ovid-10q_20170630.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 June 30, 2017

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 August 10, 2017, the registrant had 24,601,936 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 and Comprehensive Loss

 

3

 

 

Condensed Statements of Changes in Stockholders’ Equity

 

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

 

14

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

Item 4.

 

Controls and Procedures

 

21

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

22

Item 1A.

 

Risk Factors

 

22

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

50

Item 6.

 

Exhibits

 

50

Signatures

 

 

Exhibit Index

 

 

 

 

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 (unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,115,648

 

 

$

51,939,661

 

Prepaid and other current assets

 

 

1,195,669

 

 

 

221,507

 

Due from related parties

 

 

-

 

 

 

7,369

 

Deferred transaction costs

 

 

-

 

 

 

242,673

 

Total current assets

 

 

107,311,317

 

 

 

52,411,210

 

 

 

 

 

 

 

 

 

 

Security deposit

 

 

430,275

 

 

 

407,785

 

Property, plant and equipment, net

 

 

49,798

 

 

 

43,591

 

Other assets

 

 

215,748

 

 

 

165,301

 

Total assets

 

$

108,007,138

 

 

$

53,027,887

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,571,534

 

 

$

857,169

 

Accrued expenses

 

 

3,493,493

 

 

 

2,876,243

 

Total current liabilities

 

 

7,065,027

 

 

 

3,733,412

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 125,000,000 and 58,000,000 shares authorized at

   June 30, 2017 and December 31, 2016, respectively, 24,601,936 and 9,838,590 shares

   issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

24,602

 

 

 

9,839

 

Preferred Series A - zero and 5,121,453 shares authorized at June 30, 2017 and December 31, 2016, respectively

   zero and 2,382,069 issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

-

 

 

 

2,382

 

Preferred Series B - zero and 12,038,506 shares authorized at June 30, 2017 and December 31, 2016, respectively

   zero and 5,599,282 issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

-

 

 

 

5,599

 

Additional paid-in-capital

 

 

181,314,312

 

 

 

85,186,269

 

Accumulated deficit

 

 

(80,396,803

)

 

 

(35,909,614

)

Total stockholders' equity

 

 

100,942,111

 

 

 

49,294,475

 

Total liabilities and stockholders' equity

 

$

108,007,138

 

 

$

53,027,887

 

 

See accompanying notes to these unaudited condensed financial statements

 

2


 

OVID THERAPEUTICS INC.

Condensed Statements of Operations and Comprehensive Loss (unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,074,927

 

 

$

1,770,202

 

 

$

37,359,355

 

 

$

2,896,804

 

General and administrative

 

 

4,213,173

 

 

 

3,646,731

 

 

 

7,191,039

 

 

 

6,234,624

 

Total operating expenses

 

 

10,288,100

 

 

 

5,416,933

 

 

 

44,550,394

 

 

 

9,131,428

 

Loss from operations

 

 

(10,288,100

)

 

 

(5,416,933

)

 

 

(44,550,394

)

 

 

(9,131,428

)

Interest income

 

 

39,721

 

 

 

31,307

 

 

 

63,205

 

 

 

63,636

 

Net loss and comprehensive loss

 

$

(10,248,379

)

 

$

(5,385,626

)

 

$

(44,487,189

)

 

$

(9,067,792

)

Net loss attributable to common stockholders

 

$

(10,248,379

)

 

$

(5,385,626

)

 

$

(44,487,189

)

 

$

(9,067,792

)

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

 

$

(0.57

)

 

$

(0.55

)

 

$

(3.18

)

 

$

(0.92

)

Weighted-average common shares outstanding basic and diluted

 

 

18,112,554

 

 

 

9,838,590

 

 

 

13,998,428

 

 

 

9,838,590

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited condensed financial statements

 

 

3


 

OVID THERAPEUTICS INC.

Condensed Statement of Changes in Stockholders’ Equity (unaudited)

 

 

 

Common Stock

 

 

Series A Preferred

Stock

 

 

Series B Preferred

Stock

 

 

Series B-1

Preferred Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance, December 31, 2016

 

 

9,838,590

 

 

$

9,839

 

 

 

2,382,069

 

 

$

2,382

 

 

 

5,599,282

 

 

$

5,599

 

 

 

-

 

 

$

-

 

 

$

85,186,269

 

 

$

(35,909,614

)

 

$

49,294,475

 

Issuance of Series B-1 Preferred Stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,781,996

 

 

 

1,782

 

 

 

25,859,446

 

 

 

-

 

 

 

25,861,228

 

Proceeds from Initial Public Offering, net of underwriting costs and commissions

 

 

5,000,000

 

 

 

5,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

69,745,000

 

 

 

-

 

 

 

69,750,000

 

Deferred offering costs reclassified to additional paid-in capital

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,087,481

)

 

 

-

 

 

 

(3,087,481

)

Conversion of preferred stock into common stock

 

 

9,763,346

 

 

 

9,763

 

 

 

(2,382,069

)

 

 

(2,382

)

 

 

(5,599,282

)

 

 

(5,599

)

 

 

(1,781,996

)

 

 

(1,782

)

 

 

(464

)

 

 

-

 

 

 

(464

)

Stock-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,611,542

 

 

 

-

 

 

 

3,611,542

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(44,487,189

)

 

 

(44,487,189

)

Balance, June 30, 2017

 

 

24,601,936

 

 

$

24,602

 

 

 

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

$

181,314,312

 

 

$

(80,396,803

)

 

$

100,942,111

 

 

See accompanying notes to these unaudited condensed financial statements

4


 

OVID THERAPEUTICS INC.

Condensed Statements of Cash Flows (unaudited)

 

 

 

Six Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(44,487,189

)

 

$

(9,067,792

)

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

 

 

 

 

 

 

 

 

Noncash research and development expense

 

 

25,861,228

 

 

 

-

 

Stock-based compensation expenses

 

 

3,611,542

 

 

 

1,497,726

 

Depreciation and amortization

 

 

37,555

 

 

 

14,569

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(834,314

)

 

 

(673,195

)

Deferred transaction costs

 

 

(496,657

)

 

 

(21,103

)

Security deposit

 

 

(22,490

)

 

 

(7,500

)

Accounts payable

 

 

2,564,072

 

 

 

298,898

 

Accrued expenses

 

 

616,785

 

 

 

422,973

 

Due from/ to related parties

 

 

7,369

 

 

 

57,816

 

Deferred rent

 

 

-

 

 

 

23,675

 

Net cash used in operating activities

 

 

(13,142,099

)

 

 

(7,453,933

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(21,998

)

 

 

(21,950

)

Software development and other assets

 

 

(61,766

)

 

 

(13,500

)

Net cash used in investing activities

 

 

(83,764

)

 

 

(35,450

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of offering expenses

 

 

67,401,850

 

 

 

-

 

Net cash provided by financing activities

 

 

67,401,850

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

54,175,987

 

 

 

(7,489,383

)

Cash and cash equivalents, at beginning of period

 

 

51,939,661

 

 

 

69,944,292

 

Cash and cash equivalents, at end of period

 

$

106,115,648

 

 

$

62,454,909

 

 

See accompanying notes to these unaudited condensed financial statements

5


 

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 of its efforts to business development, research and development, recruiting management and technical staff, 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 payable by us.  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 6).

The Company has incurred operating losses since inception and had an accumulated deficit of $80.4 million as of June 30, 2017. 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 to fund its operations. Management believes that the Company’s existing cash and cash equivalents as of June 30, 2017, will be sufficient to fund its current operating plans through at least the next 12 months. Management expects that future sources of funding may include new or expanded partnering arrangements and sales of equity or debt securities. 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 business strategies. 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 Prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-217245), which was filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424 on May 5, 2017 (the “Prospectus”). There have been no material changes to the significant accounting policies during the period ended June 30, 2017, except for those listed below.

(A) Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet at June 30, 2017, and the condensed statements of operations and comprehensive loss for the three and six months ended June 30, 2017 and 2016, changes in stockholder’s equity for the six months ended June 30, 2017, and cash flows for the six months ended June 30, 2017 and 2016 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 and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other future annual or interim period. The balance sheet as of December 31, 2016 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, 2016.

6


 

(B) Reverse Stock Split

In connection with the IPO, the Board of Directors and the stockholders of the Company approved a one-for-2.15 reverse stock split of the Company’s issued and outstanding common stock and preferred stock. The reverse stock split became effective on May 1, 2017. All share and per share amounts in the financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.

(C) 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.

(D) Collaboration Arrangement

License and Collaboration Agreement with Takeda Pharmaceutical Company Limited

The Company accounts for the license and collaboration agreement with Takeda Pharmaceutical Company Limited (“Takeda”) in accordance with Accounting Standard Codification (“ASC”) 808 – “Collaborative Arrangements.” As Ovid and Takeda are sharing 50/50 in the drug development and throughout the life of this compound, the Company records 50% of the net expenses of the development costs in research and development.  When Ovid incurs the majority of the costs and Takeda transfers a payment to Ovid to equalize the costs, Ovid records the participation by Takeda as a reduction of its research and development expenses, as the parties under the collaboration are sharing in the costs and the payment represents reimbursement of costs by Takeda. When Takeda incurs the majority of the costs and Ovid transfers a payment to Takeda (to equalize the costs), Ovid records the participation in Takeda’s expenses as research and development costs in its statement of operations, as Ovid and Takeda are sharing in the research and development activities and this participation represents Ovid’s share of the research and development costs in the specific period.

(E) Recent Accounting Pronouncements

Recent accounting standards which have been adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies various aspects of the accounting for share-based payments. The simplifications include: (a) recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the complications of tracking a “windfall pool,” but will increase the volatility  of income tax expense; (b) allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award; (c) modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur; and (d) changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period.  

The Company early adopted ASU 2016-09 as of September 30, 2016 on a retroactive basis to the beginning of the period. In connection with the early adoption, the Company elected an accounting policy to record forfeitures as they occur. There was no financial statement impact upon adoption for the above accounting policy election.  In addition, there was no financial statement impact of adopting ASU 2016-09 provisions regarding recognition of tax effects associated with stock-based compensation as the Company is in a net operating loss (“NOL”) position with a full valuation allowance. Also, for the period from inception through December 31, 2016, the Company did not record an income statement benefit for excess tax benefits as there were no exercises of options during the period.

New accounting standards which have not yet 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 award remain the same as the original award. ASU 2017-09 is effective for public companies for fiscal years beginning on or after December 15, 2017.  The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

7


 

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, among others, 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 public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  The adoption of this standard is not expected to 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 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. The new standard also clarifies that an entity should determine each separately identifiable source or use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows. 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. ASU 2016-15 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s statements of cash flows upon adoption.

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 is currently evaluating the impact of adopting ASU 2016-02 on the Company's results of operations and financial position.

NOTE 3 – PRECLINICAL AND CLINICAL AGREEMENTS

On May 5, 2016, the Company entered into a Start Up Agreement (“SUA”) 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.” Under the terms of the SUA, as amended, the direct fees and pass-through expenses are not to exceed $854,463 and $584,267, respectively, (a) without prior written authorization from the Company or (b) in the event of early termination which triggers necessary wind down activities. The term of the SUA, as amended, expired on August 31, 2016.

On August 26, 2016, the Company entered into a Master Services Agreement (“MSA”) with a clinical research organization replacing the above mentioned SUA. In connection with the execution of the MSA, the Company provided an upfront retainer of $355,435. This retainer has been reflected within security deposits on the balance sheet. During the six months ended June 30, 2017, the Company has expensed approximately $2,144,541 related to both the MSA and the SUA.

In the normal course of business, the Company enters into various firm purchase commitments related to certain preclinical studies and clinical trials. As of June 30, 2017, the noncancellable commitments totaled approximately $420,000 of which $82,558 has been paid as of June 30, 2017, and the balance is expected to be paid within the next fiscal year.

NOTE 4 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS

Property and equipment is summarized as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Furniture and equipment

 

$

85,781

 

 

$

63,783

 

Less accumulated depreciation

 

 

(35,983

)

 

 

(20,192

)

Total property, plant and equipment, net

 

$

49,798

 

 

$

43,591

 

 

Depreciation expense was $11,984 and $7,053 for the six months ended June 30, 2017 and 2016, respectively.  Depreciation expense was $6,655 and $3,993 for the three months ended June 30, 2017 and 2016, respectively.

8


 

Intangible assets, net of accumulated amortization, were $131,100 and $110,073 as of June 30, 2017 and December 31, 2016, respectively, and are included in other assets. Amortization expense was $25,571 and $7,513 for the six months ended June 30, 2017 and 2016, respectively. Amortization expense was $12,437 and $4,680 for the three months ended June 30, 2017 and 2016, respectively.

NOTE 5 – ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Collaboration agreement accrual

 

$

1,242,042

 

 

$

-

 

Payroll and bonus accrual

 

 

866,887

 

 

 

1,324,649

 

Professional fees accrual

 

 

697,329

 

 

 

874,525

 

Clinical trials accrual

 

 

562,915

 

 

 

409,804

 

Other

 

 

124,320

 

 

 

267,265

 

Total

 

$

3,493,493

 

 

$

2,876,243

 

 

NOTE 6 – STOCKHOLDERS’ EQUITY AND PREFERRED STOCK

The Company’s capital structure consists of common stock and preferred stock with certain rights and privileges summarized below.

The Company was initially authorized to issue 1,000 shares of common stock at $0.001 par value per share. The eighth amendment to the Company’s certificate of incorporation was made 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 7 – 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 purpose of the 2014 Plan is to provide the Company with the flexibility to issue stock-based awards as part of an overall compensation package to attract and retain qualified personnel.

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 that may be issued under the 2017 Plan is 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 under the 2017 Plan.  Upon the adoption of the 2017 Plan, no further awards will be granted under the 2014 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 is 279,069 shares.  No offering periods under the 2017 ESPP had been initiated as of June 30, 2017.

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 vesting period. The vesting requirement is conditioned upon grantee’s continued service with the

9


 

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 twelve 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 June 30, 2017, there were 46,511 performance-based options outstanding and unvested.

The fair value of options granted during the six months ended June 30, 2017 and 2016 was estimated using the Black-Scholes option valuation model. The inputs for the Black-Scholes 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 as the Company’s shares just recently became publicly traded. 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 27,906 and 34,882 stock options to nonemployee consultants for services rendered during the six months ended June 30, 2017 and 2016, respectively. There were 51,600 and 85,754 unvested nonemployee options outstanding as of June 30, 2017, and 2016, respectively. Total expense recognized related to the nonemployee stock options for the three months ended June 30, 2017 and 2016 was $72,247 and $37,871, respectively. Total expense recognized related to the nonemployee stock options for the six months ended June 30, 2017 and 2016 was $306,205 and $69,075, respectively. Total unrecognized compensation expenses related to the nonemployee stock options was $432,899 as of June 30, 2017. During the six months ended June 30, 2017, the Company recognized $162,700 in expenses for non-employee performance-based option awards.

The Company granted 1,302,084 and 577,434 stock options to employees during the six months ended June 30, 2017 and 2016 respectively. There were 2,775,620 and 2,083,245 unvested employee options outstanding as of June 30, 2017, and 2016, respectively. Total expense recognized related to the employee stock options for the three months ended June 30, 2017 and 2016 was $2,120,641 and $744,991 respectively. Total expense recognized related to the employee stock options for the six months ended June 30, 2017 and 2016 was $3,305,337 and $1,428,651 respectively. Total unrecognized compensation expense related to employee stock options was $14,106,293 as of June 30, 2017.  During the three months ended June 30, 2017, the Company recognized $830,997 in expenses for employee performance-based option awards.

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

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development

 

$

589,255

 

 

$

355,635

 

 

$

1,259,430

 

 

$

605,086

 

General and administrative

 

 

1,603,633

 

 

 

421,096

 

 

 

2,352,112

 

 

 

892,640

 

Total

 

$

2,192,888

 

 

$

776,731

 

 

$

3,611,542

 

 

$

1,497,726

 

 

10


 

The fair value of employee options granted during the three and six months ended June 30, 2017 and 2016, respectively, was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

79.61

%

 

 

83.39

%

 

 

80.53

%

 

 

83.63

%

Expected term in years

 

 

6.08

 

 

 

6.06

 

 

 

6.08

 

 

 

6.06

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

1.93

%

 

 

1.50

%

 

 

2.08

%

 

 

1.50

%

Fair value of option on grant date

 

$

7.74

 

 

$

5.01

 

 

$

6.34

 

 

$

5.18

 

 

The fair value of nonemployee options granted and remeasured during the three and six months ended June 30, 2017 and 2016, respectively, was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

78.01

%

 

 

83.39

%

 

 

79.57

%

 

 

83.43

%

Expected term in years

 

 

4.02

 

 

 

5.16

 

 

 

4.52

 

 

 

5.19

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

1.72

%

 

 

1.10

%

 

 

1.86

%

 

 

1.20

%

Fair value of option on grant date

 

$

8.41

 

 

$

4.75

 

 

$

7.53

 

 

$

5.14

 

 

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 at December 31, 2016

 

 

2,987,729

 

 

$

7.46

 

 

 

8.82

 

 

$

837,036

 

Granted

 

 

1,329,990

 

 

 

9.07

 

 

 

9.61

 

 

 

 

 

Exercised

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(139,534

)

 

 

6.26

 

 

 

 

 

 

 

 

 

Options Outstanding June 30, 2017

 

 

4,178,185

 

 

$

8.02

 

 

 

8.77

 

 

$

10,568,518

 

Vested and expected to vest at June 30, 2017

 

 

4,178,185

 

 

$

8.02

 

 

 

8.77

 

 

$

10,568,518

 

Exercisable at June 30, 2017

 

 

1,350,965

 

 

$

7.69

 

 

 

8.42

 

 

$

3,785,547

 

 

At June 30, 2017 there was approximately $14,539,192 of unamortized share–based compensation expense, which is expected to be recognized over a remaining average vesting period of 2.88 years.

NOTE 8 – 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 form 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.

On February 15, 2017, the Company was approved for a $200,251 refundable credit towards future New York City tax expense.  The credit is for qualified emerging technology companies (“QETCS”) focused on biotechnology located in New York City.

11


 

NOTE 9 COMMITMENTS AND CONTINGENCIES

Contingencies

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 10 – 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 (Note 6), 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 and six months ended June 30, 2017, the Company recognized $1,242,042 and $2,776,148 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.  As of June 30, 2017, $1.5 million was included within accounts payable.

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.

NOTE 11 – RELATED PARTY TRANSACTIONS

As of December 31, 2016, amounts due from related parties represented travel related expenses.

12


 

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 Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

Stock options to purchase common stock

 

 

4,178,185

 

 

 

2,565,796

 

Preferred stock convertible into common stock

 

 

-

 

 

 

7,981,351

 

Total

 

 

4,178,185

 

 

 

10,547,147

 

 

NOTE 13 SUBSEQUENT EVENTS

Equity Awards

On August 8, 2017, the Company granted a performance-based option award for 50,000 shares to an employee with an exercise price of $7.17 per share.

13


 

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 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 Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-217245), which was filed with the SEC pursuant to Rule 424 on May 5, 2017. 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. Using recent scientific advances in genetics and the biological pathways of the brain, we have created a proprietary map of disease-relevant pathways 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 rare developmental and/or epileptic encephalopathies. Our most advanced candidate, OV101, has commenced a Phase 2 trial, which is primarily a safety trial that is designed to provide proof-of-concept on efficacy parameters, in adults with Angelman syndrome. OV101 has also commenced a Phase 1 trial in adolescents with Angelman syndrome or Fragile X syndrome. Along with our collaborator, Takeda Pharmaceutical Company Limited (“Takeda”), in June 2017 we initiated patient recruitment in our Phase 1b/2a trial of OV935 in adults with rare epileptic encephalopathies.

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 will receive 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 (the “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 estimated 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 June 30, 2017, we have raised net proceeds of $142.3 million from the sale of convertible preferred stock and our IPO. As of June 30, 2017, we had $106.1 million in cash and cash equivalents. We recorded net losses of $44.5 million, which includes a non-cash charge of $25.9 million related to our Takeda collaboration and $9.1 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, we had an accumulated deficit of approximately $80.4 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;

14


 

 

implement operational, financial and management systems; and

 

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

License and Collaboration Agreement with Takeda Pharmaceutical Company Limited

In January 2017, we entered into a license and collaboration agreement, or the Takeda collaboration, with Takeda Pharmaceutical Company Limited, or Takeda. All activities of the collaboration regarding OV935 will be guided by the Takeda/Ovid “One Team” concept, an integrated and interdisciplinary team from both companies devoted to the successful advancement of OV935 across rare epilepsy syndromes. Under the agreement, we will take the lead in clinical development activities and commercialization of the compound OV935 and products containing this compound for the treatment of certain rare neurological disorders in the United States, Canada, the European Union and Israel. Takeda will take the lead in commercialization of OV935 in Japan and has the option to lead in Asia and other selected geographies. We and Takeda will initially share equally all development and commercialization costs and expenses prior to launch of a product and all revenues and commercialization costs and expenses after launch.

Please see Note 10 of our unaudited financial statements included in this Quarterly Report on Form 10-Q and the sections titled “Business—License and Collaboration Agreements—License and Collaboration Agreement with Takeda” and “Certain Relationships and Related Party Transactions—Series B-1 Convertible Preferred Stock Purchase Agreement with Takeda” in our Prospectus that forms a part of our Registration Statement on Form S-1 (File No. 333-217245), which was filed with the SEC pursuant to Rule 424 on May 5, 2017, for additional information.

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;

 

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;

15


 

 

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 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 Securities and Exchange Commission (“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 and cash equivalents maintained in money market funds.

Results of Operations

Comparison of the three months ended June 30, 2017 and 2016

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

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change $

 

 

 

(in thousands)

 

Research and development

 

$

6,075

 

 

$

1,770

 

 

$

4,305

 

General and administrative

 

 

4,213

 

 

 

3,647

 

 

 

566

 

Total operating expenses

 

 

10,288

 

 

 

5,417

 

 

 

4,871

 

Loss from operations

 

 

(10,288

)

 

 

(5,417

)

 

 

(4,871

)

Interest income

 

 

40

 

 

 

31

 

 

 

9

 

Loss

 

 

(10,248

)

 

 

(5,386

)

 

 

(4,862

)

Net loss and comprehensive loss

 

$

(10,248

)

 

$

(5,386

)

 

$

(4,862

)

 

16


 

Research and Development Expenses

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change $

 

 

 

(in thousands)

 

Preclinical and development expense

 

$

3,868

 

 

$

459

 

 

$

3,409

 

Payroll and payroll-related expenses

 

 

1,920

 

 

 

1,028

 

 

 

892

 

Other expenses

 

 

287

 

 

 

283

 

 

 

4

 

Total research and development

 

$

6,075

 

 

$

1,770

 

 

$

4,305

 

 

Research and development expenses were $6.1 million for the three months ended June 30, 2017 compared to $1.8 million for the three months ended June 30, 2016. The increase of $4.3 million was primarily due to an increase in preclinical and development expenses for the clinical studies of OV101 and our Takeda collaboration expenses related to OV935. During the three months ended June 30, 2017, total research and development expenses consisted of $3.9 million in preclinical and development expenses, of which $1.2 million represents amounts reimbursable to Takeda in respect of the Takeda collaboration, $1.9 million in payroll and payroll-related expenses, of which $0.6 million related to stock-based compensation, due to increased headcount in the research and development department, and $0.3 million in other expenses. During the three months ended June 30, 2016, total research and development expenses consisted of $0.5 million in preclinical and development expenses, $1.0 million in compensation expenses, of which $0.4 million related to stock-based compensation, and $0.3 million in other expenses. 

General and Administrative Expenses

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

2017

 

 

2016

 

 

Change $

 

 

 

(in thousands)

 

Payroll and payroll-related expenses

 

$

2,852

 

 

$

2,086

 

 

$

766

 

Legal and professional fees

 

 

860

 

 

 

1,279

 

 

 

(419

)

General office expenses

 

 

501

 

 

 

281

 

 

 

220

 

Total general and administrative

 

$

4,213