The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q or this Report, as well as the audited financial statements and the related notes thereto, and the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 (the "Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see the sections "Forward-Looking Statements," "Summary Risk Factors," and Part I, Item 1A. "Risk Factors" herein.
Company Overview
We are a clinical-stage biopharmaceutical company engaged in the science of ribosome modulation, leveraging both our innovative TURBO-ZM™ chemistry technology platform in an effort to develop novel Ribosome Modulating Agents ("RMAs") and its library of Eukaryotic Ribosome Selective Glycosides ("ERSGs"), for the treatment of rare and ultra-rare premature stop codon diseases. Premature stop codons are point mutations that disrupt the stability of the impacted messenger RNA ("mRNA") and the protein synthesis from that mRNA. Our lead clinical program, ELX-02, is currently in Phase 2 clinical development for the treatment of cystic fibrosis ("CF") in patients with diagnosed nonsense mutations and is being conducted at leading investigator sites inEurope ,Israel andthe United States . As of the end ofJune 2021 , we believe that we have enrolled a sufficient number of patients to assess biological activity of ELX-02. We expect to present data from the first four treatment arms of the study before the end of 2021. TheCystic Fibrosis Foundation ("CFF") is providing funding for a portion of this clinical trial program.
The FDA has granted orphan drug designation to ELX-02 for the treatment of
nephropathic cystinosis, MPS I, Rett syndrome, and CF. In
Acquisition of
OnApril 1, 2021 , the Company acquiredZikani Therapeutics, Inc. ("Zikani"), a company in preclinical development and engaged in the science of ribosome modulation, leveraging its innovative TURBO-ZMTM chemistry technology platform to develop novel RMAs as potential therapeutics for diseases with limited treatment options. The TURBO-ZMTM platform is designed to enable rapid synthesis of novel compounds that can be optimized to modulate the ribosome in a disease specific manner. The TURRBO-ZMTM synthetic chemistry platform can design oral novel macrolide-based small molecules that are potent oral modulators with favorable therapeutic indices. Macrolides are antibiotics that inhibit protein synthesis in bacteria. We expect the combined company to emerge as a leader in the science of ribosome modulation through our complementary platforms and continued development of our library of RMAs and ERSGs. ELX-02, is a small molecule drug candidate designed to restore production of full-length functional proteins. The investigational therapy has shown strong activity across a full range of mutations in CF preclinical models. In Phase 1 testing, ELX-02 was generally well tolerated and demonstrated high bioavailability with consistent pharmacokinetics across both single and multiple-dose studies. The Phase 2 trials are designed to validate the safety of ELX-02 and assess its biological activity. With the strength of our ELX-02 program for CF, the acquisition of Zikani provides us with the opportunity to amplify the potential of our innovative science by developing a new class of therapies to treat diseases with limited to no treatment options. The CFF has agreed to provide funding for a portion of this research. Our preclinical programs are focused on select rare diseases including inherited diseases, cancer caused by nonsense mutations, kidney diseases, including autosomal dominant polycystic kidney disease, as well as rare ocular genetic disorders. In addition, we plan to file an Investigational New Drug ("IND") in 2022 for what could potentially become the first oral therapy for protein restoration for patients with nonsense mutations in Recessive Dystrophic Epidermolysis Bullosa ("RDEB") and Junctional Epidermolysis Bullosa ("JEB"). RDEB is an incurable, extremely painful and often fatal skin blistering condition caused by a lack of collagen type VII that is estimated to affect more than 3,000 people worldwide. JEB is the most severe form of Epidermolysis Bullosa, with most patients dying in infancy. By extending the application of ribosomal RNA modulation to the readthrough of nonsense mutations in tumor suppressor genes, we are also rapidly advancing preclinical research for familial adenomatous polyposis (FAP), an inherited pre-cancerous colorectal disease frequently caused by nonsense mutations in the 22
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adenomatous polyposis coli (APC) gene. We plan to target rare diseases including genetic diseases and cancers caused by nonsense mutations.
Nonsense mutations cause approximately 10-12% of rare inherited diseases. ELX-02 along with the TURBO-ZMTM library of compounds are anticipated to significantly expand to include the treatment of many other rare diseases and certain cancers. Under the terms of the Agreement and Plan of Merger (the "Merger Agreement"), the Company issued 7,596,810 shares of common stock in exchange for all of the issued and outstanding equity interests of Zikani. (the "Merger Consideration"). COVID-19 The ongoing COVID-19 pandemic and the measures that we, our employees, consultants, suppliers, contract research organizations ("CROs"), and other partners or governments may take in response to the pandemic may significantly disrupt our business operations. We are working to ensure that we can operate with minimal disruption and mitigate the impact of the pandemic on the health and safety of our employees and the patients and healthcare professionals that participate in our clinical trials. However, given the significant uncertainty regarding the ongoing impact of the COVID-19 pandemic, there remains a risk that we or our employees, contractors, suppliers, and other partners may be prevented or prohibited from conducting business activities for indefinite periods of time, for example due to a substantial percentage of personnel contracting the virus or due to government-mandated restrictions. While the pandemic has not to date had a material adverse impact on our financial condition, and we have not had to furlough any employees, our clinical trials were temporarily paused in March 021. As ofAugust 2021 , both Phase 2 clinical trials have resumed, and we believe that we have enrolled a sufficient number of patients to assess biological activity of ELX-02. We continue to monitor our operations, states of affairs in the regions in which we and our business partners operate and conduct research and clinical trial activities, and applicable government recommendations.
Results of Operations
The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % Operating expenses: Research and development$ 5,210 $ 3,445 $ 1,765
51 %
5,035 2,851 2,184 77 % 16,731 11,705 5,026 43 % Acquired in-process research and development - - - - 22,670 - 22,670 - Restructuring charges - - - - - 3,994 (3,994 ) - Total operating expenses 10,245 6,296 3,949 63 % 54,388 27,649 26,739 97 % Loss from operations (10,245 ) (6,296 ) (3,949 )
63 % (54,388 ) (27,649 ) (26,739 ) 97 % Other income (expense), net
360 (321 ) 681 (212 ) % (249 ) (801 ) 552 (69 ) % Net loss$ (9,885 ) $ (6,617 ) $ (3,268 ) 49 %$ (54,637 ) $ (28,450 ) $ (26,187 ) 92 %
Research and development expense
Research and development expenses were$5.2 million for the three months endedSeptember 30, 2021 , compared to$3.4 million for the same period in 2020, an increase of$1.8 million . The increase was primarily related to a$0.8 million increase in expenses related to subcontractors, consultants and advisors in connection with continued development of ELX-02 due to the impact of the COVID-19 pandemic on the corresponding prior year period expense, an increase in salaries and other personnel related costs of$0.5 million , and an increase in operational facilities of$0.5 million . Research and development expenses were$15.0 million for the nine months endedSeptember 30, 2021 compared to$12.0 million for the same period in 2020, an increase of$3.0 million . The increase was primarily related to a$2.2 million 23 -------------------------------------------------------------------------------- increase in expenses related to subcontractors, consultants and advisors in connection with continued development of ELX-02 due to the impact of the COVID-19 pandemic on the corresponding prior year period expense, an increase of$0.7 million related to operational facilities acquired with Zikani, and a$0.1 million increase in salaries and benefits.
General and administrative expenses
General and administrative expenses were$5.0 million for the three months endedSeptember 30, 2021 , compared to$2.9 million for the same period in 2020, an increase of$2.2 million . The increase was primarily related to a$0.7 million increase in stock-based compensation expense, a$0.5 million increase in in salaries and other personnel related costs related to the merger with Zikani, as well as an increase of$1.0 million in expenses attributable principally to infrastructure related costs including legal, accounting and other professional fees. General and administrative expenses were$16.7 million for the nine months endedSeptember 30, 2021 , compared to$11.7 million for the same period in 2020, an increase of$5.0 million . The increase was primarily related to$0.8 million increase in expenses attributable principally to infrastructure related costs including legal, accounting and other professional fees,$0.2 million related to office facilities acquired from Zikani and insurance, and, as further described below,$4.0 million related to restructuring charges in 2020 that were not incurred in 2021.
Acquired in-process research and development
Acquired in-process research and development ("IPR&D") expense of$22.7 million for the nine months endedSeptember 30, 2021 consists of the estimated fair value of the assets acquired and consideration given in connection with the acquisition of the Zikani's IPR&D. As the assets acquired were in the research and development phase and were determined to not have any alternative future use, such assets were expensed as acquired IPR&D. There was no such expense for the nine months endedSeptember 30, 2020 .
Restructuring charges
Restructuring charges of$4.0 million for the nine months endedSeptember 30, 2020 resulted from the leadership and organizational realignment during the first quarter of 2020. The total included$1.9 million related to contract termination and employee separation costs, primarily severance and benefits, and$2.1 million of stock-based compensation, relating to accelerated vesting of stock awards. There were no similar charges during the nine months endedSeptember 30, 2021 .
Other expense, net
We recorded$0.4 million in other income, net for the three months endedSeptember 30, 2021 compared to a$0.3 million other expense, net during the same period in 2020. We recorded$0.2 million in other expense, net for the nine months endedSeptember 30, 2021 , compared to$0.8 million for the same period in 2020. The increase in the 2021 periods as comparted to the same periods in 2020 was primarily due to the Company recognizing a$0.8 million gain on extinguishment of debt related to the forgiveness of the PPP loan (defined below), offset by a$0.3 million loss on extinguishment of debt related to the repayment of the amounts outstanding under our existing term loan from SVB inSeptember 2021 .
Liquidity and Capital Resources
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. We have not generated revenue from sales of any product or service. We have incurred significant operating losses to date and have not generated revenue from sales of any products or services. Our net losses were$54.6 million and$28.5 million for the nine months endedSeptember 30, 2021 , and 2020. As ofSeptember 30, 2021 , we had an accumulated deficit of$226.2 million . We have financed our operations primarily through the issuance of equity instruments, and to a lesser extent, from loans and grants. We have devoted substantially all of our financial resources and efforts to the development of our product candidates. We expect that it may be several 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 operating losses for the foreseeable future. A successful transition to profitable operations is dependent upon achieving a level of revenue adequate to support our cost structure. Our net losses may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses may increase if, and as, we: 24
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• advance ELX-02 and/or other product candidates further into clinical
development;
• experience any additional delays in enrollment and completion of our
clinical trials due to the COVID-19 pandemic;
• continue the preclinical development of our research programs and advance
candidates into clinical trials;
• pursue regulatory authorization to conduct clinical trials of additional
product candidates; • seek marketing approvals for our product candidates; • 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;
• acquire or in-license other product candidates and technologies; and • operate as a public company. We may never achieve profitability and until we do, we will continue to need to raise additional cash to fund our operations. Our cash and cash equivalents are highly liquid investments with original maturities of one year or less at the date of purchase and consist of cash in operating accounts and secured investments, primarily money market funds. We believe that our cash and cash equivalents of$52.4 million atSeptember 30, 2021 , will enable us to meet anticipated cash needs required to maintain our current and planned operations through at least the next 12 months from the issuance of this Report. Management intends to fund future operations through private or public debt or equity financing transactions and may seek additional capital through arrangements with strategic partners or from other sources. If we are unable to obtain adequate financing, we will evaluate alternatives which may include reducing or deferring operating expenses, including by downsizing our workforce and curtailing certain development programs, which could have a material adverse effect on our operations and future prospects.
Principal Financing Activities
InApril 2020 , we entered into a loan agreement with SVB under theU.S. Small Business Administration (the "SBA") Paycheck Protection Program (the "PPP") pursuant to the Coronavirus Aid, Relief and Economic Security Act of 2020 (the "CARES Act") and received loan proceeds of$0.8 million (the "PPP Loan"). We used the loan proceeds for payroll and other covered costs in accordance with the relevant terms and conditions of the CARES Act. The PPP Loan has an interest rate of 1.0% per annum. Under the terms of the PPP, onSeptember 3, 2021 , the PPP Loan was forgiven in full and the Company recognized a gain on extinguishment of debt of$0.8 million during the three and nine months endedSeptember 30, 2021 .
On
OnSeptember 30, 2021 , we entered into a Loan and Security Agreement with Hercules Capital, Inc., ("Hercules" or the "Lender"), Hercules agreed to extend term loans (the "Hercules Term Loan") to the Company in an aggregate principal amount of up to$30.0 million , comprised of three tranches. The Company drew on the first tranche of$12.5 million onSeptember 30, 2021 and used$7.7 million of the proceeds to repay the SVB loan principal, final payment, and early termination fees, resulting in net proceeds to us of$4.2 million , net of issuance related costs of$0.6 million . The remaining tranches totaling$17.5 million will be available to the Company based on achieving certain clinical and equity milestones during defined time periods. We will pay interest only on the outstanding principal on a monthly basis for the first 18 months of the agreement, which may be extended for an additional 12 months upon the achievement of certain milestones. Any amounts outstanding under the term loan advances, if not repaid sooner, are due and payable onApril 1, 2025 . On any date 25
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that we partially repay the outstanding obligations, the Company shall pay the Lenders a charge equal to 6.55% of the original principal amount.
OnSeptember 30, 2021 , the Company entered into a Sales Agreement withSVB Leerink, LLC ("SVB Leerink") pursuant to which the Company may offer and sell up to$50.0 million of shares of its common stock (the "ATM Shares") from time to time, through an "at the market offering" program (the "ATM Program"), under whichSVB Leerink will act as sales agent. Pursuant to the Sales Agreement, the Company will set the parameters for the sale of ATM Shares, including the number of ATM Shares to be issued, the time period during which sales are requested to be made, limitations on the number of ATM Shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Company is not obligated to make any sales of Shares under the ATM Program. This ATM Program was not active as ofSeptember 30, 2021 , and the Company had not sold any shares under the ATM Program as of such date.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented (in thousands):
Nine Months Ended September 30, 2021 2020 Net cash used in operating activities$ (25,070 ) $ (23,498 ) Net cash provided by investing activities 2,076
33,792
Net cash provided by (used in) financing activities 50,948 (2,186 )
Our operating activities used cash of$25.1 million and$23.5 million during the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , net cash used in operating activities resulted primarily from our net loss of$54.6 million , partially offset by total non-cash charges of$31.5 million . Non-cash charges primarily related to$22.7 million of acquired in-process research and development,$7.6 million of stock-based compensation,$0.7 million of amortization of lease assets, and$0.3 million of debt discount amortization. Changes in working capital were primarily related to decreases of$0.6 million in prepaid expenses,$0.7 million in operating lease liabilities,$0.2 million net of accounts payable and accrued expenses, and$1.0 million of merger related costs. For the nine months endedSeptember 30, 2020 , net cash used in operating activities resulted primarily from our net loss of$28.5 million and total changes in working capital of$3.4 million partially offset by total non-cash charges of$8.3 million . Non-cash charges primarily related to$7.4 million of stock-based compensation,$0.5 million of amortization of lease assets, and$0.4 million of debt discount amortization. Changes in working capital were primarily related to increases of$1.7 million in accrued expenses,$1.2 million in accounts payable,$0.4 million in operating lease liabilities, and in increase of$0.1 million in prepaid expenses and other current assets. Our investing activities provided cash of$2.1 million and$33.8 million during the nine months endedSeptember 30, 2021 and 2020, respectively. For the nine months endedSeptember 30, 2021 , cash provided in investing activities was primarily related to$2.1 million of cash acquired as part of the merger. For the nine months endedSeptember 30, 2020 , cash provided in investing activities was primarily related to$33.8 million of proceeds from the maturity of marketable securities. Our financing activities provided cash of$50.9 million during the nine months endedSeptember 30, 2021 and used cash of$2.2 million during the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , net cash provided by financing activities consisted primarily of net proceeds of$47.7 million from our public offering of common stock inMay 2021 ,$2.9 million in advances received from collaboration partners,$11.9 million of net cash received from the Hercules term loan, offset by$11.3 million in SVB term loan principal and repayments and final loan payment, and$0.2 million related to the settlement of taxes upon vesting of restricted stock units. For the nine months endedSeptember 30, 2020 , net cash used in financing activities consisted primarily of$3.3 million in term loan principal repayments, offset by$0.8 million received from the PPP Loan and$0.4 million in advances received from collaboration partners. 26
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Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of theSEC , that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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 inthe United States , orU.S. GAAP. The preparation of these condensed consolidated 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 expense during the reporting periods. We monitor and analyze these items 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 condensed consolidated financial statements presented in this Report are described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report. There have been no material changes to our critical accounting policies throughSeptember 30, 2021 from those discussed in our Annual Report filed with theSEC onMarch 12, 2021 . 27
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