UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

For the quarterly period ended September 30, 2018

OR

For the transition period from                      to                      

Commission File Number: 001-31326

 

ELOXX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

950 Winter Street

Waltham, Massachusetts 02451

(Address of principal executive offices) (Zip Code)

781-577-5300

(Registrant’s telephone number, including area code)

 

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

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

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

 

 

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, 2018, the registrant had 35,124,844 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

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ELOXX PHARMACEUTICALS, INC.

TABLE OF CONTENTS

 

 

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PART I. FINANCIAL INFORMATION

ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

Item 1. Condensed Consolidated Financial Information

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

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ELOXX PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Nature of the Business

Eloxx Pharmaceuticals, Inc., together with its wholly-owned subsidiary Eloxx Pharmaceuticals, Ltd. (collectively “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 formulated 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 levels of, or no, critical functional proteins 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 functional 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. 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’s preclinical candidate pool consists of a library of novel drug candidates identified based on read-through potential. Eloxx recently announced a new program focused on rare ocular genetic disorders. 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 models 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 for its lead investigational drug product candidate, ELX-02, is on cystic fibrosis and cystinosis. The Company has initiated a new program focused on rare inherited retinal disease and is conducting IND enabling studies for several compounds from its library. The Company will identify an additional molecule later this year to advance into clinical development. Eloxx has entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to support its inherited retinal degenerative disease registry and educational programs. FFB will provide ELX-02 with ongoing R&D consultation and support. The Company believes this partnership has the potential to accelerate Eloxx’s development programs and support patients with ocular disease and a high unmet medical need.

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. For more information relating to the Technion Agreement, see Note 7 to these unaudited consolidated financial statements.

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

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statements include the accounts of the Company since the effective date of the reverse capitalization and the accounts of Eloxx Limited since inception.

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 it obtains marketing approval and commercialization of one of its product candidates. As of September 30, 2018, the Company had cash and cash equivalents of $55.3 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 nine months ended September 30, 2018 of $33.2 million and had a negative cash flow from operating activities of $22.3 million during the nine months ended September 30, 2018. The accumulated deficit as of September 30, 2018 was $72.1 million.

Correction of an Immaterial Error

The presentation of reverse merger related expense in the Statement of Operations for the nine-months ended September 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 nine-months ended September 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 nine months ended September 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.  This reclassification correction had no impact on net loss or net cash flows for the three months ended March 31, 2018, the three and nine months ended September 30, 2018.

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):

 

 

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 September 30, 2018 and 2017.

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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.

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 nine months ended September 30, 2018.

Recent Accounting Pronouncements

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 September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

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4. Property and Equipment, net

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

 

 

Depreciation expense was $75,000, and $11,000 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense was $121,000, and $24,000 for the nine months ended September 30, 2018 and 2017, respectively.

 

5. Accrued Expenses

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

 

 

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.

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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):

 

 

7. Related Parties

On August 29, 2013, the Company entered into the 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. For the three and nine months ended September 30, 2018, the Company recorded research and development expense of $0.1 million and $0.1 million, respectively, in relation to in relation to reimbursement for the preparation, filing, prosecution and maintenance of TRDF patent rights related to Eloxx Limited. For the three and nine months ended September 30, 2017, the Company recorded general and administrative expenses amounting to $0 and $7,000, respectively, and research and development expenses amounting to $24,000 in relation to the Technion Agreement. As of September 30, 2018 and December 31, 2017, amounts recorded in accrued expenses were $6,000 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.

Moreover, upon the closing of an Exit Event which is not Initial Public Offering ("IPO"), as defined in the Technion Agreement, TRDF shall be entitled to an amount equal to 3% of all non-refundable, non-contingent consideration, whether in cash or in kind, actually received by the Company and / or its shareholders. Upon the closing of an exit event which is IPO, as defined in the Technion Agreement, TRDF shall be entitled to a number of Ordinary Shares of the Company representing 3% of the Company's outstanding shares on a fully diluted basis immediately prior to the closing of such IPO.

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 shares to TRDF at fair market value on the purported date of the exit event. On June 13, 2018 the Company issued 569,395 shares to TRDF in satisfaction of this claim.

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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 September 30, 2018 and 2017, the Company was not a party to any litigation that is likely to have a material adverse effect on the Company’s business, financial position, results of operations or cash flows. Legal costs incurred in connection with loss contingencies are expensed as incurred.

9. Stockholders’ Equity

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

Transactions related to stockholders’ equity of the Company during the nine months ended September 30, 2018 were as follows (in thousands, except share amounts):

 

 

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 nine months ended September 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 as fees to certain service providers.

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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 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 nine months ended September 30, 2018 for these transactions was zero and $0.5 million, respectively.

Warrants

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

 

 

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 described 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 September 30, 2018, there were 3,805,297 shares available for future grant under the 2018 Plan.

The 2008 Incentive Compensation Plan

In December 2008, the Company adopted 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, the shares available for awards under the 2008 Plan were added to the shares available for issuance under the 2018 Plan.

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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. 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, the shares available for award under the 2013 Plan were added to the shares available for issuance under the 2018 Plan.

Summary of Option Activity

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

 

 

The aggregate intrinsic value represents the total intrinsic value (the difference between the deemed fair value of the Company’s Common Stock as of September 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 September 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 September 30, 2018, was $10.97.

Summary of Restricted Stock Unit Activity

 

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

 

 

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The Company granted 22,427 performance-based options and 22,427 performance-based restricted stock units to an employee during the nine months ended September 30, 2018. The performance-based restricted stock units immediately vest upon the occurrence of the successful completion of a Phase-2B study.  For the three and nine months ending September 30, 2018, the Company recognized $0.1 million of expense associated with these awards granted.

 

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

 

 

On January 15, 2018, the Company issued an award outside of the Prior Plans 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 September 30, 2018, 732,212 options to purchase the Company’s stock and 663,212 restricted share units that were issued outside of the Prior Plans were outstanding.

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

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 nine months ended September 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 September 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 September 30, 2018 and 2017, respectively, due to losses for which no future benefit is expected. As of September 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 its financial statements for the period ended December 31, 2017, the Company 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 September 30, 2018, but it expects to complete this analysis within the one-year measurement period provided by SAB 118. 

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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):

 

 

 

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).

 

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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”).

The unaudited consolidated financial statements of the Company, included elsewhere in this Quarterly Report on Form 10-Q, 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) that are formulated 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 levels of, or no, critical functional proteins 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 functional 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. 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’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. Eloxx recently announced a new program focused on rare ocular genetic disorders. Eloxx is headquartered in Waltham, MA, with R&D operations in Rehovot, Israel.

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 models 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 for our lead investigational drug product candidate, ELX-02, is on cystic fibrosis and cystinosis. We have initiated a new program focused on rare inherited retinal disease and are conducting IND enabling studies for several compounds from our library. We will identify an additional molecule later this year to advance into clinical development. Eloxx has entered into a multiyear partnership with the Foundation Fighting Blindness (FFB) to

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support our inherited retinal degenerative disease registry and educational programs. FFB will provide ELX-02 with ongoing R&D consultation and support. We believe this partnership has the potential to accelerate Eloxx’s development programs and support patients with ocular disease and a high unmet medical need.

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 holds the potential to be disease-modifying therapies that may change the course of hundreds of genetic diseases and improve the lives of patients. Our early preclinical data in in vitro and in vivo 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, Rett syndrome and a variety of rare ocular genetic diseases. We have demonstrated the potential for beneficial effects in multiple organs such as the brain, kidney, muscles, eye and others.

Currently our lead program, ELX-02, is focused on development for cystic fibrosis and cystinosis patients with diagnosed nonsense mutations. Our pre-clinical trial application (“CTA”) has been approved by the Federal Agency for Medicines and Health Products (the "FAMHP") in Brussels and our IND submitted to the U.S. Food and Drug Administration (the “FDA”) is now open. We expect to initiate Phase 2 studies in cystic fibrosis and cystinosis following completion of our ongoing Phase 1 multiple ascending dose (“MAD”) study and report top line results in 2019.

As part of our clinical program for ELX-02, 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). The results of the SAD study have been submitted for publication. Currently ongoing is the Phase 1 multiple ascending dose (“MAD”) study in Belgium (ClinicalTrials.gov Identifier: NCT03309605). We have completed the first four cohorts of the MAD study and have initiated the fifth cohort.

We have initiated a new program focused on rare ocular genetic disorders and is conducting pre-IND enabling studies for several compounds from our library and will identify an additional molecule later this year to take into clinical development.  

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. Similarly, in cystinosis, we believe there is also a high unmet medical need as there are no currently approved therapeutics that target the nonsense mutation mediated impairment of cystinosin. Cystinosin is 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.

The European Medicines Agency (the “EMA”) has granted ELX-02 an orphan drug designation for the treatment of cystic fibrosis and mucopolysaccharidosis type I (“MPS I”). 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.

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

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$53.6 million after deducting underwriting discounts and commissions and estimated offering expenses. As of September 30, 2018, we had cash and cash equivalents of $55.3 million. We expect that our current cash and cash equivalents will be sufficient to fund our current operations to 2020.

Since our inception, we have incurred significant operating losses. Our net losses were $33.2 million and $10.6 million for each of the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, we had an accumulated deficit of $72.1 million. To date, we have financed our operations primarily through equity capital investments, and to a lesser extent, from loans and grants from the Israeli Innovation Authority of the Ministry of Economy and Industry, or the IIA. We have devoted substantially all of our financial resources and efforts to research and development. We expect that it will be many years, if ever, before we receive regulatory approval and have a product candidate ready for commercialization. We expect to continue to incur significant expenses and increasing operating losses for the foreseeable future. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:

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 September 30, 2018, from those discussed in our Annual Report on Form 10-K filed with the SEC on March 16, 2018.

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Results of Operations

The following table summarizes our results of operations for each of the periods presented (in thousands):

 

 

Research and development expenses.

Research and development expenses were $5.4 million for the three months ended September 30, 2018 compared to $3.3 million for the period ended September 30, 2017, an increase of $2.1 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 $1.6 million. Additionally, salaries and other personnel and occupancy related costs increased by $0.5 million.

Research and development expenses were $14.0 million for the nine months ended September 30, 2018, compared to $8.2 million for the period ended September 30, 2017, an increase of $5.8 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 $4.5 million. Additionally, salaries and other personnel and occupancy related costs increased by $1.3 million.

General and administrative expenses.

General and administrative expenses were $5.9 million for the three months ended September 30, 2018, compared to $0.7 million for the period ended September 30, 2017, an increase of $5.2 million. The increase in general and administrative expenses was primarily due to an increase in headcount and related salaries, stock-based compensation, and other personnel related costs of $3.6 million, and professional service fees and other fees of $1.6 million.

General and administrative expenses were $18.9 million for the nine months ended September 30, 2018, compared to $1.6 million for the period ended September 30, 2017, an increase of $17.3 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 $6.3 million, and professional service fees and other fees of $6.0 million.

Reverse merger related expenses.

We recorded professional service fees of $0.6 million for the nine months ended September 30, 2018 related to the reverse merger we completed on December 19, 2017. No professional service fees were recorded during the three months ended September 30, 2018.

Other (income) expense, net.

We recorded $0.2 million in other income, net of expense for the three months ended September 30, 2018, compared to $40,000 in other expense, net of income for the period ended September 30, 2017. The increase of $0.2 million was due to an increase in interest income.  

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We recorded $0.3 million in other income, net of expense for the nine months ended September 30, 2018, compared to $0.8 million in other expense, net of income for the period ended September 30, 2017. The increase of $1.1 million was primarily due to an increase in interest income of $0.3 million and a $0.8 million decrease in interest expense on debt issuance costs.  

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 September 30, 2018, we have funded our operations primarily through equity and convertible debt financings in private placements, as described below.

As of September 30, 2018, we had cash and cash equivalents of $55.3 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 to the unaudited condensed consolidated financial statements contained in this report, 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 as fees to certain service providers.

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. For more information, see Note 9 to the unaudited condensed consolidated financial statements contained in this report.

Cash Flows

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