What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-12 compared with 2022-05-06 · 49 added, 49 removed, 90 unchanged (52% of the section changed)

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.

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, as well as the audited financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” 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, 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 “Forward-Looking Statements,” “Summary Risk Factors,” and Part II, Item 1A.

“Risk Factors” herein.

8 unchanged sentences

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 addition, the FDA granted ELX-02 Orphan Drug Designation for the treatment of CF in July 2020 and based on the European Medicines Agency’s (“EMA”) positive opinion, the European Commission 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.

8 unchanged sentences

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

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”).

1 unchanged sentence

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

Six Months Ended

Operating expenses:

1 unchanged sentence

General and administrative

Acquired in-process research and development

Total operating expenses

2 unchanged sentences

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.

Research and development expenses were $7.7 million for the three months ended June 30, 2022, compared to $5.7 million for the same period in 2021, an increase of $1.9 million.

The increase was primarily related to a $0.7 million increase of expense related to subcontractors, advisors, and labs supplies in connection with preclinical research and development activities, a $0.8 million increase in clinical trial expenses related primarily to CFF funded activities, a $0.2 million increase in facility and overhead expenses, and a $0.2 million increase in stock-based compensation.

Research and development expenses were $15.6 million for the six months ended June 30, 2022 compared to $9.8 million for the same period in 2021, an increase of $5.8 million.

The increase was primarily related to a $2.7 million increase in expenses related to subcontractors, advisors, and lab supplies in connection with preclinical research and development activities, a $1.3 million increase in clinical trial expenses related primarily to CFF funded activities, a $0.5 million increase in salaries and other personnel costs and an increase of $0.3 million of stock-based compensation expense, a $0.3 million increase in consulting expenses, and a $0.7 million increase in facility and overhead expenses.

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.

General and administrative expenses were $2.6 million for the three months ended June 30, 2022, compared to $7.4 million for the same period in 2021, a decrease of $4.7 million.

The decrease was primarily related to a $1.9 million decrease in salaries and other personal related costs offset by an increase of $0.9 million in expenses attributable to professional and consulting fees as the Company reduced headcount and outsourced certain functions, a $3.5 million decrease in stock-based compensation expense due primarily to option modifications of former executives in 2021, and a $0.2 million decrease in facility and overhead expenses.

General and administrative expenses were $5.7 million for the six months ended June 30, 2022, compared to $11.7 million for the same period in 2021, a decrease of $6.0 million.

The decrease was primarily related to a $2.4 million decrease in salaries and other personnel related costs, offset by an increase of $0.7 million in expenses attributable to professional and consulting fees as the Company reduced headcount and outsourced certain functions, a decrease of $4.0 million in stock-based compensation expense due primarily to option modifications of former executives in 2021, and a decrease of $0.3 million related to facility and overhead expenses.

Acquired in-process research and development

Acquired in-process research and development (“IPR&D”) expense of $22.7 million for the three and six months ended June 30, 2021 consists of the estimated fair value of the assets acquired and consideration given in connection with the acquisition of the Zikani’s IPR&D.

As the assets acquired were in the research and development phase and were determined to not have any alternative future use, it was expensed as acquired IPR&D.

There was no such expense for the three and six months ended June 30, 2022.

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).

We recorded $0.3 million in other expense, net, for each of the three months ended June 30, 2022 and 2021.

We recorded $1.0 million in other expense, net for the six months ended June 30, 2022, compared to $0.6 million for the same period in 2021.

The Company recognized an increase of $0.1 million and $0.3 million related to the Hercules Term Loan (defined below) for the three and six month periods ended June 30, 2022 as compared to the prior year periods, respectively.

We recognized a $0.1 million decrease and a $0.2 million increase in the change in the fair value of derivative liabilities related to the CFF awards during the three and six month periods ended June 30, 2022 as compared to the prior year periods, respectively.

Liquidity and Capital Resources

3 unchanged sentences

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.

Our net losses were $22.2 million and $44.8 million for the six months ended June 30, 2022 and 2021, respectively.

As of June 30, 2022, we had an accumulated deficit of $260.6 million.

We have financed our operations primarily through the issuance of equity instruments, and to a lesser extent, from loans and grants.

18 unchanged sentences

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 believe that our cash and cash equivalents of $30.0 million at June 30, 2022, are 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.

See Note 1— Nature of the Business - Liquidity and Going Concern to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and Part II, Item 1A.

Risk Factors – Our recurring losses from operations raise substantial doubt regarding our ability to continue as a going concern.

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

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 .

On September 30, 2021, we entered into a loan and security agreement (the “Hercules Term Loan 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 amount of up to $30.0 million, comprised of three tranches, of which $12.5 million had been funded as of June 30, 2022.

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.

2 unchanged sentences

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.

The Hercules Term Loan Agreement 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 June 30, 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.

4 unchanged sentences

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.

Upon the successful commercialization of ELX-02, we will pay the CFF sales milestones and 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.

1 unchanged sentence

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.

The Company has not sold any shares under the ATM Program as of June 30, 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.

1 unchanged sentence

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

1 unchanged sentence

Net cash provided by financing activities

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.

Our operating activities used cash of $19.2 million and $17.5 million during the six months ended June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022, net cash used in operating activities resulted primarily from our net loss of $22.2 million partially offset by changes in working capital and total non-cash charges of $2.4 million.

Non-cash charges during the six months ended June 30, 2022 primarily related to $1.7 million of stock-based compensation, $0.3 million of amortization of right-of-use assets, $0.3 million of debt discount amortization, and a recognized change in fair value of derivative liabilities of $0.2 million.

Changes in working capital during the six months ended June 30, 2022 primarily related to a $0.4 million decrease in prepaid expenses, a $0.6 million increase in accounts payable and a $0.7 million increase in accrued expenses, and a decrease of $0.3 million in operating lease liabilities.

For the six months ended June 30, 2021, net cash used in operating activities resulted primarily from our net loss of $44.8 million partially offset by changes in working capital and total non-cash charges of $28.5 million.

Non-cash charges during the six months ended June 30, 2021 primarily related to $22.7 million of acquired in-process research and development, $5.3 million of stock-based compensation, $0.4 million of amortization of lease assets, and $0.2 million of debt discount amortization.

Changes in working capital during the six months ended June 30, 2021 were primarily related to decreases of $0.1 million in prepaid expenses, $0.4 million in operating lease liabilities, and $1.0 million of merger related costs.

Our investing activities provided cash of $2.1 million during the six months ended June 30, 2021, related to the Zikani Merger.

There were no material investing activities during the six months ended June 30, 2022.

Our financing activities provided cash of $7.0 million during the six months ended June 30, 2022 and $47.6 million during the six months ended June 30, 2021.

For the six months ended June 30, 2022, net cash provided by financing activities consisted of $7.0 million in advances received from the CFF.

For the six months ended June 30, 2021, net cash provided by financing activities consisted primarily of net proceeds of $47.7 million from our underwritten public offering of common stock in May 2021, $2.6 million in advances received from collaboration partners, offset by $2.5 million in term loan principal repayments under our term loan with Silicon Valley Bank which was repaid in September 2021, and $0.2 million related to the settlement of taxes upon vesting of restricted stock units.

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.

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.

The preparation of these interim unaudited 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.

2 unchanged sentences

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.

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our interim unaudited condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q 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 2 – 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 June 30, 2022 from those discussed in our 2021 Annual Report.

Quantitative and Qualitative Disclosures about Market Risk

1 unchanged sentence

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