elox-10q_20190331.htm

 

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, 2019

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)

 

950 Winter Street

Waltham, Massachusetts 02451

(Address of principal executive offices) (Zip Code)

781-577-5300

(Registrant’s telephone number, including area code)

 

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  

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

 

On May 3, 2019, the registrant had 36,025,422 shares of common stock, $0.01 par value per share, outstanding.

 

 


ELOXX PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three Months ended March 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

24

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

25

 

 

 

 

 

Item 1A.

 

Risk Factors

 

25

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

45

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

45

 

 

 

 

 

Item 5.

 

Other Information

 

45

 

 

 

 

 

Item 6.

 

Exhibits

 

46

 

 

 

 

 

 

 

SIGNATURES

 

47

 


2


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, or this Report and the other documents we have filed with the SEC that are incorporated herein by reference, contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. In particular, you should consider the numerous risks described in the “Risk Factors” section in this Report.

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. 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.

This Report and the other documents incorporated by reference herein includes 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.

The following are some risks and uncertainties, among others, that could cause actual results to differ materially from those expressed or implied by forward looking statements in this Report:

 

risks related to our ability to progress any product candidates in preclinical or clinical trials;

 

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;

 

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; general business conditions; competition; business abilities and judgment of personnel; and the availability of qualified personnel; and

 

risks related to the reverse merger and potentially significant, unexpected costs and liabilities arising with respect to our predecessor corporation’s business and operations.

 

3


PART I. FINANCIAL INFORMATION

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

Item 1. Condensed Consolidated Financial Information

 

 

 

March 31,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,576

 

 

$

48,606

 

Marketable securities

 

 

8,928

 

 

 

 

Restricted bank deposit

 

 

45

 

 

 

45

 

Prepaid expenses and other current assets

 

 

1,911

 

 

 

1,690

 

Total current assets

 

 

55,460

 

 

 

50,341

 

Property and equipment, net

 

 

231

 

 

 

248

 

Operating lease right-of-use asset

 

 

1,106

 

 

 

 

Other long-term assets

 

 

94

 

 

 

129

 

Total assets

 

$

56,891

 

 

$

50,718

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,240

 

 

$

747

 

Accrued expenses

 

 

4,597

 

 

 

6,938

 

Current portion of long-term debt

 

 

984

 

 

 

 

Current portion of operating lease liability

 

 

481

 

 

 

 

Taxes payable

 

 

122

 

 

 

122

 

Total current liabilities

 

 

8,424

 

 

 

7,807

 

Long-term debt

 

 

13,409

 

 

 

 

Operating lease liability

 

 

625

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   shares issued and outstanding at March 31, 2019 and December 31, 2018

 

 

 

 

 

 

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

   36,047,498 and 35,951,537 shares issued and 35,945,608 and 35,860,114

   shares outstanding as of March 31, 2019 and December 31, 2018,

   respectively

 

 

361

 

 

 

360

 

Common stock in treasury, at cost, 101,890 and 91,423 shares at

   March 31, 2019 and December 31, 2018, respectively

 

 

(1,250

)

 

 

(1,129

)

Additional paid in capital

 

 

133,383

 

 

 

129,825

 

Accumulated other comprehensive income

 

 

1

 

 

 

 

Accumulated deficit

 

 

(98,062

)

 

 

(86,145

)

Total stockholders’ equity

 

 

34,433

 

 

 

42,911

 

Total liabilities and stockholders' equity

 

$

56,891

 

 

$

50,718

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND OTHER COMPREHENSIVE LOSS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

6,019

 

 

$

4,394

 

General and administrative

 

 

5,958

 

 

 

3,393

 

Reverse merger related expenses

 

 

 

 

 

761

 

Total operating expenses

 

 

11,977

 

 

 

8,548

 

Loss from operations

 

 

(11,977

)

 

 

(8,548

)

Other (income) expense, net

 

 

(60

)

 

 

43

 

Net loss

 

$

(11,917

)

 

$

(8,591

)

 

 

 

 

 

 

 

 

 

Other Comprehensive Loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,917

)

 

$

(8,591

)

Unrealized gain from available-for-sale securities

 

 

1

 

 

 

 

Comprehensive loss

 

$

(11,916

)

 

$

(8,591

)

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.33

)

 

$

(0.31

)

Weighted average number of common shares in computing basic and diluted

   net loss per share

 

 

35,910,270

 

 

 

27,527,738

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

5


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,917

)

 

$

(8,591

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

2,658

 

 

 

735

 

Depreciation

 

 

33

 

 

 

21

 

Amortization of operating lease right-of-use asset

 

 

114

 

 

 

 

Amortization of debt discount

 

 

91

 

 

 

 

Amortization of premium and discount on investment

 

 

(5

)

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(183

)

 

 

(90

)

Accounts payable

 

 

1,493

 

 

 

643

 

Accrued expenses

 

 

(1,358

)

 

 

1,585

 

Operating lease liabilities

 

 

(114

)

 

 

 

Net cash used in operating activities

 

 

(9,188

)

 

 

(5,697

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(16

)

 

 

(57

)

Cash paid for long-term deposits

 

 

(3

)

 

 

 

Net cash used in investing activities

 

 

(19

)

 

 

(57

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Purchase of marketable securities

 

 

(8,923

)

 

 

 

Proceeds from debt financing obligation

 

 

15,000

 

 

 

 

Payment of debt issuance costs

 

 

(276

)

 

 

 

 

Payment for settlement of taxes upon vesting of Restricted Stock Securities

 

 

(1,104

)

 

 

 

Proceeds from sale of Common Stock under Equity Sales Agreement

 

 

455

 

 

 

 

Proceeds from issuance of Common Stock on share-based compensation arrangements

 

 

25

 

 

 

 

Net cash provided by financing activities

 

 

5,177

 

 

 

 

Effect of exchange rate on cash

 

 

 

 

 

(5

)

Increase in cash and cash equivalents

 

 

(4,030

)

 

 

(5,759

)

Cash, cash equivalents and restricted cash, beginning of year

 

 

48,651

 

 

 

24,049

 

Cash, cash equivalents and restricted cash, end of period

 

$

44,621

 

 

$

18,290

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to

   condensed consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,576

 

 

$

18,290

 

Restricted cash included in restricted bank deposit

 

 

45

 

 

 

106

 

Total cash, cash equivalents and restricted cash

 

$

44,621

 

 

$

18,396

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Non-cash acquisition of treasury shares

 

$

121

 

 

$

 

Fair value of warrants issued in connection with long-term debt

 

$

421

 

 

$

 

Cash paid during the year for interest

 

$

93

 

 

$

 

Final payment in connection with debt financing obligation

 

$

900

 

 

$

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

6


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Nature of the Business

Eloxx Pharmaceuticals, Inc., together with its wholly-owned subsidiary Eloxx Pharmaceuticals, Ltd. (collectively “Eloxx” or the “Company”), is a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates (designed to be eukaryotic ribosomal selective glycosides (ERSG)) that are formulated to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA (mRNA) and the protein synthesis from that mRNA. As a consequence, patients with premature stop codon diseases have reduced levels of, or no, protein from a gene whose product performs an essential function. This type of mutation accounts for some of the most severe phenotypes across genetic diseases. Nonsense mutations have been identified in over 1,800 rare and ultra-rare diseases. Read-through therapeutic development is focused on increasing mRNA stability and enabling functional protein synthesis. As opposed to a typical gene therapy approach of targeting a single, unique mutation in a target disease, this small molecule strategy enables targeting an entire class of mutations across the rare disease landscape. The small molecule approach has the potential to address a range of different premature stop codons in a single gene since the ERSG are targeted to the ribosomes. ELX-02, the Company’s lead investigational drug product candidate, is a small molecule drug candidate designed to restore production of full-length functional proteins. ELX-02 is in the early stages of clinical development for systemic administration for cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. In addition, the Company recently announced a new program studying intravitreal administration of ERSG compounds for rare inherited retinal disorders with a focus on Usher Syndrome. The Company’s preclinical candidate pool consists of a library of novel ERSG drug candidates identified based on read-through potential and cytoplasmic ribosomal selectivity. Eloxx is headquartered in Waltham, MA, with additional offices in New Jersey, Pennsylvania and Rehovot, Israel.

The Company’s research and development strategy is to target rare or ultra-rare diseases where: a high unmet medical need exists, identified nonsense mutation-bearing patient population is identified, preclinical read-through can be established in predictive personalized medicine models, and a defined path through Organ Drug development, regulatory approval, patient access and commercialization is identified. The Company believes patient advocacy to be an important element of patient focused drug development and seeks opportunities to collaborate with patient advocacy groups throughout the discovery and development process. The Company’s current clinical focus for its lead investigational drug product candidate, ELX-02, is Cystic Fibrosis where the Company expects to complete its multiple ascending dose (“MAD”) study in the first half of 2019 and report top line results from its Phase 2 clinical trial in the second half of 2019. Eloxx has participated in the North American Cystic Fibrosis Foundation (CFF) CFTR Translation Read-through Workshop and is engaged with CFF on extending Cystic Fibrosis clinical studies to the United States. Eloxx presented positive new data for its lead investigational drug, ELX-02, at the European Cystic Fibrosis Society (ECFS) Basic Science Conference. In 2018, the European Cystic Fibrosis Society Clinical Trial Network assigned a “high priority” rating to Eloxx’s Phase 2 program. Eloxx has recently initiated a new program studying inherited retinal disease and is conducting IND enabling studies for several ERSG compounds from its library. Eloxx presented at the Sixth Annual Retinal Cell and Gene Therapy Innovation Summit and the Association for Research in Vision and Ophthalmology 2019 Annual Meeting. The Company entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to support its inherited retinal degenerative disease registry and educational programs. Eloxx presented as part of the FFB “Investing in Cures” 2019 meeting and believes that the ongoing R&D consultation and support provided by the FFB will accelerate the Company’s development programs that seek to support patients with ocular disease and high unmet medical need.

Liquidity

The Company has a history of net losses and negative cash flows from operating activities since inception, and as of March 31, 2019, had an accumulated deficit of $98.1 million. The Company expects to continue to incur net losses and use cash in its operations for the foreseeable future. To date, the Company has not generated revenue from the sale of any product or service and does not expect to generate significant revenue unless and until obtaining marketing approval and commercialization 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.

7


The Company has financed its operations primarily from the sale of equity securities. 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. The Company believes that its cash, cash equivalents and marketable securities of $53.5 million at March 31, 2019 will enable it to meet anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and cystinosis in 2019 and maintain the Company’s current and planned operations into the second quarter of 2020. Management intends to fund future operations through private and public debt or equity financing transactions and may seek additional capital through arrangements with strategic partners or from other sources. If the Company is unable to obtain 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. Summary of Significant Accounting Policies

Basis of presentation and principles of consolidation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company 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 Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in the Company’s annual 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, 2019 and 2018.

The unaudited Condensed Consolidated Statements of Operations includes the Company’s operating expenses related to research and development and general and administrative which were substantially comprised of fees for professional services and employee compensation. 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 financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2018.

Summary of Accounting Policies

The significant accounting policies and estimates used in the preparation of the condensed consolidated financial statements are described in the Company’s audited financial statements as of and for the year ended December 31, 2018, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. During the three months ended March 31, 2019, the Company invested in marketable securities and as a result has provided the following updates.

Marketable Securities—All investment instruments with an original maturity date, when purchased, in excess of three months but less than 1 year have been classified as current marketable securities. The Company classifies securities that are available to fund current operations as current assets. These marketable securities are classified as available-for-sale and are carried at fair value. The Company records unrealized gains and losses on available-for-sale debt securities as a component of Accumulated other comprehensive income, which is a separate component of stockholders’ equity on its condensed consolidated balance sheet, until such gains and losses are realized. Realized gains and losses on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. The Company periodically reviews the portfolio of securities to determine whether an other-than-temporary impairment has occurred. No such losses have occurred to date. There were no realized gains or losses on the sale of securities for the three months ended March 31, 2019.

Below is a summary of cash, cash equivalents and marketable securities at March 31, 2019 (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Cash and cash equivalents

 

$

44,576

 

 

$

 

 

$

 

 

$

44,576

 

Marketable securities

 

 

8,927

 

 

 

1

 

 

 

 

 

 

8,928

 

Total cash, cash equivalents and marketable securities

 

$

53,503

 

 

$

1

 

 

$

 

 

$

53,504

 

 

8


Fair Value Measurements—Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal market for the asset or liability in an orderly transaction between market participants. Authoritative guidance specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s own assumptions of market participant valuation (unobservable inputs).

The fair value hierarchy consists of three levels:

 

Level 1 - Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The authoritative guidance requires the use of observable market data if such data is available without undue cost and effort. When available, the Company uses unadjusted quoted market prices to measure fair value and classify such items within Level 1. If quoted market prices are not available, fair value is based upon internally developed models that use, where possible, current market-based or independently-sourced market parameters, such as interest and currency rates and comparable transactions. Items valued using internally generated models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, items may be classified in Level 3 even though there may be inputs that are readily observable. If quoted market prices are not available, the valuation model used generally depends on the specific asset or liability being valued. The Company has classified its cash, cash equivalents and marketable securities as Level 1. There were no transfers to Level 3 during the three months ended March 31, 2019.

 

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.

 

Concentrations of Credit Risk and Off-Balance-Sheet Risk—Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents and available-for-sale marketable securities. The Company mitigates its risk with respect to cash and cash equivalents and marketable securities by maintaining its deposits and investments at high-quality financial institutions. The Company invests any excess cash in money market funds and other securities, and the management of these investments is not discretionary on the part of the financial institution. The Company has no significant off-balance-sheet risks such as foreign exchange contracts, option contracts, or other hedging arrangements.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 establishes ASC Topic 842 (“Topic 842”) which amends ASC 840, Leases, by introducing a lessee model that requires balance sheet recognition for most leases and the disclosure of key information about leasing arrangements. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. Topic 842 provides several optional practical expedients in transition. The Company elected the package of practical expedients which would allow the Company to not reassess its existing conclusions on lease identification, classification and initial direct costs. Further, the Company elected the hindsight practical expedient and utilized the short-term lease exemption for all leases with an original term of 12 months or less for purposes of applying the recognition and measurement requirements of the new standard. The Company elected the practical expedient which allowed it to not separate lease and non-lease components for all its leases. The Company adopted the new standard on January 1, 2019 and applied the effective date as its date of initial application and has not updated disclosures required under the new standard for dates and periods prior to January 1, 2019. See Note 6.

9


3. Prepaids and Other Current Assets

Prepaids and other current assets as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Prepaid insurance

 

$

325

 

 

$

251

 

Other governmental agencies receivables

 

 

26

 

 

 

20

 

Prepaid research and development

 

 

1,215

 

 

 

864

 

Prepaid other

 

 

345

 

 

 

555

 

 

 

$

1,911

 

 

$

1,690

 

 

4. Property and Equipment

Property and equipment as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Computers and software

 

$

146

 

 

$

146

 

Office furniture and equipment

 

 

165

 

 

 

165

 

Leasehold improvements

 

157

 

 

 

141

 

 

 

 

468

 

 

 

452

 

Less: Accumulated depreciation

 

 

237

 

 

 

204

 

Property and equipment, net

 

$

231

 

 

$

248

 

 

Depreciation expense was $33 thousand and $21 thousand for the three months ended March 31, 2019 and 2018, respectively.

5. Accrued Expenses

Accrued expenses as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Payroll and related expenses

 

$

1,060

 

 

$

2,562

 

Research and development expenses

 

 

2,688

 

 

 

3,086

 

Professional services

 

 

583

 

 

 

985

 

Accrued interest on debt

 

 

103

 

 

 

 

Accrued other

 

 

163

 

 

 

305

 

 

 

$

4,597

 

 

$

6,938

 

 

 

6. Leases

 

The Company adopted new lease accounting standard, Topic 842, effective January 1, 2019. The Company has elected the ‘package of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to apply Topic 842 to arrangements with lease terms of 12 months or less. The Company has operating leases for its principal offices in the U.S. and Israel.

10


 

Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from its operating leases. In determining the length of the lease term to its long term lease, the Company determined not to consider an embedded renewal option for one operating lease primarily due to i) the renewal rate is at future market rate to be determined and ii) Company does not have significant leasehold improvements that would restrict its ability to consider relocation. The Company applied its incremental borrowing rate based upon information available in determining the present value of the lease payments. The Company’s incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease.  

Operating lease costs under the leases for the three months ended March 31, 2019 was approximately $0.1 million. Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. At lease commencement date, the Company estimated the lease liability and the right of use assets at present value using the Company’s estimated incremental borrowing rate of 8% and determined the initial present value, at inception, of $1.5 million. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right to use assets of $1.2 million and a lease liability of $1.2 million. Operating lease assets and obligations are reflected within Operating lease right to use asset, and Operating lease liability, respectively, on the unaudited Condensed Consolidated Balance Sheet. The weighted average remaining lease term at March 31, 2019 was 2.3 years.

The following table summarizes the Company’s maturities of operating lease liabilities as of March 31, 2019 (in thousands):

 

Remainder of 2019

 

$

413

 

2020

 

 

493

 

2021

 

 

310

 

Total lease payments

 

 

1,216

 

Less: present value discount

 

 

(110

)

Total

 

$

1,106

 

For comparative purposes, the Company’s aggregate future minimum non-cancellable commitments under operating leases as of December 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

2019

 

$

541

 

2020

 

 

490

 

2021

 

 

310

 

Total minimum lease payments

 

$

1,341

 

 

 

7. Debt

On January 30, 2019 the Company entered into a Loan and Security Agreement (the “SVB Loan Agreement”) with Silicon Valley Bank (“SVB”) and WestRiver Innovation Lending Fund VIII, L.P. (“WestRiver”), collectively the Lenders. Under the SVB Loan Agreement, the Lenders agreed to extend term loans to the Company in an aggregate principal amount of $25 million, comprised of (i) an initial loan advance of $15 million; and (ii) a subsequent loan advance of $10 million, subject to first achieving certain conditions (collectively, the “Term Loan Advances”). The initial term loan was funded on January 30, 2019. The subsequent term loan advance is available until December 31, 2019 at the Company’s election after the occurrence of certain milestone events relating to data from the Company’s clinical trials and receipt by the Company of certain minimum cash proceeds of at least $75 million from an additional equity offering through a private placement or a public offering.

 

11


Any outstanding principal on the Term Loan Advances will accrue interest at a floating rate equal to the greater of (i) 5.25% per annum and (i) the sum of 2.5% plus the prime rate, as published in the Wall Street Journal. Interest payments are payable monthly following the funding of a Term Loan advance. On March 31, 2019, the rate was 8%. The Company will be required to make principal payments on the outstanding balance of the Term Loan Advances commencing on February 1, 2020 (the “Term Loan Amortization Date”) in 36 equal monthly instalments, plus interest; provided that if the Company has achieved the milestones described above relating to the availability of the subsequent loan advance on or prior to December 31, 2019, then the Term Loan Amortization Date is automatically extended to February 1, 2021. Any amounts outstanding under the Term Loan Advances, if not repaid sooner, are due and payable on January 1, 2023 (the “Maturity Date”)

In conjunction with the initial loan advance, the Company issued warrants (the “Warrants”) to SVB and WestRiver to purchase an aggregate of 40,834 shares of the Company’s common stock at a warrant exercise price of $11.02 (subject to certain adjustments), which price was calculated using the 10-day average bid price of the Company’s common stock prior to the date of the Loan Agreement. If the subsequent term loan is advanced, the Company will be obligated to issue Warrants to the Lender to purchase an aggregate of 27,222 shares of the Company’s common stock.

The Company may prepay the outstanding principal balance of the term loans advanced by SVB in whole but not in part, subject to a prepayment fee ranging from 1.0% to 3.0% of any amount prepaid, depending upon when the prepayment occurs. The Company will also pay a final payment fee equal to 6% of the total term loans advanced, due upon the earliest of maturity or termination of the SVB Loan Agreement.

Under the terms of the SVB Loan Agreement, the Company granted first priority liens and security interests in substantially all of the Company’s assets (excluding all of its intellectual property, which is subject to a negative pledge) and a pledge by the Company of the shares of one of its wholly-owned subsidiaries as collateral for the obligations thereunder. The SVB Loan Agreement also contains representations and warranties by the Company and SVB and indemnification provisions in favor of SVB and customary covenants (including limitations on other indebtedness, liens, acquisitions, investments and dividends, but no financial covenants), and events of default (including payment defaults, breaches of covenants following any applicable cure period, a material impairment in the perfection or priority of SVB’s security interest in the collateral, and events relating to bankruptcy or insolvency).

As of March 31, 2019, the carrying value of the term loan consists of $15.0 million principal outstanding less the debt issuance costs of approximately $1.6 million. The debt issuance costs have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the term loan. Interest expense relating to the term loan for the three months ended March 31 2019 was $0.2 million. Interest expense is calculated using the effective interest method, and is inclusive of non-cash amortization of capitalized loan costs. At March 31, 2019, the effective interest rate was 13.05%. The final maturity payment of $0.9 million is recognized over the life of the term loan through interest expense using the effective interest method.

 

Future principal payments for the long-term debt are as follows (in thousands):

 

 

 

March 31,

 

 

 

2019

 

Remainder of 2019

 

$

917

 

2020

 

 

5,623

 

2021

 

 

5,659

 

2022

 

 

5,252

 

2023

 

 

420

 

 

 

 

17,871

 

Less amount representing interest

 

 

(2,871

)

Less unamortized discount

 

 

(1,507

)

Less loan payable, current, net of discount

 

 

(984

)

 

 

 

12,509

 

Final fee due at maturity in 2023

 

 

900

 

Long-term debt, net of current portion and discount

 

$

13,409

 

 

12


8. 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. However, the Company may at times in the future become involved in litigation in the ordinary course of business, which may include actions related to or based on its intellectual property and its use, customer claims, employment practices and employee complaints and other events arising out of its operations. When appropriate in management’s estimation, the Company will record adequate reserves in its financial statements for pending litigation. Litigation is subject to inherent uncertainties, and an adverse result in any such matters could adversely impact its reputation, operations, and its financial operating results or overall financial condition. Additionally, any litigation to which the Company may become subject could also require significant involvement of its senior management and may divert management’s attention from its business and operations.

The Company accounts for its contingent liabilities in accordance with ASC Topic 450 “Contingencies”. A provision is recorded when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. With respect to legal matters, provisions are reviewed and adjusted to reflect the impact of negotiations, estimated settlements, legal rulings, advice of legal counsel and other information and events pertaining to a particular matter. For the periods ended March 31, 2019 and 2018, the Company was not a party to any litigation that is reasonably possible to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows. Legal costs incurred in connection with loss contingencies are expensed as incurred.

9. Stockholders’ Equity

For accounting purposes, all common stock, preferred stock, warrants, options to purchase common stock and loss per share amounts have been adjusted to give retroactive effect to the exchange ratio and reverse stock split for all periods presented in these condensed unaudited consolidated financial statements.

Transactions related to stockholders’ equity of the Company during the three months ended March 31, 2019 were as follows (in thousands, except share amounts):

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Income

 

 

Accumulated

deficit

 

 

Shares

 

 

Amount

 

 

Total

stockholders'

equity

 

Balance at December 31, 2018

 

 

35,860,114

 

 

$

360

 

 

$

129,825

 

 

$

 

 

$

(86,145

)

 

 

(91,423

)

 

$

(1,129

)

 

$

42,911

 

Exercise of stock options

 

 

25,000

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

Vesting of restricted shares

 

 

25,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,467

)

 

 

(121

)

 

 

(121

)

Issuance of shares from at-the-

   market sales agreement

 

 

35,362

 

 

 

1

 

 

 

454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

455

 

Issuance of warrants

 

 

 

 

 

 

 

 

421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

421

 

Share-based compensation

 

 

 

 

 

 

 

 

2,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,658

 

Change in unrealized gain

   (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,917

)

 

 

 

 

 

 

 

 

(11,917

)

Balance at March 31, 2019

 

 

35,945,608

 

 

$

361

 

 

$

133,383

 

 

$

1

 

 

$

(98,062

)

 

 

(101,890

)

 

$

(1,250

)

 

$

34,433

 

 

13


Transactions related to stockholders’ equity of the Company during the three months ended March 31, 2018 were as follows (in thousands, except share amounts):

 

 

 

Common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

deficit

 

 

Total

stockholders'

equity

 

Balance at December 31, 2017

 

 

27,527,738

 

 

$

274

 

 

$

60,047

 

 

$

(38,961

)

 

$

21,360

 

Share-based compensation

 

 

 

 

 

 

 

 

735

 

 

 

 

 

 

735

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(8,591

)

 

 

(8,591

)

Balance at March 31, 2018

 

 

27,527,738

 

 

$

274

 

 

$

60,782

 

 

$

(47,552

)

 

$

13,504

 

 

Warrants

In connection with the 2019 issuance of debt, the Company granted 40,834 warrants to purchase 40,834 shares of common stock and recorded a charge in Accumulated paid in capital in the amount of $0.4 million reflecting the value of the warrants. Transactions related to warrants to purchase the Company’s common stock during the three months ended March 31, 2019, were as follows:

 

 

 

Shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

life

 

Warrants outstanding and exercisable at December 31, 2018

 

 

347,241

 

 

$

3.77

 

 

 

3.92

 

Granted

 

 

40,834

 

 

 

11.02

 

 

 

10.00

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

Warrants outstanding and exercisable at March 31, 2019

 

 

388,075

 

 

$

4.53

 

 

 

4.33

 

 

10. Stock-Based Compensation

Stock Incentive Plans

Prior to April 20, 2018, the Company had two equity compensation plans which provided options to purchase ordinary shares of Eloxx Limited or ordinary shares of Eloxx Limited may be granted to employees, officers, directors, service providers and consultants of Eloxx Limited; the Sevion 2008 Incentive Compensation Plan (the “2008 Plan”) and the Eloxx Limited 2013 Share Ownership and Option Plan (the “2013 Plan”).

On March 12, 2018, the Company’s Board of Directors (the “Board”) adopted the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan became effective on April 20, 2018 upon approval by the stockholders of the Company with the outstanding options and shares available for future grant under all prior plans being assumed by the 2018 Plan and the total number of shares available for awards to employees, non-employee directors and other key personnel increased by 5,000,000 shares. Upon the 2018 Plan becoming effective, the Company ceased granting awards under each of the 2008 Plan and the 2013 Plan (the “Prior Plans”).

Equity awards granted have a ten-year contractual life and, upon termination, vested options are generally exercisable between one and three months following the termination date, while unvested options are forfeited immediately.

 

14


Summary of Option Activity

Transactions related to the grant of options to employees and directors during the three months ended March 31, 2019 were as follows:

 

 

 

Shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

life

 

 

Aggregate

intrinsic

value

 

Options outstanding at December 31, 2018

 

 

3,261,719

 

 

$

13.09

 

 

 

8.56

 

 

$

11,650,373

 

Granted

 

 

804,100

 

 

 

11.71

 

 

 

 

 

 

 

 

 

Exercised

 

 

(25,000

)

 

 

1.00

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(118,996

)

 

 

11.37

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2019

 

 

3,921,823

 

 

$

15.07

 

 

 

8.67

 

 

$

10,417,568

 

Options exercisable at March 31, 2019

 

 

1,084,567

 

 

$

10.49

 

 

 

7.17

 

 

$

6,507,695

 

 

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s Common Stock as of March 31, 2019, 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, 2019. This amount is impacted by the changes in the fair value of the Company’s shares.

Summary of Restricted Stock Unit Activity

 

Transactions related to the grant of restricted stock units to employees and directors during the three months ended March 31, 2019 were as follows:

 

 

 

Shares

 

 

Weighted

average

grant date

fair value

price

 

Unvested at December 31, 2018

 

 

554,147

 

 

$

9.34

 

Granted

 

 

100,000

 

 

 

11.53

 

Vested

 

 

(35,599

)

 

 

8.00

 

Forfeited

 

 

 

 

 

 

Unvested at March 31, 2019

 

 

618,548

 

 

$

9.77

 

 

In 2017, the Company issued an inducement award outside of the Prior Plans to the Company’s Chief Executive Officer in the form of an option to purchase 22,427 shares of the Company’s common stock with an exercise price per share equal to $8.00, and an award of restricted stock units for 22,427 shares of the Company’s common stock (collectively the “Performance Option Awards”). Subject to continued service through the vesting date, the Performance Option Awards will vest and become immediately exercisable upon the date that marks the first successful completion of a Phase-2B study with respect to any indication. For each of the three months ended March 31, 2019 and March 31, 2018, the Company recognized $24 thousand of expense associated with these awards.

In addition, the Company issued an inducement award outside of the Prior Plans to the Company’s Chief Executive Officer in the form of an option to purchase 640,785 shares of the Company’s common stock with an exercise price per share equal to $8.00, and an award of restricted stock units for 640,785 shares of the Company’s common stock (collectively the “Time-Vesting Awards”). Subject to continued service through the vesting date, 1/3 of the Time-Vesting Awards will vest and become immediately exercisable on the first anniversary of the effective date, with an additional 1/12 of the Time-Vesting Awards vesting on each quarterly anniversary of the effective date, provided that vesting of the Time-Vesting Awards shall be subject to acceleration following the achievement of certain milestones.

 

15


Stock-based compensation relates to options granted to employees, non-employee directors and non-employees, time-based restricted stock units granted to employees and performance-based options and restricted stock units granted to an employee. The total equity-based compensation expense related to all of the Company’s equity-based awards were recognized as follows:

 

 

 

For the Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Research and development

 

$

525

 

 

$

82

 

General and administrative

 

 

2,133

 

 

 

653

 

Total stock-based compensation expenses

 

$

2,658

 

 

$

735

 

 

 

11. Income Taxes

The United States enacted the Tax Cuts and Jobs Act (“Tax Act”) on December 22, 2017, most provisions of which took effect in years beginning after December 31, 2017. The Tax Act made substantial changes to U.S. taxation of corporations, including lowering the U.S. federal corporate income tax rate from 34% to 21%. The effect on deferred tax assets and liabilities of a change in law or tax rates is recognized in income in the period that includes the enactment date. The Tax Act also includes a provision designed to currently tax global intangible low-taxed income (“GILTI”). The Company elected to record the U.S. income tax effect of future GILTI inclusions in the period in which they arise, if ever, and the Company has estimated that there will not be a GILTI inclusion for the year ended December 31, 2019.

In accordance with ASC 740-270, Income Taxes – Interim Reporting, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate and apply that rate to year-to-date ordinary income or loss. The resulting tax expense (or benefit) is adjusted for the tax effect of specific events, if any, required to be discretely recognized in the interim period as they occur. For both the three months ended March 31, 2019 and 2018, the Company recorded zero attributable to its operations in the U.S. The Company has not recorded net deferred tax assets as of March 31, 2019, or December 31, 2018, because it maintained a full valuation allowance against all material deferred tax assets, and management has determined that it is more likely than not, that the Company will be unable to realize those future benefits. The Company’s effective tax rate differs from the statutory rate of 21%, due to losses for which no future benefit is expected. As of March 31, 2019, and December 31, 2018, the Company had no uncertain tax positions recorded in its consolidated balance sheets.

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, is as follows (amounts in thousands, except share numbers):

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,917

)

 

$

(8,591

)

Denominator:

 

 

 

 

 

 

 

 

Shares used in computing net loss per share of Common

   Stock, basic and diluted(1)

 

 

35,910,270

 

 

 

27,527,738

 

Net loss per share of Common Stock, basic and diluted

 

$

(0.33

)

 

$

(0.31

)

 

 

(1)

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,

 

 

 

2019

 

 

2018

 

Options to purchase common stock

 

 

3,921,823

 

 

 

2,498,617

 

Restricted stock units

 

 

618,548

 

 

 

 

Warrants

 

 

388,075

 

 

 

411,615

 

Total potential common stock equivalents

 

 

4,928,446

 

 

 

2,910,232

 

 

16


 

13. Reverse Merger

On December 19, 2017, Sevion Therapeutics, Inc. (“Sevion”) acquired Eloxx Pharmaceuticals, Limited (“Eloxx Limited”) pursuant to a merger between the companies (the “Transaction” or “Reverse Merger”). Upon consummation of the Transaction (the “Closing”), Sevion adopted the business plan of Eloxx Limited and discontinued the pursuit of Sevion’s business plan pre-Closing. In connection with the Transaction, Sevion agreed to acquire all of the outstanding capital stock of Private Eloxx in exchange for the issuance of an aggregate 20,316,656 shares of the Sevion’s common stock, par value $0.01 per share, after giving effect to a 1-for-20 reverse split effected immediately prior to the Transaction. Immediately after giving effect to the Transaction, on December 19, 2017, Sevion changed its name to Eloxx Pharmaceuticals, Inc.  

The Reverse Merger was accounted for as a reverse recapitalization which is outside the scope of ASC Topic 805, “Business Combinations”. Under reverse capitalization accounting, Eloxx Limited is considered the acquirer for accounting and financial reporting purposes and acquired the assets and assumed the liabilities of the Company. The assets acquired and liabilities assumed are reported at their historical amounts. The annual consolidated financial statements of the Company reflect the operations of the acquirer for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. The annual consolidated financial statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of Eloxx Limited since inception.

The following summarizes the estimated fair value of the assets and liabilities assumed at the date of the Reverse Merger (in thousands):

 

 

 

December 19,

2017

 

Cash and cash equivalents

 

$

123

 

Prepaid expenses and other current assets

 

 

220

 

Property, plant and equipment, net

 

 

39

 

Restricted bank deposits

 

 

6

 

Total assets acquired

 

 

388

 

Accounts payable

 

 

(215

)

Accrued expenses

 

 

(343

)

Total liabilities acquired

 

 

(558

)

Total net liabilities acquired

 

$

(170

)

 

17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, or this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed under the caption “Risk Factors” in this Report. These and other factors could cause actual results to differ materially from those indicated by the forward-looking statements made in this Report.

Company Overview

We are a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates (designed to be eukaryotic ribosomal selective glycosides (ERSG)) that are formulated to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA (mRNA) and the protein synthesis from that mRNA. As a consequence, patients with premature stop codon diseases have reduced levels of, or no, protein from a gene whose product performs an essential function. This type of mutation accounts for some of the most severe phenotypes across genetic diseases. Nonsense mutations have been identified in over 1,800 rare and ultra-rare diseases.  Read-through therapeutic development is focused on increasing mRNA stability and enabling functional protein synthesis. As opposed to a typical gene therapy approach of targeting a single, unique mutation in a target disease, this small molecule strategy enables targeting an entire class of mutations across the rare disease landscape. Our small molecule approach has the potential to address a range of different premature stop codons in a single gene since our ERSG are targeted to the ribosomes. ELX-02, our lead investigational drug product candidate, is a small molecule designed to restore production of full-length functional proteins. ELX-02, is in the early stages of clinical development for systemic administration for cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. In addition, we recently announced a new program studying intravitreal administration of ERSG compounds for rare inherited retinal disorders with a focus on Usher Syndrome.  Our preclinical candidate pool consists of a library of novel ERSG drug candidates identified based on read-through potential and cytoplasmic ribosomal selectivity.  

From the outset, our research and development strategy targets rare or ultra-rare diseases where: a high unmet medical need exists, an identified nonsense mutation-bearing patient population is established, preclinical read-through can be established in predictive personalized medicine models, and a defined path through Orphan Drug development, regulatory approval, patient access and commercialization is identifiable. We believe patient advocacy to be an important element of patient focused drug development and seek opportunities to collaborate with patient advocacy groups throughout the discovery and development process. Our current clinical focus for our lead investigational drug product candidate, ELX-02 is Cystic Fibrosis where we expect to complete our MAD study in the first half of 2019 and report top line results from our Phase 2 clinical trial in the second half of 2019. We have participated in the North American Cystic Fibrosis Foundation (CFF) CFTR Translational Read-through Workshop and are engaged with CFF on extending our Cystic Fibrosis clinical studies to the United States. Eloxx presented positive new data for its lead investigational drug, ELX-02, at the European Cystic Fibrosis Society (ECFS) Basic Science Conference. In 2018, the European Cystic Fibrosis Society Clinical Trial Network assigned a “high priority” rating to our Phase 2 program.  We have recently initiated a new program studying inherited retinal disease and are conducting IND enabling studies for several ERSG compounds from our library. Eloxx presented at the Sixth Annual Retinal Cell and Gene Therapy Innovation Summit and the Association for Research in Vision and Ophthalmology 2019 Annual Meeting. We entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to support the inherited retinal degenerative disease registry and educational programs. We presented as part of the FFB “Investing in Cures” 2019 meeting and believe that the ongoing R&D consultation and support provided by the FFB will accelerate our development programs that seek to support patients with ocular disease and high unmet medical need.  

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We intend to be the global leader in the application of the science of translational read-through and the associated pathway of nonsense mediated decay (NMD). We believe that expanding our expertise across these basic science areas of mRNA regulation, ribosomal function, and protein translation forms a solid foundation to support our discovery and development activities. Our ERSG compounds modulate the activity of the ribosome, a complex of RNAs and proteins, and therefore, a ribonucleoprotein, responsible for protein production, a process also known as translation. These novel small molecule ERSG compounds are designed to allow the ribosome to read-through a nonsense mutation in mRNA (which is transcribed from the DNA sequence), to restore the translation process to produce full-length, functional proteins and increase the amount of mRNA that would otherwise be degraded as part of a phenomenon called nonsense mediated mRNA decay. As our ERSG compounds target the general mechanism for protein production in the cell, we believe they have the potential to treat hundreds of genetic diseases where nonsense mutations have impaired gene function. Since nonsense mutations may occur at different positions within a given gene, a potential advantage of the small molecule ERSG approach is being able to use one molecule to address a range of mutations within a given disease state. Our subcutaneously injected ERSG molecules have the potential to be self-administered for systemic disease and to be active at most tissue locations across the body.

We believe that our library of related novel small molecules holds the potential to be disease-modifying therapies that may change the course of hundreds of genetic diseases and improve the lives of patients. Our early preclinical data in animal models of nonsense mutations suggests that drug product candidates from our read-through compound library may have potential beneficial effects for each of the following diseases: cystic fibrosis, cystinosis, a variety of inherited retinal diseases (including Usher Syndrome), primary ciliary diskinesia, polycystic kidney disease, mucopolysaccharidosis type 1, Duchenne muscular dystrophy and Rett syndrome, and have demonstrated the potential for beneficial effects in multiple organs such as the brain, eye, kidney, muscles and others. Of the novel compounds in the ERSG Library, approximately 30 compounds have been selected, based on read-through activity, for continued preclinical research and we anticipate additional compounds advancing toward IND filings.

Currently our lead program, ELX-02, is focused on development for cystic fibrosis and cystinosis patients with diagnosed nonsense mutations. Our clinical trial application (“CTA”) has been approved by the Federal Agency for Medicines and Health Products (the “FAMHP”) in Brussels and our IND submitted to the U.S. Food and Drug Administration (the “FDA”) is open. Our Phase 2 program has been given a “high priority” ranking by the European Cystic Fibrosis Society Clinical Trial Network. We expect to initiate Phase 2 studies in cystic fibrosis and cystinosis following completion of our ongoing Phase 1b MAD study in the first half and to report top line Phase 2 data in the second half of 2019.

In 2018, we entered into a collaboration with Dr. Paul Goodyear at McGill University as part of the Genome Canada Genomic Applications Partnership Program (GAAP), to conduct clinical trials of ELX-02 for the treatment of cystinosis. During 2018, Eloxx submitted an IND to the FDA for the conduct of Phase 2 studies in cystinosis and the IND is now open. The Phase 2 program as discussed with the FDA will enroll no more than 6 patients to evaluate multiple doses of ELX-02 for the primary endpoint of safety and exploratory endpoints that will include white blood cell cystine levels. In support of the cystinosis program where many patients have impaired renal function, we initiated a renal impairment safety study. We are pleased that the cohorts of subjects with mild and moderate renal impairment have been successfully completed. To date, the pharmacokinetic results were as expected with no adverse events.

As part of our clinical program, we have completed a Phase 1 SAD study in a total of 60 healthy volunteers at sites in Israel (ClinicalTrials.gov Identifier: NCT02807961) and Belgium (ClinicalTrials.gov Identifier: NCT03292302). The results of the SAD study were published in the Journal of Clinical Pharmacology in January 2019. Our MAD study is being conducted in Belgium (ClinicalTrials.gov Identifier: NCT03309605). We have initiated the 7th and final cohort of the MAD study in the U.S. and expect to complete the study in the first half of this year.

In 2018, we initiated a new program studying inherited retinal disorders with a focus on Usher Syndrome by conducting pre-IND enabling studies on several compounds from our library. We expect to advance one or more compounds into development for intravitreal administration.

We believe there is a significant unmet medical need in the treatment of cystic fibrosis patients carrying nonsense mutations on one or both alleles of the Cystic Fibrosis Transmembrane Conductance Regulator (“CFTR”) gene. Cystic fibrosis is the most prevalent genetic disease in the western world and there are no currently approved therapies that target the impairment associated with Class 1 CFTR mutations. We believe that nonsense mutations may impact a similar proportion of patients diagnosed with cystinosis. There are no currently approved therapeutics that target the nonsense mutation mediated impairment of cystinosin, the cystine-selective transport channel in the lysosomal membrane that is attributed as the cause for the accumulation of cystine in this disease state. Given the high proportion of pediatric patients in each of these rare orphan diseases we intend to apply for relevant Orphan Drug incentives in the U.S. and Europe, including the Rare Pediatric Disease Priority Review Voucher in the U.S.

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Currently, the European Medicines Agency (the “EMA”) has designated ELX-02 as an orphan medicine for the treatment of cystic fibrosis and mucopolysaccharidosis type I (“MPS I”), and the FDA has granted orphan drug designation to ELX-02 for the treatment of cystinosis, MPS I, and Rett Syndrome.

We hold worldwide development and commercialization rights to ELX-02 and other novel compounds in our read-through library, for all indications, in all territories, under a license from the Technion Research and Development Foundation Ltd. (“TRDF”). Professor Timor Baasov, the inventor of our compounds, has served as our senior consultant since our incorporation.

We believe that our cash, cash equivalents and marketable securities of $53.5 million at March 31, 2019 will enable us to meet the anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and cystinosis in 2019 and maintain our current and planned operations into the second quarter of 2020. Since our inception, we have incurred significant operating losses. As of March 31, 2019, we had an accumulated deficit of $98.1 million. To date, we have financed our operations primarily through equity capital investments, and to a lesser extent, from loans and grants from the Israeli Innovation Authority of the Ministry of Economy and Industry, or the IIA. We have devoted substantially all of our financial resources and efforts to research and development. We expect that it will be many 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 increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:

 

advance ELX-02 further into clinical trials;

 

continue the preclinical development of our research programs and advance candidates into clinical trials;

 

identify additional product candidates and advance them into preclinical development;

 

pursue regulatory authorization to conduct clinical trials of additional product candidates;

 

seek marketing approvals for our product candidates that successfully complete clinical trials;

 

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;