elox-10q_20190930.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 September 30, 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)

 

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 November 1, 2019, the registrant had 40,002,654 shares of common stock, $0.01 par value per share, outstanding.

 

 


ELOXX PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

4

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months ended September 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 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

 

19

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

26

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

26

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

27

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

 

 

 

Item 1A.

 

Risk Factors

 

27

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

47

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

47

 

 

 

 

 

Item 5.

 

Other Information

 

47

 

 

 

 

 

Item 6.

 

Exhibits

 

48

 

 

 

 

 

 

 

SIGNATURES

 

49

 


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 may 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.

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; and

 

risks related to our ability to obtain adequate financing in the future through product licensing, public or private equity or debt financing or otherwise, as well as general business conditions, competition, and the availability of qualified personnel.

 

3


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)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,155

 

 

$

48,606

 

Marketable securities

 

 

42,781

 

 

 

 

Restricted bank deposit

 

 

40

 

 

 

45

 

Prepaid expenses and other current assets

 

 

1,878

 

 

 

1,690

 

Total current assets

 

 

66,854

 

 

 

50,341

 

Property and equipment, net

 

 

220

 

 

 

248

 

Operating lease right-of-use asset

 

 

870

 

 

 

 

Other long-term assets

 

 

113

 

 

 

129

 

Total assets

 

$

68,057

 

 

$

50,718

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,687

 

 

$

747

 

Accrued expenses

 

 

5,145

 

 

 

6,938

 

Current portion of long-term debt

 

 

3,488

 

 

 

 

Advances from collaboration partners

 

 

403

 

 

 

 

Current portion of operating lease liability

 

 

461

 

 

 

 

Taxes payable

 

 

43

 

 

 

122

 

Total current liabilities

 

 

11,227

 

 

 

7,807

 

Long-term debt

 

 

11,193

 

 

 

 

Operating lease liability

 

 

409

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   shares issued and outstanding at September 30, 2019 and December 31, 2018

 

 

 

 

 

 

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

   40,117,186 and 35,951,537 shares issued and 39,977,654 and 35,860,114

   shares outstanding as of September 30, 2019 and December 31, 2018,

   respectively

 

 

404

 

 

 

360

 

Common stock in treasury, at cost, 139,532 and 91,423 shares at September 30,

   2019 and December 31, 2018, respectively

 

 

(1,585

)

 

 

(1,129

)

Additional paid-in capital

 

 

171,783

 

 

 

129,825

 

Accumulated other comprehensive income

 

 

12

 

 

 

 

Accumulated deficit

 

 

(125,386

)

 

 

(86,145

)

Total stockholders’ equity

 

 

45,228

 

 

 

42,911

 

Total liabilities and stockholders' equity

 

$

68,057

 

 

$

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,801

 

 

$

5,415

 

 

$

20,160

 

 

$

13,959

 

General and administrative

 

 

5,978

 

 

 

5,945

 

 

 

18,907

 

 

 

18,898

 

Reverse merger related expenses

 

 

 

 

 

 

 

 

 

 

 

594

 

Total operating expenses

 

 

12,779

 

 

 

11,360

 

 

 

39,067

 

 

 

33,451

 

Loss from operations

 

 

(12,779

)

 

 

(11,360

)

 

 

(39,067

)

 

 

(33,451

)

Other expense (income), net

 

 

96

 

 

 

(199

)

 

 

174

 

 

 

(293

)

Net loss

 

$

(12,875

)

 

$

(11,161

)

 

$

(39,241

)

 

$

(33,158

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(12,875

)

 

$

(11,161

)

 

$

(39,241

)

 

$

(33,158

)

Unrealized gain (loss) from available-for-sale securities

 

 

(12

)

 

 

 

 

 

12

 

 

 

 

Comprehensive loss

 

$

(12,887

)

 

$

(11,161

)

 

$

(39,229

)

 

$

(33,158

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.32

)

 

$

(0.32

)

 

$

(1.05

)

 

$

(1.05

)

Weighted average number of common shares in computing basic

   and diluted net loss per share

 

 

39,944,324

 

 

 

35,005,979

 

 

 

37,394,310

 

 

 

31,485,067

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 

 

5


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(39,241

)

 

$

(33,158

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

8,631

 

 

 

9,608

 

Depreciation

 

 

68

 

 

 

121

 

Loss on disposal of property and equipment

 

 

 

 

 

12

 

Amortization of operating lease right-of-use asset

 

 

350

 

 

 

 

Amortization of debt discount

 

 

378

 

 

 

 

Amortization of premium and discount on investment

 

 

(228

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(150

)

 

 

(401

)

Other assets

 

 

 

 

 

(41

)

Advances from collaboration partners

 

 

403

 

 

 

 

Accounts payable

 

 

940

 

 

 

(178

)

Accrued expenses

 

 

(856

)

 

 

1,730

 

Operating lease liabilities

 

 

(350

)

 

 

 

Taxes payable

 

 

(79

)

 

 

 

Net cash used in operating activities

 

 

(30,134

)

 

 

(22,307

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(56,041

)

 

 

 

Proceeds from maturity of marketable securities

 

 

13,500

 

 

 

6

 

Purchases of property and equipment

 

 

(40

)

 

 

(133

)

Cash paid for long-term deposits

 

 

(22

)

 

 

(11

)

Net cash used in investing activities

 

 

(42,603

)

 

 

(138

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from underwritten public offerings, net of issuance costs

 

 

32,169

 

 

 

53,573

 

Proceeds from debt financing obligation

 

 

15,000

 

 

 

 

Payment of debt issuance costs

 

 

(276

)

 

 

 

Payment for settlement of taxes upon vesting of restricted stock securities

 

 

(1,215

)

 

 

 

Proceeds from sale of common stock under equity sales agreement

 

 

455

 

 

 

 

Proceeds from issuance of common stock on share-based compensation

   arrangements

 

 

148

 

 

 

103

 

Net cash provided by financing activities

 

 

46,281

 

 

 

53,676

 

(Decrease) increase in cash, cash equivalents and restricted cash

 

 

(26,456

)

 

 

31,231

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

48,651

 

 

 

24,151

 

Cash, cash equivalents and restricted cash, end of period

 

$

22,195

 

 

$

55,382

 

Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated

   balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,155

 

 

$

55,336

 

Restricted cash included in restricted bank deposit

 

 

40

 

 

 

46

 

Total cash, cash equivalents and restricted cash

 

$

22,195

 

 

$

55,382

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow activities

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

703

 

 

$

 

Cash paid for income taxes

 

$

79

 

 

$

 

Capital expenditures in liabilities for purchases of property, plant and equipment

 

$

 

 

$

104

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Non-cash acquisition of treasury shares

 

$

46

 

 

$

83

 

Non-cash issuance of shares upon exercise of warrants

 

$

178

 

 

$

 

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

 

$

421

 

 

$

 

 

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 subsidiaries (collectively “Eloxx” or the “Company”), is a clinical-stage biopharmaceutical company developing novel ribonucleic acid (RNA)-modulating drug candidates, each designed to be a eukaryotic ribosomal selective glycoside (ERSG), 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 compounds are targeted to the ribosomes. ELX-02, the Company’s lead investigational drug product candidate, is a small molecule designed to restore production of full-length functional proteins. ELX-02 is in clinical development for systemic administration for cystic fibrosis and nephropathic 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 an initial focus on Usher Syndrome. During the quarter ended September 30, 2019, the Company advanced its clinical program for ELX-02 into Phase 2 studies in cystic fibrosis and nephropathic cystinosis. The Company also completed a renal impairment study with ELX-02 in subjects with mild, moderate, and severe renal impairment. The results from the renal impairment study provide support for both continuing the Company’s clinical development programs and evaluating the suitability of its ERSG library for development in additional renal disorders, including autosomal dominant polycystic kidney disease and cystinuria. 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.  The Company 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, a 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 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 program for its lead investigational drug product candidate, ELX-02, includes studies in both cystic fibrosis and nephropathic cystinosis.

During the quarter ended September 30, 2019, the Company announced that the Cystic Fibrosis Foundation (the “CF Foundation”) is providing funding for a portion of the U.S. Phase 2 cystic fibrosis clinical trial and that it will form a joint program advisory group with the CF Foundation focused on the development of ELX-02 for cystic fibrosis. The Cystic Fibrosis Therapeutics Development Network (“TDN”) has sanctioned the Phase 2 study protocol, which will be conducted at TDN member sites.

 

Liquidity

The Company has a history of net losses and negative cash flows from operating activities since inception, and as of September 30, 2019, had an accumulated deficit of $125.4 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 it obtains marketing approval for and commercializes 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. The Company believes that its cash, cash equivalents and marketable securities of $64.9 million at September 30, 2019 will enable it to meet anticipated cash needs required to reach top line Phase 2 data in cystic fibrosis and in cystinosis and maintain the Company’s current and planned operations into the first quarter of 2021. 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.

7


 

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 Updates (“ASUs”) 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 September 30, 2019 and 2018.

The unaudited Condensed Consolidated Statements of Operations include the Company’s operating expenses related to research and development and general and administrative activities 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, 2019.

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 nine months ended September 30, 2019, the Company invested in marketable securities and as a result has provided the following update.

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 and nine months ended September 30, 2019.

Below is a summary of cash, cash equivalents and marketable securities at September 30, 2019 (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Cash and cash equivalents

 

$

22,155

 

 

$

 

 

$

 

 

$

22,155

 

Marketable securities - U.S. treasuries

 

 

42,769

 

 

 

15

 

 

 

(3

)

 

 

42,781

 

Total cash, cash equivalents and marketable securities

 

$

64,924

 

 

$

15

 

 

$

(3

)

 

$

64,936

 

 

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).

8


The fair value hierarchy consists of three levels:

 

Level 1 - Quoted prices (“unadjusted”) 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.

 

Financial assets and liabilities are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. 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. At September 30, 2019, the Company’s financial assets valued based on Level 1 inputs consisted of cash, cash equivalents and marketable securities (U.S. treasuries). During the three and nine months ended September 30, 2019, the Company did not have any transfers of financial assets between Level 2 and 3.

 

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 – Adopted

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


Recent Accounting Pronouncements – Pending Adoption

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This standard requires that for most financial assets, losses be based on an expected loss approach which includes estimates of losses over the life of exposure that considers historical, current and forecasted information. Expanded disclosures related to the methods used to estimate the losses as well as a specific disaggregation of balances for financial assets are also required. This standard is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted for annual periods beginning after December 15, 2018. The Company is assessing the impact the adoption of ASU 2016-13 may have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which modifies the disclosure requirements for fair value measurements. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted. The Company is evaluating the impact the adoption of ASU 2018-13 may have on its disclosures.

 

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Prepaid research and development

 

$

667

 

 

$

864

 

Prepaid other

 

 

533

 

 

 

555

 

Other receivable

 

 

403

 

 

 

 

Prepaid insurance

 

 

269

 

 

 

251

 

Other governmental agencies receivables

 

 

6

 

 

 

20

 

 

 

$

1,878

 

 

$

1,690

 

 

4. Property and Equipment

Property and equipment as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Computers and software

 

$

170

 

 

$

146

 

Office furniture and equipment

 

 

164

 

 

 

165

 

Leasehold improvements

 

 

158

 

 

 

141

 

 

 

 

492

 

 

 

452

 

Less: Accumulated depreciation

 

 

(272

)

 

 

(204

)

Property and equipment, net

 

$

220

 

 

$

248

 

 

Depreciation expense was $18 thousand and $75 thousand for the three months ended September 30, 2019 and 2018 and $68 thousand and $121 thousand for the nine months ended September 30, 2019 and 2018, respectively.

10


5. Accrued Expenses

Accrued expenses as of September 30, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

As of

 

 

 

September 30,

2019

 

 

December 31,

2018

 

Research and development expenses

 

$

2,032

 

 

$

3,086

 

Payroll, bonus and other employee-related expenses

 

 

1,983

 

 

 

2,562

 

Professional services

 

 

801

 

 

 

985

 

Accrued other

 

 

233

 

 

 

305

 

Accrued interest on debt

 

 

96

 

 

 

 

 

 

$

5,145

 

 

$

6,938

 

 

 

6. Leases

 

The Company adopted the 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.

 

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 and nine months ended September 30, 2019 were approximately $0.1 million and $0.4 million, respectively. 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 Topic 842, the Company recorded right-of-use assets of $1.2 million and lease liabilities of $1.2 million. These assets and obligations are reflected within ‘Operating lease right-of-use asset’, and ‘Operating lease liability’, respectively, on the unaudited Condensed Consolidated Balance Sheet. The weighted average remaining lease term at September 30, 2019 was 1.8 years.

The following table summarizes the Company’s maturities of operating lease liabilities as of September 30, 2019 (in thousands):

 

Remainder of 2019

 

$

138

 

2020

 

 

493

 

2021

 

 

310

 

Total lease payments

 

 

941

 

Less: present value discount

 

 

(71

)

Total

 

$

870

 

 

11


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”, and together with SVB, the “Lenders”). Under the SVB Loan Agreement, the Lenders agreed to extend term loans to the Company in an aggregate principal amount of $25.0 million, comprised of (i) an initial loan advance of $15.0 million; and (ii) a subsequent loan advance of $10.0 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.

 

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 September 30, 2019, the rate was 7.65%. 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 installments, 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 SVB 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% to 3% 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).

12


As of September 30, 2019, the carrying value of the term loan consists of $15.0 million principal outstanding less the unamortized debt issuance costs of approximately $1.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 and nine months ended September 30, 2019 was $0.4 million and $1.2 million, respectively. Interest expense is calculated using the effective interest method and is inclusive of non-cash amortization of capitalized loan costs. At September 30, 2019, the effective interest rate was 12.65%. 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.

 

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

 

 

 

September 30,

 

 

 

2019

 

Remainder of 2019

 

$

 

2020

 

 

4,583

 

2021

 

 

5,000

 

2022

 

 

5,000

 

2023

 

 

417

 

Total future principal payments

 

 

15,000

 

Less: unamortized discount

 

 

(1,219

)

Carrying value of long-term debt

 

 

13,781

 

Less: current portion

 

 

(3,488

)

Add: Final fee due at maturity in 2023

 

 

900

 

Long-term portion

 

$

11,193

 

 

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 September 30, 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.

During the quarter ended September 30, 2019, the Company received a funding award from the CF Foundation and entered into an agreement relating to the award and provision of other services. Payment of award amounts are subject to achievement of certain milestones in connection with the Company’s cystic fibrosis development program in the U.S. 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.” The Company recorded a liability for advances from collaboration partners of $0.4 million as of September 30, 2019. 

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.

13


On April 30, 2018, the Company completed an underwritten public offering of 5,899,500 shares of common stock at the public offering price of $9.75 per share and received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses.

On June 24, 2019, the Company completed an underwritten public offering of 3,833,334 shares of common stock of the Company at the public offering price of $9.00 per share and received net proceeds of approximately $32.2 million after deducting underwriting discounts and commissions of $2.1 million and estimated offering expenses of $0.2 million.

Transactions related to stockholders’ equity of the Company during the three and nine months ended September 30, 2019 were as follows (in thousands, except share data):

 

 

 

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 stock

   units

 

 

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

 

Stock-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

 

Exercise of stock options

 

 

36,790

 

 

 

 

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90

 

Issuance of shares upon

   exercise of warrants

 

 

44,814

 

 

 

 

 

 

178

 

 

 

 

 

 

 

 

 

(14,893

)

 

 

(178

)

 

 

 

Vesting of restricted stock

   units

 

 

54,122

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

(11,914

)

 

 

(111

)

 

 

(111

)

Issuance of shares upon

   equity financing, net of the

   underwriting discounts and

   commissions and offering

   expenses

 

 

3,833,334

 

 

 

38

 

 

 

32,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32,222

 

Stock-based compensation

 

 

 

 

 

 

 

 

3,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,016

 

Change in unrealized gain

   (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

23

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,449

)

 

 

 

 

 

 

 

 

(14,449

)

Balance at June 30, 2019

 

 

39,914,668

 

 

$

402

 

 

$

168,848

 

 

$

24

 

 

$

(112,511

)

 

 

(128,697

)

 

$

(1,539

)

 

$

55,224

 

Exercise of stock options

 

 

29,537

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Vesting of restricted stock

  units

 

 

33,449

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

(10,835

)

 

 

(46

)

 

 

(44

)

Equity financing issuance

   costs

 

 

 

 

 

 

 

 

(50

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,957

 

Change in unrealized gain

   (loss) on investments

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

 

 

 

(12

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,875

)

 

 

 

 

 

 

 

 

(12,875

)

Balance at September 30, 2019

 

 

39,977,654