SEC Filing | Eledon Pharmaceuticals, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐ 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: 001-36620

ELEDON PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		20-1000967
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

19900 MacArthur Blvd., Suite 550 Irvine, California		92612
(Address of principal executive offices)		(Zip Code)

(949) 238-8090

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value

ELDN

Nasdaq Capital Market

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

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

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


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of November 7, 2023 there were 24,198,130 shares of the Registrant’s common stock outstanding.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as defined by the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Any statements other than statements of historical or current fact in this Quarterly Report on Form 10-Q are forward looking statements. In some instances, you can identify forward-looking statements by the use of words such as “believes,” “anticipates,” “plans,” “expects,” “estimates,” “intends,” “predicts,” “projects,” “targets,” “could,” “may,” and similar expressions, although not all forward-looking statements include such identifying words. Forward-looking statements include, but are not limited to statements regarding:

•

our product development plans, expectations for and the timing of commencement, enrollment, completion, data, and release of results of clinical trials for our product candidates;

•

our estimates regarding expenses, capital requirements and needs for additional financing;

•

our strategies with respect to our preclinical and clinical development programs;

•

our plans, strategy and timing to obtain and maintain regulatory approvals of our product candidates;

•

our review of strategic alternatives and the outcome of such review; and

•

expectations about our future financial performance or condition.

Actual results may differ materially from those indicated by such forward-looking statements as a result of various factors, including the factors listed under “Risk Factor Summary” below. These risks and uncertainties, as well as other risks and uncertainties that could cause the Company’s actual results to differ significantly from the forward-looking statements contained herein, are described in greater detail in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.

Any forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date hereof and not as of any future date, and the Company expressly disclaims any intent to update any forward-looking statements, whether as a result of new information, future events or otherwise.

The market data and certain other statistical information used in this Quarterly Report are based on independent industry publications, governmental publications, reports by market research firms or other independent sources. Some data are also based on our good faith estimates. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information.

RISK FACTOR SUMMARY

The following summarizes the principal factors that make an investment in the Company speculative or risky, all of which are more fully described in Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q. This summary should be read in conjunction with the Risk Factors section and should not be relied upon as an exhaustive summary of the material risks facing our business. The occurrence of any of these risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the risk factors described in our public filings when evaluating our business.

•

Our short operating history and the acquisition of Anelixis Therapeutics, Inc. in September 2020 may make it difficult to evaluate the success of our business to date and to assess our future viability.

•

Our financial condition raises substantial doubt as to our ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.

•

We have incurred significant operating losses since our inception and expect that we will continue to incur losses over the next several years and may never achieve or maintain profitability.

•

We will require additional funding to be able to complete the development of our lead drug candidate. If we are unable to raise such capital, or if we are unable to do so on acceptable terms, we will be forced to significantly alter our business strategy, substantially curtail our current operations, or liquidate and cease operations altogether.

•

Issuances of our common stock, including common stock that may be issuable pursuant to outstanding warrants or other convertible securities as well as shares and warrants issued in connection with our recent Private Placement, could result in significant dilution and could cause our stock price to fall.

•

Our product candidates are in the early stages of clinical development and may not be successfully developed. If we are unable to successfully develop and commercialize these or any other product candidate, or if we experience significant delays in doing so, our business will be materially harmed.

•

Unfavorable global economic conditions could have a material adverse effect on our business.

•

Adverse conditions in the financial markets, including bank failures, could adversely affect our liquidity and financial performance.

•

Drug development involves a lengthy and expensive process with an uncertain outcome, including failure to demonstrate safety and efficacy to the satisfaction of the U.S. Food and Drug Administration (FDA) or similar regulatory authorities outside the United States. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development, formulation and commercialization of our product candidates.

•

The results of nonclinical studies and early clinical trials of our product candidates may not be predictive of the results of later-stage clinical trials, and there is a risk that additional nonclinical and/or clinical safety studies will be required by the FDA or similar regulatory authorities outside the United States or that subsequent studies will not match results seen in prior studies.

•

Delays or difficulties in the enrollment of patients in clinical trials could delay or prevent our receipt of necessary regulatory approvals and increase expenses for the development of our product candidates.

•

If serious adverse events or unacceptable side effects are identified during the development of our product candidates, we may need to abandon or limit our development of some of our product candidates.

•

Our future success depends on our ability to retain executives and key employees and to attract, retain and motivate qualified personnel in the future.

•

If we are not able to obtain, or if there are delays in obtaining, required regulatory approvals, or the approvals may be for a narrow indication, we may not be able to commercialize our product candidates, and our ability to generate revenue may be materially impaired.

•

Legislation regulating the pharmaceutical and healthcare industries may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.

•

Our internal computer systems, or those of our third-party collaborators, service providers, contractors or consultants, may fail or suffer security breaches, disruptions, or incidents, which could result in a material disruption of our development programs or loss of data or compromise the privacy, security, integrity or confidentiality of sensitive information related to our business and have a material adverse effect on our reputation, business, financial condition or results of operations.

•

Even if any of our product candidates receives marketing approval, we may fail to achieve the degree of market acceptance by physicians, patients, third-party payers and others in the medical community necessary for commercial success.

•

If our current product candidates, or a future product candidate receives marketing approval and we, or others, later discover that the product is less effective than previously believed or causes undesirable side effects that were not previously identified, the ability to market the product could be compromised.

•

We face substantial competition, which may result in others discovering, developing or commercializing competing products before or more successfully than we do.

•

The insurance coverage and reimbursement status of newly approved products is uncertain. Failure to obtain or maintain adequate coverage and reimbursement for new or current products could limit our ability to market those products and decrease our ability to generate revenue.

•

Our reliance on third parties for the manufacture of our product candidates for nonclinical and clinical trials, and for eventual commercialization, increases the risk that we will not have sufficient quantities of our product candidates or products at an acceptable cost and quality, which could delay, prevent or impair our development or commercialization efforts.

•

We depend on contract research organizations (“CROs”) and other contracted third parties to perform nonclinical and clinical testing and certain other research and development activities. As a result, the outcomes of the activities performed by these organizations will be, to a certain extent, beyond our control.

•

If we are unable to obtain and maintain intellectual property protection for our technology and products or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize technology and products similar or identical to ours, and our ability to successfully commercialize our technology and products may be impaired.

•

The COVID-19 pandemic has adversely affected and it or other public health crises, including any future pandemics or epidemics, could in the future adversely affect our business operations, which could have a material adverse effect on our business.

•

Our stock price could be volatile, and the market price of our common stock may drop unexpectedly.

•

If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

•

Provisions in our corporate charter and under Delaware law could make an acquisition of the Company more difficult and may prevent attempts by our stockholders to replace or remove our current management.

ELEDON PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2023

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements - Unaudited	6

	Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022	6

	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022	7

	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022	8

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022	9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

Signatures		57

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ELEDON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	September 30, 2023			December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	3,667		$	56,409
Short-term investments		55,942			—
Prepaid expenses and other current assets		3,382			3,109
Total current assets		62,991			59,518
Operating lease asset, net		459			739
In-process research and development		32,386			32,386
Other assets		233			150
Total assets	$	96,069		$	92,793
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	465		$	2,200
Current operating lease liabilities		396			363
Accrued expenses and other liabilities		2,038			3,912
Total current liabilities		2,899			6,475
Deferred tax liabilities		1,752			1,752
Non-current operating lease liabilities		83			383
Total liabilities		4,734			8,610

Commitments and contingencies (Note 8)

Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized at September 30, 2023 and December 31, 2022:
Series X1 non-voting convertible preferred stock, $0.001 par value, 515,000 shares designated; 110,086 and 117,970 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		—			—
Series X non-voting convertible preferred stock, $0.001 par value, 10,000 shares designated; 4,422 and 6,204 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		—			—
Common stock, $0.001 par value, 200,000,000 shares authorized at September 30, 2023 and December 31, 2022; 23,545,130 and 13,776,788 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		24			14
Additional paid-in capital		324,876			287,034
Accumulated deficit		(233,565	)		(202,865	)
Total stockholders’ equity		91,335			84,183
Total liabilities and stockholders’ equity	$	96,069		$	92,793

See accompanying notes to unaudited condensed consolidated financial statements.

ELEDON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
Operating expenses
Research and development	$	7,931		$	7,452		$	23,245		$	19,830
General and administrative		3,267			3,146			9,417			9,910
Total operating expenses		11,198			10,598			32,662			29,740
Loss from operations		(11,198	)		(10,598	)		(32,662	)		(29,740	)
Other income, net		849			127			1,962			158
Net loss and comprehensive loss	$	(10,349	)	$	(10,471	)	$	(30,700	)	$	(29,582	)
Net loss per share, basic and diluted	$	(0.35	)	$	(0.73	)	$	(1.35	)	$	(2.07	)
Weighted-average common shares outstanding, basic and diluted		29,974,400			14,265,905			22,813,085			14,289,729

See accompanying notes to unaudited condensed consolidated financial statements.

ELEDON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)


	Series X1 Non-Voting Convertible Preferred Stock					Series X Non-Voting Convertible Preferred Stock					Common Stock					Additional Paid-In			Accumulated			Total Stockholders'
	Shares			Amount		Shares			Amount		Shares			Amount		Capital			Deficit			Equity
Balance as of December 31, 2022		117,970		$	—		6,204		$	—		13,776,788		$	14	$	287,034		$	(202,865	)	$	84,183
Stock-based compensation		—			—		—			—		—			—		1,381			—			1,381
Net loss and other comprehensive loss		—			—		—			—		—			—		—			(10,772	)		(10,772	)
Balance as of March 31, 2023		117,970			—		6,204			—		13,776,788			14		288,415			(213,637	)		74,792
Issuance of common stock and pre-funded warrants in connection with Securities Purchase Agreement, net of issuance costs		—			—		—			—		8,730,168			9		33,008			—			33,017
Issuance of common stock in connection with conversion of X non-voting convertible preferred stock		—			—		(1,782	)		—		99,000			—		—			—			—
Issuance of common stock in connection with conversion of X1 non-voting convertible preferred stock		(7,884	)		—		—			—		437,977			—		(1	)		—			(1	)
Stock-based compensation		—			—		—			—		—			—		1,720			—			1,720
Net loss and other comprehensive loss		—			—		—			—		—			—		—			(9,579	)		(9,579	)
Balance as of June 30, 2023		110,086			—		4,422			—		23,043,933			23		323,142			(223,216	)		99,949
Issuance of common stock in connection with exercise of pre-funded warrants		—			—		—			—		501,197			1		—			—			1
Stock-based compensation		—			—		—			—		—			—		1,734			—			1,734
Net loss and other comprehensive loss		—			—		—			—		—			—		—			(10,349	)		(10,349	)
Balance as of September 30, 2023		110,086		$	—		4,422		$	—		23,545,130		$	24	$	324,876		$	(233,565	)	$	91,335

	Series X1 Non-Voting Convertible Preferred Stock					Series X Non-Voting Convertible Preferred Stock					Common Stock					Additional Paid-In			Accumulated			Total Stockholders'
	Shares			Amount		Shares			Amount		Shares			Amount		Capital			Deficit			Equity
Balance as of December 31, 2021		108,070		$	—		6,204		$	—		14,306,788		$	14	$	278,880		$	(114,899	)	$	163,995
Cancellation of common stock in connection with exchange for X1 non-voting convertible preferred stock		9,900			—		—			—		(550,000	)		—		1			—			1
Stock-based compensation		—			—		—			—		—			—		2,186			—			2,186
Net loss and other comprehensive loss		—			—		—			—		—			—		—			(9,864	)		(9,864	)
Balance as of March 31, 2022		117,970			—		6,204			—		13,756,788			14		281,067			(124,763	)		156,318
Stock-based compensation		-			—		—			—		—			—		2,308			—			2,308
Net loss and other comprehensive loss		-			—		—			—		—			—		—			(9,247	)		(9,247	)
Balance as of June 30, 2022		117,970			—		6,204			—		13,756,788			14		283,375			(134,010	)		149,379
Stock-based compensation		-			—		—			—		—			—		2,185			—			2,185
Net loss and other comprehensive loss		-			—		—			—		—			—		—			(10,471	)		(10,471	)
Balance as of September 30, 2022		117,970		$	—		6,204		$	—		13,756,788		$	14	$	285,560		$	(144,481	)	$	141,093

See accompanying notes to unaudited condensed consolidated financial statements.

ELEDON PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	For the Nine Months Ended September 30,
	2023			2022
Cash flows used in operating activities:
Net loss	$	(30,700	)	$	(29,582	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of operating lease asset		280			280
Accretion on investment discounts		(579	)		—
Stock-based compensation		4,835			6,679
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(356	)		2,082
Accounts payable, accrued expenses and other liabilities		(3,609	)		1,871
Operating lease liabilities		(267	)		(274	)
Net cash used in operating activities		(30,396	)		(18,944	)
Cash flows from investing activities:
Purchase of available-for-sale short-term investments		(60,363	)		—
Proceeds from maturities of available-for-sale short-term investments		5,000			—
Net cash used in investing activities		(55,363	)		—
Cash flows from financing activities:
Proceeds from issuances of common stock and pre-funded warrants, net		33,017			—
Net cash provided by financing activities		33,017			—
Net change in cash and cash equivalents		(52,742	)		(18,944	)
Cash and cash equivalents at beginning of period		56,409			84,833
Cash and cash equivalents at end of period	$	3,667		$	65,889
Supplemental disclosure of non-cash investing and financing activities
Non-cash activities:
Common stock exchanged for X and X1 non-voting convertible preferred stock	$	1		$	1
Increase in operating lease asset and liability due to lease modification	$	—		$	344

See accompanying notes to unaudited condensed consolidated financial statements.

ELEDON PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Eledon Pharmaceuticals, Inc. is a clinical stage biotechnology company using its immunology expertise in targeting the CD40 Ligand (“CD40L”, also called “CD154”) pathway to develop therapies to protect transplanted organs and prevent rejection, and to treat amyotrophic lateral sclerosis (“ALS”). The Company’s lead compound in development is tegoprubart, an IgG1, anti-CD40L antibody with high affinity for the CD40 Ligand, a well-validated biological target that we believe has broad therapeutic potential. Unless otherwise indicated, references to the terms “Eledon,” “our,” “us,” “we,” or the “Company” refer to Eledon Pharmaceuticals, Inc. and its wholly owned subsidiaries, on a consolidated basis.

On September 14, 2020, Eledon acquired Anelixis Therapeutics, Inc. (“Anelixis”), a privately held clinical stage biotechnology company developing a next generation anti-CD40L antibody as a potential treatment for organ and cellular transplantation, autoimmune diseases, and neurodegenerative diseases. The Company maintains its corporate headquarters in Irvine, California and has research and development facilities in Burlington, Massachusetts.

Note 2. Going Concern and Management’s Plans

The accompanying condensed consolidated financial statements have been prepared under the assumption the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to the Company’s ability to continue as a going concern.

The Company had a net loss of $30.7 million for the nine months ended September 30, 2023 and an accumulated deficit of $233.6 million as of September 30, 2023, as a result of incurring losses since its inception. The Company expects to continue to incur net losses into the foreseeable future in connection with its ongoing activities, particularly as the Company expands its clinical program with tegoprubart, continues the research and development of, and seeks marketing approval for, its product candidates. In addition, if the Company obtains marketing approval for any of its product candidates, the Company expects to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. The Company has financed operations primarily by net proceeds from the sale of preferred and common stock and warrants.

On April 28, 2023, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with certain institutional and accredited investors (the “Purchasers”), pursuant to which the Company agreed to issue and sell to the Purchasers in a private placement (the “Private Placement”) shares of common stock and warrants in a series of three potential closings. On May 5, 2023, the initial closing occurred and the Company received $35.0 million, in exchange for 8,730,168 shares of common stock, pre-funded warrants to purchase 6,421,350 shares of common stock and additional common stock warrants to purchase 15,151,518 shares of common stock (or pre-funded warrants in lieu thereof). The Company may receive up to an additional $105.0 million in tranche financing in a second and a third closing, subject to achieving specified clinical development milestones and volume weighted average share price levels and trading volume conditions, and an additional $45.5 million assuming the exercise of all common stock warrants issued in the initial closing of the Private Placement. See Note 9. “Stockholders’ Equity” for further information regarding the Private Placement. Due to the contingent nature of the exercise of the common stock warrants and the second and third closings of the Private Placement, accounting principles generally accepted in the United States of America (“GAAP”) requires the Company to exclude them from its going concern analysis. If these events do not occur or the Company is unable to secure additional capital or is unable to do so on acceptable terms, it will be forced to significantly alter its business strategy, substantially curtail its current operations, or liquidate and cease operations altogether.

As of September 30, 2023, the Company had cash and cash equivalents and short-term investments of approximately $59.6 million. Additionally, in view of the Company’s expectation to incur significant losses for the foreseeable future, the Company will be required to raise additional capital resources in order to fund its operations, although the availability of, and the Company’s access to, such resources is not assured. Accordingly, management believes that there is substantial doubt regarding the Company’s ability to continue operating as a going concern.

Note 3. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and Article 8 of Regulation S-X requirements as set forth by the Securities and Exchange Commission (“SEC”) for interim financial information and reflect all adjustments and disclosures, which are, in the opinion of management, of a normal and recurring nature, and considered necessary for a fair presentation of the financial information contained herein. Pursuant to these rules and regulations, the unaudited condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of results of operations and comprehensive loss, financial position, and cash flows in conformity with GAAP.

The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and accompanying notes of Eledon for the year ended December 31, 2022 included in the Annual Report on Form 10-K filed by the Company with the SEC on March 30, 2023. The results of operations and comprehensive loss for the three and nine months ended September 30, 2023 are not necessarily indicative of results expected for the full fiscal year or any other future period.

Principles of Consolidation

Eledon, a Delaware corporation, owns 100% of the issued and outstanding common stock or other ownership interest in Anelixis Therapeutics, LLC, a Delaware limited liability company, and Otic Pharma, Ltd., a private limited company organized under the laws of the State of Israel (“Otic”). Otic owns 100% of the issued and outstanding common stock or other ownership interest in its U.S. subsidiary, Otic Pharma, Inc.

The functional currency of the Company’s foreign subsidiary is the U.S. Dollar; however, certain expenses, assets and liabilities are transacted at the local currency. These transactions are translated from the local currency into U.S. Dollars at exchange rates during or at the end of the reporting period. The activities of the Company’s foreign subsidiary are not significant to the condensed consolidated financial statements.

All significant intercompany accounts and transactions among the entities have been eliminated from the condensed consolidated financial statements.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make informed estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. The most significant estimates in the Company’s consolidated financial statements relate to stock-based compensation, accruals for liabilities, impairment of long-lived assets, and other matters that affect the consolidated financial statements and related disclosures. Actual results could differ materially from those estimates under different assumptions or conditions and the differences may be material to the consolidated financial statements.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to significant concentration of credit risk consists of cash, cash equivalents and short-term investments. The Company maintains deposits in federally insured institutions in excess of federally insured limits and invests in short-term investments with the primary objective of seeking to preserve principal, achieve liquidity requirements and safeguard invested funds. We believe that the Company is not exposed to significant credit risk due to the financial position of the depository institution in which those deposits are held and the nature, including the credit ratings, of our cash equivalents and short-term investments, but we have not eliminated all credit risk.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts, money market funds, U.S. government securities and U.S. government agency securities. The carrying amounts reported in the unaudited

condensed consolidated balance sheets for cash and cash equivalents are valued at cost, which approximates their fair value due to the short-term maturities of these investments.

Risks and Uncertainties

As of September 30, 2023 and December 31, 2022, all of the Company’s long-lived assets were located in the United States.

The Company’s products will require approval from the U.S. Food and Drug Administration (“FDA”) and foreign regulatory agencies before commercial sales can commence. There can be no assurance that its products will receive any of these required approvals. The denial or delay of such approvals may impact the Company’s business in the future. In addition, after the approval by the FDA, there is still an ongoing risk of adverse events that did not appear during the product approval process.

The Company is subject to risks common to companies in the pharmaceutical industry, including, but not limited to, new technological innovations, clinical development risk, establishment of appropriate commercial partnerships, protection of proprietary technology, compliance with government and environmental regulations, uncertainty of market acceptance of products, product liability, the volatility of its stock price and the need to obtain additional financing.

The Company's facilities and equipment, including those of the Company's suppliers and vendors, may be affected by natural or man-made disasters. The Company's administrative office is based in Irvine, California and the Company manages all its research and development activities through third parties that are located throughout the world. The Company has taken precautions to safeguard its facilities, equipment and systems, including insurance, health and safety protocols, and off-site storage of computer data. However, the Company's facilities and systems, as well as those of its third-party suppliers and vendors, may be vulnerable to earthquakes, fire, storm, public health or similar emergencies, power loss, telecommunications failures, physical and software break-ins, software viruses and similar events which could cause substantial delays in its operations, damage or destroy its equipment or inventory, and cause the Company to incur additional expenses and delay research and development activities. In addition, the insurance coverage the Company maintains may not be adequate to cover its losses in any circumstance and may not continue to be available to use on acceptable terms, or at all.

Research and Development Expenses

Research and development expenses include personnel and facility-related expenses, outside contracted services including clinical trial costs, manufacturing and process development costs, research costs and other consulting services and non-cash stock-based compensation. Research and development costs are expensed as incurred. Amounts due under contracts with third parties may be either fixed fee or fee for service, and may include upfront payments, monthly payments and payments upon the completion of milestones or receipt of deliverables. Non-refundable advance payments under agreements are capitalized and expensed as the related goods are delivered or services are performed.

The Company contracts with third parties to perform various clinical trial activities in the on-going development of potential products. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows to its vendors. Payments under the contracts depend on factors such as the achievement of certain events, successful enrollment of patients, and completion of portions of the clinical trial or similar conditions. The Company’s accrual for clinical trials is based on estimates of the services received and efforts expended pursuant to contracts with clinical trial centers and clinical research organizations. These contracts may be terminated by the Company upon written notice and the Company is generally only liable for actual effort expended by the organizations to the date of termination, although in certain instances the Company may be further responsible for termination fees and penalties. The Company estimates its research and development expenses and the related accrual as of each balance sheet date based on the facts and circumstances known to the Company at that time. There have been no material adjustments to the Company’s prior‑period accrued estimates for clinical trial activities during the three and nine months ended September 30, 2023.

Recently Adopted Accounting Pronouncements

No new accounting pronouncement issued or effective during the fiscal period had or is expected to have a material impact on the Company’s condensed consolidated financial statements or disclosures.

Note 4. Short-Term Investments

The objectives of the Company’s investment policy are to preserve principal, achieve liquidity requirements and safeguard invested funds. Short-term investments consist of U.S. government securities and U.S. government agency securities. The Company has classified these investments as available-for-sale securities, as the sale of such investments may be required prior to maturity to implement management strategies, and therefore has classified all investments with maturity dates beyond three months at the date of purchase as current assets in the accompanying unaudited condensed consolidated balance sheets. Any premium or discount arising at purchase is amortized and/or accreted to interest income as an adjustment to yield using the straight-line method over the life of the instrument. The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. Investments are reported at their estimated fair value. Unrealized gains and losses are included in accumulated other comprehensive loss as a component of stockholders' equity until realized.

The following is a summary of short-term investments, which were classified as available-for-sale securities as of September 30, 2023:


	September 30, 2023
	Amortized Cost	Fair Value
U.S. government securities