ovid-10q_20180331.htm

 

 

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 March 31, 2018

OR

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

For the transition period from ______________________ to ______________________

Commission File Number: 001-38085

 

Ovid Therapeutics Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

46-5270895

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

1460 Broadway, Suite 15044

New York, New York

10036

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (646) 661-7661

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small 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 May 1, 2018, the registrant had 24,623,467 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 


Table of Contents

 

 

 

 

 

Page

PART I.

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (Unaudited)

 

2

 

 

Condensed Balance Sheets

 

2

 

 

Condensed Statements of Operations

 

3

 

 

Condensed Statements of Comprehensive Loss

 

4

 

 

Condensed Statements of Cash Flows

 

5

 

 

Notes to Unaudited Condensed Financial Statements

 

6

Item 2.

 

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

 

16

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

23

Item 4.

 

Controls and Procedures

 

23

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

24

Item 1A.

 

Risk Factors

 

24

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 6.

 

Exhibits

 

56

Signatures

 

57

 

i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “positioned,” “potential,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” and elsewhere in this report, regarding, among other things:

 

the initiation, timing, progress and results of our current and future preclinical studies and clinical trials and our research and development programs;

 

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

 

our ability to identify additional novel compounds with significant commercial potential to acquire or in-license; 

 

our ability to successfully acquire or in-license additional drug candidates on reasonable terms;

 

our ability to obtain regulatory approval of our current and future drug candidates;

 

our expectations regarding the potential market size and the rate and degree of market acceptance of such drug candidates;

 

our ability to fund our working capital requirements;

 

the implementation of our business model and strategic plans for our business and drug candidates;

 

developments or disputes concerning our intellectual property or other proprietary rights;

 

our ability to maintain and establish collaborations or obtain additional funding;

 

our expectations regarding government and third-party payor coverage and reimbursement;

 

our ability to compete in the markets we serve;

 

the impact of government laws and regulations;

 

developments relating to our competitors and our industry; and

 

the factors that may impact our financial results.

You should not rely upon forward-looking statements as predictions of future events.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we are under no duty to update or revise any of the forward-looking statements, whether because of new information, future events or otherwise, after the date of this report.

 

 

ii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

OVID THERAPEUTICS INC.

Condensed Balance Sheets

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,202,559

 

 

$

87,125,600

 

Short-term investments

 

 

44,955,987

 

 

 

-

 

Prepaid expenses and other current assets

 

 

1,529,694

 

 

 

1,462,448

 

Total current assets

 

 

75,688,240

 

 

 

88,588,048

 

 

 

 

 

 

 

 

 

 

Long term prepaid expenses

 

 

2,638,345

 

 

 

604,646

 

Security deposit

 

 

128,405

 

 

 

88,940

 

Property, plant and equipment, net

 

 

52,083

 

 

 

51,775

 

Other assets

 

 

160,390

 

 

 

124,194

 

Total assets

 

$

78,667,463

 

 

$

89,457,603

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,396,965

 

 

$

2,025,766

 

Accrued expenses

 

 

4,182,299

 

 

 

3,995,334

 

Total current liabilities

 

 

6,579,264

 

 

 

6,021,100

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares and no shares authorized at March 31, 2018 and December 31, 2017

 

 

-

 

 

 

-

 

Common stock, $0.001 par value; 125,000,000 shares authorized at March 31, 2018 and December 31, 2017,

    24,617,979 and 24,606,256 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

24,618

 

 

 

24,606

 

Additional paid-in-capital

 

 

185,997,921

 

 

 

184,127,565

 

Accumulated other comprehensive loss

 

 

(35,914

)

 

 

-

 

Accumulated deficit

 

 

(113,898,426

)

 

 

(100,715,668

)

Total stockholders' equity

 

 

72,088,199

 

 

 

83,436,503

 

Total liabilities and stockholders' equity

 

$

78,667,463

 

 

$

89,457,603

 

 

See accompanying notes to these unaudited condensed financial statements

2


 

OVID THERAPEUTICS INC.

Condensed Statements of Operations

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

8,474,557

 

 

$

31,284,429

 

General and administrative

 

 

4,955,307

 

 

 

2,977,864

 

Total operating expenses

 

 

13,429,864

 

 

 

34,262,293

 

Loss from operations

 

 

(13,429,864

)

 

 

(34,262,293

)

Interest income

 

 

247,106

 

 

 

23,483

 

Net loss

 

$

(13,182,758

)

 

$

(34,238,810

)

Net loss attributable to common stockholders

 

$

(13,182,758

)

 

$

(34,238,810

)

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.54

)

 

$

(3.48

)

Weighted-average common shares outstanding basic and diluted

 

 

24,609,050

 

 

 

9,838,590

 

 

See accompanying notes to these unaudited condensed financial statements

3


 

OVID THERAPEUTICS INC.

Condensed Statements of Comprehensive Loss

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net loss

 

$

(13,182,758

)

 

$

(34,238,810

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities

 

 

(35,914

)

 

 

-

 

Comprehensive loss

 

$

(13,218,672

)

 

$

(34,238,810

)

 

See accompanying notes to these unaudited condensed financial statements

4


 

OVID THERAPEUTICS INC.

Condensed Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,182,758

)

 

$

(34,238,810

)

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

 

 

 

 

 

 

 

 

Noncash research and development expense

 

 

-

 

 

 

25,861,228

 

Stock-based compensation expense

 

 

1,794,967

 

 

 

1,418,655

 

Depreciation and amortization

 

 

26,372

 

 

 

18,463

 

Change in accrued interest and accretion of discount on short-term investments

 

 

22,998

 

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(67,246

)

 

 

(167,853

)

Deferred transaction costs

 

 

-

 

 

 

(1,178,115

)

Security deposit

 

 

(39,465

)

 

 

(7,475

)

Long term prepaid expenses

 

 

(2,033,699

)

 

 

-

 

Accounts payable

 

 

365,454

 

 

 

718,752

 

Accrued expenses

 

 

186,965

 

 

 

411,731

 

Due from/ to related parties

 

 

-

 

 

 

7,369

 

Net cash used in operating activities

 

 

(12,926,412

)

 

 

(7,156,055

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(45,014,899

)

 

 

-

 

Purchase of property and equipment

 

 

(7,581

)

 

 

(12,131

)

Software development and other assets

 

 

(49,550

)

 

 

(40,439

)

Net cash used in investing activities

 

 

(45,072,030

)

 

 

(52,570

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments for transaction costs

 

 

-

 

 

 

(505,229

)

Proceeds from employee stock purchase plan

 

 

62,723

 

 

 

-

 

Proceeds from exercise of options

 

 

12,678

 

 

 

-

 

Net cash provided by (used in) financing activities

 

 

75,401

 

 

 

(505,229

)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(57,923,041

)

 

 

(7,713,854

)

Cash and cash equivalents, at beginning of period

 

 

87,125,600

 

 

 

51,939,661

 

Cash and cash equivalents, at end of period

 

$

29,202,559

 

 

$

44,225,807

 

 

See accompanying notes to these unaudited condensed financial statements

5


 

OVID THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – NATURE OF OPERATIONS

Ovid Therapeutics Inc. (the “Company”) was incorporated under the laws of the state of Delaware on April 1, 2014 and maintains its principal executive office in New York, New York. The Company commenced operations on April 1, 2014 (date of inception). The Company is a biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders.

Since its inception, the Company has devoted substantially all its efforts to business development, research and development, recruiting management and technical staff, and raising capital, and has financed its operations through issuance of convertible preferred stock (“Preferred Stock”), common stock and other equity instruments. The Company has not generated any revenue. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, and ability to secure additional capital to fund operations.

On May 10, 2017, the Company completed its initial public offering (“IPO”) of 5,000,000 shares of the Company's common stock at a public offering price of $15.00 per share. The gross proceeds from the IPO were $75.0 million and the net proceeds were $66.7 million, after deducting underwriting discounts and commissions and other offering expenses.  At the time of the IPO, the Series A Preferred Stock, the Series B Preferred Stock, and the Series B-1 Preferred Stock were converted into common stock (see Note 7).

The Company has incurred operating losses since inception and had an accumulated deficit of $113.9 million as of March 31, 2018. The Company expects to continue to incur net losses for at least the next several years and is highly dependent on its ability to find additional sources of funding in the form of debt or equity financing or expanded partnering arrangements to fund its operations. Management believes that the Company’s existing cash, cash equivalents, and short-term investments as of March 31, 2018, will be sufficient to fund its current operating plans through at least the next 12 months from the date of filing of the Company’s Quarterly Report on Form 10-Q. Adequate additional funding may not be available to the Company on acceptable terms or at all. The failure to raise capital as and when needed could have a negative impact on the Company’s financial condition and ability to pursue its business strategy. The Company may be required to delay, reduce the scope of or eliminate research and development programs, or obtain funds through arrangements with collaborators or others that may require the Company to relinquish rights to certain drug candidates that the Company might otherwise seek to develop or commercialize independently.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on March 29, 2018. There have been no material changes to the significant accounting policies during the period ended March 31, 2018, except for those listed below.

(A) Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet at March 31, 2018, the condensed statements of operations and comprehensive loss for the three months ended March 31, 2018 and 2017, and condensed statements of cash flows for the three months ended March 31, 2018 and 2017 are unaudited. The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that are necessary for a fair statement of its financial information. The results of operations for the three months ended March 31, 2018 and 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any other future annual or interim period. The balance sheet as of December 31, 2017 included herein was derived from the audited financial statements as of that date. These interim condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K.

6


 

(B) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates.

(C) Fair Value of Financial Instruments

 

Financial Accounting Standards Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

 

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

 

 

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active). Level 2 includes financial instruments that are valued using models or other valuation methodologies.

 

 

Level 3—Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

 The carrying amounts reported in the balance sheets for cash and cash equivalents approximate their fair value based on the short-term maturity of these instruments.

 

(D) Short-term Investments

 

Short-term investments consist of debt securities with maturities greater than ninety days from the date of purchase.  The Company classifies all of its investments as available-for-sale securities. Accordingly, these investments are recorded at fair value with unrealized gains and losses included in other comprehensive income (loss) as a component of stockholders’ equity until realized. Realized gains and losses, amortization and accretion of discounts and premiums will be included within net loss.

(E) Recent Accounting Pronouncements

Recent accounting standards which have been adopted

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting. This new standard clarifies when to account for a change to the terms or conditions of share-based payment award as a modification. Under the new guidance, modification accounting is required unless the fair value, the vesting conditions, or the classification of the modified award remain the same as the original award. The adoption of this standard on January 1, 2018, did not have a material impact on the Company’s financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 is effective for the Company as of January 1, 2018. The adoption of this standard on January 1, 2018, did not have a material impact on the Company’s financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a

7


 

business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. The adoption of this standard on January 1, 2018 did not have a material impact on the Company’s statements of cash flows.

 

In January 2016 the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This new standard amends certain aspects of accounting and disclosure requirements for financial instruments, including the requirement that equity investments with readily determinable fair values are to be measured at fair value with any changes in fair value recognized in a company's results of operations. This new standard does not apply to investments accounted for under the equity method of accounting or those investments that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in other comprehensive income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets. The ASU makes targeted changes to the presentation requirements for financial instruments under current GAAP. All entities will be required to disclose financial assets and financial liabilities separately, grouped by measurement category (e.g., fair value, amortized cost, lower of cost or market) and form of financial asset (e.g., loans, securities). ASU 2016-01 is effective for the Company as of January 1, 2018. As the Company does not have equity investments, financial liabilities measured at fair value in accordance with the fair value option or deferred tax assets, the recognition and measurement guidance of this new standard is not applicable to the Company. However, since the Company does have financial asset investments, it has adopted the presentation and disclosure requirements of this standard.

New accounting standards which have not yet been adopted

On March 30, 2017, the FASB issued ASU 2017-08 that requires premiums on callable debt securities, that have explicit, non-contingent call features that are callable at fixed prices on preset dates, to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. Under current GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. The guidance is applicable to Ovid beginning on January 1, 2019. The Company will be impacted if it will have on January 1, 2019 callable debt purchased with a premium. However, based on the Company’s current investment strategy where it purchases debt securities with maturity dates of less than a year, it does not expect to have significant premiums for callable debt. The Company is in the process of assessing the impact of this standard on its financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost, including loans and trade and other receivables. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The standard also amends the impairment model for AFS debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. Under the new guidance, an entity will recognize an allowance for credit losses on AFS debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is in the process of assessing the impact of this standard on its financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 was issued to increase transparency and comparability among entities by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not expect ASU 2016-02 to have a material impact on its financial statements.

NOTE 3 – PRECLINICAL AND CLINICAL AGREEMENTS

On August 26, 2016, the Company contracted with a clinical research organization for the study entitled “Safety and Efficacy of Gaboxadol in Angelman Syndrome: A Phase 2 Study of OV101 in adolescents and adults.” In connection with the execution of this contract, the Company provided an upfront retainer of $355,435. This retainer is reflected within current assets on the balance sheet. During the three months ended March 31, 2018 and 2017, the Company has expensed approximately $1,218,915 and $891,500 related to this contract, respectively.

8


 

NOTE 4 – CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All short-term investments are classified as available-for-sale. The following tables summarize the fair value of cash, cash equivalents, short-term investments, and gross unrealized holding gains and losses as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

Amortized

 

 

Gross unrealized

 

 

Gross unrealized

 

 

Estimated fair

 

 

 

cost, as adjusted

 

 

holding gains

 

 

holding losses

 

 

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Cash

 

$

377,584

 

 

$

-

 

 

$

-

 

 

$

377,584

 

  Money market funds  (a)

 

 

28,824,975

 

 

 

-

 

 

 

-

 

 

 

28,824,975

 

Total cash and cash equivalents

 

$

29,202,559

 

 

$

-

 

 

$

-

 

 

$

29,202,559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  U.S. treasury notes (a)

 

$

41,981,630

 

 

$

-

 

 

$

(26,945

)

 

$

41,954,685

 

  Corporate bonds (a)

 

 

3,010,271

 

 

 

-

 

 

 

(8,969

)

 

 

3,001,302

 

Total short-term investments

 

$

44,991,901

 

 

$

-

 

 

$

(35,914

)

 

$

44,955,987

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)  As of March 31, 2018, the Company's Level 1 assets consisted of money market funds, U.S. treasury notes, and corporate bonds totaling $73.8 million.  The Company had no level 2 or level 3 assets or liabilities as of March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

Amortized

 

 

Gross unrealized

 

 

Gross unrealized

 

 

Estimated fair

 

 

 

cost, as adjusted

 

 

holding gains

 

 

holding losses

 

 

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Cash

 

$

526,648

 

 

$

-

 

 

$

-

 

 

$

526,648

 

  Money market funds (a)

 

 

86,598,952

 

 

 

-

 

 

 

-

 

 

 

86,598,952

 

Total cash and cash equivalents

 

$

87,125,600

 

 

$

-

 

 

$

-

 

 

$

87,125,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  U.S. treasury notes

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

  Corporate bonds

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total short-term investments

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)  As of December 31, 2017, the Company's Level 1 assets consisted of money market funds totaling $86.6 million.  The Company had no level 2 or level 3 assets or liabilities as of December 31, 2017.

 

 

 

 

As of March 31, 2018, and December 31, 2017, the aggregate fair value of securities that were in an unrealized loss position for less than 12 months was $45.0 million and zero, respectively. The Company did not hold any securities in an unrealized loss position for more than twelve months as of March 31, 2018. As of March 31, 2018, the Company did not intend to sell, and would not be more likely than not required to sell, the securities in an unrealized loss position before recovery of their amortized cost bases. Furthermore, the Company determined that there was no material change in the credit risk of these securities. As a result, the Company determined it did not hold any securities with any other-than-temporary impairment as of March 31, 2018.

 

There were no realized gains or losses on available-for-sale securities during the three months ended March 31, 2018.

9


 

NOTE 5 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS

Property and equipment is summarized as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Furniture and equipment

 

$

112,066

 

 

$

102,690

 

Less accumulated depreciation

 

 

(59,983

)

 

 

(50,915

)

Total property, plant and equipment, net

 

$

52,083

 

 

$

51,775

 

 

Depreciation expense was $9,068 and $5,329 for the three months ended March 31, 2018 and 2017, respectively.

Intangible assets, net of accumulated amortization, were $160,390 and $124,194 as of March 31, 2018 and December 31, 2017, respectively, and are included in other assets. Amortization expense was $17,304 and $13,134 for the three months ended March 31, 2018 and 2017, respectively.

NOTE 6 – ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Collaboration agreement accrual

 

$

432,706

 

 

$

754,841

 

Payroll and bonus accrual

 

 

850,956

 

 

 

1,919,120

 

Professional fees accrual

 

 

669,526

 

 

 

321,852

 

Clinical trials accrual

 

 

2,078,343

 

 

 

753,018

 

Other

 

 

150,768

 

 

 

246,503

 

Total

 

$

4,182,299

 

 

$

3,995,334

 

 

NOTE 7 – STOCKHOLDERS’ EQUITY AND PREFERRED STOCK

The Company’s capital structure consists of common stock and preferred stock.

Upon inception, the Company was initially authorized to issue 1,000 shares of common stock at $0.001 par value per share. The Company’s certificate of incorporation was amended on January 6, 2017 to increase the authorized shares of common stock available for issuance to 62,000,000 at $0.001 par value, and shares of Preferred Stock to 20,991,252.

On May 10, 2017, the Company filed an amended and restated certificate of incorporation with the Secretary of the State of Delaware, which was approved by the Company’s Board of Directors and stockholders on April 12, 2017 and April 24, 2017, respectively, and which went effective immediately after the closing of the Company’s IPO on May 10, 2017.  Pursuant to the amended and restated certificate of incorporation, the Company is authorized to issue 125,000,000 shares of common stock and 10,000,000 shares of preferred stock.  Upon completion of its IPO, on May 10, 2017, the Company issued 5,000,000 shares of its common stock, and 2,382,069 shares of Series A Preferred Stock, 5,599,282 shares of Series B Preferred Stock and 1,781,996 shares Series B-1 Preferred Stock were converted into 9,763,346 shares of common stock.

 

NOTE 8 – STOCK-BASED COMPENSATION

 

On August 29, 2014, the Company’s Board of Directors adopted and approved the 2014 Equity Incentive Plan (the “2014 Plan”), which authorized the Company to grant shares of common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units. The types of stock-based awards, including share purchase rights amount, terms, and exercisability provisions of grants are determined by the Company’s Board of Directors.

The Company's Board of Directors adopted and the Company's stockholders approved the 2017 equity incentive plan (“2017 Plan”), which became effective immediately prior to the execution of the underwriting agreement related to the IPO on May 4, 2017. The initial reserve of shares of common stock under the 2017 Plan was 3,052,059 shares.  The 2017 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance-based stock awards, and other forms of stock-based awards.  Additionally, the 2017 Plan provides for the grant of performance cash awards. The Company's employees, officers, directors and consultants and advisors are eligible to receive awards

10


 

under the 2017 Plan.  Upon the adoption of the 2017 Plan, no further awards will be granted under the 2014 Plan. Pursuant to the terms of the 2017 Plan, on each January 1st, the plan limit shall be increased by the lesser of (x) 5% of the number of shares of common stock outstanding as of the immediately preceding December 31 and (y) such lesser number as the Board of Directors may determine in its discretion.  Accordingly, on January 1, 2018, an additional 1,230,312 shares were reserved for issuance under the 2017 Plan. As of March 31, 2018, there were 3,129,454  shares of the Company’s common stock reserved for issuance under the 2017 Plan. 

The Company's Board of Directors adopted and the Company's stockholders approved the 2017 employee stock purchase plan (the “2017 ESPP”), which became effective immediately prior to the execution of the underwriting agreement related to the IPO on May 4, 2017. The initial reserve of shares of common stock that may be issued under the 2017 ESPP was 279,069 shares. On September 20, 2017, the Company’s Compensation Committee approved an offering period under the 2017 ESPP, which began on October 20, 2017. The ESPP allows employees to purchase common stock of the Company at a 15% discount to the market price on designated purchase dates. During the three months ended March 31, 2018, 9,972 shares were purchased under the ESPP and the Company recorded expense of $16,869. The number of shares of common stock reserved for issuance under the 2017 ESPP will automatically increase on January 1 of each year, beginning on January 1, 2018 and continuing through and including January 1, 2027, by the lesser of (i) 1% of the total number of shares of the Company’s capital stock outstanding on December 31 of the preceding calendar year, (ii) 550,000 shares or (iii) such lesser number of shares determined by our Board. On January 1, 2018, an additional 246,062 shares were reserved for issuance under the 2017 ESPP. As of March 31, 2018, there were 515,159 shares of the Company’s common stock reserved for issuance under the 2017 ESPP.

Unless specified otherwise in an individual option agreement, stock options granted under the 2014 Plan and 2017 Plan generally have a ten-year term and a four-year graded vesting period. The vesting requirement is conditioned upon the grantee’s continued service with the Company during the vesting period. Once vested, all awards are exercisable from the date of grant until they expire. The option grants are non-transferable. Vested options generally remain exercisable for 90 days subsequent to the termination of the option holder’s service with the Company. In the event of option holder’s death or disability while employed by or providing service to the Company, the exercisable period extends to 12 months.

Performance-based option awards generally have similar vesting terms, with vesting commencing on the date the performance condition is achieved and expire in accordance to the specific terms of the agreement. At March 31, 2018, there were 50,000 performance-based options outstanding and unvested.

The fair value of options granted during the three months ended March 31, 2018 and 2017 was estimated using the Black-Scholes option valuation model. The inputs for the Black-Scholes option valuation model require management’s significant assumptions and are detailed in the table below. Prior to the IPO, the common stock price was determined by the Board of Directors. In the absence of market data for the Company’s common stock, the Board of Directors considered various factors in estimating the fair value of the common stock at the time of each option grant which included but was not limited to the common stock valuation performed by a third party independent valuation firm, the Company’s performance and future economic outlook, the potential financing available to the Company, and the valuation of common stock of similar companies in the industry. The risk-free interest rates were based on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected life was based on the simplified method in accordance with the SEC Staff Accounting Bulletin Nos. 107 and 110. The expected volatility was estimated based on historical volatility information of peer companies that are publicly available.

All assumptions used to calculate the grant date fair value of nonemployee options are generally consistent with the assumptions used for options granted to employees. In the event the Company terminates any of its consulting agreements, the unvested options underlying the agreements would also be cancelled. Unvested nonemployee options are marked-to-market at each reporting period.

The Company granted zero and 27,906 stock options to nonemployee consultants for services rendered during the three months ended March 31, 2018 and 2017, respectively. There were 29,798, and 58,868 unvested nonemployee options outstanding as of March 31, 2018, and 2017, respectively. Total expense recognized related to the nonemployee stock options for the three months ended March 31, 2018, and 2017 was $43,843, and $233,958, respectively. Total unrecognized compensation expenses related to the nonemployee stock options was $148,200 as of March 31, 2018. During the three months ended March 31, 2018 and 2017, the Company recognized zero and $162,700 in expenses for nonemployee performance-based option awards, respectively.

The Company granted 976,476 and 1,017,441 stock options to employees during the three months ended March 31, 2018 and 2017 respectively. There were 3,043,757 and 2,794,997 unvested employee options outstanding as of March 31, 2018, and 2017, respectively. Total expense recognized related to the employee stock options for the three months ended March 31, 2018 and 2017 was $1,734,256 and $1,184,696 respectively. Total unrecognized compensation expense related to employee stock options was $16,721,386 as of March 31, 2018.

11


 

The Company’s stock-based compensation expense was recognized in operating expense as follows:

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Research and development

 

$

738,789

 

 

$

670,175

 

General and administrative

 

 

1,056,178

 

 

 

748,479

 

Total

 

$

1,794,967

 

 

$

1,418,654

 

 

The fair value of employee options granted during the three months ended March 31, 2018 and 2017 was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

82.97

%

 

 

80.79

%

Expected term in years

 

 

6.08

 

 

 

6.08

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

2.53

%

 

 

2.12

%

Fair value of option on grant date

 

$

6.46

 

 

$

5.95

 

 

The fair value of nonemployee options granted and remeasured during the three months ended March 31, 2018 and 2017 was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

90.76

%

 

 

75.34

%

Expected term in years

 

 

3.47

 

 

 

4.57

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

2.42

%

 

 

1.92

%

Fair value of option on grant date

 

$

5.08

 

 

$

7.44

 

 

The following table summarizes the number of options outstanding and the weighted average exercise price:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number of

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

Shares

 

 

Price

 

 

Life in Years

 

 

Value

 

Options Outstanding December 31, 2017

 

 

4,298,802

 

 

$

8.07

 

 

 

8.32

 

 

$

8,174,686

 

Granted

 

 

976,476

 

 

 

9.02

 

 

 

9.06

 

 

 

 

 

Exercised

 

 

(1,751

)

 

 

7.24

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(16,633

)

 

 

7.63

 

 

 

 

 

 

 

 

 

Options Outstanding March 31, 2018

 

 

5,256,894

 

 

$

8.25

 

 

 

8.38

 

 

$

1,043,074

 

Vested and exercisable at March 31, 2018

 

 

2,183,339

 

 

$

7.78

 

 

 

7.79

 

 

$

713,581

 

 

At March 31, 2018 there was approximately $16,869,586 of unamortized share–based compensation expense, which is expected to be recognized over a remaining average vesting period of 2.74 years.

12


 

NOTE 9 – INCOME TAXES

The Company did not record a federal or state income tax provision for the periods presented as it has incurred net losses since inception. In addition, the net deferred tax assets generated from the net operating losses have been fully reserved as the Company believes it is not more likely than not that the benefit will be realized.

During the three months ended March 31, 2018 and 2017, the Company recorded a $186,218 and $200,251 refundable credit towards future New York City tax expense as a reduction to operating expenses, respectively. The credit is for qualified emerging technology companies focused on biotechnology located in New York City.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

License Agreements

On March 26, 2015, the Company entered into an exclusive agreement with H. Lundbeck A/S (“Lundbeck”) for a worldwide perpetual licensing right related the research, development and commercialization of OV101.

 

Pursuant to the Lundbeck license agreement, the Company agreed to make milestone payments totaling up to $181 million upon the achievement of certain development, regulatory and sales milestones. The first payment of $10 million is due upon the successful completion of the first Phase 3 trial for a product in which OV101 is an active ingredient. In addition, the agreement calls for the Company to pay royalties for an initial term based on a low double-digit percentage of sales and provides for the reduction of royalties in certain limited circumstances.

 

On December 15, 2016, the Company entered into a license agreement with Northwestern University, (“Northwestern”), pursuant to which Northwestern granted the Company an exclusive, worldwide license to patent rights in certain inventions, (“Northwestern Patent Rights”), which relate to a specific compound and related methods of use for such compound, along with certain Know-How related to the practice of the inventions claimed in the Northwestern Patents.

Under the Northwestern agreement, the Company was granted exclusive rights to research, develop, manufacture and commercialize products utilizing the Northwestern Patent Rights for all uses. The Company has agreed that it will not use the Northwestern Patent Rights to develop any products for the treatment of cancer, but Northwestern may not grant rights in the technology to others for use in cancer. The Company also has an option, exercisable during the term of the agreement to an exclusive license under certain intellectual property rights covering novel compounds with the same or similar mechanism of action as the primary compound that is the subject of the license agreement.  Northwestern has retained the right, on behalf of itself and other non-profit institutions, to use the Northwestern Patent Rights and practice the inventions claimed therein for educational and research purposes and to publish information about the inventions covered by the Northwestern Patent Rights.

Upon entry into the Northwestern agreement, the Company paid an upfront non-creditable one-time license issuance fee of $75,000, and is required to pay an annual license maintenance fee of $20,000, which will be creditable against any royalties payable to Northwestern following first commercial sale of licensed products under the agreement.  The Company is responsible for all ongoing costs of filing, prosecuting and maintaining the Northwestern Patents, but also has the right to control such activities using its own patent counsel.  In consideration for the rights granted to the Company under the Northwestern agreement, the Company is required to pay to Northwestern up to an aggregate of $5.3 million upon the achievement of certain development and regulatory milestones for the first product covered by the Northwestern Patents, and, upon commercialization of any such products, will be required to pay to Northwestern a tiered royalty on net sales of such products by the Company, its affiliates or sublicensees, at percentages in the low to mid single-digits, subject to standard reductions and offsets.  The Company’s royalty obligations continue on a product-by-product and country-by-country basis until the later of the expiration of the last-to-expire valid claim in a licensed patent covering the applicable product in such country and 10 years following the first commercial sale of such product in such country.  If the Company sublicenses a Northwestern Patent Right, it will be obligated to pay to Northwestern a specified percentage of sublicense revenue received by the Company, ranging from the high single digits to the low-teens.  

The Northwestern agreement requires that the Company use commercially reasonable efforts to develop and commercialize at least one product that is covered by the Northwestern Patent Rights.

Unless earlier terminated, the Northwestern agreement will remain in force until the expiration of the Company’s payment obligations thereunder.  The Company has the right to terminate the agreement for any reason upon prior written notice or for an uncured material breach by Northwestern.  Northwestern may terminate the agreement for the Company’s uncured material breach or insolvency.

Contingencies

13


 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company is not currently involved in any legal matters arising in the normal course of business.

Under the terms of their respective employment agreements, each of our named executive officers is eligible to receive severance payments and benefits upon a termination without “cause” or due to “permanent disability,” or upon “resignation for good reason,” contingent upon the named executive officer’s delivery to us of a satisfactory release of claims, and subject to the named executive officer’s compliance with non-competition and non-solicitation restrictive covenants for two years following the termination date.

NOTE 11 – COLLABORATION AGREEMENT

Takeda Collaboration

On January 6, 2017, the Company entered into a license and collaboration agreement with Takeda, pursuant to which Takeda granted the Company an exclusive license to commercialize the compound TAK-935, which the Company now refers to as OV935, in certain territories, and a co-exclusive worldwide license, together with Takeda, to develop OV935. In consideration of certain license rights granted to the Company pursuant to the Takeda collaboration, the Company issued 1,781,996 shares of its Series B-1 Preferred Stock, pursuant to a Series B-1 preferred stock purchase agreement entered into on January 6, 2017, at an ascribed price per share of $14.513 on January 6, 2017 for an aggregate fair value of $25,861,228, which was recorded as research and development expense at the date of the transaction. Under the Takeda collaboration, the Company is obligated to pay Takeda future payments if and when certain milestones are achieved. Upon the first patient enrollment in the first Phase 3 trial for the first of the initial indications the Company and Takeda are focusing on in the Takeda collaboration, the Company is obligated to issue to Takeda the number of unregistered shares of the Company’s common stock equal to the lesser of (a) 8% of the Company outstanding capital stock on the issuance date or (b) $50.0 million divided by the applicable share price, unless certain events occur. The remaining potential global commercial and regulatory milestone payments equal approximately $35.0 million and can be satisfied in cash or unregistered shares of the Company’s common stock at its election, unless certain events occur. During the three months ended March 31, 2018 and 2017, the Company recognized $432,707 and $1,534,106 respectively, in research and development expenses representing research and development expenses reimbursed to Takeda in respect of this collaboration agreement.  The 1,781,996 shares of Series B-1 Preferred Stock held by Takeda was automatically converted into 1,781,996 shares of the Company’s common stock upon the completion of its IPO.  

The Takeda collaboration will expire upon the cessation of commercialization of the products by both the Company and Takeda. Either party may terminate the Takeda collaboration because of the other party’s uncured material breach or insolvency, for safety reasons, or, after completion of the first proof of mechanism clinical trial, for convenience. Takeda may terminate the Takeda collaboration for the Company’s (or the Company’s sublicensee’s) challenge to the patents licensed under the Takeda collaboration. If the collaboration is terminated by Takeda for material breach by the Company, bankruptcy or patent challenge or by the Company for convenience or safety reasons, the Company’s rights to the products will cease, the Company will transition all activities related to the products to Takeda, and the Company will grant Takeda an exclusive, royalty-bearing license under certain patents and other intellectual property controlled by the Company to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders. If the collaboration is terminated by the Company for Takeda’s material breach or bankruptcy or by Takeda for convenience or safety reasons, Takeda’s rights to the products will cease, Takeda will transition all activities related to the products to us, and Takeda will grant us an exclusive, royalty-bearing license under certain patents and other intellectual property controlled by Takeda to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders.

14


 

NOTE 12 – NET LOSS PER SHARE

Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period. For all periods presented, the common shares underlying the Preferred Stock and options have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average shares outstanding used to calculate both basic and diluted loss per common share are the same.

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Stock options to purchase common stock

 

 

5,256,894

 

 

 

3,893,542

 

Preferred stock convertible into common stock

 

 

-

 

 

 

9,763,347

 

Total

 

 

5,256,894

 

 

 

13,656,889

 

 

 

15


 

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

The following information should be read in conjunction with the unaudited condensed financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial information and the notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on March 29, 2018. In addition to historical financial information, the following discussion contains forward-looking statements based upon our current plans, expectations and beliefs that involve risks, uncertainties and assumptions. Our actual results may differ materially from those described in or implied by these forward-looking statements because of many factors, including those set forth under the section titled “Risk Factors” in Part II, Item 1A.

Overview

We are a biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders. We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years; yet has remained underappreciated by the industry. Our experienced team began with a vision to integrate the biology and symptomology of rare neurological conditions to employ innovative research and clinical strategies for the development of our drug candidates. Based on recent scientific advances in genetics and the biological pathways of the brain, we created a proprietary map of disease-relevant pathways and used it to identify and acquire novel compounds for the treatment of rare neurological disorders. We are executing on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. We are developing a robust pipeline of clinical assets with an initial focus on neurodevelopmental disorders and developmental and epileptic encephalopathies (“dEE”). Our most advanced candidate, OV101, has completed randomization of a Phase 2 trial, which is primarily a safety trial with exploratory efficacy parameters, in adults and adolescents with Angelman syndrome. We completed a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome in which, OV101 was found to be generally well tolerated and its pharmacokinetic (“PK’), profile in adolescents was similar to previous data generated in young adults.  Along with our collaborator, Takeda Pharmaceutical Company Limited, (“Takeda”), we initiated patient recruitment in our Phase 1b/2a trial of OV935 in adults with dEE in June 2017.  We expect data from the OV101 STARS trial in the third quarter of 2018 and data from the phase 1b/2a trial of OV935 in the second half of 2018.

Since our inception in April 2014, we have devoted substantially all of our efforts to organizing and planning our business, building our management and technical team, acquiring operating assets and raising capital.

On May 1, 2017, we effected a 1-for-2.15 reverse stock split of our outstanding common stock and convertible preferred stock. Stockholders entitled to fractional shares because of the reverse stock split received a cash payment in lieu of receiving fractional shares. All of our historical share and per share information shown in the accompanying unaudited condensed financial statements and related notes have been retroactively adjusted to give effect to this reverse stock split.

On May 10, 2017, we completed our initial public offering (“IPO”), of 5,000,000 shares of our common stock at a public offering price of $15.00 per share. The gross proceeds from the IPO were $75.0 million and the net proceeds were $66.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.

Since our inception, we have not generated any revenue and have funded our business primarily through the sale of our capital stock. Through March 31, 2018, we have raised net proceeds of $142.3 million from the sale of convertible preferred stock and our IPO. As of March 31, 2018, we had $29.2 million in cash and cash equivalents and $45.0 million in short-term investments. We recorded net losses of $13.2 million and $34.2 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had an accumulated deficit of approximately $113.9 million.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development and commercial development activities. We expect our expenses will increase substantially over time as we:

 

continue the ongoing and planned preclinical and clinical development of our drug candidates;

 

build a portfolio of drug candidates through the acquisition or in-license of drugs, drug candidates or technologies;

 

initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future;

 

seek marketing approvals for our current and future drug candidates that successfully complete clinical trials;

 

establish a sales, marketing and distribution infrastructure to commercialize any drug candidate for which we may obtain marketing approval;

 

develop, maintain, expand and protect our intellectual property portfolio;

16


 

 

implement operational, financial and management systems; and

 

attract, hire and retain additional administrative, clinical, regulatory and scientific personnel.

Preclinical/Clinical Development

 

We completed patient enrollment in the Phase 2 STARS clinical trial of OV101 in adults and adolescents with Angelman syndrome and expect topline data from the STARS trial to be available in the third quarter of 2018.

 

We plan to initiate a Phase 2 multi-dose, three-arm clinical trial evaluating OV101 for the treatment of adolescent and young adults with Fragile X syndrome in 2018. The trial is expected to enroll up to 30 males ages 13 to 22 diagnosed with Fragile X syndrome. The primary endpoint is safety and tolerability. Secondary endpoints are expected to include an evaluation of changes in behavior during 12 weeks of treatment with OV101.

 

The U.S. Patent and Trademark Office (“USPTO”) recently granted Ovid a new patent directed to methods of treating Fragile X syndrome using OV101. The issued patent expires in 2035 without regulatory extensions.

 

OV101 was recently granted fast track designation by the U.S. Food and Drug Administration (“FDA”) for the treatment of both Angelman syndrome and Fragile X syndrome.

 

Enrollment of patients continues in a Phase 1b/2a clinical trial of OV935 in adults with rare developmental and/or epileptic encephalopathies. The primary endpoint of the study is to characterize the safety and tolerability of OV935. Secondary endpoints include evaluation of PK parameters. Exploratory endpoints include change from baseline in seizure frequency and 24-S-hydroxycholesterol (24HC) levels. Data from the Phase 1b/2a trial is expected in the second half of 2018.

 

In 2018, Ovid and Takeda plan to initiate additional Phase 2 studies with OV935 in younger patient populations with dEE and additional rare epilepsies.

 

With Takeda, we plan to study the role of 24HC as a plasma-based biomarker that can inform future clinical trial designs and help clinicians individualize the use of OV935.

 

The FDA has recently granted orphan drug designations for TAK-935 for the treatment of both Dravet syndrome and Lennox-Gastaut syndrome, two types of dEE.

 

Ovid plans to present preclinical data for two of its programs at the 14th Eilat Conference on New Antiepileptic Drugs and Device (EILAT XIV) taking place May 13 -16, 2018 in Madrid, Spain. The oral presentations are expected to include new preclinical data for OV935 in dEE, and the first presentation of preclinical data for OV329, a next generation GABA aminotransferase (GABA-AT) inhibitor with the potential to treat treatment-resistant epilepsy.

Financial Operations Overview

Revenue

We have not generated any revenue from commercial drug sales and do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates. In the future, we may also seek to generate revenue from a combination of research and development payments, license fees and other upfront or milestone payments.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include, among other things:

 

fees related to the acquisition of the rights to OV101 and OV935;

 

employee-related expenses, including salaries, benefits and stock-based compensation expense;

 

fees paid to consultants for services directly related to our drug development and regulatory effort;

 

expenses incurred under agreements with contract research organizations, as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials;

 

costs associated with preclinical activities and development activities;

 

costs associated with technology and intellectual property licenses;

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milestone payments and other costs under licensing agreements; and

 

depreciation expense for assets used in research and development activities.

Costs incurred in connection with research and development activities are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or other information provided to us by our vendors.

Research and development activities are and will continue to be central to our business model. We expect our research and development expenses to increase for the foreseeable future as we advance our current and future drug candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. It is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct. The duration, costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include, but are not limited to, the following:

 

number of clinical trials required for approval and any requirement for extension trials;

 

per patient trial costs;

 

number of patients that participate in the clinical trials;

 

number of sites included in the clinical trials;

 

countries in which the clinical trial is conducted;

 

length of time required to enroll eligible patients;

 

number of doses that patients receive;

 

drop-out or discontinuation rates of patients;

 

potential additional safety monitoring or other studies requested by regulatory agencies;

 

duration of patient follow-up; and

 

efficacy and safety profile of the drug candidate.

In addition, the probability of success for any of our current or future drug candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each drug candidate, as well as an assessment of each drug candidate’s commercial potential.

General and Administrative Expenses

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation expense, related to our executive, finance, business development and support functions. Other general and administrative expenses include costs associated with operating as a public company, travel expenses, conferences, professional fees for auditing, tax and legal services and facility-related costs.

We expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly traded company. These increases will include legal and accounting fees, costs associated with maintaining compliance with The Nasdaq Global Select Market LLC and the SEC, directors’ and officers’ liability insurance premiums and fees associated with investor relations. In addition, if our current or future drug candidates are approved for sale, we expect that we would incur expenses associated with building our commercial and distribution infrastructure.

Interest Income

Interest income consists of interest income earned on our cash, cash equivalents, and short-term investments maintained in money market funds, U.S. treasury notes, and corporate bonds.

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Results of Operations

Comparison of the three months ended March 31, 2018 and 2017

The following table summarizes the results of our operations for the periods indicated:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change $

 

 

 

(in thousands)

 

Research and development

 

$

8,475

 

 

$

31,284

 

 

$

(22,809

)

General and administrative

 

 

4,955

 

 

 

2,978

 

 

 

1,977

 

Total operating expenses

 

 

13,430

 

 

 

34,262

 

 

 

(20,832

)

Loss from operations

 

 

(13,430

)

 

 

(34,262

)

 

 

20,832

 

Interest income

 

 

247

 

 

 

23

 

 

 

224

 

Net Loss

 

$

(13,183

)

 

$

(34,239

)

 

$

21,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and Development Expenses

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change $

 

 

 

(in thousands)

 

Preclinical and development expense

 

$

4,990

 

 

$

29,432

 

 

$

(24,442

)

Payroll and payroll-related expenses

 

 

2,766

 

 

 

1,645

 

 

 

1,121

 

Other expenses

 

 

719

 

 

 

207

 

 

 

512

 

Total research and development

 

$

8,475

 

 

$

31,284

 

 

$

(22,809

)

 

Research and development expenses were $8.5 million for the three months ended March 31, 2018 compared to $31.3 million for the three months ended March 31, 2017. The decrease of $22.8 million was primarily due to the issuance of Series B-1 Preferred Stock to Takeda as an upfront payment upon signing the collaboration agreement during the three months ended March 31, 2017. During the three months ended March 31, 2018, total research and development expenses consisted of $5.0 million in preclinical and development expenses, of which $0.4 million represents amounts reimbursable to Takeda in respect of the Takeda collaboration, $2.8 million in payroll and payroll-related expenses, of which $0.7 million related to stock-based compensation, and $0.7 million in other expenses. During the three months ended March 31, 2017, total research and development expenses consisted of $29.4 million in preclinical and development expenses of which $25.9 million related to the issuance of Series B-1 Preferred Stock associated with the collaboration rights to OV935, $1.6 million in Takeda alliance costs, $1.6 million in payroll and payroll-related expenses, of which $0.7 million related to stock-based compensation, due to increased headcount in the research and development department, and $0.2 million in other expenses.

General and Administrative Expenses

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change $

 

 

 

(in thousands)

 

Payroll and payroll-related expenses

 

$

2,638

 

 

$

1,989

 

 

$

649

 

Professional fees

 

 

1,532

 

 

 

754

 

 

 

778

 

General office expenses

 

 

785

 

 

 

235

 

 

 

550

 

Total general and administrative

 

$

4,955

 

 

$

2,978

 

 

$

1,977

 

 

General and administrative expenses were $5.0 million for the three months ended March 31, 2018 compared to $3.0 million for the three months ended March 31, 2017. The increase of $2.0 million primarily consisted of increases in payroll and payroll-related expenses of $0.6 million due to increased headcount, which includes increases of $0.3 million in stock-based compensation, and an increase of $0.8 million due to increased professional fees associated with operating as a public company.

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Interest Income

Interest income increased to $247 thousand for the three months ended March 31, 2018 from $23 thousand for the three months ended March 31, 2017. The increase is attributable to increased interest and investment income on our cash, cash equivalents and short-term investments due to the investment of the net proceeds received from our IPO.

Liquidity and Capital Resources

Overview

As of March 31, 2018, we had total cash, cash equivalents and short-term investments of $74.2 million as compared to $ 87.1 million of cash and cash equivalents as of December 31, 2017. The $12.9 million decrease in total cash, cash equivalents, and short-term investments was due primarily to funding of operations, which mainly consisted of research and development activities and general and administrative activities. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in cash and money market bank accounts and short-term investments, all of which have maturities of less than one year.

We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years. We incurred net losses of approximately $13.2 million and $34.2 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, we had an accumulated deficit of approximately $113.9 million and working capital of $69.1 million.

We believe that our existing cash, cash equivalents, and short-term investments as of March 31, 2018 will be sufficient to fund our current operating plans through at least the next 12 months from the filing of this Quarterly Report on Form 10-Q.

Until such time, if ever, as we can generate revenue from drug sales, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaborations, and license and development agreements. To the extent that we raise additional capital through future equity offerings or debt financings, ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may have to significantly delay, scale back or discontinue our research and development programs or future commercialization efforts. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(in thousands)

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

(12,926

)

 

$

(7,156

)

Investing activities

 

 

(45,072

)

 

 

(53

)

Financing activities

 

 

75

 

 

 

(505

)

Net decrease in cash and cash equivalents

 

$

(57,923

)

 

$

(7,714

)

 

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Net Cash Used in Operating Activities

Net cash used in operating activities was $12.9 million for the three months ended March 31, 2018, which consisted of net losses of $13.2 million offset by $1.8 million of net non-cash charges, compared to $7.2 million for the three months ended March 31, 2017. The increase of $5.7 million in net cash used in operating activities was primarily due to an increase in our costs related to our research and development programs and an increase in our payroll and payroll-related expenses as the result of increased headcount as we continue to build our management team and expand our operations.

Net Cash Used in Investing Activities

Net cash used in investing activities was $45.0 million for the three months ended March 31, 2018 compared to $53 thousand for the three months ended March 31, 2017. The increase in net cash used for investing activities was primarily due to purchases of investments in short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $75 thousand for the three months ended March 31, 2018 was primarily due to the proceeds from the exercise of stock options and purchases of shares under the 2017 employee stock purchase plan. Net cash used in financing activities of $0.5 million for the three months ended March 31, 2017 was primarily for transaction costs related to our IPO.  

Contractual Obligations and Commitments

As of March 31, 2018, there were no other material changes in our contractual obligations from those disclosed in our Annual Report on Form 10-K, which was filed with the SEC on March 29, 2018.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses and stock-based compensation. 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 apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

During the three months ended March 31, 2018, there were no material changes to our critical accounting policies as reported for the year ended December 31, 2017 as part of our Annual Report on Form 10-K, which was filed with the SEC on March 29, 2018.  In addition, see Note 2 of our Condensed Financial Statements under the heading “Recent Accounting Pronouncements” for new accounting pronouncements or changes to the recent accounting pronouncements during the three months ended March 31, 2018.

Emerging Growth Company Status

We are an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies.  

We have taken advantage of reduced reporting requirements in this report and may continue to do so until such time that we are no longer an emerging growth company. We will remain an “emerging growth company” until the earliest of (a) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (b) December 31, 2022, the last day of the fiscal year following the fifth anniversary of the completion of the our IPO, (c) the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years or (d) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.  Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended

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transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The primary objectives of our investment activities are to ensure liquidity and to preserve capital. As of March 31, 2018, we had cash equivalents of $29.2 million that were held in an interest-bearing money market account and $45 million of short-term investments invested in treasury notes and corporate bonds. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to the short-term maturities of our cash equivalents and short-term investments and the low risk profile of our investments, an immediate 100 basis point change in interest rates would not have a material effect on the fair market value of our cash equivalents and short-term investments. To minimize the risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in institutional market funds that are comprised of U.S. Treasury and U.S. Treasury-backed repurchase agreements as well as treasury notes and high quality short-term corporate bonds.

Item 4. Controls and Procedures.

Management’s Evaluation of our Disclosure Controls and Procedures

We maintain disclosure controls a