ITEM 2 — Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis
of our financial condition and results of operations should be read together with our financial statements and related notes appearing
elsewhere in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize
or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements.
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by
the use of words such as, but not limited to, “can,” “may,” “will,” “should,” “could,”
“would,” “expects,” “plans,” “continues,” “anticipates,” “intends,”
“seeks,” “targets,” “believes,” “estimates,” “projects,” “predicts,”
“potential” and similar expressions or variations intended to identify forward-looking statements. These statements
are based on the beliefs and assumptions of our management based on information currently available to them. Such forward-looking
statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors”
in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, and any updates to those risk factors
included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Furthermore, such forward-looking statements speak only as
of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Overview
We are a clinical stage biopharmaceutical
company with an emphasis on genomic medicine. The National Human Genome Research Institute of the National Institute of Health
defines “genomic medicine” as “an emerging medical discipline that involves using genomic information about an
individual as part of their clinical care (e.g., for diagnostic or therapeutic decision-making) and the health outcomes and policy
implications of that clinical use.” Genomic medicine is currently being studied in the fields of oncology, pharmacology,
rare and undiagnosed diseases, and infectious disease.
We have partnered with the Center for Applied
Genomics (CAG) at The Children’s Hospital of Philadelphia (CHOP) to implement a genomics-medicine driven approach to drug
development. CAG’s assets include a fully automated biorepository containing specimens from more than 60,000 pediatric patients,
and 150,000 of their relatives. The sample is highly enriched for rare and orphan diseases and the large majority of patients have
been genotyped. Their phenotypes are recorded in a modern electronic health record. The patients have been consented for anonymized
use of their data for research and follow up contact if needed.
CAG continues to discover important and
novel genetic biomarkers by both genome-wide association studies and exome sequencing and analysis of affected individuals and
their family members. Such markers not only identify patients with the disease but frequently point to the cause of the disease
and suggest targets and feasible intervention strategies that include protein or peptide therapy, monoclonal antibodies, drugs
or gene therapy. By working initially in a pediatric population, confounding environmental factors seen in older patients are minimized.
Our therapeutic strategy is to work closely
with our collaborators at CAG to identify populations of need with well-characterized, novel, genetically-defined targets. We then
designate an actionable therapeutic development approach based upon the target, the biology and human pathophysiology, and the
clinical and regulatory pathways. The collaboration affords us with unique and proprietary insight into these diseases and allows
us to better select therapeutic approaches including the appropriateness of our TARGT
TM
gene therapy technology. This,
in turn, allows us to rapidly identify appropriate potential therapeutics that have already been tested in patients but were not
advanced due to either lack of efficacy in a different patient population or for strategic reasons. We believe there are hundreds
of such potential therapeutics currently listed in proprietary databases. Many of these have remaining composition of matter patent
life and many would be eligible for regulatory exclusivity based on first registration (up to 12 years for biologics), as well
as orphan drug and additional pediatric exclusivity. Because these potential therapeutics have already been tested in patients
and have the requisite regulatory safety data generated, the time and cost to file an investigational new drug application (in
the United States) or investigational medicinal product dossier (in Europe) and initiate additional clinical trials, should be
substantially reduced.
In addition, the availability of robust
genetic biomarker(s) allows trial designs to focus on highly enriched patient populations that are more likely to respond to targeted
therapies. This can allow smaller, more focused and less expensive trials. Likewise, highly targeted drugs, that are less likely
to exhibit off-target effects, can be used when available. This further enhances the likelihood of clinical and regulatory success
and potentially requires smaller, easier-to-enroll clinical trials. In some cases it may be possible to advance from discovery
to the clinic in less than two years, and to achieve proof of concept in as little as three years. Furthermore, such highly targeted
therapies in specifically targeted diseases should allow the creation of higher value medicines that can address critical needs
in patients suffering from rare and orphan diseases. The solid genetic foundation underlying these disease targets along with highly
targeted therapies may also allow rapid label expansion into adjacent populations.
Our initial program arising out of our genomic
medicine strategy is the development candidate NFC-1. Through our acquisition of neuroFix, LLC, or neuroFix, in September 2015,
we acquired the rights to develop NFC-1, as well as the rights to certain data derived from a clinical trial and other studies
of NFC-1. NFC-1 is a first-in-class, non-stimulant metabotropic glutamate receptor (mGluR) neuromodulator that is Phase 2/3 ready
for the treatment of mGluR network mutation positive Attention Deficit Hyperactivity Disorder (ADHD), as well as neuropsychiatric
symptoms resulting from a related rare genetic disorder, 22q11.2 Deletion Syndrome (22q11.2 DS). We intend to develop NFC-1 for
the treatment of mGluR network mutation positive ADHD (mGluR+ ADHD) and certain other neurological and neuropsychological indications.
A Phase 1b clinical trial of NFC-1 in adolescents with ADHD and disruptions in the mGluR gene network was recently completed showing
the safety of NFC-1 as well as signaling potential efficacy in the adolescents treated.
We have generated significant losses to
date, and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. We incurred
net losses of approximately $11.14 million for the three month period ended March 31, 2016. As of March 31, 2016, we had stockholders’
equity of approximately $41.61 million. As of March 31, 2016, we had cash reserves of $43.89 million, which we believe will provide
funding for the Company at least through the end of the third quarter of 2017. We are unable to predict the extent of any future
losses or when we will become profitable, if at all.
Financial Operations Overview
Research and Development Expense
Research and development expense consists
of: (i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations,
contract manufacturers, clinical trial sites and consultants; (iii) technology and intellectual property license costs; (iv) manufacturing
development costs; (v) personnel related expenses, including salaries, and other related costs, including stock-based compensation
expense, for the personnel involved in product development; (vi) activities related to regulatory filings and the advancement of
our product candidates through preclinical studies and clinical trials; and (vii) facilities and other allocated expenses, which
include direct and allocated expenses for rent, facility maintenance, as well as laboratory and other supplies. All research and
development costs are expensed as incurred.
Conducting a significant amount of development
is central to our business model. Product candidates in later-stage clinical development generally have higher development costs
than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials.
We plan to increase our research and development expenses for the foreseeable future in order to advance the development of NFC-1,
and to advance our earlier-stage research and development projects.
The process of conducting pre-clinical studies
and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product
candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s
early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of
these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development
process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates
or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development
timelines, probability of success and development costs vary widely. We are concurrently focusing on advancing the development
of NFC-1, and advancing our earlier-stage research and development projects, including a second-generation TARGT system and the
application of TARGT in the central nervous system (“CNS”).
Research and development expenses are shown
net of participation by third parties.
General and Administrative Expense
General and administrative expense consists
primarily of salaries and other related costs, including stock-based compensation expense, for persons serving as our directors
and in our executive, finance and accounting functions. Other general and administrative expense includes facility-related costs
not otherwise included in research and development expense, costs associated with industry and trade shows, and professional fees
for legal services and accounting services. We expect that our general and administrative expenses will increase as we add personnel.
Financial Expense and Income
Financial expense consists primarily of
warrant valuations and foreign currency exchange differences.
Financial income consists primarily of warrant
valuations.
Results of Operations for the Three Months Ended March 31,
2016 and 2015
Research and Development Expenses
Research and development expenses, both
gross and net, for the three months ended March 31, 2016 were $6.95 million, increasing from $3.90 million for the same period
in 2015 mainly due to increased sub-contractor costs to advance our clinical activities related to the NFC-1 program and the CHOP
collaboration.
General and Administrative Expenses
General and administrative expenses for
the three months ended March 31, 2016 were $4.19 million, increasing from $3.95 million for the same period in 2015 primarily due
to severance benefits recorded upon the termination of an officer of the Company, offset in part by a decrease in stock-based compensation
expenses related to options granted to directors.
Financial Income and Expenses
Financial expenses for the three months
ended March 31, 2016 were de minimis, decreasing from $1.08 million for the same period in 2015. This decrease was mainly due to
all such warrants being exercised in 2015, thus eliminating the need for such valuation in 2016.
Financial
income for the three months ended March 31, 2016 and 2015 was de minimis
.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through a combination of equity issues, debt issues and grants from the Israeli Office of the Chief Scientist (OCS) and other third
parties.
We received $13.57 million from inception
through March 31, 2016 from the OCS in development grants, of which nil was received during the three months ended March 31, 2016.
In October 2015, we completed a registered
public offering of 7,078,250 shares of common stock, including 923,250 shares sold pursuant to the full exercise of the underwriters’
over-allotment option, at a price to the public of $6.50 per share. The net proceeds from this offering to us were approximately
$42.88 million, after deducting underwriting discounts and commissions and offering expenses payable by us.
Cash Flows
We had cash and cash equivalents of $43.89
million at March 31, 2016 and $53.06 million at December 31, 2015. The decrease in our cash balance during the three months ended
March 31, 2016 was primarily the result of operating activities during the period.
Net cash used in operating activities of
$9.11 million for the three months ended March 31, 2016 and $8.14 million for the three months ended March 31, 2015 primarily reflected
our cash expenses for our operations.
Our cash used in investing activities relates
mainly to our purchases of property and equipment.
No cash was provided by financing activities
during the three months ended March 31, 2016 and $0.03 million was provided during the three months ended March 31, 2015, as a
result of the exercise of options and warrants.
Funding Requirements
Our future capital requirements will depend
on a number of factors, including our success in targeting rare and orphan disease candidates, the timing and outcome of clinical
trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent
claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive
products, the availability of financing, and our success in developing markets for our product candidates.
Without taking into account any revenue
we may receive as a result of licensing or other commercialization agreements, we believe that cash on hand, including the net
proceeds we received from our public offering of common stock in the fourth quarter of 2015, will be sufficient to enable us to
fund our operating expenses and capital expenditure requirements at least through the end of the third quarter of 2017. We have
based this estimate on assumptions that may prove to be wrong and we could use our available resources sooner than we currently
expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates,
we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated
clinical trials.
We do not anticipate that we will generate
revenue from the sale of products for several years or more given the uncertainty of drug development. In the absence of additional
funding or adequate funding from commercialization agreements, we expect our continuing operating losses to result in decreases
in our cash balances. Absent significant corporate collaboration and licensing arrangements, we will need to finance our future
cash needs through public or private equity offerings or debt financings. We do not currently have any commitments for future external
funding. We may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose
to expand our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds
even before we need them if the conditions for raising capital are favorable. We may seek to encourage holders of our warrants
to exercise, sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt
securities, if convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased
fixed obligations and could also result in covenants that would restrict our operations.
Our plans include seeking additional investments
and commercial agreements to continue our operations. However, there is no assurance that we will be successful in our efforts
to raise the necessary capital and/or reach such commercial agreements to continue our planned research and development activities.
Critical Accounting Policies
Our management’s discussion and analysis
of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate
these estimates and judgments, including those described below. We base our estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
and experiences may differ materially from these estimates.
While our significant accounting policies
are more fully described in Note 2 to our financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe
that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial
results and affect the more significant judgments and estimates that we use in the preparation of our financial statements.
Stock-Based Compensation
We account for stock options according to
the Accounting Standards Codification No. 718 (ASC 718) “Compensation – Stock Compensation.” Under ASC 718, stock-based
compensation cost is measured at grant date, based on the estimated fair value of the award, and is recognized as an expense over
the employee’s requisite service period on a straight-line basis.
We account for stock options granted to
non-employees on a fair value basis using an option pricing method in accordance with ASC 718. The initial non-cash charge to operations
for non-employee options with vesting are revalued at the end of each reporting period based upon the change in the fair value
of the options and amortized to consulting expense over the related vesting period.
For the purpose of valuing options and warrants
granted to our employees, non-employees and directors and officers during the three months ended March 31, 2016 and 2015, we used
the Binomial options pricing model. To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect
at the time of grant with a term consistent with the expected term of our awards. We estimated the expected life of the options
granted based on anticipated exercises in the future periods assuming the success of our business model as currently forecast.
The expected dividend yield reflects our current and expected future policy for dividends on our common stock. The expected stock
price volatility for our stock options was calculated by examining historical volatilities for publicly traded industry peers as
we do not have sufficient trading history for our common stock. We will continue to analyze the expected stock price volatility
and expected term assumptions as more historical data for our common stock becomes available. We currently estimate that we will
experience 8% forfeitures for those options currently outstanding.
Off-Balance Sheet Arrangements
There have been no material changes to the
discussion of off-balance sheet arrangements included in our Annual Report on Form 10-K for the year ended December 31, 2015.