ovid-10q_20180630.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, 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 August 2, 2018, the registrant had 24,631,979 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

 

17

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

25

Item 4.

 

Controls and Procedures

 

25

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

26

Item 1A.

 

Risk Factors

 

26

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

Item 6.

 

Exhibits

 

58

Signatures

 

 

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

(unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,535,378

 

 

$

87,125,600

 

Short-term investments

 

 

40,059,218

 

 

 

-

 

Prepaid expenses and other current assets

 

 

2,594,680

 

 

 

1,462,448

 

Total current assets

 

 

65,189,276

 

 

 

88,588,048

 

 

 

 

 

 

 

 

 

 

Long term prepaid expenses

 

 

2,919,921

 

 

 

604,646

 

Security deposit

 

 

121,905

 

 

 

88,940

 

Property, plant and equipment, net

 

 

67,653

 

 

 

51,775

 

Other assets

 

 

313,333

 

 

 

124,194

 

Total assets

 

$

68,612,088

 

 

$

89,457,603

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,429,388

 

 

$

2,025,766

 

Accrued expenses

 

 

4,066,840

 

 

 

3,995,334

 

Total current liabilities

 

 

7,496,228

 

 

 

6,021,100

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 10,000,000 shares and no shares authorized at June 30, 2018 and December 31, 2017

 

 

-

 

 

 

-

 

Common stock, $0.001 par value; 125,000,000 shares authorized at June 30, 2018 and December 31, 2017,

    24,631,972 and 24,606,256 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

24,632

 

 

 

24,606

 

Additional paid-in-capital

 

 

187,940,813

 

 

 

184,127,565

 

Accumulated other comprehensive loss

 

 

(16,022

)

 

 

-

 

Accumulated deficit

 

 

(126,833,563

)

 

 

(100,715,668

)

Total stockholders' equity

 

 

61,115,860

 

 

 

83,436,503

 

Total liabilities and stockholders' equity

 

$

68,612,088

 

 

$

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 June 30,

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

8,116,385

 

 

$

6,074,927

 

 

$

16,590,942

 

 

$

37,359,355

 

General and administrative

 

 

5,093,311

 

 

 

4,213,173

 

 

 

10,048,615

 

 

 

7,191,039

 

Total operating expenses

 

 

13,209,696

 

 

 

10,288,100

 

 

 

26,639,557

 

 

 

44,550,394

 

Loss from operations

 

 

(13,209,696

)

 

 

(10,288,100

)

 

 

(26,639,557

)

 

 

(44,550,394

)

Interest income

 

 

274,556

 

 

 

39,721

 

 

 

521,662

 

 

 

63,205

 

Net loss

 

$

(12,935,140

)

 

$

(10,248,379

)

 

$

(26,117,895

)

 

$

(44,487,189

)

Net loss attributable to common stockholders

 

$

(12,935,140

)

 

$

(10,248,379

)

 

$

(26,117,895

)

 

$

(44,487,189

)

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

 

$

(0.53

)

 

$

(0.57

)

 

$

(1.06

)

 

$

(3.18

)

Weighted-average common shares outstanding basic and diluted

 

 

24,625,966

 

 

 

18,112,554

 

 

 

24,617,555

 

 

 

13,998,428

 

 

See accompanying notes to these unaudited condensed financial statements

3


 

OVID THERAPEUTICS INC.

Condensed Statements of 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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(12,935,140

)

 

$

(10,248,379

)

 

$

(26,117,895

)

 

$

(44,487,189

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on available-for-sale securities

 

 

19,892

 

 

 

-

 

 

 

(16,022

)

 

 

-

 

Comprehensive loss

 

$

(12,915,248

)

 

$

(10,248,379

)

 

$

(26,133,917

)

 

$

(44,487,189

)

 

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,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(26,117,895

)

 

$

(44,487,189

)

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

 

 

 

 

 

 

 

 

Noncash research and development expense

 

 

-

 

 

 

25,861,228

 

Stock-based compensation expense

 

 

3,639,173

 

 

 

3,611,542

 

Depreciation and amortization

 

 

51,692

 

 

 

37,555

 

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

 

 

(60,341

)

 

 

-

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(1,132,232

)

 

 

(834,314

)

Deferred transaction costs

 

 

-

 

 

 

(496,657

)

Security deposit

 

 

(32,965

)

 

 

(22,490

)

Long term prepaid expenses

 

 

(2,315,275

)

 

 

-

 

Accounts payable

 

 

1,349,506

 

 

 

2,564,072

 

Accrued expenses

 

 

71,506

 

 

 

616,785

 

Due from/ to related parties

 

 

-

 

 

 

7,369

 

Net cash used in operating activities

 

 

(24,546,831

)

 

 

(13,142,099

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(45,014,899

)

 

 

-

 

Proceeds from maturities of short-term investments

 

 

5,000,000

 

 

 

-

 

Purchase of property and equipment

 

 

(28,857

)

 

 

(21,998

)

Software development and other assets

 

 

(173,736

)

 

 

(61,766

)

Net cash used in investing activities

 

 

(40,217,492

)

 

 

(83,764

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from initial public offering, net of offering expenses

 

 

-

 

 

 

67,401,850

 

Proceeds from employee stock purchase plan

 

 

62,724

 

 

 

-

 

Proceeds from exercise of options

 

 

111,377

 

 

 

-

 

Net cash provided by financing activities

 

 

174,101

 

 

 

67,401,850

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(64,590,222

)

 

 

54,175,987

 

Cash and cash equivalents, at beginning of period

 

 

87,125,600

 

 

 

51,939,661

 

Cash and cash equivalents, at end of period

 

$

22,535,378

 

 

$

106,115,648

 

 

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).

On June 1, 2018, the Company entered into a Sales Agreement (“ATM Agreement”) with Cowen and Company, LLC (“Cowen”) under which the Company may offer and sell, from time to time at its sole discretion through Cowen, as its sales agent, shares of the Company’s common stock having an aggregate offering price of up to $50.0 million. Cowen may sell the common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act of 1933, as amended, including sales made directly on or through the Nasdaq Global Market or on any other existing trading market for the Company’s common stock. Any common stock sold will be issued pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-225391). The Company will pay Cowen a commission equal to 3.0% of the gross sales proceeds of any common stock sold through Cowen under the ATM Agreement and also have provided Cowen with indemnification and contribution rights. To date, the Company has not sold any common stock under the ATM Agreement.

The Company has incurred operating losses since inception and had an accumulated deficit of $126.8 million as of June 30, 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 June 30, 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 June 30, 2018, except for items mentioned below.

(A) Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet at June 30, 2018, the condensed statements of operations and comprehensive loss for the three and six months ended June 30, 2018 and 2017, and condensed statements of cash flows for the six months ended June 30, 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 are condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the

6


 

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, 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.

(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 three months 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 premiums and discounts are included within net loss.

(E) Recent Accounting Pronouncements

Recent accounting standards which have been adopted

In May 2017, the FASB issued Accounting Standards Update (“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, and 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.

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 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 an 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. 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 (other than equity method investees) 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. 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. The standard also includes certain amendments for the accounting for a financial liability that is measured at fair value in accordance with the fair value option and prescribes that 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 and form of financial asset. 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 June 20, 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This new standard simplifies the accounting for share-based payments granted to nonemployees for goods and services. The standard supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. As such, among others, the measurement date for nonemployee awards would generally be the grant date same as the measurement date for employee equity awards and for performance-based awards, an entity is required to recognize any cost on the basis of the probable outcome of the performance conditions using the grant-date fair value of the award. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of assessing the impact of this standard on its financial statements.

On March 30, 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization and Purchased Callable Debt Securities.  This new standard 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 the Company 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 ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This new standard 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 available-for-sale debt securities and requires entities to determine whether all or a portion of the unrealized loss on an available-for-sale debt security is a credit loss. Under the new guidance, an entity will recognize an allowance for credit

8


 

losses on available-for-sale 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). This new standard was issued to increase transparency and comparability among entities by recognizing for all leases lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. This new standard 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 six months ended June 30, 2018 and 2017, the Company has expensed approximately $2,095,896 and $2,144,541 related to this contract, respectively. The expense related to this contract is reflected within research and development on the statement of operations.

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, and short-term investments, as well as gross unrealized holding gains and losses as of June 30, 2018 and December 31, 2017:

 

 

 

June 30, 2018

 

 

 

Amortized

 

 

Gross unrealized

 

 

Gross unrealized

 

 

Fair

 

 

 

cost

 

 

holding gains

 

 

holding losses

 

 

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Cash

 

$

26,191

 

 

$

-

 

 

$

-

 

 

$

26,191

 

  Money market funds  (a)

 

 

22,509,187

 

 

 

-

 

 

 

-

 

 

 

22,509,187

 

Total cash and cash equivalents

 

$

22,535,378

 

 

$

-

 

 

$

-

 

 

$

22,535,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  U.S. treasury notes (a)

 

$

37,050,441

 

 

$

-

 

 

$

(12,504

)

 

$

37,037,937

 

  Corporate bonds (a)

 

 

3,024,799

 

 

 

-

 

 

 

(3,518

)

 

 

3,021,281

 

Total short-term investments

 

$

40,075,240

 

 

$

-

 

 

$

(16,022

)

 

$

40,059,218

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)  As of June 30, 2018, the Company's Level 1 assets consisted of money market funds, U.S. treasury notes, and corporate bonds totaling $62.6 million. The Company had no level 2 or level 3 assets or liabilities as of June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9


 

 

 

 

December 31, 2017

 

 

 

Amortized

 

 

Gross unrealized

 

 

Gross unrealized

 

 

Fair

 

 

 

cost

 

 

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 June 30, 2018, and December 31, 2017, the aggregate fair value of securities that were in an unrealized loss position for less than 12 months was $40.1 million and zero, respectively. The Company did not hold any securities in an unrealized loss position for more than 12 months as of June 30, 2018.

 

There were no realized gains or losses on available-for-sale securities during the three and six months ended June 30, 2018.

NOTE 5 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS

Property and equipment is summarized as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Furniture and equipment

 

$

133,985

 

 

$

102,690

 

Less accumulated depreciation

 

 

(66,332

)

 

 

(50,915

)

Total property, plant and equipment, net

 

$

67,653

 

 

$

51,775

 

 

Depreciation expense was $15,417 and $11,984 for the six months ended June 30, 2018 and 2017, respectively. Depreciation expense was $8,972 and $6,655 for the three months ended June 30, 2018 and 2017, respectively.

Intangible assets, net of accumulated amortization, were $313,333 and $124,194 as of June 30, 2018 and December 31, 2017, respectively, and are included in other assets. Amortization expense was $36,275 and $25,571 for the six months ended June 30, 2018 and 2017, respectively. Amortization expense was $18,971 and $12,437 for the three months ended June 30, 2018 and 2017, respectively.

NOTE 6 – ACCRUED EXPENSES

Accrued expenses consist of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Collaboration agreement accrual

 

$

-

 

 

$

754,841

 

Payroll and bonus accrual

 

 

1,657,271

 

 

 

1,919,120

 

Professional fees accrual

 

 

875,789

 

 

 

321,852

 

Clinical trials accrual

 

 

1,390,984

 

 

 

753,018

 

Other

 

 

142,796

 

 

 

246,503

 

Total

 

$

4,066,840

 

 

$

3,995,334

 

 

10


 

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 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 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 June 30, 2018, there were 3,067,549  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 and six months ended June 30, 2018, zero and 9,972 shares were purchased under the ESPP and the Company recorded expense of $29,759 and $46,628, respectively. 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 June 30, 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 June 30, 2018, there were 50,000 performance-based options outstanding and unvested.

11


 

The fair value of options granted during the six months ended June 30, 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. Topic 14D. 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 until vested.

The Company granted zero and 27,906 stock options to nonemployee consultants for services rendered during the six months ended June 30, 2018 and 2017, respectively. There were 18,896, and 51,600 unvested nonemployee options outstanding as of June 30, 2018, and 2017, respectively. Total expense recognized related to the nonemployee stock options for the three months ended June 30, 2018 and 2017 was $48,886, and $72,247, respectively. Total expense recognized related to the nonemployee stock options for the six months ended June 30, 2018 and 2017 was $92,729 and $306,205, respectively. Total unrecognized compensation expenses related to the nonemployee stock options was $99,754 as of June 30, 2018. During the six months ended June 30, 2018 and 2017, the Company recognized zero and $162,700 in expenses for nonemployee performance-based option awards, respectively.

The Company granted 1,057,728 and 1,032,084 stock options to employees during the six months ended June 30, 2018 and 2017 respectively. There were 2,852,494 and 2,775,620 unvested employee options outstanding as of June 30, 2018, and 2017, respectively. Total expense recognized related to the employee stock options for the three months ended June 30, 2018 and 2017 was $1,765,560 and $2,120,641, respectively. Total expense recognized related to the employee stock options for the six months ended June 30, 2018 and 2017 was $3,499,816 and $3,305,337 respectively. Total unrecognized compensation expense related to employee stock options was $15,370,087 as of June 30, 2018. During the six months ended June 30, 2018 and 2017, the Company recognized zero and $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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Research and development

 

$

766,699

 

 

$

589,255

 

 

$

1,505,488

 

 

$

1,259,430

 

General and administrative

 

 

1,077,507

 

 

 

1,603,633

 

 

 

2,133,685

 

 

 

2,352,112

 

Total

 

$

1,844,206

 

 

$

2,192,888

 

 

$

3,639,173

 

 

$

3,611,542

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

$

1,814,447

 

 

$

2,192,888

 

 

$

3,592,545

 

 

$

3,611,542

 

Employee Stock Purchase Plan

 

 

29,759

 

 

 

-

 

 

 

46,628

 

 

 

-

 

Total

 

$

1,844,206

 

 

$

2,192,888

 

 

$

3,639,173

 

 

$

3,611,542

 

 

12


 

The fair value of employee options granted during the three and six months ended June 30, 2018 and 2017 was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

87.44

%

 

 

79.61

%

 

 

83.31

%

 

 

80.53

%

Expected term in years

 

 

5.91

 

 

 

6.08

 

 

 

6.07

 

 

 

6.08

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

2.76

%

 

 

1.93

%

 

 

2.54

%

 

 

2.08

%

Fair value of option on grant date

 

$

5.79

 

 

$

7.74

 

 

$

6.41

 

 

$

6.34

 

 

The fair value of nonemployee options granted and remeasured during the three and six months ended June 30, 2018 and 2017 was estimated by utilizing the following assumptions:

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

 

Weighted

Average

 

Volatility

 

 

84.16

%

 

 

78.01

%

 

 

84.16

%

 

 

79.57

%

Expected term in years

 

 

3.38

 

 

 

4.02

 

 

 

3.38

 

 

 

4.52

 

Dividend rate

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

Risk-free interest rate

 

 

2.64

%

 

 

1.72

%

 

 

2.64

%

 

 

1.86

%

Fair value of option on measurement date

 

$

5.28

 

 

$

8.41

 

 

$

5.28

 

 

$

7.53

 

 

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

 

 

1,057,728

 

 

 

8.93

 

 

 

9.59

 

 

 

 

 

Exercised

 

 

(15,744

)

 

 

7.07

 

 

 

 

 

 

$

31,125

 

Forfeited or expired

 

 

(35,980

)

 

 

8.06

 

 

 

 

 

 

 

 

 

Options Outstanding June 30, 2018

 

 

5,304,806

 

 

$

8.24

 

 

 

8.16

 

 

$

1,667,370

 

Vested and exercisable at June 30, 2018

 

 

2,433,416

 

 

$

7.86

 

 

 

7.56

 

 

$

1,101,918

 

 

At June 30, 2018 there was approximately $15,469,841 of unamortized share–based compensation expense, which is expected to be recognized over a remaining average vesting period of 2.58 years.

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 six months ended June 30, 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

13


 

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

 

Pursuant to the Lundbeck license agreement, the Company agreed to make milestone payments totaling up to $181.0 million upon the achievement of certain development, regulatory and sales milestones. The first payment of $10.0 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

In the ordinary course of business, the Company is from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment and other matters. The Company accrues for loss contingencies when available information indicates that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible. Legal costs incurred in connection with loss contingencies are expensed as incurred.

The Company does not believe that it is probable that a liability has been incurred or that the amount of any potential liability can be reasonably estimated for any of its legal proceedings described in Part II, Item 1, Legal Proceedings, of this Quarterly Report on Form 10-Q, which includes matters pertaining to the Northwestern agreement. As a result, the Company did not record a loss contingency related to any of these legal proceedings. Particularly with respect to the litigation related to the Northwestern license agreement, the Company is presently unable to predict the outcome of such claim or to reasonably estimate the possible loss, or range of potential losses, if any, related to such claim.

14


 

Severance Benefits

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. 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.  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. None of these potential milestone payments mentioned above are deemed probable at balance sheet date.

During the six months ended June 30, 2018 and June 20, 3017, the Company recognized $95,408 and $2,776,148, respectively, in research and development expenses representing expenses reimbursed to Takeda in respect of this collaboration agreement. During the three months ended June 30, 2018, the Company recognized a credit of $337,289 in research and development expenses representing costs reimbursed to the Company from Takeda.   During the three months ended June 30, 2017, the Company recognized $1,242,042 in research and development expenses representing research and development expenses reimbursed to Takeda in respect of this collaboration agreement.  

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.

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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 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,

 

 

 

2018

 

 

2017

 

Stock options to purchase common stock

 

 

5,304,806

 

 

 

4,178,185

 

 

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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 a Phase 2 trial in adults and adolescents with Angelman syndrome.  As announced on August 6, 2018, the Phase 2 trial achieved its primary endpoint of safety and tolerability and showed an improvement in the once-daily and combined OV101 dosing groups on the prespecified physician-rated Clinical Global Impressions-Improvement (CGI-I) endpoint. We also 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.  The trial is fully enrolled, and we expect 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.

We have not generated any revenue and have funded our business primarily through the sale of our capital stock. Through June 30, 2018, we have raised net proceeds of $142.3 million from the sale of convertible preferred stock and our IPO. As of June 30, 2018, we had $22.5 million in cash and cash equivalents and $40.1 million in short-term investments. We recorded net losses of $26.1 million and $44.5 million for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, we had an accumulated deficit of approximately $126.8 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;

 

implement operational, financial and management systems; and

 

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

 

 

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STARS Phase 2 Clinical Trial Update

 

Phase 2 STARS trial of OV101 achieved its primary endpoint of safety and tolerability. The investigational medicine showed a favorable safety profile and was well tolerated in adults and adolescents with Angelman syndrome.

 

At the prespecified efficacy analysis at 12 weeks of treatment, OV101 once-daily and combined dosing groups showed a statistically significant improvement compared to placebo in the physician-rated clinical global impressions of improvement (CGI-I) – a measure commonly used in clinical trials that allows the physician to capture a constellation of clinical symptoms.

 

CGI-I was ranked first in the prespecified topline hierarchy of the statistical analysis plan. Subsequent analyses in the hierarchy were conducted on a prespecified subset of scales across the domains of behavior, sleep and gait. These prespecified subsets did not show a statistically significant difference from placebo. Full data analyses on these domains are ongoing.

 

Ovid intends to discuss these data with regulatory authorities to determine the next steps for a registrational pathway.

 

Based on these data, the company plans to initiate in the fourth quarter of 2018 an open-label extension study (named ELARA). Angelman syndrome patients who completed any prior OV101 study may be eligible to receive the investigational medicine in this study.

Other Preclinical/Clinical Development Updates

 

In July 2018, we initiated our Phase 2 ROCKET clinical trial, a randomized, double-blind, parallel-group trial evaluating OV101 for the treatment of adolescent and young male adults with Fragile X syndrome. The trial is expected to enroll up to 30 males ages 13 to 22 diagnosed with a confirmed diagnosis of Fragile X syndrome. The primary endpoint is safety and tolerability of OV101 over 12 weeks of treatment in three different cohorts of either 5mg once daily, 5mg twice daily, or 5mg three times daily. A secondary endpoint will evaluate changes in behavior during 12 weeks of treatment with OV101. We anticipate data from this trial in 2019.

 

Enrollment is complete in a Phase 1b/2a clinical trial of OV935 in 18 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 pharmacokinetic (PK) parameters. Exploratory endpoints include change from baseline in seizure frequency and 24 hydroxycholesterol (24HC) levels. Data from the Phase 1b/2a trial is expected in the fourth quarter of 2018.

 

We plan to initiate in the fourth quarter of 2018, the SKY ROCKET study, a 12-week, non-drug study to assess the suitability of several behavioral scales in individuals with Fragile X syndrome. The trial is an observational study designed to provide additional data on the key endpoints that are being explored in the ROCKET trial as well as provide comparative data on the benefit offered by the standard of care. The study will enroll 30 males ages 5 to 30 with Fragile X syndrome.

 

In the third quarter of 2018, Ovid and Takeda plan to initiate three clinical trials: a Phase 2 clinical trial in pediatric patients with Dravet syndrome and Lennox-Gastaut syndrome (ELEKTRA); a Phase 2 clinical trial in pediatric patients with CDKL5 deficiency disorder and Duplication 15q syndrome (ARCADE); and an open-label extension trial for patients with dEE who participated in a previous OV935 clinical trial (ENDYMION).  The ENDYMION trial  began enrollment of patients in July 2018.

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;

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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;

 

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 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.

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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.

Results of Operations

Comparison of the three months ended June 30, 2018 and 2017

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

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change $

 

 

 

(in thousands)

 

Research and development

 

$

8,116

 

 

$

6,075

 

 

$

2,041

 

General and administrative

 

 

5,093