Eloxx Pharmaceuticals, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”). 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 that involve risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see the sections “Special Note Regarding Forward-Looking Statements,” “Summary Risk Factors,” and Part II, Item 1A. “Risk Factors” herein. Company Overview We are a clinical-stage biopharmaceutical company engaged in the science of ribosome modulation, leveraging both our innovative TURBO-ZM™ chemistry technology platform and our library of novel aminoglycosides in an effort to develop novel oral small molecule Ribosome Modulating Agents (“RMAs”) and Eukaryotic Ribosome Selective Glycosides (“ERSGs”), for the treatment of rare and ultra-rare premature stop codon diseases and ribosomal mutations. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA (“mRNA”) and the protein synthesis from that mRNA. Additionally, certain mutations of the ribosome disrupt normal protein translation and are drivers of a subset of cancers. We have multiple programs in our pipeline including a clinical program for the treatment of cystic fibrosis (“CF”) patients with nonsense (“Class 1 CF”) mutations, preclinical programs in Recessive Dystrophic (“RDEB”) and Junctional Epidermolysis Bullosa (“JEB”) and Familial Adenomatous Polyposis (“FAP”) and various earlier discovery stage programs in oncology. We are also actively looking to expand our programs by seeking new indications in other rare diseases for our lead compounds. In November 2021, we announced positive topline results from the monotherapy arms of a Phase 2 study evaluating the safety and activity of one of our ERSGs, ELX-02, in Class 1 CF patients with at least one G542X nonsense allele mutation. We have expanded this Phase 2 study to evaluate the safety and efficacy in Class 1 CF patients of a combination of ELX-02 and ivacaftor, an approved drug currently marketed for the treatment of certain CF patients under the trade name “Kalydeco.” The U.S. Food and Drug Administration (“FDA”) has granted Fast Track designation for ELX-02 for the treatment of CF patients with nonsense mutations. In addition, the FDA granted ELX-02 Orphan Drug Designation for the treatment of CF in July 2020 and the European Medicines Agency (“EMA”) granted ELX-02 orphan medicinal product designation in September 2018. In March 2022, we entered into an agreement with the Cystic Fibrosis Foundation (“CFF”) for an award of up to $15.9 million to fund the ongoing global Phase 2 clinical development of ELX-02 in CF. We received an upfront payment of $7.0 million in March 2022. The remaining $8.9 million of the award will be payable upon the achievement of certain clinical development milestones. If we successfully commercialize ELX-02, we agreed to pay the CFF royalties based on future sales tiered on the actual level of funding from the CFF. Acquisition of Zikani Therapeutics, Inc. On April 1, 2021, the Company acquired Zikani Therapeutics, Inc. (“Zikani” and such acquisition, the “Zikani Merger”)), a company in preclinical development and engaged in the science of ribosome modulation, leveraging its innovative TURBO-ZM TM chemistry technology platform to develop novel RMAs as potential therapeutics for diseases with limited treatment options. The TURBO-ZM TM platform is designed to enable rapid synthesis of novel compounds that can be optimized to modulate the ribosome in a disease specific manner. The TURBO-ZM TM synthetic chemistry platform can design oral novel macrolide-based small molecules that are potent oral modulators with favorable therapeutic indices. Macrolides are antibiotics that inhibit protein synthesis in bacteria. As a result of the Zikani Merger in April 2021, we expect the Company to emerge as a leader in the science of ribosome modulation through our complementary platforms and continued development of our library of RMAs and ERSGs. ELX-02, is a small molecule drug candidate designed to restore production of full-length functional proteins. The investigational therapy has shown strong activity across a full range of mutations in CF preclinical models. In Phase 1 testing, ELX-02 was generally well tolerated and demonstrated high bioavailability with consistent pharmacokinetics across both 19 single and multiple-dose studies. The Phase 2 trials are designed to validate the safety of ELX-02 and assess its biological activity. With the strength of our ELX-02 program for CF, the acquisition of Zikani provides us with the opportunity to amplify the potential of our innovative science by developing a new class of therapies to treat diseases with limited to no treatment options. The CFF has agreed to provide funding for a portion of this research. Our preclinical programs are focused on select rare diseases including inherited diseases, cancer caused by nonsense mutations, kidney diseases, including autosomal dominant polycystic kidney disease, as well as rare ocular genetic disorders. In addition, we plan to file an Investigational New Drug (“IND”) in 2022 for patients with nonsense mutations in Recessive Dystrophic Epidermolysis Bullosa (“RDEB”) and Junctional Epidermolysis Bullosa (“JEB”). RDEB is an incurable, extremely painful and often fatal skin blistering condition caused by a lack of collagen type VII that is estimated to affect more than 3,000 people worldwide. JEB is the most severe form of Epidermolysis Bullosa, with most patients dying in infancy. By extending the application of ribosomal RNA modulation to the readthrough of nonsense mutations in tumor suppressor genes, we are also rapidly advancing preclinical research for familial adenomatous polyposis (FAP), an inherited pre-cancerous colorectal disease frequently caused by nonsense mutations in the adenomatous polyposis coli (APC) gene. We plan to target rare diseases including genetic diseases and cancers caused by nonsense mutations. Nonsense mutations cause approximately 10-12% of rare inherited diseases. ELX-02 along with the TURBO-ZM TM library of compounds are anticipated to significantly expand to include the treatment of many other rare diseases and certain cancers. Under the terms of the Agreement and Plan of Merger, the Company issued 7,596,810 shares of common stock in exchange for all of the issued and outstanding equity interests of Zikani (the “Merger Consideration”). The Zikani Merger was accounted for as an asset acquisition with acquired in-process research and development which was immediately expensed. Results of Operations Three Months Ended March 31, 2022, Compared to Three Months Ended March 31, 2021 The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended March 31, Change 2022 2021 $ % Operating expenses: Research and development $ 7,899 $ 4,073 $ 3,826 94 % General and administrative 3,054 4,341 (1,287 ) (30 ) % Total operating expenses 10,953 8,414 2,539 30 % Loss from operations (10,953 ) (8,414 ) (2,539 ) 30 % Other expense, net 667 280 387 138 % Net loss $ (11,620 ) $ (8,694 ) $ (2,926 ) 34 % Research and development expense Research and development expenses were $7.9 million for the three months ended March 31, 2022 compared to $4.1 million for the same period in 2021, an increase of $3.8 million. The increase was primarily related to an increase of $1.9 million related to our preclinical activities, an increase of $0.4 million related to clinical trials, an increase of $0.6 million in employee salaries and benefits, an increase of $0.1 million related to stock-based compensation, and an increase of $0.8 million in overhead and infrastructure costs. General and administrative expenses General and administrative expenses were $3.1 million for the three months ended March 31, 2022, compared to $4.3 million for the same period in 2021, a decrease of $1.3 million. The decrease was primarily related to a $0.5 million decrease in salaries and other personnel related costs, a $0.5 million decrease in stock-based compensation expense, a decrease of $0.2 million related to external consultant and professional fees, and a decrease of $0.1 million related to overhead and infrastructure costs. 20 O ther expense, net We recorded $0.7 million in other expense, net for the three months ended March 31, 2022, compared to $0.3 million for the same period in 2021. The increase in other expense, net, was primarily due to the recognition of $0.3 million of derivative liabilities related to the CFF awards and a $0.1 million increase in interest expense under the Hercules Term Loan (as defined below). 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. We have not generated revenue from sales of any product or service. We have incurred significant operating losses to date and have not generated revenue from sales of any products or services. Our net losses were $11.6 million and $8.7 million for the three months ended March 31, 2022, and 2021. As of March 31, 2022, we had an accumulated deficit of $249.9 million. We have financed our operations primarily through the issuance of equity instruments, and to a lesser extent, from loans and grants. We have devoted substantially all of our financial resources and efforts to the development of our product candidates. 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; • 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 until we do, we will continue to need to raise additional cash to fund our operations. Our cash and cash equivalents 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 money market funds . 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 $39.8 million at March 31, 2022, which includes the upfront payment of $7.0 million received from the Cystic Fibrosis Foundation (“CFF”) is not sufficient to maintain our current and planned operations for at least the next twelve months following the filing of this Quarterly Report on Form 10-Q. We will need to raise additional capital to finance our operations, which cannot be assured. We have concluded that these conditions, in aggregate, raise substantial doubt about our ability to continue as a going concern without additional funding through one year after the date of the financial statements included in the Quarterly Report on Form 10-Q. Principal Financing Activities On September 30, 2021, we entered into a Loan and Security Agreement with Hercules Capital, Inc., (“Hercules” or the “Lender”), Hercules agreed to extend term loans (the “Hercules Term Loan”) to the Company in an aggregate principal 21 amount of up to $30.0 millio n, comprised of three tranches, of which $12.5 million had been funded as of March 31, 202 2 . The remaining tranches totaling $17.5 million will be available to the Company based on achieving certain clinical and equity milestones during defined time periods. We will pay interest only on the outstanding principal on a monthly basis for the first 18 months of the agreement, which may be extended for an additional 12 months upon the achievement of certain milestones. Any amounts outstanding under the term loan advances, if not repaid sooner, are due and payable on April 1, 2025. On any date that we partially repay the outstanding obligations, the Company shall pay the Lenders a charge equal to 6.55% of the original principal amount. The Hercules Term Loan contains customary affirmative and negative covenants, which among others requires us to maintain at all times a minimum qualified cash balance equaling amounts ranging from $6.3 million to $10.0 million plus qualified accounts payable. As of March 31, 2022 we were in compliance with all debt covenants. However, the inherent uncertainties described above may impact our ability to remain in compliance with these covenants over the next twelve months. If we breach our financial covenants and fail to secure a waiver or forbearance from the third-party lender, such breach or failure could accelerate the repayment of the outstanding borrowings under the Hercules Term Loan or the exercise of other rights or remedies the third-party lender may have under applicable law. No assurance can be provided that a waiver or forbearance will be granted or that the outstanding borrowings under the Hercules Term Loan, will be successfully refinanced on terms that are acceptable to the Company. As previously noted, in March 2022, we entered into an agreement with the CFF for an award of up to $15.9 million to fund the ongoing global Phase 2 clinical development of ELX-02 in CF. We received an upfront payment of $7.0 million in March 2022. The remaining $8.9 million of the award will be payable upon the achievement of certain clinical development milestones. Upon the successful commercialization of ELX-02, we will pay the CFF royalties based on future sales tiered on the actual level of funding from the CFF. On September 30, 2021, we entered into a Sales Agreement with SVB Leerink, LLC (“SVB Leerink”) pursuant to which the Company may offer and sell up to $50.0 million of shares of its common stock (the “ATM Shares”) from time to time, through an “at the market offering” program (the “ATM Program”), under which SVB Leerink will act as sales agent. Pursuant to the Sales Agreement, the Company will set the parameters for the sale of ATM Shares, including the number of ATM Shares to be issued, the time period during which sales are requested to be made, limitations on the number of ATM Shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Company is not obligated to make any sales of Shares under the ATM Program. The Company has not sold any shares under the ATM Program as of March 31, 2022. 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, including by downsizing our workforce and curtailing certain development programs, which could have a material adverse effect on our operations and future prospects. Cash Flows The following table summarizes our sources and uses of cash for each of the periods presented (in thousands): Three Months Ended March 31, 2022 2021 Net cash used in operating activities $ (9,491 ) $ (7,685 ) Net cash (used in) provided by investing activities (11 ) - Net cash provided by financing activities 7,000 1,262 22 Our operating activities used cash of $9.5 million and $7.7 million during the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, net cash used in operating activities resulted primarily from our net loss of $11.6 million and changes in working capital of $0.6 million, partially offset by total non-cash charges of $1.5 million. Non-cash charges primarily related to $0.9 million of stock-based compensation, $0.2 million of amortization of lease assets, $0.3 million of derivative liabilities, and $0.1 million of debt discount amortization. For the three months ended March 31, 2021, net cash used in operating activities resulted primarily from our net loss of $8.7 million and changes in working capital of $0.5 million, partially offset by total non-cash charges of $1.5 million. Non-cash charges primarily related to $1.3 million of stock-based compensation, $0.1 million of amortization of lease assets, and $0.1 million of debt discount amortization. We had no material investing activities during the three months ended March 31, 2022 and 2021. Our financing activities provided cash of $7.0 million during the three months ended March 31, 2022 and provided cash of $1.3 million during the three months ended March 31, 2021. For the three months ended March 31, 2022, net cash provided by financing activities consisted primarily of $7.0 million in advances received from the CFF. For the three months ended March 31, 2021, net cash provided by financing activities consisted primarily of $1.3 million in term loan principal repayments and $2.6 million in advances received from collaboration partners. 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 and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these condensed consolidated 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 condensed consolidated financial statements presented in this Report are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our 2021 Annual Report and Note – Basis of Presentation and Significant Accounting to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes to our critical accounting policies through March 31, 2022 from those discussed in our 2021 Annual Report. 23 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.