10-Q 1 elox-10q_20180630.htm 10-Q elox-10q_20180630.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 June 30, 2018

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

  (Do not check if a smaller reporting company)

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 August 3, 2018, the registrant had 34,857,680 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 June 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2018 and 2017

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

16

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

22

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

22

 

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

 

 

 

Item 1A.

 

Risk Factors

 

23

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

43

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

43

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

43

 

 

 

 

 

Item 5.

 

Other Information

 

43

 

 

 

 

 

Item 6.

 

Exhibits

 

44

 

 

 

 

 

 

 

SIGNATURES

 

47

 

2


PART I. FINANCIAL INFORMATION

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

June 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,412

 

 

$

24,049

 

Restricted bank deposit

 

 

100

 

 

 

102

 

Prepaid expenses and other current assets

 

 

458

 

 

 

355

 

Total current assets

 

 

63,970

 

 

 

24,506

 

Property and equipment, net

 

 

302

 

 

 

278

 

Total

 

$

64,272

 

 

$

24,784

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,098

 

 

$

1,530

 

Accrued expenses

 

 

2,258

 

 

 

1,893

 

Total current liabilities

 

 

4,356

 

 

 

3,423

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 5,000,000 shares authorized,

   no shares issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 

 

 

 

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

   34,869,450 and 27,527,738 shares issued at June 30, 2018 and

   December 31, 2017, respectively

 

 

349

 

 

 

274

 

Common stock in treasury, at cost, 8,385 and 0 shares at June 30, 2018 and December 31, 2017, respectively

 

 

(83

)

 

 

 

Additional paid in capital

 

 

120,607

 

 

 

60,047

 

Accumulated deficit

 

 

(60,957

)

 

 

(38,960

)

Total stockholders’ equity

 

 

59,916

 

 

 

21,361

 

Total

 

$

64,272

 

 

$

24,784

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

3


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,150

 

 

$

2,595

 

 

$

8,544

 

 

$

4,950

 

General and administrative

 

 

9,560

 

 

 

584

 

 

 

12,953

 

 

 

861

 

Reverse merger related expenses

 

 

(167

)

 

 

 

 

 

594

 

 

 

 

Total operating expenses

 

 

13,543

 

 

 

3,179

 

 

 

22,091

 

 

 

5,811

 

Loss from operations

 

 

(13,543

)

 

 

(3,179

)

 

 

(22,091

)

 

 

(5,811

)

Other (income) expense, net

 

 

(137

)

 

 

699

 

 

 

(94

)

 

 

745

 

Net loss

 

$

(13,406

)

 

$

(3,878

)

 

$

(21,997

)

 

$

(6,556

)

Basic and diluted net loss per share

 

$

(0.42

)

 

$

(1.04

)

 

$

(0.74

)

 

$

(1.77

)

Weighted average number of common shares in computing

   basic and diluted net loss per share

 

 

31,839,303

 

 

 

4,205,277

 

 

 

29,695,430

 

 

 

4,205,277

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

4


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(21,997

)

 

$

(6,556

)

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

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

6,913

 

 

 

21

 

Depreciation

 

 

46

 

 

 

13

 

Amortization and revaluation of discount in respect to convertible loan

 

 

 

 

 

625

 

Accrued interest on convertible loan

 

 

 

 

 

43

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(103

)

 

 

701

 

Accounts payable

 

 

568

 

 

 

(1,182

)

Accrued expenses

 

 

365

 

 

 

433

 

Net cash used in operating activities

 

 

(14,208

)

 

 

(5,902

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(101

)

 

 

(96

)

Net cash used in investing activities

 

 

(101

)

 

 

(96

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from the underwritten public offering, net of issuance costs

 

 

53,571

 

 

 

 

Proceeds from issuance of Series C preferred stock, net of issuance costs

 

 

 

 

 

14,669

 

Proceeds from convertible loan and financial derivative into Series C

   preferred stock

 

 

 

 

 

2,500

 

Proceeds from share based compensation arrangements

 

 

97

 

 

 

 

Net cash provided by financing activities

 

 

53,668

 

 

 

17,169

 

Effect of exchange rate on cash

 

 

2

 

 

 

 

Increase in cash and cash equivalents

 

 

39,361

 

 

 

11,171

 

Cash, cash equivalents and restricted cash, beginning of year

 

 

24,151

 

 

 

2,250

 

Cash, cash equivalents and restricted cash, end of period

 

$

63,512

 

 

$

13,421

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash to

   condensed consolidated balance sheets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

63,412

 

 

$

13,360

 

Restricted cash included in restricted bank deposit

 

 

100

 

 

 

61

 

Total cash, cash equivalents and restricted cash

 

$

63,512

 

 

$

13,421

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash financing activities

 

 

 

 

 

 

 

 

Non-cash acquisition of treasury shares

 

$

83

 

 

$

 

Conversion of convertible loan into Series C preferred stock

 

$

 

 

$

3,168

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

5


ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of the Business

Eloxx Pharmaceuticals, Inc., together with its wholly-owned subsidiary Eloxx Pharmaceuticals, Ltd. (collectively “we,” “our,” “us,” “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) that are designed to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt protein synthesis from messenger RNA. As a consequence, patients with premature stop codon diseases have reduced or eliminated protein production from the mutation bearing allele accounting for some of the most severe phenotypes in these genetic diseases. These premature stop codons have been identified in over 1,800 rare and ultra-rare diseases. Read-through therapeutic development is focused on extending mRNA (messenger RNA) half-life and increasing protein synthesis by enabling the cytoplasmic ribosome to read through premature stop codons to produce full-length proteins. Eloxx’s lead investigational product candidate, ELX-02, is a small molecule drug candidate designed to restore production of full-length functional proteins. Eloxx’s preclinical candidate pool consists of a library of novel drug candidates designed to be eukaryotic ribosomal selective glycosides identified based on read-through potential. ELX-02 is in the early stages of clinical development focusing on cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body. Eloxx is headquartered in Waltham, MA, with research and development operations in Rehovot, Israel.

The Company’s research and development strategy is to target rare or ultra-rare diseases where a high unmet medical need, nonsense mutation bearing, patient population has been identified, there are established preclinical read-through or personalized medicine experiments that are predictive of clinical activity, and a definable path for Orphan Drug development, regulatory approval, patient access and commercialization. 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 is on cystic fibrosis and cystinosis where the Company is advancing its lead investigational drug product candidate, ELX-02.

Eloxx Pharmaceuticals Ltd. (“Eloxx Limited”) was incorporated in Israel on September 17, 2013 and was acquired by the Company in a reverse merger described below. The Company focuses its activity on the discovery, development and commercialization of compounds for the treatment of genetic diseases caused by nonsense mutations primarily through a license agreement (the “Technion Agreement”) with the Technion Research and Development Foundation Ltd. (“TRDF”) entered into in 2013.

Reverse Merger

On December 19, 2017, Sevion Therapeutics, Inc. (“Sevion”) acquired 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. In connection with the Transaction, Sevion acquired all of the outstanding capital stock of Eloxx Limited in exchange for the issuance of an aggregate 20,316,656 shares of Sevion’s common stock, par value $0.01 per share (the “Common Stock”), after giving effect to a 1-for-20 reverse split immediately prior to the Transaction. As a result of the Transaction, Eloxx Limited became a wholly-owned subsidiary of Sevion. While Sevion was the legal acquirer in the transaction, Eloxx Limited was deemed the accounting acquirer. Immediately after giving effect to the Transaction, on December 19, 2017, Sevion changed its name to Eloxx Pharmaceuticals, Inc.

These interim unaudited 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 at the equity of the accounting acquirer. The annual audited 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.

6


Liquidity

As reflected in the accompanying unaudited consolidated financial statements, the Company has not generated revenue from the sale of any product and does not expect to generate significant revenue unless and until obtaining marketing approval and commercialization of one of its product candidates. As of June 30, 2018, the Company had cash and cash equivalents of $63.4 million, inclusive of net proceeds of $53.6 million received upon the completion of an underwritten public offering of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share on April 30, 2018.

The Company expects that its cash and cash equivalents will fund operations to 2020 based on its current operating plans. The Company incurred a loss for the six months ended June 30, 2018 of $22.0 million and had a negative cash flow from operating activities of $14.2 million during the six months ended June 30, 2018. The accumulated deficit as of June 30, 2018 was $61.0 million.

Correction of an Immaterial Error

The presentation of reverse merger related expense in the Statement of Operations for the six-months ended June 30, 2018 includes the effects of the correction of an immaterial error of the amounts of functional operating expenses previously reported for the three months ended March 31, 2018.  The Company assessed the materiality of these errors in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) Topic 1.M, Materiality, codified in ASC Topic 250, Presentation of Financial Statements (“ASC 250”), and concluded that the previously issued unaudited condensed consolidated interim financial statements for the three months ended March 31, 2018 and 2017 were not materially misstated; however, in order to correctly reflect the adjustment as described above in the appropriate period, management has elected to correct the presentation in the Statement of Operations for the six-months ended June 30, 2018 and will revise the affected previously issued financial statements for the three-months ended March 31, 2018 when such amounts are presented as comparative prior period balances in the Form 10-Q filing for the period ending March 31, 2019. As a result, the revised consolidated financial statements for the three and six months ended June 30, 2018 reflect a $0.4 million increase to research and development expense, a $0.9 million increase in general and administrative expense, and a corresponding decrease in reverse merger related expenses of $1.3 million.  The reclassification had no impact on net loss or net cash flows for the three months ended March 31, 2018 or the three and six months ended June 30, 2018, nor other prior periods presented.

The impact on specific line items in the accompanying consolidated statement of operations for the three months ended March 31, 2018 is presented below (in thousands):

 

 

 

Three Months Ended

March 31, 2018

 

 

 

As reported

 

 

Adjustments

 

 

As corrected

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,013

 

 

$

381

 

 

$

4,394

 

General and administrative

 

 

2,480

 

 

 

913

 

 

 

3,393

 

Reverse merger related expenses

 

 

2,055

 

 

 

(1,294

)

 

 

761

 

Total operating expenses

 

$

8,548

 

 

$

 

 

$

8,548

 

 

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 (“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 June 30, 2018 and 2017.

The Unaudited Consolidated Statements of Operations includes the Company’s operating expenses related to research and development and general and administrative, along with reverse merger related expenses, which were substantially comprised of fees for professional services.

7


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, 2017, 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 16, 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, 2017, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2018.

Recent Accounting Pronouncements adopted

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): “Restricted Cash” (ASU 2016-18), which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted the new guidance using the retrospective transition method as required with respect to each period presented. This new guidance does not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases”. This guidance will require that lease arrangements longer than 12 months result in an entity recognizing an asset and liability equal to the present value of the lease payments in the statement of financial position. This guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. This standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements and related disclosures.

3. Prepaids and Other Current Assets

Prepaids and other current assets as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

As of

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Prepaid insurance

 

$

290

 

 

$

242

 

Other governmental agencies receivables

 

 

 

 

 

88

 

Prepaid other

 

 

168

 

 

 

25

 

 

 

$

458

 

 

$

355

 

 

8


4. Property and Equipment, net

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

 

 

 

As of

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Computers and software

 

$

200

 

 

$

124

 

Office furniture and equipment

 

 

120

 

 

 

118

 

Laboratory equipment

 

 

 

 

 

37

 

Leasehold improvements

 

73

 

 

 

53

 

 

 

 

393

 

 

 

332

 

Less: Accumulated depreciation

 

 

91

 

 

 

54

 

Property and equipment, net

 

$

302

 

 

$

278

 

 

Depreciation expense was $25,000, and $7,000 for the three months ended June 30, 2018 and 2017, respectively. Depreciation expense was $46,000, and $13,000 for the six months ended June 30, 2018, 2018 and 2017, respectively.

5. Accrued Expenses

Accrued expenses as of June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

As of

 

 

 

June 30,

2018

 

 

December 31,

2017

 

Accrued payroll and related expenses

 

$

700

 

 

$

402

 

Accrued research and development expenses

 

 

712

 

 

 

704

 

Accrued professional services

 

 

846

 

 

 

787

 

 

 

$

2,258

 

 

$

1,893

 

 

6. Convertible Loan

On January 26, 2017 (the “Closing Date”), the Company entered into a Convertible Loan Agreement (the “Agreement”) with five of its shareholders (the “Lenders”), pursuant to which the Company raised an aggregate amount of $2.5 million (the “Convertible Loan”). The Convertible Loan included interest at an annual rate of 5%. According to the Agreement, the outstanding portion of the Convertible Loan (without accrued interest) automatically converts upon the consummation of an equity investment by a third party of an aggregate amount of at least $5.0 million (the “Qualified Equity Investment”), prior to the date that is two years from the Closing Date (the “Maturity Date”), into equity securities of the same class issued by the Company in such Qualified Equity Investment.

In accordance with ASC Topic 815 “Derivatives and Hedging”, features related to convertible loans qualify as embedded derivative instruments at the date of issuance, since these are considered as stock settled debt. In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value. The embedded conversion feature is classified under level 3 in the hierarchy. The fair value assigned to the embedded conversion feature on the issuance dates amounted to $0.3 million. The embedded instruments are marked to market in each reporting period and changes are recorded in financial expenses. The discount is amortized using the effective interest over the loan period.

On May 31, 2017, the Convertible Loan (without accrued interest) was converted into 825,213 shares of Series C preferred stock, according to the price per share that was paid in the 2017 Share Purchase Agreement (see Note 9). During the year ended December 31, 2017, the Company recorded $0.7 million as financial and other expenses, as a result of changes in the embedded instruments. In connection with the conversion, the embedded instrument together with all accrued interest in the amount of $0.7 million and was classified to additional paid in capital.

9


The following table presents reconciliations for the Company’s liabilities measured and recorded at fair value on a recurring basis, using significant unobservable inputs (in thousands):

 

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Balance at January 26, 2017

 

$

(308

)

Amortization and revaluation embedded conversion feature

 

 

(317

)

Conversion of convertible loan into Series C preferred

   stock

 

 

625

 

Balance at December 31, 2017

 

$

 

 

7. Related Parties

On August 29, 2013, the Company entered into an agreement (“Technion Agreement”) with TRDF, with respect to certain technology relating to aminoglycosides and the redesign of aminoglycosides for the treatment of human genetic diseases caused by premature stop mutations and further results of the research of the technology, in order to develop and commercialize products based on such technology. Under the Technion Agreement, TRDF is obligated to provide the Company with research services for an estimated annual payment of $0.1 million, the precise amount to be agreed by the parties prior to the beginning of each year of the research period. During the periods ended June 30, 2018 and 2017, the Company recorded general and administrative expenses amounting to zero and $7,000, respectively, in relation to the TRDF reimbursement for the preparation, filing, prosecution and maintenance of TRDF patents rights related to Eloxx Limited. For the periods ended June 30, 2018 and 2017 the Company did not record any research and development expenses in relation to the Technion Agreement. As of June 30, 2018 and December 31, 2017, amounts recorded in accrued expenses were $25,000 and $25,000, respectively.

In addition, TRDF granted the Company a license to use, market, sell or sub-license the rights of the product developed under the TRDF research results (the “Licensed Product”), as fully defined in the Technion Agreement, for the following considerations: (a) milestone payments, to be transferred upon meeting certain milestones as defined in the Technion Agreement, up to total consideration of $6.1 million; (b) certain royalties on a low- to mid- single-digit percentage of net sales (subject to change in the case of (x) sublicensing to a big pharmaceutical or biotechnology company, or (y) payment of royalties to third parties, or (z) commercialization by a third party of an authorized generic to a licensed product), for a period until the later of (i) the expiration of a valid claim on the Licensed Product in each country the Licensed Product is sold to, or (ii) a certain amount of years from the date of the first commercial sale of the Licensed Product in such country, and (c) a low- to mid- double-digit percentage of any non-royalty sub-license income received by the Company from a sub-licensed entity. In addition, the Company will be required to pay a fee to TRDF upon an exit event as described in the Technion Agreement.

On August 9, 2017 the Company received a legal claims letter from TRDF regarding TRDF’s alleged entitlement to an exit fee in accordance with the Technion Agreement. The Company recorded a $3.4 million research and development expense with an offsetting adjustment to additional paid-in capital for the year ended December 31, 2017 related to the planned issuance of those shares at fair market value on the date of the exit event. On June 13, 2018 the Company issued 569,395 shares to TRDF in satisfaction of this claim.

8. Legal and Other Contingencies

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 June 30, 2018 and 2017, the Company was not a party to any litigation that could 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.

10


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 six months ended June 30, 2018 were as follows (in thousands, except share amounts):

 

 

 

Common stock

 

 

Additional

paid-in

 

 

Accumulated

 

 

Treasury stock

 

 

Total

stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

deficit

 

 

Shares

 

 

Amount

 

 

equity

 

Balance at December 31, 2017

 

 

27,527,738

 

 

$

274

 

 

$

60,047

 

 

$

(38,960

)

 

 

 

 

$

 

 

$

21,361

 

Issuance of common stock related to

   share-based compensation

 

 

808,443

 

 

 

8

 

 

 

89

 

 

 

 

 

 

 

 

 

 

 

 

97

 

Issuance of common stock Techion

   settlement

 

 

569,395

 

 

 

6

 

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares upon execution

   of warrants

 

 

64,374

 

 

 

1

 

 

 

51

 

 

 

 

 

 

(3,385

)

 

 

(52

)

 

 

 

Issuance of shares upon public offering

 

 

5,899,500

 

 

 

60

 

 

 

53,018

 

 

 

 

 

 

 

 

 

 

 

 

53,078

 

Equity component of deferred financing

   costs of shares upon public offering

 

 

 

 

 

 

 

 

495

 

 

 

 

 

 

 

 

 

 

 

 

495

 

Repurchase of Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,000

)

 

 

(31

)

 

 

(31

)

Share-based compensation expense related

   to share-based award

 

 

 

 

 

 

 

 

6,913

 

 

 

 

 

 

 

 

 

 

 

 

6,913

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(21,997

)

 

 

 

 

 

 

 

 

(21,997

)

Balance at June 30, 2018

 

 

34,869,450

 

 

$

349

 

 

$

120,607

 

 

$

(60,957

)

 

 

(8,385

)

 

$

(83

)

 

$

59,916

 

 

Preferred and Common Stock

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

On May 22, 2017, Eloxx Limited entered into a Share Purchase Agreement (the “2017 SPA”) (and subsequently joinder agreements) with certain existing and new investors, whereby, an aggregate gross amount of $21.5 million, which included the conversion of certain loans (as detailed in Note 6), was received by Eloxx Limited in exchange for the issuance of 7,136,289 shares of Series C preferred stock with a par value of $0.01 with the initial closing, of which 39,293 shares were issued as a result of the anti-dilution effect of the Reverse Merger. The related issuance costs of $0.6 million were recorded in the three and six months ended June 30, 2017. All outstanding shares of Series C preferred stock were converted to common stock upon closing of the Reverse Merger.

In connection with the 2017 SPA, the Company granted 142,524 warrants to purchase 142,524 shares of Series C preferred stock to certain service providers as finder fee compensation.

Upon the closing of the Reverse Merger, the Company issued 6,333,333 shares of common stock related to the closing of the 2017 SPA with a par value of $0.01 for an aggregate gross amount of $17.5 million. Additionally, Sevion raised $1.5 million prior to the Reverse Merger. The related issuance costs recorded in the three and six months ended June 30, 2018 for these transactions was $0.5 million.

11


Warrants

Transactions related to warrants to purchase the Company’s common stock during the period ended June 30, 2018, were as follows:

 

 

 

Shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

life

 

Warrants outstanding at December 31, 2017

 

 

480,049

 

 

$

3.97

 

 

 

4.24

 

Exercised

 

 

(64,374

)

 

 

0.08

 

 

 

 

 

Forfeited

 

 

(68,434

)

 

 

8.00

 

 

 

 

 

Warrants outstanding at June 30, 2018

 

 

347,241

 

 

$

3.77

 

 

 

4.40

 

Warrants exercisable at June 30,2018

 

 

347,241

 

 

$

3.77

 

 

 

4.40

 

 

10. Stock-Based Compensation

Prior to April 20, 2018, the Company had two equity compensation plans; the Sevion 2008 Incentive Compensation Plan (the “2008 Plan”) and the Eloxx Limited 2013 Share Ownership and Option Plan (the “2013 Plan”). On April 20, 2018, the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) became effective. All of the plans are explained in detail below.

The 2018 Equity Incentive Plan

On March 12, 2018, our Board of Directors (the “Board”) adopted the 2018 Plan which was subsequently approved by our stockholders on March 26, 2018. On April 20, 2018, the 2018 Plan became effective and the Company ceased granting awards under each of the 2008 Plan and the 2013 Plan (the “Prior Plans”).

The purpose of the 2018 Plan is to provide a means whereby the Company can align the long-term financial interests of its employees, consultants, and directors with the financial interests of its stockholders. In addition, the Board believes that the ability to grant options and other equity-based awards will help the Company to attract, retain, and motivate employees, consultants, and directors and encourages them to devote their best efforts to the Company’s business and financial success. The 2018 Plan authorizes the grant and issuance of awards that may take the form of stock options, stock appreciation rights, restricted stock, stock units, and performance-based incentive awards.

The 2018 Plan became effective on April 20, 2018, with the outstanding awards and shares available for future grants under the 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. As of June 30, 2018, there were 3,765,654 shares available for future grant under the 2018 Plan, which represents approximately 11% of the Company’s outstanding common equity.

The 2008 Incentive Compensation Plan

In December 2008, the Company adopted the 2008 Incentive Compensation Plan (the “2008 Plan”), which provided for the grant of stock options, stock grants and stock purchase rights to certain designated employees and certain other persons performing services for the Company, as designated by the Company’s Board of Directors. Upon effectiveness of the 2018 Plan, all outstanding awards and all shares available for issuance in the 2008 Plan were incorporated into the 2018 Plan.

The 2013 Share Ownership and Option Plan

In December 2013, Eloxx Limited’s Board of Directors adopted the 2013 Plan in accordance with section 102 and 3(i) of the Israeli Income Tax Ordinance (the “2013 Plan”). Under the 2013 Plan, 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. Upon effectiveness of the 2018 Plan, all outstanding awards and all shares available for issuance in the 2013 Plan were incorporated into the 2018 Plan.

12


Summary of Option Activity

Transactions related to the grant of options to employees and directors during the period ended June 30, 2018 were as follows:

 

 

 

Shares

 

 

Weighted

average

exercise

price

 

 

Weighted

average

remaining

contractual

life

 

 

Aggregate

intrinsic

value

 

Options outstanding at December 31, 2017

 

 

3,215,661

 

 

$

4.91

 

 

 

7.70

 

 

$

15,174,026

 

Granted

 

 

1,470,141

 

 

 

18.44

 

 

 

 

 

 

 

 

 

Exercised

 

 

(667,130

)

 

 

0.13

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(148,435

)

 

 

4.69

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2018

 

 

3,870,237

 

 

$

10.66

 

 

 

8.70

 

 

$

28,689,787

 

Options exercisable at June 30,2018

 

 

1,275,487

 

 

$

10.72

 

 

 

6.90

 

 

$

16,685,166

 

 

 

(1)

Includes 141,389 option grant to a director at $23.27 per share which fully vested on the grant date.

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s Common Stock as of June 30, 2018, 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 June 30, 2018. This amount is impacted by the changes in the fair value of the Company’s shares.

The weighted average grant date fair value of the options granted during the period ended June 30, 2018, was $11.59.

Summary of Restricted Stock Unit Activity

 

Transactions related to the grant of restricted stock units to employees and directors during the period ended June 30, 2018 were as follows:

 

 

 

Shares

 

 

Weighted

average

grant date

fair value

price

 

Unvested at December 31, 2017

 

 

663,212

 

 

$

8.00

 

Granted

 

 

207,852

 

 

 

15.03

 

Vested

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

Unvested at June 30, 2018

 

 

871,064

 

 

$

9.68

 

 

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

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

329

 

 

$

6

 

 

$

411

 

 

$

12

 

General and administrative

 

 

5,849

 

 

 

5

 

 

 

6,502

 

 

 

9

 

Total stock-based compensation expenses

 

$

6,178

 

 

$

11

 

 

$

6,913

 

 

$

21

 

 

On January 15,2018, the Company issued an award outside of the 2008 Plan and 2013 Plan to an employee of the Company in the form of an option to purchase 69,000 shares of the Company’s common stock with an exercise price per share equal to $6.65. Subject to continued service through the vesting date, one-sixteenth of the awards will vest on each quarterly anniversary of the grant date. As of June 30, 2018, 732,212 options to purchase the Company’s stock and 663,212 restricted share units that were issued outside of the 2008 Plan and 2013 Plan were outstanding.

On June 15, 2018, the Company issued a fully vested stock award to a director of 141,389 shares at $23.27.

13


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, 2018.

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 the six months ended June 30, 2018 and 2017, the Company recorded zero and immaterial tax expense (or benefit), respectively, attributable to the operations of a U.S. subsidiary which files income tax returns on a stand-alone basis. The Company has not recorded net deferred tax assets as of June 30, 2018, or December 31, 2017, 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 rates of 21% and 34% as of June 30, 2018 and 2017, respectively, due to losses for which no future benefit is expected. As of June 30, 2018, and December 31, 2017, the Company had no uncertain tax positions recorded in its consolidated balance sheets.

After the enactment of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In our financial statements for the period ended December 31, 2017, we calculated an estimate of the impact of the Tax Act related to the remeasurement of our net U.S. deferred tax asset due to the change in U.S. federal corporate income tax rate. The provisional amount recorded was deferred tax expense of $10.2 million, but which was fully and equally offset by a deferred tax benefit related to a corresponding reduction in our valuation allowance. The Company has not adjusted the provisional amount in these financial statements for the period ended June 30, 2018, but we expect to complete this analysis within the one-year measurement period provided by SAB 118.

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 June 30,

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

13,406

 

 

$

3,878

 

 

$

21,997

 

 

$

6,556

 

Dividends accumulated for the period(1)

 

 

 

 

 

483

 

 

 

 

 

 

867

 

Net loss available to stockholders of Common Stock

 

$

13,406

 

 

$

4,361

 

 

$

21,997

 

 

$

7,423

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing net loss per share of Common

   Stock, basic and diluted(2)

 

 

31,839,303

 

 

 

4,205,277

 

 

 

29,695,430

 

 

 

4,205,277

 

Net loss per share of Common Stock, basic and diluted

 

$

0.42

 

 

$

1.04

 

 

$

0.74

 

 

$

1.77

 

 

 

(1)

The net loss used for the computation of basic and diluted net loss per share include 8% per share per annum compounded annually which was related to distributions for preferred stockholders of Eloxx Limited. On December 19, 2017, in conjunction with the Reverse Merger all preferred shares were converted to common shares.

14


 

 

(2)

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

 

 

 

Six months ended June 30,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

3,870,237

 

 

 

1,873,809

 

Restricted stock units

 

 

871,064

 

 

 

 

Warrants

 

 

347,241

 

 

 

5,282,794

 

Preferred stock

 

 

 

 

 

13,415,116

 

Total potential common stock equivalents

 

 

5,088,542

 

 

 

20,571,719

 

 

13. Segment and Geographic Information

Operating segments are defined as components of an enterprise (business activity from which it earns revenue and incurs expenses) about which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The chief operating decision maker reviews consolidated operating results to make decisions about allocating resources and assessing performance for the entire company. The Company views its operations and manages its business as one operating segment; however, it operates in two geographic regions: United States (Waltham, MA) and Israel (Rehovot).

 

15


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. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements 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 Quarterly Report on Form 10-Q. These and other factors could cause actual results to differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q.

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. In connection with the Transaction, Sevion acquired all of the outstanding capital stock of Eloxx Limited in exchange for the issuance of an aggregate 20,316,656 shares of Sevion’s common stock, par value $0.01 per share (the “Common Stock”), after giving effect to a 1-for-20 reverse split effected immediately prior to the Transaction. As a result of the Transaction, Eloxx Limited became a wholly-owned subsidiary of Sevion. While Sevion was the legal acquirer in the transaction, Eloxx Limited was deemed the accounting acquirer. Immediately after giving effect to the Transaction, on December 19, 2017, Sevion changed its name to Eloxx Pharmaceuticals, Inc. (collectively “we”, “our”, “us”, “Eloxx” or the “Company”).

These interim unaudited 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 at 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.

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 designed to treat rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt protein synthesis from messenger RNA. As a consequence, patients with premature stop codon diseases have reduced or eliminated protein production from the mutation bearing allele accounting for some of the most severe phenotypes in these genetic diseases. These premature stop codons have been identified in over 1,800 rare and ultra-rare diseases. Read-through therapeutic development is focused on extending mRNA (messenger RNA) half-life and increasing protein synthesis by enabling the cytoplasmic ribosome to read-through premature stop codons to produce full-length proteins. Eloxx’s lead investigational drug product candidate, ELX-02, is a small molecule designed to restore production of full-length functional proteins. Eloxx’s preclinical candidate pool consists of a library of novel drug candidates designed to be eukaryotic ribosomal selective glycosides identified based on read-through potential. ELX-02 is in the early stages of clinical development focusing on cystic fibrosis and cystinosis. ELX-02 is an investigational drug that has not been approved by any global regulatory body.

Our research and development strategy is to target rare or ultra-rare diseases where a high unmet medical need, nonsense mutation bearing, patient population has been identified, there are established preclinical read-through or personalized medicine experiments that are predictive of clinical activity, and a definable path for Orphan Drug development, regulatory approval, patient access and commercialization. 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 is on cystic fibrosis (or “CF”) and cystinosis where we are advancing our lead drug product candidate, ELX-02.

16


We intend to be the global leader in the application of the science of translational read-through and the associated pathway of nonsense mediated messenger ribonucleic acid (“mRNA”) decay. 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 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 cellular process 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. Our subcutaneously injected small molecules have the potential to be self-administered and to be active at most tissue locations across the body.

We believe that our library of related novel small molecules hold 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 the following diseases: cystic fibrosis, cystinosis, mucopolysaccharidosis type 1, Duchenne muscular dystrophy and Rett syndrome, and have demonstrated the potential for beneficial effects in multiple organs such as the brain, kidney, muscles and others. We intend to advance one or more additional molecules from our drug product candidate library toward clinical development by initiating the required investigational new drug (“IND”)-enabling studies in 2018.

Currently our lead program, ELX-02, is focused on development for cystic fibrosis and cystinosis patients with diagnosed nonsense mutations. To advance the program, we have held pre-clinical trial application (CTA) discussions with the Federal Agency for Medicines and Health Products (the “FAMHP”) in Brussels, Belgium and pre-IND discussions with the U.S. Food and Drug Administration (the “FDA”) for cystic fibrosis and cystinosis, respectively. Our CTA has been approved by the FAMHP and our IND is now open in the U.S. We expect to initiate Phase 2 studies in cystic fibrosis and cystinosis in 2018.

As part of our clinical program, we have completed a Phase 1 single ascending dose (“SAD”) study in a total of 60 healthy volunteers at sites in Israel (ClinicalTrials.gov Identifier: NCT02807961) and Belgium (ClinicalTrials.gov Identifier: NCT03292302). Currently ongoing is the Phase 1 multiple ascending dose (“MAD”) study in 45 healthy volunteers in Belgium (ClinicalTrials.gov Identifier: NCT03309605). We have completed the first four cohorts of the MAD study and will begin dosing in the fifth and final cohort. We anticipate that the Phase 1 MAD study will be completed in 2018. The results from the completed Phase 1 SAD study were included in the planned IND and CTA submissions.

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 US and Europe, including the Rare Pediatric Disease Priority Review Voucher in the U.S.

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

We hold worldwide development and commercialization rights to ELX-02 and novel compounds in our read-through library, for all indications, in all territories, under a license from the Technion Research and Development Foundation Ltd. Professor Timor Baasov, the inventor of our compounds, has served as our senior consultant since our inception, and is a member of our Scientific Advisory Board.

On April 30, 2018 the Company completed an underwritten public offering of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. The Company received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. As of June 30, 2018, we had cash and cash equivalents of $63.4 million. We expect that our current cash and cash equivalents will be sufficient to fund our current operations to 2020.

17


Since our inception, we have incurred significant operating losses. Our net losses were $22.0 million and $6.6 million for each of the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had an accumulated deficit of $61.0 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;

 

add operational, financial and management information systems and personnel, including personnel to support product development;

 

acquire or in-license other product candidates and technologies; and

 

operate as a public company.

Results of Operations

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

The critical accounting policies that we believe impact significant judgments and estimates used in the preparation of our financial statements presented in this Quarterly Report on Form 10-Q are described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K. There have been no material changes to our critical accounting policies through June 30, 2018, from those discussed in our Annual Report on Form 10-K filed with the SEC on March 16, 2018.

18


Results of Operations

The following table summarizes our results of operations for the periods ended, is as follows (in thousands):

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

4,150

 

 

$

2,595

 

 

$

8,544

 

 

$

4,950

 

General and administrative

 

 

9,560

 

 

 

584

 

 

 

12,953

 

 

 

861

 

Reverse merger related expenses

 

 

(167

)

 

 

 

 

 

594

 

 

 

 

Total operating expenses

 

 

13,543

 

 

 

3,179

 

 

 

22,091

 

 

 

5,811

 

Loss from operations

 

 

(13,543

)

 

 

(3,179

)

 

 

(22,091

)

 

 

(5,811

)

Other (income) expense, net

 

 

(137

)

 

 

699

 

 

 

(94

)

 

 

745

 

Net loss

 

$

(13,406

)

 

$

(3,878

)

 

$

(21,997

)

 

$

(6,556

)

 

Research and development expenses.

Research and development expenses were $4.2 million for the three months ended June 30, 2018 compared to $2.6 million for the period ended June 30, 2017, an increase of $1.6 million. The increase in research and development expenses was primarily related to fees, incurred to subcontractors, consultants and advisors in connection with research and development of ELX-02 of $1.1 million. Additionally, salaries and other personnel related costs increased by $0.5 million.

Research and development expenses were $8.5 million for the six months ended June 30, 2018, compared to $5.0 million for the period ended June 30, 2017, an increase of $3.5 million. The increase in research and development expenses was primarily related to fees incurred to subcontractors, consultants and advisors in connection with research and development of ELX-02 of $2.5 million. Additionally, salaries and other personnel related costs increased by $0.7 million.

General and administrative expenses.

General and administrative expenses were $9.6 million for the three months ended June 30, 2018, compared to $0.6 million for the period ended June 30, 2017, an increase of $9.0 million. The increase in general and administrative expenses was primarily due to stock-based compensation to a director of $5.0 million, an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $1.7 million, and professional service fees of $1.6 million.

General and administrative expenses were $13.0 million for the six months ended June 30, 2018, compared to $0.9 million for the period ended June 30, 2017, an increase of $12.1 million. The increase in general and administrative expenses was primarily due to stock-based compensation to a director of $5.0 million, an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $2.7 million, and professional service fees of $3.6 million.

Reverse merger related expenses.

We recorded a decrease in estimate of $0.2 million in professional service fees for the three months ended June 30, 2018, and $0.6 million in professional service fees for the six months ended June 30, 2018, related to the reverse merger we completed on December 19, 2017.

Other (income) expense, net.

We recorded $0.1 million in other income, net of expense for the three months ended June 30, 2018, compared to $0.7 million in other expense, net of income for the period ended June 30, 2017. The increase of $0.8 million was primarily due to a decrease of debt issuance costs of $0.6 million.  

We recorded $0.1 million in other income, net of expense for the six months ended June 30, 2018, compared to $0.7 million in other expense, net of income for the period ended June 30, 2017. The increase of $0.8 million was primarily due to a decrease of debt issuance costs of $0.6 million.  

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Liquidity and Capital Resources

General

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures. Since our inception and through June 30, 2018, we have funded our operations primarily through equity and convertible debt financings in private placements, as described below.

As of June 30, 2018, we had cash and cash equivalents of $63.4 million. On April 30, 2018, the Company completed an underwritten public offering (“2018 Offering”) of 5,899,500 shares of common stock of the Company at the public offering price of $9.75 per share. The Company received net proceeds of approximately $53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. We expect that our cash and cash equivalents will enable us to fund our current operations to 2020.

Our future viability beyond that point is dependent on our ability to raise additional capital to finance our operations. Although we have been successful in raising capital in the past, there is no assurance that we will be successful in obtaining such additional financing on terms acceptable to us, if at all. If we are unable to obtain funding, we could be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations.

Principal Financing Activities

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

On May 22, 2017, Eloxx Limited entered into a Share Purchase Agreement (the “2017 SPA”) (and subsequently joinder agreements) with certain existing and new investors, whereby, an aggregate gross amount of $21.5 million, which included the conversion of the loan as detailed in Note 6, was received by Eloxx Limited in exchange for the issuance of 7,136,289 shares of Series C preferred stock with par value of $0.01 with the initial closing, of which 39,293 shares were issued as a result of the anti-dilution effect of the Reverse Merger. The related issuance costs were $0.6 million.

In connection with the 2017 SPA, the Company granted 142,524 warrants to purchase 142,524 shares of Series C preferred stock to certain service providers as finder fee compensation.

Upon the closing of the Reverse Merger in December 2017, the Company issued 6,333,333 shares of common stock related to the closing of the 2017 SPA with a par value of $0.01 for an aggregate gross amount of $17.5 million. Additionally, Sevion raised $1.5 million prior to the Reverse Merger. The related issuance costs for these transactions was $0.5 million.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Net cash used in operating activities

 

$

(14,208

)

 

$

(5,902

)

Net cash used in investing activities

 

 

(101

)

 

 

(96

)

Net cash provided by financing activities

 

 

53,668

 

 

 

17,169

 

 

Operating Activities

During the six months ended June 30, 2018, the net cash used in operating activities was $14.2 million, primarily driven by our net loss of $22.0 million, partially offset by non-cash charges of $6.9 million related to stock-based compensation, and $0.8 million related to changes in working capital.

During the six months ended June 30, 2017, the net cash used in operating activities was $5.9 million, primarily driven by our net loss of $6.6 million, partially offset by the amortization and revaluation of the embedded conversion feature of $0.6 million.

20


Investing Activities

During the six months ended June 30, 2018, the net cash used in investing activities was $0.1 million, primarily driven by the purchase of property and equipment.

During the six months ended June 30, 2017, the net cash used in investing activities was $0.1 million, primarily driven by the purchase of property and equipment.

Financing Activities

During the six months ended June 30, 2018, the net cash provided by financing activities was $53.7 million, primarily due to the net proceeds from the 2018 Offering of $53.6 million, and $0.1 million of proceeds from share based compensation arrangements.

During the six months ended June 30, 2017, the net cash provided by financing activities was $17.2 million, resulting from the proceeds from the issuance of Series C preferred stock of $14.7 million and the convertible loan and financial derivative into the Series C preferred stock of $2.5 million.

Technion Research and Development Foundation Limited (“TRDF”) Agreement

On August 29, 2013, the Company entered into an agreement (“Technion Agreement”) with TRDF, with respect to certain technology relating to aminoglycosides and the redesign of aminoglycosides for the treatment of human genetic diseases caused by premature stop mutations and further results of the research of the technology, in order to develop and commercialize products based on such technology. Under the Techion Agreement, TRDF is obligated to provide the Company with research services for an estimated annual payment of $0.1 million, the precise amount to be agreed by the parties prior to the beginning of each year of the research period. During the periods ended June 30, 2018 and 2017, the Company recorded general and administrative expenses amounting to zero and $7,000, respectively, in relation to the TRDF reimbursement for the preparation, filing, prosecution and maintenance of TRDF patents rights related to Eloxx Limited. For the periods ended June 30, 2018 and 2017, the Company did not record any research and development expenses in relation to the Technion Agreement. As of June 30, 2018 and December 31, 2017, amounts recorded in accrued expenses were zero and $25,000, respectively.

In addition, TRDF granted the Company a license to use, market, sell or sub-license the rights of the product developed under the TRDF research results (the “Licensed Product”), as fully defined in the Technion Agreement, for the following considerations: (a) milestone payments, to be transferred upon meeting certain milestones as defined in the Technion Agreement, up to total consideration of $6.1 million; (b) certain royalties on a low- to mid- single-digit percentage of net sales (subject to change in the case of (x) sublicensing to a big pharmaceutical or biotechnology company, or (y) payment of royalties to third parties, or (z) commercialization by a third party of an authorized generic to a licensed product), for a period until the later of (i) the expiration of a valid claim on the Licensed Product in each country the Licensed Product is sold to, or (ii) a certain amount of years from the date of the first commercial sale of the Licensed Product in such country, and (c) a low- to mid- double-digit percentage of any non-royalty sub-license income received by the Company from a sub-licensed entity. In addition, the Company will be required to pay a fee to TRDF upon an exit event as described in the Technion Agreement.

On August 9, 2017, the Company received a legal claims letter from TRDF regarding TRDF’s alleged entitlement to an exit fee in accordance with the Technion Agreement. The Company recorded a $3.4 million research and development expense with an offsetting adjustment to additional paid-in capital for the year ended December 31, 2017, related to the planned issuance of these shares at fair market value on the date of the exit event. On June 13, 2018, the Company issued 569,395 shares to TRDF in satisfaction of this claim.

Contractual Obligations

There have been no material changes to our contractual obligations during the six months ended June 30, 2018. Please refer to our contractual obligations reported in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not have any off-balance sheet arrangements, as such term is defined under Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

21


Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to a “smaller reporting company”, as defined in Item 10(f)(1) of SEC Regulation S-K.

Item 4. Controls and Procedures

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

As of June 30, 2018, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our principal executive officer and principal financial officer have concluded based upon the evaluation described above that, as of June 30, 2018, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2018, there have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. We are currently unaware of any material pending legal proceedings to which we are party or of which our property is the subject. However, we 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 our intellectual property and its use, customer claims, employment practices and employee complaints and other events arising out of our operations. When appropriate in management’s estimation, we will record adequate reserves in our financial statements for pending litigation. Litigation is subject to inherent uncertainties, and an adverse result in any such matters could adversely impact our reputation, operations, and our financial operating results or overall financial condition. Additionally, any litigation to which we may become subject could also require significant involvement of our senior management and may divert management’s attention from our business and operations.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all other information in this Quarterly Report on Form 10-Q, before you decide to purchase our common stock. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of the events described below, and you may lose all or part of your investment. Additional risks that we currently do not know about, or that we currently believe immaterial, may also impair our business.

Risks Related to the Reverse Merger

The risks arising with respect to the historic Sevion business and operations may be different from what we anticipate, which could lead to significant, unexpected costs and liabilities and could materially and adversely affect our business going forward.

We may not have fully anticipated the extent of the risks associated with the recent reverse merger between Sevion and Eloxx Limited. After the reverse merger, Sevion’s historic business was discontinued, but prior to the transaction Sevion had a long operating history. As a consequence, we may be subject to claims, demands for payment, regulatory issues, costs and liabilities that were not and are not currently expected or anticipated. Notwithstanding our exercise of due diligence pre-transaction and risk mitigation strategies post-transaction, the risks involved with taking over a business with a long operating history and the costs and liabilities associated with these risks may be greater than we anticipate. Further, we do not have rights of indemnification against the pre-transaction stockholders of Sevion. We may not be able to contain or control the costs or liabilities associated with Sevion’s historic business, which could materially and adversely affect our business, liquidity, capital resources or results of operation, and may divert management’s time and attention from conducting the business of the Company.

Risks Related to Our Financial Position and Need for Additional Capital

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

Since our inception, we have incurred significant operating losses. Our net loss was $22.0 million and $6.6 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had an accumulated deficit of $61.0 million. Recently, on April 30, 2018, we completed an underwritten public offering of 5,899,500 shares of our common stock at a price to the public of $9.75 per share, including 769,500 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares, or the Public Offering. The gross proceeds from the Public Offering were approximately $53.6 million, before deducting the underwriting discounts and commissions and offering expenses. Historically, 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. Although we recently completed the Public Offering, 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;

23


 

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;

 

add operational, financial and management information systems and personnel, including personnel to support product development;

 

acquire or in-license other product candidates and technologies; and

 

operate as a public company.

We have never generated any revenue from product sales and may never be profitable. To become and remain profitable, we and our collaborators must develop and eventually commercialize one or more product candidates with significant market potential. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, obtaining marketing approval for these product candidates, manufacturing, marketing and selling those product candidates for which we may obtain marketing approval, securing coverage and reimbursement for those product candidates for which we may obtain marketing approval, and satisfying any post-marketing requirements. We may never succeed in these activities and, even if we do, may never generate revenue that is significant or large enough to achieve profitability. Our failure to become and remain profitable would decrease the value of the company and could impair our ability to raise capital, maintain our research and development efforts, expand our business or continue our operations. A decline in the value of our Company could also cause you to lose all or part of your investment.

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

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue and initiate clinical trials of, and seek marketing approval for ELX-02, and as we become obligated to make milestone payments pursuant to our outstanding license agreements. In addition, if we obtain marketing approval for any of our current or future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution of the approved product. Our future capital requirements will depend on many factors, including:

 

the scope, progress, results and costs of drug discovery, clinical development, laboratory testing and clinical trials for ELX-02;

 

the costs, timing and outcome of any regulatory review of ELX-02;

 

the cost of any other product candidate programs we pursue;

 

the costs and timing of commercialization activities, including manufacturing, marketing, sales and distribution, and securing coverage and reimbursement for any product candidates that receive marketing approval;

 

the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;

 

our ability to establish and maintain collaborations on favorable terms, if at all; and

 

the extent to which we acquire or in-license other product candidates and technologies.

Identifying potential product candidates and conducting preclinical studies and clinical trials are time consuming, expensive and uncertain processes that take years to complete, and we may never generate the necessary data or results required to obtain marketing approval or achieve product sales for any of our current or future product candidates. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenue, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all.

24


Accordingly, even with the recent Public Offering, we will need substantial additional funding in connection with our continuing operations and to achieve our goals. However, our existing cash and cash equivalents may prove to be insufficient for these activities. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs, product portfolio expansion or future commercialization efforts. Adequate additional financing may not be available to us on acceptable terms, or at all. In addition, we may seek additional financing due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our operating plans.

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity and debt financings, as well as entering into new collaborations, strategic alliances and licensing arrangements. We do not have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and may be secured by all or a portion of our assets. If we raise funds by entering into new collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Risks Related to Drug Discovery, Development, Regulatory Approval and Commercialization