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, 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. 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 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. 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. 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. 21 Results of Operations The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended June 30, Change Six Months Ended June 30, Change 2022 2021 $ % 2022 2021 $ % Operating expenses: Research and development $ 7,651 $ 5,704 $ 1,947 34 % $ 15,550 $ 9,777 $ 5,773 59 % General and administrative 2,645 7,355 (4,710 ) (64 ) % 5,699 11,696 (5,997 ) (51 ) % Acquired in-process research and development — 22,670 (22,670 ) (100 ) % — 22,670 (22,670 ) (100 ) % Total operating expenses 10,296 35,729 (25,433 ) (71 ) % 21,249 44,143 (22,894 ) (52 ) % Loss from operations (10,296 ) (35,729 ) (25,433 ) (71 ) % (21,249 ) (44,143 ) (22,894 ) (52 ) % Other expense, net 322 329 (7 ) (2 ) % 989 609 380 62 % Net loss $ (10,618 ) $ (36,058 ) $ 25,440 (71 ) % $ (22,238 ) $ (44,752 ) $ 22,514 (50 ) % Research and development expense 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 $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. 22 O ther expense, net 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 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 $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. 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. 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. 23 Principal Financing Activities 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. 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 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. 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 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. 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 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. 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): Six Months Ended June 30, 2022 2021 Net cash used in operating activities $ (19,238 ) $ (17,482 ) Net cash (used in) provided by investing activities (18 ) 2,145 Net cash provided by financing activities 7,000 47,593 24 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. GAAP”). 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. 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 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. 25 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.