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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-31326

 

ELOXX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

84-1368850

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

 

480 Arsenal Way

Watertown, Massachusetts 02472

(Address of principal executive offices) (Zip Code)

781-577-5300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

ELOX

The Nasdaq Global Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

On May 3, 2022, the registrant had 86,653,089 shares of common stock, $0.01 par value per share, outstanding.

 

 


 

 

ELOXX PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

Special Note Regarding Forward Looking Statements

 

ii

 

 

 

 

 

 

 

Risk Factor Summary

 

iv

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

6

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

 

 

Balance Sheets as of March 31, 2022 and December 31, 2021

 

6

 

 

 

 

 

 

 

Statements of Operations for the Three Months ended March 31, 2022 and 2021

 

7

 

 

 

 

 

 

 

Statements of Cash Flows for the Three Months ended March 31, 2022 and 2021

 

8

 

 

 

 

 

 

 

Statements of Stockholders’ Equity for the Three Months ended March 31, 2022 and 2021

 

9

 

 

 

 

 

 

 

Notes to Financial Statements

 

11

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

25

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

25

 

 

 

 

 

Item 1A.

 

Risk Factors

 

25

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

55

 

 

 

 

 

Item 4.

 

Mine Safety Data

 

55

 

 

 

 

 

Item 5.

 

Other Information

 

55

 

 

 

 

 

Item 6.

 

Exhibits

 

56

 

 

 

 

 

 

 

SIGNATURES

 

58

 

 

i


 

 

Special Note Regarding Forward-Looking Statements

Eloxx Pharmaceuticals, Inc., together with its subsidiaries, is collectively referred to herein as “we,” “our,” “us,” “Eloxx” or the “Company,” Hyperlinks and web addresses are provided as a convenience and for informational purposes only. Eloxx bears no responsibility for the security or content of external websites.

This Quarterly Report on Form 10-Q, and information incorporated herein, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of present and historical facts contained in this Report, including without limitation statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. Without limiting the foregoing, in some cases, you can identify forward-looking statements by terms such as “aim,” “may,” “will,” “would,” “should,” “expect,” “exploring,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “seeks,” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. No forward-looking statement is a guarantee of future results, performance, or achievements, and one should avoid placing undue reliance on such statements.

Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to us. Such beliefs and assumptions may or may not prove to be correct. Additionally, such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, and actual results may differ materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to:

 

risks related to our dependence on our lead product candidate, ELX-02 and our ability to progress any product candidates in preclinical or clinical trials;

 

the length and expense of preclinical and clinical trial development, the uncertainty of clinical trial results and the fact that positive results from preclinical studies are not always indicative of positive clinical results;

 

risks related to the scope, rate and progress of our preclinical studies and clinical trials and other research and development activities;

 

risks related to the competition for patient enrollment from drug candidates in development;

 

the impact of the global COVID-19 pandemic on our clinical trials, operations, vendors, suppliers and employees;

 

risks related to regulatory approvals and other requirements applicable to our product candidates;

 

risks related to our ability to obtain the capital necessary to fund our operations;

 

risks relating to the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

risks related to our ability to obtain adequate financing in the future through product licensing, public or private equity or debt financing or otherwise;

 

our and our stockholders’ ability to realize benefits from our strategic initiatives, including the Zikani Merger (defined below);

 

general business conditions, regulatory environment, competition and market for our products;

 

business abilities and judgment of personnel, and the availability of qualified personnel; and

 

those identified in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Annual Report”).

ii


 

Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risks and uncertainties.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not rely upon forward-looking statements as predictions of future events. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Unless required by law, we will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made.

MARKET AND INDUSTRY DATA

This Report and the other documents incorporated herein by reference include statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data and disclaim responsibility for its content.


iii


 

 

RISK FACTOR SUMMARY

The following is a summary of the principal risks of an investment in our common stock. This summary does not list all the risks that we face. Additional discussion of the risks summarized below follow directly under the heading “Risk Factors” and should be carefully considered, together with other information in our 2021 Annual Report on Form 10-K and our other filings with the SEC before making an investment decision regarding our common stock.

 

We depend heavily on the success of our lead product candidate, ELX-02. If ELX-02 fails during development or suffers any material development delays, it may adversely impact the commercial viability of ELX-02 and our business.

 

Preclinical and clinical drug development is a lengthy and expensive process, with an uncertain outcome. Our preclinical and clinical programs may experience delays or may never advance, which would adversely affect ability to obtain regulatory approvals or commercialize our product candidates on a timely basis or at all, which could have an adverse effect on our business.

 

We and our collaborating partners may be subject, directly or indirectly, to federal and state healthcare fraud and abuse and false claims laws and regulations. If we or our collaborating partners are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

 

Our product candidates, including ELX-02, may cause adverse events or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.

 

Even though we have received orphan drug designation from the FDA for ELX-02 for the treatment of cystic fibrosis, cystinosis, MPS I, and Rett syndrome, we may not be able to maintain the benefits of orphan drug designation or obtain orphan drug marketing exclusivity for ELX-02 or any of our other product candidates for other indications.

 

A Fast Track Designation by the FDA, even if granted for any of our product candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that our product candidates will receive marketing approval.

 

We may find it difficult to recruit and enroll patients in our clinical trials, which could cause significant delays in the completion of such trials or may cause us to abandon one or more clinical trials.

 

If we are unable to develop and commercialize our product candidates, our business will be adversely affected.

 

We have incurred significant operating losses since our inception and anticipate that we will continue to incur substantial operating losses for the foreseeable future. We may never achieve or maintain profitability.

 

We will need substantial additional funding. If we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

 

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

 

Our stockholders may not realize a benefit from the Zikani Merger commensurate with the ownership dilution they experienced in connection with the Zikani Merger.

 

If we fail to adequately protect or enforce our intellectual property rights or secure rights to third party patents, the value of our intellectual property rights would diminish, and our business, competitive position and results of operations would suffer.

 

If we infringe the rights of third parties, we could be prevented from selling products, forced to pay damages and required to defend against litigation which could result in substantial costs and may have a material adverse effect on our business, results of operations and financial condition.

 

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

iv


 

 

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

 

Our stock price may be volatile, and purchasers of our common stock could incur substantial losses.

 

 

 

v


 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Information

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31,

2022

 

 

December 31,

2021

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,768

 

 

$

42,268

 

Restricted cash

 

 

297

 

 

 

299

 

Prepaid expenses and other current assets

 

 

2,082

 

 

 

913

 

Total current assets

 

 

42,147

 

 

 

43,480

 

Property and equipment, net

 

 

206

 

 

 

216

 

Operating lease right-of-use asset

 

 

1,265

 

 

 

1,443

 

Total assets

 

$

43,618

 

 

$

45,139

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,903

 

 

$

1,379

 

Accrued expenses

 

 

4,631

 

 

 

4,196

 

Advances from collaboration partners

 

 

10,723

 

 

 

3,723

 

Derivative liabilities

 

 

270

 

 

 

 

Current portion of operating lease liability

 

 

647

 

 

 

657

 

Total current liabilities

 

 

19,174

 

 

 

9,955

 

Long-term debt

 

 

12,120

 

 

 

11,996

 

Operating lease liability

 

 

638

 

 

 

804

 

Total liabilities

 

 

31,932

 

 

 

22,755

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 5,000,000 shares authorized, no

   shares issued or outstanding as of March 31, 2022 and

   December 31, 2021

 

 

 

 

 

 

Common stock, $0.01 par value per share, 500,000,000 shares authorized,

  87,074,455 and 87,071,324 shares issued and 86,653,089 and

   86,649,958 shares outstanding as of March 31, 2022 and

   December 31, 2021, respectively

 

 

871

 

 

 

871

 

Common stock in treasury, at cost, 421,366 shares as of

   March 31, 2022 and December 31, 2021

 

 

(2,190

)

 

 

(2,190

)

Additional paid-in capital

 

 

262,948

 

 

 

262,026

 

Accumulated deficit

 

 

(249,943

)

 

 

(238,323

)

Total stockholders’ equity

 

 

11,686

 

 

 

22,384

 

Total liabilities and stockholders’ equity

 

$

43,618

 

 

$

45,139

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

6


 

 

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

7,899

 

 

$

4,073

 

General and administrative

 

 

3,054

 

 

 

4,341

 

Total operating expenses

 

 

10,953

 

 

 

8,414

 

Loss from operations

 

 

(10,953

)

 

 

(8,414

)

Other expense, net

 

 

667

 

 

 

280

 

Net loss and comprehensive loss

 

$

(11,620

)

 

$

(8,694

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.13

)

 

$

(0.22

)

Weighted average number of shares of common stock used in

   computing net loss per share, basic and diluted

 

 

86,651,036

 

 

 

40,180,131

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

7


 

 

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

Three Months Ended

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,620

)

 

$

(8,694

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

922

 

 

 

1,308

 

Depreciation

 

 

21

 

 

 

16

 

Amortization of operating lease right-of-use asset

 

 

177

 

 

 

132

 

Amortization of debt discount

 

 

124

 

 

 

110

 

Change in fair value of derivative liabilities

 

 

270

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(1,169

)

 

 

(460

)

Accounts payable

 

 

1,525

 

 

 

4

 

Accrued expenses

 

 

434

 

 

 

31

 

Operating lease liabilities

 

 

(175

)

 

 

(132

)

Net cash used in operating activities

 

 

(9,491

)

 

 

(7,685

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(11

)

 

 

 

Net cash (used in) provided by investing activities

 

 

(11

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of term loan principal

 

 

 

 

 

(1,250

)

Proceeds from advances from collaboration partners

 

 

7,000

 

 

 

2,606

 

Payment for settlement of taxes upon vesting of restricted stock units

 

 

 

 

 

(94

)

Net cash provided by financing activities

 

 

7,000

 

 

 

1,262

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

 

(2,502

)

 

 

(6,423

)

Cash, cash equivalents and restricted cash at the beginning of the period

 

 

42,567

 

 

 

24,724

 

Cash, cash equivalents and restricted cash at the end of the period

 

$

40,065

 

 

$

18,301

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to condensed

   consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,768

 

 

$

18,247

 

Restricted cash

 

 

297

 

 

 

54

 

Total cash, cash equivalents and restricted cash

 

$

40,065

 

 

$

18,301

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow activities:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

297

 

 

$

144

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

8


 

 

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

paid-in

capital

 

 

Accumulated other comprehensive income

 

 

Shares

 

 

Amount

 

 

Accumulated

deficit

 

 

Total

stockholders'

equity

 

Balance at December 31, 2021

 

 

86,649,958

 

 

$

871

 

 

$

262,026

 

 

$

 

 

 

(421,366

)

 

$

(2,190

)

 

$

(238,323

)

 

$

22,384

 

Vesting of restricted stock units

 

 

3,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

922

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,620

)

 

 

(11,620

)

Balance at March 31, 2022

 

 

86,653,089

 

 

$

871

 

 

$

262,948

 

 

$

 

 

 

(421,366

)

 

$

(2,190

)

 

$

(249,943

)

 

$

11,686

 

 

See accompanying notes to unaudited condensed consolidated financial statements

9


 

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

paid-in

capital

 

 

Accumulated

other

comprehensive

income

 

 

Shares

 

 

Amount

 

 

Accumulated

deficit

 

 

Total

stockholders'

equity

 

Balance at December 31, 2020

 

 

40,157,187

 

 

$

404

 

 

$

183,250

 

 

$

 

 

 

(193,735

)

 

$

(1,828

)

 

$

(171,596

)

 

$

10,230

 

Vesting of restricted stock units

 

 

57,687

 

 

 

 

 

 

-

 

 

 

 

 

 

(23,883

)

 

 

(94

)

 

 

 

 

 

(94

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

1,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,308

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,694

)

 

 

(8,694

)

Balance at March 31, 2021

 

 

40,214,874

 

 

$

404

 

 

$

184,558

 

 

$

 

 

 

(217,618

)

 

$

(1,922

)

 

$

(180,290

)

 

$

2,750

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

10


 

 

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business

  Eloxx Pharmaceuticals, Inc., together with its subsidiaries (collectively “Eloxx” or the “Company”), is a clinical-stage biopharmaceutical company engaged in the science of ribosomal modulation. The Company is developing novel small molecule drug candidates from its library of unique Ribosome Modulating Agents (“RMAs”) and Eukaryotic Ribosomal Selective glycosides (“ERSGs”), for the treatment of a subset of rare and ultra-rare diseases and cancers characterized by genetic mutations that cause defects in protein translation. Specifically, the Company is targeting premature stop codon mutations 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. On April 1, 2021, the Company acquired Zikani Therapeutics, Inc. (“Zikani”), a preclinical stage biopharmaceutical company engaged in the science of ribosome modulation, leveraging its innovative TURBO-ZMTM chemistry technology platform to develop novel ribosome modulating agents (“RMAs”). The TURBO-ZMTM platform is designed to enable rapid synthesis of novel macrolides that can be optimized to modulate the human, bacterial or viral ribosomes to treat rare diseases and cancers with certain ribonucleic acid (“RNA”) and ribosomal mutations. 

The Company is headquartered in Watertown, Massachusetts, with additional operations in Israel and Australia.

 

Liquidity and Going Concern

 The Company has a history of net losses and negative cash flows from operating activities since inception, and as of March 31, 2022, had an accumulated deficit of $249.9 million. The Company expects to continue to incur net losses and use cash in its operations for the foreseeable future. The Company has not generated revenue from the sale of any product or service and does not expect to generate significant sales revenue unless and until it obtains marketing approval for and commercializes one or more of its product candidates currently in development. Successful transition to profitable operations is dependent upon achieving a level of revenue adequate to support the Company’s cost structure.

The Company has financed its operations primarily from the sale of equity securities and to a lesser extent, loans and grants. The Company may never achieve profitability, and unless and until it does, the Company will continue to need to raise additional capital to fund its operations. In addition, as disclosed in Note 6, in September 2021, the Company entered into a Loan and Security Agreement for an aggregate principal amount of $30.0 million of which $12.5 million had been funded as of March 31, 2022. The term loan contains customary affirmative and negative covenants, which among others further described in Note 6, require the Company 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 defined).

As of March 31, 2022, the Company was in compliance with all debt covenants. However, the inherent uncertainties described above may impact the Company’s ability to remain in compliance with these covenants over the next twelve months. If the Company breaches its financial covenants and fails 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 Credit Agreement or the exercise of other rights or remedies the third-party lender may have under applicable law. No assurance can be provided a waiver or forbearance will be granted or the outstanding borrowings under the Loan and Security Agreement, will be successfully refinanced on terms that are acceptable to the Company.

The Company believes that its cash and cash equivalents of $39.8 million at March 31, 2022 will not be sufficient to maintain its current and planned operations for at least the next twelve months following the filing of this Quarterly Report on Form 10-Q. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business. However, based on the Company’s current working capital, anticipated operating expenses and net losses and the uncertainties surrounding its ability to raise additional capital as needed, as discussed below, the Company believes that these conditions, in aggregate, raise substantial doubt about its ability to continue as a going concern for one year after the date these consolidated financial statements are issued. 

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. The availability of sufficient funding to alleviate the conditions that raise substantial doubt are not within management’s control and cannot be assessed as

11


 

being probable of occurring. If the Company is unable to obtain adequate financing, it will evaluate options which may include reducing or deferring operating expenses, which may have a material adverse effect on the Company’s operations and future prospects.    

 

2. Basis of Presentation and Significant Accounting Policies

 

The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”). These interim condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods ended March 31, 2022 and 2021.            

Certain information and footnote disclosures normally included in the Company’s annual consolidated financial statements have been condensed or omitted, as permitted by such rules and regulations. These interim consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations, and cash flows for the interim periods ended March 31, 2022 and 2021.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 30, 2022 (the “2021 Annual Report”).

The significant accounting policies used in the preparation of these condensed consolidated financial statements are consistent with those described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021 and the notes thereto in the Company’s 2021 Annual Report.  

Recent Accounting Pronouncements

Although the FASB has issued several ASUs for which adoption dates are pending, the Company does not expect any to have any impacts on its consolidated financial statements.

 

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31, 2021

 

Research and development

 

$

415

 

 

$

413

 

Insurance

 

 

1,065

 

 

 

123

 

Other

 

 

602

 

 

 

377

 

Total

 

$

2,082

 

 

$

913

 

 

12


 

 

4. Property and Equipment

Property and equipment, net consisted of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31, 2021

 

Computers and software

 

$

31

 

 

$

31

 

Office furniture and equipment

 

 

27

 

 

 

27

 

Laboratory equipment

 

 

221

 

 

 

221

 

Leasehold improvements

 

 

88

 

 

 

88

 

Assets in progress

 

 

31

 

 

 

20

 

 

 

 

398

 

 

 

387

 

Less accumulated depreciation

 

 

(192

)

 

 

(171

)

Property and equipment, net

 

$

206

 

 

$

216

 

 

Depreciation expense was $21 thousand and $16 thousand for the three months ended March 31, 2022 and 2021, respectively.

5. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

 

 

March 31,

2022

 

 

December 31, 2021

 

Research and development expenses

 

$

3,374

 

 

$

1,849

 

Payroll other employee-related expenses

 

 

528

 

 

 

1,615

 

Professional services

 

 

380

 

 

 

489

 

Other

 

 

245

 

 

 

141

 

Interest on debt

 

 

104

 

 

 

102

 

Total

 

$

4,631

 

 

$

4,196

 

 

 

 

6. Debt

Hercules Term Loan

 

On September 30, 2021, the Company entered into a Loan and Security Agreement, dated as of September 30, 2021 (the “Hercules Loan Agreement”) with Hercules Capital, Inc. (“Hercules” or the “Lender”).

 

The Lender extended term loans in an aggregate principal amount of up to $30.0 million, comprised of (i) a tranche 1 advance of $12.5 million (the “Tranche 1 Advance”), (ii) a tranche 2 advance of $7.5 million (the “Tranche 2 Advance”) and (iii) a tranche 3 advance of $10.0 million (the “Tranche 3 Advance”) (collectively, the “Term Loan Advances”). The Tranche 1 Advance under the Loan Agreement was funded on September 30, 2021. The Tranche 2 Advance is available at the Company’s election after the occurrence of certain milestone events relating to data from the clinical trials. The Tranche 2 Advance will remain available for funding until August 15, 2022. The Tranche 3 Advance is available subject to approval by the Lenders’ investment committee in its sole discretion. The Tranche 3 Advance will remain available for funding until, initially, April 1, 2023, and (i) upon the occurrence of certain milestone events relating to the Company’s receipt of net cash proceeds, October 1, 2023, and (ii) upon the occurrence of certain milestone events relating to the Company’s receipt of net cash proceeds and certain milestone events relating to data from the clinical trials, April 1, 2024.

 

As security for its obligations, the Company granted Hercules a continuing security interest in substantially all of the assets of the Company, subject to certain customary exceptions, including for intellectual property.

 

Any outstanding principal on the Term Loan Advances will accrue interest at a floating rate equal to the greater of (i) 9.50% per annum and (ii) the sum of 6.25% plus the prime rate, as published in The Wall Street Journal. On September 30, 2021, the interest rate was 9.5%. Interest payments are payable monthly following the funding of a Term Loan Advance. The Company will be required to make principal payments on the outstanding balance of the Term Loan Advances commencing on April 1, 2023 (the “Term Loan Amortization Date”) in 36 equal monthly instalments, plus interest; provided that if the Company has achieved the milestones described above, then the Term Loan Amortization Date will be automatically extended to October 1, 2023 or April 1, 2024, as applicable. Any amounts outstanding under the Term Loan Advances, if not repaid sooner, are due and payable on April 1, 2025 (the “Maturity Date”). On any date that the Company partially repays the outstanding obligations, the Company shall pay the Lenders a charge equal to 6.55% of the original principal amount.

13


 

 

The Company may prepay the outstanding principal amount of the Term Loan Advances at any time (in whole, but not in part), plus accrued and unpaid interest and a prepayment premium equal to (i) 3% of the principal amount outstanding if prepaid on or prior to the first anniversary of the date of Loan Agreement, (ii) 2% of the principal amount outstanding if prepaid after the first anniversary the date of Hercules Loan Agreement but on or prior to the second anniversary of the date of Hercules Loan Agreement, and (iii) 1% of the principal amount outstanding if prepaid after the second anniversary of the date of Hercules Loan Agreement but on or prior to the Maturity Date.

 

The Hercules Loan Agreement contains customary affirmative and negative covenants which, among other things, requires the Company 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 defined) and limits the Company’s ability to (i) incur additional indebtedness, (ii) pay dividends or make certain distributions, (iii) dispose of its assets, grant liens or encumber its assets or (iv) fundamentally alter the nature of its business. These covenants are subject to a number of exceptions and qualifications. The Company was in compliance with all debt covenants at March 31, 2022.

 

The Hercules Loan Agreement also contains customary events of default, including the Company’s failure to make any principal or interest payments when due, the occurrence of certain bankruptcy or insolvency events or a breach of the covenants. Upon the occurrence of an event of default, Hercules may, among other things, accelerate the Company’s obligations under the Hercules Loan Agreement.

As of March 31, 2022, the carrying value of the outstanding loan consists of $12.5 million in principal less an unamortized debt discount of $1.2 million. The debt issuance costs and the final maturity payment of $0.8 million, have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the loan. Interest expense relating to the loan for the three months ended March 31, 2022 and 2021 was $0.4 million and $0, respectively. Interest expense is calculated using the effective interest method and is inclusive of non-cash amortization of the debt discount. At March 31, 2022, the effective interest rate was 15.25%.

 

SVB Term Loan

On January 30, 2019, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) in the amount of $15.0 million with Silicon Valley Bank (“SVB”) and WestRiver Innovation Lending Fund VIII, L.P. (“WestRiver”, and together with SVB, the “Lenders”).  

 

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. On March 31, 2021, the interest rate was 5.75%.          

      

   

On September 30, 2021, in connection with the funding of the Hercules Term Loan Tranche 1 Advance and pursuant to a Payoff Letter dated September 30, 2021, the Company voluntarily repaid in full the carrying value of the outstanding loan consisting of $6.7 million of principal, a final maturity payment of $0.9 million, and early termination fees of $0.1 million from funds received under the Hercules Loan Agreement. The debt issuance costs, the valuation of the warrants, and the final maturity payment of $0.9 million, had been recorded as a debt discount which was being accreted to interest expense through the maturity date of the loan. The remaining unamortized debt discount of $0.2 million and early termination fees were accounted for as a loss on debt extinguishment and included in other income and expense in the statement of operations for the year ended December 31, 2021. Interest expense relating to the loan for three months ended March 31, 2021, was $0.3 million. Interest expense is calculated using the effective interest method and is inclusive of non-cash amortization of the debt discount.  At March 31, 2021, the effective interest rate was 10.85%.  

 

14


 

 

PPP Loan

 

 In April 2020, the Company 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”). The Company used the loan proceeds for payroll and other covered costs in accordance with the relevant terms and conditions of the CARES Act. The PPP Loan had a maturity date of April 21, 2022 and an interest rate of 1.0% per annum. Under the terms of the PPP, on September 3, 2021, the PPP Loan was forgiven in full, and the Company recognized a gain on extinguishment of debt of $0.8 million.       

 

The Company’s scheduled future principal payments for the long-term debt are as follows (in thousands):

 

 

 

March 31,

 

 

 

2022

 

Remainder of 2022

 

$

 

2023

 

 

4,204

 

2024

 

 

6,101

 

2025

 

 

2,195

 

Total future principal payments

 

 

12,500

 

Less unamortized discount

 

 

(1,199

)

Carrying value of long-term debt

 

 

11,301

 

Less current portion

 

 

-

 

Add final fee due at maturity in 2023

 

 

819

 

Long-term portion

 

$

12,120

 

 

 

7. Legal and Other Contingencies

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. The Company is currently unaware of any material pending legal proceedings to which it is a party or of which its property is the subject. The Company accounts for its contingent liabilities in accordance with ASC Topic 450, “Contingencies”.

Cystic Fibrosis Foundation

During 2019, the Company received a funding award (the “2019 CFF Award”) from the Cystic Fibrosis Foundation (“CFF”) and entered into an agreement relating to the award, which agreement was amended in December 2020 providing for an additional award amount. Payment of award amounts are subject to the achievement of certain milestones in connection with the Company’s cystic fibrosis development program. The Company will be required to repay amounts received from the CFF (or specified multiples of such amounts) in certain circumstances, including as royalties on net sales, and, in the event of a disposition of the underlying asset.  The funding provided to the Company is accounted for as an advance from a collaboration partner within the scope of ASC Topic 730, “Research and Development.” As of December 31, 2021, the Company received payments of $3.4 million, which are recorded as Advances from collaboration partners in the accompanying condensed consolidated financial statements. In March 2022, the Company entered into an agreement with the CFF to amend the 2019 CFF Award to provide for up to an additional $15.9 million to fund the ongoing global Phase 2 clinical development of ELX-02 in cystic fibrosis (the “2022 CFF Agreement”). The Company received an upfront payment of $7.0 million in March 2022, which was recorded as Advances from collaboration partners in the accompanying condensed consolidated financial statements. The remaining $8.9 million of the amended award may be disbursed to the Company by CFF upon the achievement of certain clinical development milestones. Upon successful commercialization of ELX-02 or any derivative products thereof, the Company will pay the CFF royalties up to 6% of net sales based on the on the actual amount of funding from the CFF. In addition, the 2022 CFF Agreement includes an embedded derivative arising from a provision that upon the occurrence of a change of control or sale or license of funded assets (each a disposition event), the Company would be required to pay the CFF 10% of the consideration received for the disposition event up to three times the amount of funds received from the CFF under the 2022 CFF Agreement.        

15


 

In May 2021, the Company received an additional award from the CFF (the “2021 CFF Award”) to help identify optimized oral RMAs for further development in the treatment of cystic fibrosis patients with nonsense mutations. Payment of award amounts are subject to the achievement of certain milestones in connection with the Company’s oral RMA cystic fibrosis development program. The Company will be required to repay amounts received from the CFF (or specified multiples of such amounts) in certain circumstances, including as royalties on net sales, and, in the event of a disposition of the underlying asset. The funding provided to the Company is accounted for as an advance from a collaboration partner within the scope of ASC Topic 730, “Research and Development.” As of March 31, 2022 and December 31, 2021, the Company received payments of $0.3 million under this award, which are recorded as Advances from collaboration partners in the accompanying condensed consolidated financial statements. The 2021 CFF Award includes an embedded derivative arising from a provision that upon the occurrence of a change of control or sale or license of funded assets (each a disposition event) the Company would be required to pay the CFF 20% of the consideration received for the disposition event up to eight times the amount of funds received from the CFF under the 2021 CFF Agreement.

The fair value of the embedded derivatives related to the 2019 CFF Award and the 2021 CFF Award as described above were concluded to be de minimis as of December 31, 2021. In conjunction with the 2022 CFF Agreement, the Company estimated the fair value of the embedded derivatives to be $0.3 million as of March 31, 2022 and has recognized this amount in the condensed consolidated balance sheet as derivative liabilities with the corresponding expense recognized as change in fair value of derivative liabilities in other expense, net, in the condensed consolidated statements of operations for the three months ended March 31, 2022.                     

 

8. Stockholders’ Equity

Warrants

As of March 31, 2022 and December 31, 2021, 323,892 warrants to purchase common stock were outstanding, with a weighted average exercise price of $4.31 per share. The weighted average remaining contractual life at March 31, 2022 was 1.49 years. 

 

9. Stock-based Compensation

 

Summary of Stock Option Activity

Transactions related to stock options awarded to employees and directors during the three months ended March 31, 2022 were as follows:

 

 

 

Shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

life (years)

 

 

Aggregate

intrinsic

value

 

Options outstanding at December 31, 2021

 

 

8,904,444

 

 

$

5.24

 

 

 

7.23

 

 

$

254,223

 

Granted

 

 

3,269,497

 

 

 

0.46

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(43,161

)

 

 

23.18

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2022

 

 

12,130,780

 

 

$

3.89

 

 

 

7.76

 

 

$

580,846

 

Options exercisable at March 31, 2022

 

 

2,930,696

 

 

$

10.94

 

 

 

2.69

 

 

$

254,223

 

 

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the fair value of the common stock as of March 31, 2022 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2022. This amount is impacted by changes in the fair value of the common stock.

16


 

Summary of Restricted Stock Unit Activity

 

Activity related to restricted stock units awarded to employees during the three months ended March 31, 2022 were as follows:

 

 

 

Shares

 

 

Weighted

average

grant date

fair value

per share

 

Unvested at December 31, 2021

 

 

6,263

 

 

$

15.02

 

Vested

 

 

(3,131

)

 

 

15.02

 

Unvested at March 31, 2022

 

 

3,132

 

 

$

15.02

 

 

Stock-based Compensation Expense

 

Stock-based compensation relates to non-employee directors and non-employees, time-based restricted stock units granted and performance-based stock options and restricted stock units granted . Total equity-based compensation expense related to all of the Company’s stock-based awards was recognized as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Research and development

 

$

360

 

 

$

241

 

General and administrative

 

 

562

 

 

 

1,067

 

Total stock-based compensation expense

 

$

922

 

 

$

1,308

 

 

 

 

  

10. Fair Value of Financial Instruments

 

At March 31, 2022 and December 31, 2021, the Company’s financial assets valued based on Level 1 inputs consisted of cash and cash equivalents. During the three months ended March 31, 2022, the Company did not have any transfers of financial assets between levels, as defined in Note 2 –Summary of Significant Accounting Policies to the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021 included in the Company’s 2021 Annual Report.

Some assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis. The carrying amounts of current financial instruments, which include accounts payable, accrued expenses, lease obligation liability and debt, approximate their fair values due to the short-term nature of these instruments.

The Company is party to certain funding awards with the Cystic Fibrosis Foundation, which contain embedded derivatives (refer to Note 7). The Company has determined the fair value of these embedded derivatives using a Monte Carlo simulation of the occurrence of a disposition event. The Company has used observable input assumptions such as the amount of funding, the Royalty Cap, as well as unobservable assumptions such as the time to occurrence of 3 years, as well as the probability of occurrence of a disposition event. The table below provides a rollforward of the fair value of the embedded derivatives, a Level 3 fair value estimate (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

Fair value of embedded derivatives, beginning of period

 

$

-

 

 

Change in fair value of derivative liabilities

 

 

270

 

 

Fair value of embedded derivatives, end of period

 

$

270

 

 

 

 

 

11. Other Expense, Net

Other expense, net consisted of the following (in thousands):

 

17


 

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Interest and other expense

 

$

404

 

 

$

260

 

Interest and other income

 

 

(14

)

 

 

-

 

Foreign currency exchange losses

 

 

7

 

 

 

20

 

Change in fair value of derivative liabilities

 

 

270

 

 

 

-

 

Total other expense, net

 

$

667

 

 

$

280

 

 

 

12. Net Loss Per Share

The loss and the weighted average number of shares used in computing basic and diluted net loss per share for the periods, are as follows (amounts in thousands, except share and per share data):

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,620

)

 

$

(8,694

)

Denominator:

 

 

 

 

 

 

 

 

  Weighted average number of shares of common stock

   used in computing net loss per share, basic and diluted

 

 

86,651,036

 

 

 

40,180,131

 

Net loss per share, basic and diluted

 

$

(0.13

)

 

$

(0.22

)

 

The following potentially dilutive securities have been excluded from the computation of diluted weighted average shares outstanding as their effect would be anti-dilutive:

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

Options to purchase common stock