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, or the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or 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, 2016, 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 identifying the genetic drivers of disease and applying this understanding to the pursuit of differentiated
novel therapies for pediatric onset, life-altering diseases, including rare and orphan diseases. We look to find treatments for
genetically defined diseases for which there are limited therapeutic options currently available, with a primary focus on pediatric
patients. This strategy begins with identifying and genetically validating a therapeutic target and using genomics to guide product
development. The strategy also involves identifying and acquiring otherwise abandoned or overlooked drug candidates and matching
targets and mechanisms of action to novel genetic discoveries.
We have partnered with the Center for Applied
Genomics, or CAG, at The Children’s Hospital of Philadelphia, or CHOP, to implement a genomic medicine driven approach to
drug development. CAG’s assets include a fully automated biorepository containing specimens from more than 75,000 pediatric
patients and 150,000 relatives of those patients. 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 that is linked to the genomics
database and biorepository. The patients in the database have consented to 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 pediatric populations of specific diseases, we can minimize the confounding environmental
factors seen in older patients. In addition, the availability of robust genetic biomarkers allows us to design trials that focus
on a highly-enriched patient population that we believe is more likely to respond to targeted therapies and further enhance the
likelihood of clinical and regulatory success. We believe this will allow us to implement more efficient and shorter clinical development
programs, that will lead to higher value medicines that can address critical needs in patients suffering from rare and orphan diseases.
AEVI-001 (mGluR+ ADHD and 22q Deletion Syndrome)
Our lead program, AEVI-001, is an oral,
non-stimulant glutamatergic neuromodulator which completed a Phase 2/3 trial (SAGA) in adolescent Attention Deficit Hyperactivity
Disorder, ADHD, patients with specific mutations in their mGluR gene network, which we refer to as mGluR+ ADHD, in the first quarter
of 2017. Although AEVI-001 did not meet the primary endpoint of reduction on the ADHD rating scale (ADHD-RS) compared to placebo,
in the SAGA trial, the drug did demonstrate statistically significant and clinically meaningful improvement compared to placebo
in a pre-specified responder analysis of ADHD-RS improvement of 30% or more [ADHD-RS reduction of 17.6, p < .005]. In a second
pre-specified responder analysis of Clinical Global Impression of Improvement scale (CGI-I), a key secondary endpoint, AEVI-001
demonstrated a statistically significant and clinically meaningful improvement compared to placebo [57% of patients treated with
AEVI-001 achieved a score of much improved or very much improved compared to 33% on placebo, p=0.0155]. Additionally, the safety
analysis demonstrated that AEVI-001 was well tolerated at all doses, and the majority of adverse events were generally mild to
moderate in severity. There were no serious adverse events.
Subsequent analysis of responder data from
a subset of genomically identified patients in the SAGA trial was since identified nine genes that appear to be predictive of clinically
meaningful and statistically significant response on the ADHD-RS scales and CGI-I scales. These genes include certain glutamate
metabotropic receptors and neurodevelopmental genes that are found in approximately 10% of pediatric ADHD patients.
One of the neurodevelopmental genes, contactin-4
(CNTN4), previously identified as being important in Autism Spectrum Disorder (ASD) representing approximately 5% of the overall
pediatric ADHD patient population. The CNTN4 mutation phenotype is relatively severe, with an increased prevalence of emotional
dysregulation, which includes issues related to anger control, risk taking, and inappropriate movements and sounds. All (100%)
of the CNTN4 mutation positive patients on treatment (n=6) had clinically meaningful and statistically significant response to
therapy with AEVI-001 [ADHD-RS reduction of 20.8, p=0.03].
Importantly, these results clarify a path
forward for the continued development of AEVI-001 in ADHD, as well as in other potential neurodevelopmental disorders, including
but not limited to ASD and Pediatric Generalized Anxiety Disorder. We have initiated a Phase 2 trial in CNTN4 mutation positive
ADHD (“CNTN4+ ADHD”) (PART A) to confirm genetic responders to AEVI-001. Patient screening began in the third quarter
of 2017 and data is expected by mid-2018. We also intend to initiate work on CNTN4+ in ASD to better define the patient phenotype
and design a proof-of-concept study to begin in H1 2018.
We have completed work on a signal-finding
trial for the treatment of the psychiatric symptoms of 22q Deletion Syndrome (22q DS). Enrolling patients into the signal-finding
study was challenging, with only two patients enrolled by the time the study ended. Due to the limited enrollment, it is not feasible
to meaningfully interpret the resulting data. 22q DS is an orphan, severe autism spectrum disorder with significant co-morbidities.
The disease has a prevalence of between 1:2000-1:4000, roughly equivalent with the more recognized Down’s Syndrome.
AEVI-002 (Anti-LIGHT Monoclonal Antibody)
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a first-in-class anti-LIGHT monoclonal antibody, or the
Antibody, being developed for use in Severe Pediatric Onset Crohn’s disease which has a more aggressive phenotype at younger
ages. The genomic rationale for the use of the Antibody in Crohn’s disease was validated by CAG research showing the association
to a loss of function mutation in decoy receptor 3 (DcR3). The estimated prevalence of the mutation is estimated at 10-15% of pediatric
onset Crohn’s disease cases.
In June 2016, we entered into a Clinical
Development and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, pursuant to
which we acquired certain rights with respect to the development and potential commercialization of the Antibody. Under the Development
and Option Agreement, we received an exclusive option for exclusive rights to develop products containing the Antibody, or an Antibody
Licensed Product, exclusive rights to commercialize Antibody Licensed Product in various countries and to conduct various development
activities with respect to the Antibody Licensed Product, including the conduct of the Study. The terms of the Development and
Option Agreement with KHK are more fully described under the section entitled “Licenses” in Part I, Item 1 of our Annual
Report on Form 10-K for the year ended December 31, 2016.
An 8-week Phase Ib proof-of-concept study
has been initiated at CHOP, with the goal of enrolling up to 12 patients with a Pediatric Onset Crohn’s disease diagnosis
that are refractory to treatment with TNF-α inhibitors, with or without a DcR3 mutation. Active recruitment for the trial
is underway. The endpoints of the trial will include endoscopic evaluation, Crohn’s Disease Activity Index ratings and safety.
Initial data from the proof-of-concept study is expected by mid-2018, at which point we will make a determination on our option
to license exclusive rights to the Antibody for further development. The identification and recruitment of patients into the proof-of-concept
study has been challenging. The ability to produce initial data by mid-2018 is highly dependent on timely recruiting; thus, continued
difficulties in recruitment could cause a delay in the delivery of initial data for the program. In an effort to address the recruitment
challenges, we are currently initiating three additional trial sites for the program.
Recent Developments
Special Stockholder Meeting
On October 17, 2017, we held our previously
announced special meeting of stockholders (the “Special Meeting”). At the Special Meeting, our stockholders of record
as of September 5, 2017, voted to approve (i) the issuance by us of shares of our common stock, $0.0001 par value per share
(the “Common Stock”), accompanying warrants to purchase shares of Common Stock (the “Warrants”) and the
shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”), pursuant to and in accordance
with the terms of the private placement financing transaction contemplated by a securities purchase agreement, dated August 9,
2017 (Proposal No. 1), (ii) an amendment to our Amended and Restated Certificate of Incorporation to increase the total number
of authorized shares of Common Stock from 100,000,000 shares to 200,000,000 shares (Proposal No. 2) and (iii) to adjourn the Special
Meeting, if necessary, to solicit additional proxies, in the event that there were not sufficient votes at the time of the Special
Meeting to approve Proposal No. 1 or Proposal No. 2.
PIPE Offering
At the Special Meeting, prior to the consummation
of the Offering (as defined below), we obtained stockholder approval for the Offering (as outlined above in Proposal No. 1), pursuant
to the requirements of Nasdaq Listing Rule 5635.
On October 17, 2017, we sold an aggregate
of 22,222,222 shares (the “Shares”) of our Common Stock, and Warrants exercisable for up to an aggregate of 3,953,904 shares
of Common Stock at a purchase price of $1.26 per share of Common Stock and accompanying Warrants (the “Offering”) to
the Children’s Hospital of Philadelphia Foundation (the “CHOP Foundation”) as the lead purchaser and certain
other existing institutional and accredited investors (collectively, the “Purchasers”) pursuant to that certain securities
purchase agreement dated as of August 9, 2017 (the “Purchase Agreement”). Each Purchaser will receive a Warrant exercisable
to purchase a pro rata amount of shares of Common Stock (based on the shares of Common Stock purchased in the Offering) at a purchase
price of $2.84 per share of Common Stock, which will expire five years after the date of issuance. In addition, the CHOP Foundation
has committed to provide up to an additional $5.0 million of equity financing through June 30, 2018, subject to certain terms and
conditions.
The aggregate gross proceeds from the Offering
are approximately $28.0 million and net proceeds after estimated offering expenses of approximately $27.0 million. We intend
to use the net proceeds from the Offering primarily to further the development of our two lead clinical programs, to support our
ongoing collaboration with The Children’s Hospital of Philadelphia, to develop other product candidates and for general corporate
purposes.
In connection with the Offering, we entered
into a registration rights agreement (the “Registration Rights Agreement”) with the Purchasers. Pursuant to the Registration
Rights Agreement, we agreed to prepare and file a registration statement (the “Resale Registration Statement”) with
the SEC within 60 days after the closing of the Offering for purposes of registering the resale of the Shares and the shares
of Common Stock issuable upon exercise of the Warrants. We also agreed to use commercially reasonable efforts to cause the Resale
Registration Statement to be declared effective by the SEC within 90 days after the closing of the Offering (120 days in the event
the Resale Registration Statement is reviewed by the SEC). We also granted the Purchasers certain demand and piggyback registration
rights. We also agreed, among other things, to indemnify the selling holders under the registration statements from certain liabilities
and to pay all fees and expenses incident to our performance of or compliance with the Registration Rights Agreement.
Financial Operations Overview
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 $27.56 million for the nine-month period ended September 30, 2017. As of September 30, 2017, we had
stockholders’ equity of approximately $10.09 million. As of September 30, 2017, we had cash and cash equivalents of $14.96
million. We believe that cash on hand, including the net proceeds from the Offering (as described above), will be sufficient to
enable us to fund our operating expenses and capital expenditure requirements into early 2019. We are unable to predict the extent
of any future losses or when we will become profitable, if at all.
Our management has concluded that as of
the date of this Quarterly Report on Form 10-Q, including the net proceeds that we received from the Offering, we have sufficient
resources to continue as a going concern through at least one year after the issuance of the financial statements contained herein.
Since our inception, we have obtained funds
primarily from the issuance of common stock and convertible securities. If we raise additional funds through strategic collaborations
and alliances or licensing arrangements with third parties, which may include existing collaboration partners, we may have to relinquish
valuable rights to our technologies or product candidates, including AEVI-001 and AEVI-002, or grant licenses on terms that are
not favorable to us. In addition, we anticipate that we will continue to issue equity and/or debt securities as a source of liquidity.
There can be no assurance, however, that we will be successful in obtaining such financing in sufficient amounts, on terms acceptable
to us, or at all. Any future sales of securities to finance operations will dilute existing stockholders’ ownership. We cannot
guarantee when or if we will generate positive cash flow. If we are unable to successfully raise sufficient additional capital,
through future financings or through strategic and collaborative arrangements, we will not have sufficient cash to fund additional
trials and future operations.
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.
Research and development expenses will likely increase as we advance the development of AEVI-001 and AEVI-002 and look 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 the development and potential
commercialization of AEVI-002 under the Development and Option Agreement with KHK, advancing the development of AEVI-001 and advancing
our earlier-stage research and development projects.
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 and professional fees for legal services and accounting services.
Results of Operations for the Nine Months Ended September
30, 2017 and 2016
Research and Development Expenses
Research and development expenses for the
nine months ended September 30, 2017 were $19.91 million decreasing from $23.42 million for the same period in 2016 mainly due
to decreased costs following the closure of our operations in Israel of $2.50 million and decreasing clinical trial/development
activities.
General and Administrative Expenses
General and administrative expenses for
the nine months ended September 30, 2017 were $7.63 million, decreasing from $10.18 million for the same period in 2016 primarily
due to severance benefits recorded in 2016 related to the termination of an officer of $1.0 million and decreased stock-based
compensation expense related to options which have fully vested of $2.0 million.
Financial Income and Expenses
Financial income and expense for the nine
months ended September 30, 2017 and 2016 were de minimis.
Results of Operations for the Three Months Ended September
30, 2017 and 2016
Research and Development Expenses
Research and development expenses for the
three months ended September 30, 2017 were $6.30 million decreasing from $7.73 million for the same period in 2016 mainly related
to decreasing clinical trial/development activities.
General and Administrative Expenses
General and administrative expenses for
the three months ended September 30, 2017 were $2.27 million, decreasing from $3.04 million for the same period in 2016 mainly
due to decreased costs following the closure of our operations in Israel and stock-based compensation expense related to options
which have fully vested.
Financial Income and Expenses
Financial income and expense for the three
months ended September 30, 2017 and 2016 were de minimis.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through issuance of equity.
Cash Flows
We had cash and cash equivalents of $14.96
million at September 30, 2017 and $39.84 million at December 31, 2016. The decrease in our cash balance during the nine months
ended September 30, 2017 was primarily related to funding operations and advancing our AEVI-001 program.
Net cash used in operating activities of
$24.90 million for the nine months ended September 30, 2017 and $25.27 million for the nine months ended September 30, 2016 primarily
reflected our cash expenses for our operations.
Net cash provided by and used in investing
activities for the nine months ended September 30, 2017 and 2016 were de minimis.
Net cash used in financing activities for
the nine months ended September 30, 2017 was de minimis compared to $19.72 million provided by financing activities for the nine
months ended September 30, 2016 related to the completion of a registered public offering of our equity.
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 may enter into, we believe that cash on hand,
including the proceeds from the Offering (as described above), will be sufficient to enable us to fund our operating expenses and
capital expenditure requirements into early 2019. 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. As discussed elsewhere in
this Quarterly Report Form on 10-Q, we recently completed the Offering which provided approximately $27.0 million of net proceeds
to us. In the absence of additional funding or adequate funding from licensing or 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 additional public or private equity offerings or debt financings. Other than
the commitment from the CHOP Foundation, 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. If we are unable to successfully raise sufficient additional capital, through
future financings or through strategic and collaborative arrangements, we will not have sufficient cash to fund additional clinical
trials and future 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.
Our management has concluded that as of
the date of this Quarterly Report on Form 10-Q, including net proceeds that we received from the Offering, we have sufficient resources
to continue as a going concern through at least one year after the issuance of the financial statements contained herein.
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 granted to
employees and directors 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 requisite service period on a straight-line basis.
For the purpose of valuing options granted
to our employees and directors during the nine months ended September 30, 2017 and 2016, 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 contractual life 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 and blending in our historical volatility.
We will continue to analyze the expected stock price volatility as more historical data for our common stock becomes available.
After adoption of ASU 2016-09 in the first quarter of 2017, we recognize forfeitures as they occur.
Off-Balance Sheet Arrangements
CHOP License Agreement and Research Agreement
In November 2014, we entered into a license
agreement, or the License Agreement, and a sponsored research agreement, or the Research Agreement, each with CHOP. Under the terms
of the License Agreement, CHOP granted us (i) an exclusive, sublicensable license to use certain patent rights covering potential
diagnostic and therapeutic targets, (ii) an exclusive, non-sublicensable license to use certain biospecimen and phenotypic data
collected from patients with rare and orphan diseases and their family members or the Biobank. In February 2017, we amended the
License Agreement. The amendment allows us to extend the period of our exclusive commercial access to the Biobank for rolling two
year periods. The cost of each extension is $125,000 per year. In June 2017, we entered into an amendment to the Research Agreement,
which extended the Research Agreement through June 30, 2019, for which additional payments totaling $5.94 million will be due in
2018 and $2.38 million will be due in 2019. The amendment also allows us to extend the Research Agreement for rolling two year
periods in connection with the Company extending its exclusive commercial access to the Biobank under the License Agreement.