over 1,800 rare and ultra-rare diseases. 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. Our small molecule approach has the potential to address a range of different premature stop codons in a single gene since our ERSG compounds are targeted to the ribosomes. ELX-02, our lead investigational drug product candidate, is a small molecule designed to restore production of full-length functional proteins. ELX-02 is in clinical development for systemic administration for cystic fibrosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. 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. Our preclinical candidate pool consists of a library of novel ERSG drug candidates identified based on read-through potential and cytoplasmic ribosomal selectivity. 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. (“TRDF”). During 2019, we advanced our clinical program for ELX-02 into Phase 2 studies in cystic fibrosis and nephropathic cystinosis. 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 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 research and development strategy targets rare or ultra-rare diseases where a high unmet medical need exists, a nonsense mutation-bearing patient population is established, preclinical read-through can be established in predictive personalized medicine models, and a defined path through Orphan Drug development, regulatory approval, patient access and commercialization is identified. We believe patient advocacy is an important element of patient focused drug development, and we seek opportunities to collaborate with patient advocacy groups throughout the discovery and development process. 18 Our current clinical program for our lead investigational drug product candidate, ELX-02 , includes Phase 2 studies in c ystic f ibrosis . We intend to be the global leader in the application of the science of translational read-through and the associated pathway of nonsense mediated decay (NMD). 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 ribonucleoprotein complex of RNAs and proteins responsible for protein production (a process also known as translation). These novel small molecule ERSG 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 phenomenon 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 numerous genetic diseases where nonsense mutations have impaired gene function. Since nonsense mutations may occur at different positions within a given gene, a potential advantage of the small molecule ERSG approach is being able to use one molecule to address a range of mutations within a given disease state. 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 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, lungs, 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” 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 native 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. 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 United States 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 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. Our scientific review written by Professor Eitan Kerem, M.D., Senior Attending Physician at the Hadassah CF Center in Jerusalem, Israel and Senior Medical Consultant to Eloxx, titled “ELX-02: an investigational read-through agent for the treatment of nonsense mutation-related genetic disease” was published in October 2020 by the Expert Opinion on Investigational Drugs Journal . This manuscript details the development of ELX-02 for the restoration of functional protein in nonsense-mediated disease in support of our ongoing Phase 2 trials. Our Phase 2 cystinosis trial involved two sequential cohorts with three escalating doses in three patients per cohort. The first cohort enrolled three homozygous W138X patients ages 23 to 38, with prior kidney transplants and varying degrees of renal insufficiency. In January 2020, we announced positive data from the first cohort of the Phase 2 study of ELX-02 in the treatment of patients with nonsense mutation-mediated nephropathic cystinosis. The results of the first cohort met the primary safety endpoint and the reductions in white blood cell (WBC) cystine provided a clear indication of biologic activity in these patients at nominal doses > 0.5 mg/kg/day. Following review of the safety and pharmacokinetic data by an independent Safety Review Committee (SRC), the SRC approved progressing to the second cohort that would enable enrolling patients ages 12 and older. Due to study design limitations, patients across all dose groups had elevated and uncontrolled pretreatment WBC cystine levels which made it difficult to fully evaluate ELX-02-mediated WBC cystine reductions. Therefore, we have discontinued this study and will not proceed with the second cohort as contemplated in the original protocol. We will continue to review these data with a panel of scientific and clinical experts to determine appropriate modifications for a possible new study design. 19 The clear indications of biologic activity in this study provide human clinical proof of concept for ELX-02 and de-risk other clinical applications of our ERSG library using this dosage range. These encouraging results also provide a basis for expansion to studies of additional kidney diseases caused by nonsense mutations , such as ADPKD. Our Phase 2 cystic fibrosis 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 had 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 had been resumed in Israel and Europe, and on August 12, 2020, we announced that enrollment in our Phase 2 clinical trial in cystic fibrosis has been resumed in the U.S. The COVID-19 pandemic continues to evolve, and we continue to work closely with our clinical sites and investigators. We are also evaluating additional clinical sites in other countries where patient enrollment may be feasible. We remain committed to completing enrollment in these Phase 2 proof of concept clinical trials and reporting top line data in the first half of 2021, which is contingent on no further disruptions due to the COVID-19 pandemic. Several planned Safety Review Committee meetings have occurred and allowed dose escalation up to the top dose level with no drug-related serious adverse events reported to date. We have had multiple patients progressing through the four-dose escalation range. In the U.S., the Cystic Fibrosis Foundation (“CF Foundation”) is providing funding for a portion of the trial and we have formed a joint program advisory group with the CF Foundation focused on the development of ELX-02 for cystic fibrosis. The Cystic Fibrosis Therapeutics Development Network (“TDN”) has sanctioned the Phase 2 study protocol, which is being conducted at TDN member sites. Additional information about our clinical trials can be found at www.ClinicalTrials.gov (Identifiers: NCT04126473 and NCT04135495). Professor Eitan Kerem, M.D., former Head of the Division of Pediatrics, Children’s Hospital, Hadassah Medical Center in Israel, has joined Eloxx as a Senior Medical Consultant. For the U.S. trial, Dr. Ahmet Uluer, Director of the Adult Cystic Fibrosis Program at the Boston Children’s Hospital/Brigham and Women’s Hospital CF Center, is the lead study investigator. The protocols have been sanctioned by the TDN in the U.S. and the European Cystic Fibrosis Society Clinical Trial Network (which has given our European/Israel trial a “high priority” ranking) . During October 2019, we completed an interim CMC review meeting with the U.S. 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 was cancelled, and we withdrew our abstract. We presented data from two scientific abstracts at the North American Cystic Fibrosis Virtual Conference (NACFC). The two abstracts were also showcased in the NACFC virtual poster gallery and electronically published as a supplement to Pediatric Pulmonology. The live sessions and discussions took place through October 23, 2020. These virtual posters are available to registered attendees on the NACFC online conference platform. The preclinical study results demonstrate ELX-02’s selectivity for read-through of premature stop codons versus native stop codons and its ability to restore production of functional CFTR in patient-derived organoids. 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 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. We believe that nonsense mutations may impact a similar proportion of patients diagnosed with cystinosis. Given the high proportion of pediatric patients in many rare orphan diseases, we intend to apply for relevant Orphan Drug incentives in the U.S. 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). 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. We are also evaluating the suitability of our ERSG library for development in rare renal diseases associated with nonsense mutations, such as ADPKD. ADPKD is a relatively common inherited genetic kidney disease occurring in between one in 400 and one in 1,000 patients and is the fourth leading cause of end-stage renal disease in the United States. Over 25% of the primary genetic changes that cause ADPKD are nonsense mutations, where a premature stop codon in the gene leads to a truncated, often unstable, protein. We have evaluated the three most relevant ADPKD nonsense mutations in an in vitro read-through assay and have demonstrated significant levels of read-through for ELX-02 and several library compounds, which is the first step in our preclinical development toward an IND. 20 We continue to progress our ERSG pipeline in IRDs , another area of high unmet medical need, that are associated with vision loss and blindness . There are over 300 IRD s associated with nonsense mutations. W e recently reported on a critical milestone demonstrating that several of our library compounds successfully reach retinal disorder-relevant tissue layers and can restore protein production in an animal model. These data support that our ERSG compounds are suitable for reaching and promoting read-through in target cells within the retina. We had plan ned to present these data at the Association for Research in Vision and Ophthalmology (ARVO) Annual Meeting in May 2020 , but the meeting was cancelled due to the global COVID-19 pandemic. As an alternative, we submitted a recorded video presentation which became available on ARVO’s website May 6, 2020 . Our IRD research also includes exploring multiple sustained release formulation technologies, and in vitro release rates achieved to date have been consistent with our target release profile of one to three months . Our scientific manuscript titled “ Intravitreal administration of small molecule read-through agents demonstrate functional activity in a nonsense mutation mouse model ” was published in October 2020 by the Journal of Experimental Eye Research . This manuscript demonstrates that multiple small molecules in our ERSG library mediate dose-dependent read-through at the back of the eye after a single intravitreal injection . Collectively, these manuscripts demonstrate the wide-ranging potential of our small molecule read-through approach to rare genetic disorders mediated by nonsense mutations; from targeted delivery for inherited retinal disorders to systemic delivery for multi-system disorders like cystic fibrosis. 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 first quarter of 2020. We incurred a resulting one-time pre-tax charge of $4.0 million during the first quarter of 2020. COVID-19 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. 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 and healthcare professionals in our clinical trials. 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 have continued even though our clinical trials were temporarily paused. Both Phase 2 clinical trials have now resumed. 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 restrictions 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 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 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 oversee the administration of 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 21 impact of the COVID-19 pandemic on the operations of the FDA and other health authorities may delay potential advancement of our product candidates. 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 U.S. 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 expense during the reporting periods. We monitor and analyze these items 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 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 September 30, 2020, from those discussed in our Annual Report on Form 10-K filed with the SEC on March 6, 2020. Results of Operations The following table summarizes our results of operations for each of the periods presented (in thousands): Three Months Ended September 30, Change Nine Months Ended September 30, Change 2020 2019 $ % 2020 2019 $ % Operating expenses: Research and development, net $ 3,231 $ 6,801 $ (3,570 ) (52 ) % $ 11,308 $ 20,160 $ (8,852 ) (44 ) % General and administrative 3,065 5,978 (2,913 ) (49 ) % 12,347 18,907 (6,560 ) (35 ) % Restructuring charges — — — — 3,994 — 3,994 — Total operating expenses 6,296 12,779 (6,483 ) (51 ) % 27,649 39,067 (11,418 ) (29 ) % Loss from operations (6,296 ) (12,779 ) 6,483 (51 ) % (27,649 ) (39,067 ) 11,418 (29 ) % Other expense, net 321 96 225 234 % 801 174 627 360 % Net loss $ (6,617 ) $ (12,875 ) $ 6,258 (49 ) % $ (28,450 ) $ (39,241 ) $ 10,791 (27 ) % Research and development expense Research and development expenses were $3.2 million for the three months ended September 30, 2020 compared to $6.8 million for the same period in 2019, a decrease of $3.6 million. The decrease in research and development expenses was primarily related to $2.7 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 clinical trial enrollment resulting from the COVID-19 pandemic , a $0.4 million decrease in stock-based compensation and a $0.5 million decrease in salaries and other personnel-related costs due to lower headcount during the 2020 period. Research and development expenses for the three months ended September 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 $11.3 million for the nine months ended September 30, 2020 compared to $20.2 million for the same period in 2019, a decrease of $8.9 million. The decrease in research and development expenses was primarily related to $7.2 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 clinical trial enrollment resulting from the COVID-19 pandemic , a $1.2 million decrease in stock based compensation and a $0.4 million decrease in salaries and other personnel-related costs due to lower headcount during the 2020 period. Research and development expenses for the nine months ended September 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $0.8 million and $2.0 million, respectively. 22 General and administrative expenses General and administrative expenses were $3.1 million for the three months ended September 30, 2020, compared to $6.0 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 the 2020 period, $1.1 million in stock-based compensation and $1.0 million in professional services and other infrastructure-related costs. General and administrative expenses for the three months ended September 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $1.1 million and $2.2 million, respectively. General and administrative expenses were $12.3 million for the nine months ended September 30, 2020, compared to $18.9 million for the same period in 2019, a decrease of $6.6 million. The decrease in general and administrative expenses was primarily due to decreases of $1.7 million in personnel and related costs due to a reduction in headcount and related salaries for a portion of the 2020 period, $2.2 million in stock-based compensation and $2.7 million in professional services and other infrastructure-related costs. General and administrative expenses for the nine months ended September 30, 2020 and 2019 included non-cash stock-based compensation expense totaling $4.5 million and $6.6 million, respectively. Restructuring charges Restructuring charges of $4.0 million for the nine months ended September 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 September 30, 2020. Other expense, net We recorded $0.3 million in other expense, net for the three months ended September 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 $0.8 million in other expense, net for the nine months ended September 30, 2020, compared to $0.2 million for the same period in 2019. The increase in other expense, net was primarily due to lower interest income. Liquidity and Capital Resources 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. 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 and cash equivalents of $30.6 million at September 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 $(28.5) million for the nine months ended September 30, 2020, and $(50.9) million for the year ended December 31, 2019. As of September 30, 2020, we had an accumulated deficit of $(165.5) 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 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 and/or other product candidates further into clinical development; • experience additional 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; • pursue regulatory authorization to conduct clinical trials of additional product candidates; 23 • 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; • 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; • acquire or in-license other product candidates and technologies; and • operate as a public company. 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 $2.3 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. treasuries . 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 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”), 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. 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 September 30, 2020, the interest rate was 5.75%. We commenced making payments on the outstanding principal 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 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 24 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 September 21, 202 1 , 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 or entirely forgiven based on employee retention for the 24-week period starting on the loan date through October 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 subject to SVB approval in accordance with SBA requirements . 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 offering expenses of $0.2 million. 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, 2020 2019 Net cash used in operating activities $ (23,498 ) $ (30,134 ) Net cash provided by (used in) investing activities 33,792 (42,603 ) Net cash (used in) provided by financing activities (2,186 ) 46,281 Our operating activities used cash of $23.5 million and $30.1 million during the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, net cash used in operating activities resulted primarily from our net loss of $(28.5) million and total changes in working capital of $3.4 million partially offset by total non-cash charges of $8.3 million. Non-cash charges primarily related to $7.4 million of stock-based compensation, $0.5 million of amortization of lease assets, and $0.4 million of debt discount amortization. Changes in working capital were primarily related to decreases of $1.7 million in accrued expenses, $1.2 million in accounts payable, $0.3 million in operating lease liabilities, and an increase of $0.1 million in prepaid expenses and other assets. For the nine months ended September 30, 2019, net cash used in operating activities resulted primarily from our net loss of $(39.2) million partially offset by total non-cash charges of $9.2 million and total changes in working capital of $0.1 million. Non-cash charges primarily related to $8.6 million of stock-based compensation, $0.3 million of amortization of lease assets, $0.4 million of debt discount amortization and $0.1 million of depreciation expense, offset by $0.2 million of discount amortization on our investments. Changes in working capital were primarily related to an increase in prepaid expenses and other current assets of $0.2 million and advances from collaboration partners of $0.4 million related to the achievement of a milestone in connection with the CF Foundation funding commitment for our cystic fibrosis development program in the U.S. Our investing activities provided cash of $33.8 million and used cash of $42.6 million during the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, cash provided by investing activities was primarily related to $33.8 million of proceeds from maturities of marketable securities. For the nine months ended September 30, 2019, cash used in investing activities consisted primarily of $56.0 million in purchases of marketable securities, offset by $13.5 million of proceeds from maturities of marketable securities . Our financing activities used cash of $2.2 million during the nine months ended September 30, 2020 and provided cash of $46.3 million during the nine months ended September 30, 2019. For the nine months ended September 30, 2020, net cash used in financing activities consisted primarily of $3.3 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. For the nine months ended September 30, 2019, net cash provided by financing activities resulted primarily from net proceeds of $32.7 million from sales of common stock and the issuance of debt of $15.0 million in January 2019 offset by $1.2 million of taxes paid upon the vesting of restricted stock units and $0.3 million of debt issuance costs. 25 Equity Sales Agreement In November 2018, we entered into an Equity Distribution Agreement (the “Agreement”) with Citigroup Global Markets Inc. and Cantor Fitzgerald & Co. (collectively, the “Sales Agents”), pursuant to which we may sell and issue shares of our common stock up to an aggregate of $50 million through the Sales Agents. The shares were offered pursuant to a registered shelf offering. 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. In January 2019, we sold 35,362 shares of common stock and received net proceeds of $0.7 million. Off-Balance Sheet Arrangements 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. 26 Item 3. 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.