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, 2017, 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 primarily 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. Included in the assets at CAG is 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 potential 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 try to 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 clinical development programs
that will lead to medicines that can address critical needs in patients suffering from rare and orphan diseases.
The Children’s Hospital of Philadelphia
Foundation (the “CHOP Foundation”) is our largest stockholder. As of March 31, 2018, the CHOP Foundation beneficially
owned 18,697,233 shares of our common stock. The shares of common stock beneficially owned by the CHOP Foundation represent approximately
30.1% of our outstanding shares of common stock.
AEVI-001 (mGluR+ Genetic Subset Attention Deficit
Hyperactivity Disorder (“ADHD”)
The lead program from our genomic research
collaboration with CHOP is the development candidate AEVI-001, an oral, non-stimulant glutamatergic neuromodulator. Through our
acquisition of neuroFix, LLC, or neuroFix, in September 2015, we acquired the rights to develop AEVI-001 (then known as NFC-1),
as well as the rights to certain data derived from a clinical trial and other studies of AEVI-001.
The selection of AEVI-001 for development
in the mGluR+ ADHD patients was the result of a rational search process conducted to specifically identify therapeutic candidates
with a demonstrated ability to modulate glutamate signaling via the mGluR network. The role of glutamate in ADHD and other central
nervous system (“CNS”) disorders is supported by recent neuroimaging studies that suggest glutamate levels are abnormal
in children with ADHD. These abnormalities appear to be concentrated in the anterior singular cortex region of the brain, as evidenced
by volumetric and functional magnetic resonance imagery studies, as well as targeted studies of magnetic resonance spectroscopy.
Additional supportive evidence for targeting glutamate modulation is provided by genetic studies that have identified mutations
in glutamatergic genes that are enriched in children with ADHD.
Our ADHD Opportunity
We are developing AEVI-001 to treat a sub-population
of ADHD patients who have genetic mutations that disrupt the mGluR network, resulting in glutamate imbalance. ADHD is one of the
most common childhood neurodevelopmental disorders. In the United States, the Centers for Disease Control estimates that 6.4 million
children 4-17 years of age (11%) have been diagnosed with ADHD. It is usually first diagnosed in childhood and often lasts into
adulthood. Approximately 22% of ADHD patients aged 6-17 years are mGluR mutation positive, thereby representing approximately 1.5
million pediatric patients in the United States, and assuming a similar prevalence rate in adults, potentially representing 2.5
million adult patients in the United States.
ADHD is defined as a persistent pattern
of inattention and/or hyperactivity-impulsivity that interferes with functioning or development. ADHD can cause significant impairment
in childhood and throughout the lifespan, as well as increased mortality and psychosocial adversity. There is no definitive management
for ADHD; current management frequently includes a combination of educational support, behavioral interventions, and pharmacotherapy.
Current standard of care is the stimulant class of medications including immediate- and extended-release methylphenidate and amphetamine;
these products represent 90% of sales in the United States. In 2016, ADHD pharmaceutical product sales in the United States were
approximately $11 billion, and grew at a compounded annual growth rate of approximately 2% from 2012 to 2016. However, while conferring
great benefit for many individuals, currently available ADHD medications also have significant adverse effects including decreased
appetite, weight loss, and insomnia.
Prevalence of mGluR Network Mutations
To examine the prevalence of mGluR network
mutations in the broader pediatric and adolescent ADHD populations, we conducted a non-interventional phenotype/genotype study
at 32 sites across the United States. The study genotyped 1,876 ADHD patients aged 6-17 years, with 420
children and adolescents being mGluR+ (22.4%). A higher prevalence (75/292, 26%) was seen in patients aged 6-12 years than patients
aged 13-17 years (344/1584, 21%). The data also showed that patients with the mGluR mutations had statistically significantly higher
prevalence of symptoms associated with inappropriate movements, disruptive behavior, and anger control.
mGluR Network Mutations Highly Predictive of ADHD
A study identified 3,445 ADHD patients from
the CHOP Psychiatry and Behavioral Sciences Clinics, who had previously been genotyped, to classify the prevalence of copy number
variation mGluR+ mutations and the proportion of those patients who had already been diagnosed with ADHD. The research demonstrated
an association between mutations in the mGluR pathway and ADHD in pediatric patients who possess these mutations. The study also
demonstrated the highly predictive capabilities of the genetic biomarker, as demonstrated by the fact that 98% of the patients
with the identified mGluR network mutations had a positive diagnosis of ADHD (the study was conducted on a blinded basis). We believe
the genomic validation for AEVI-001 could address a key inefficiency in the current ADHD diagnosis and treatment paradigm and may
potentially lead to improved safety and ultimately a personalized approach to treatment.
Development of AEVI-001 in mGluR+ Genetic Subset
ADHD
AEVI-001 completed a Phase 2/3 trial (which
we refer to as the SAGA trial) in adolescent 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 improvement in ADHD-RS scores of 30% or more from baseline
[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 identified nine genes (genetic subset) 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), has been previously identified as being important in Autism Spectrum Disorder (ASD) and represents 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 of the CNTN4 mutation positive (CNTN4+) patients on treatment (n=6, 100%) 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 potentially in other neurodevelopmental disorders, including
but not limited to ASD and Pediatric Generalized Anxiety Disorder. We have initiated a Phase 2 trial in the mGluR mutation positive
genetic subset ADHD (“mGluR+ Genetic Subset ADHD”) to confirm genetic responders to AEVI-001. Patient screening began
in the third quarter of 2017 and data is expected by mid-2018.
In the United States, mGluR+ Genetic Subset
ADHD represents approximately 10% of pediatric ADHD patients, estimated at 600,000 pediatric patients and, assuming a similar prevalence
rate in adults, 1.5 million adult patients. Based on pricing assumptions of currently available ADHD therapies, as well as established
compliance and adherence rates, this equates to a potential $2 billion to $3 billion market opportunity for AEVI-001.
Diagnostic Development in ADHD
As part of our precision medicine strategy,
Aevi is looking to develop and commercialize novel diagnostic tests to support therapies in development. For AEVI-001, Aevi is
developing a stand-alone diagnostic to be used as an aid in the diagnosis of ADHD in patients aged 6-17, based on the discovery
that mutations in the mGluR network are highly associated with ADHD. Aevi has engaged in discussions with the US FDA on seeking
a path to approval for the diagnostic test, although there is no guarantee that the test will be approved. In addition to potentially
providing valuable information for the diagnosis of pediatric patients with mGluR+ ADHD, the diagnostic could support pre-identification
of patients for future clinical trials in ADHD.
Previous Study of AEVI-001
The originator company for AEVI-001, Nippon Shinyaku, conducted
research showing the ability of AEVI-001 to cross the blood-brain barrier and ameliorate cognitive impairment in animal behavioral
models, at concentrations achievable in humans. AEVI-001 was shown to have a compelling pharmacokinetic and metabolic profile and
to be a pan-selective activator and modulator of multiple mGluRs. Nippon Shinyaku studied AEVI-001 in vascular dementia, where
approximately 1,000 adult patients were exposed to AEVI-001 for periods up to 12 months, in a development program that progressed
to Phase 3. AEVI-001 was shown to be well tolerated with no treatment-emergent serious adverse events in this patient population,
but was not effective for the treatment of vascular dementia.
The GREAT
Study
A Phase Ib proof-of-concept trial (which
we refer to as the GREAT trial) of AEVI-001 in adolescent patients with ADHD was completed in 2015. The study enrolled 30 adolescents
aged 12-17 with severe and genetically confirmed mGluR+ ADHD. Of the 30 enrolled patients, 17 had Tier 1 mGluR mutations, which
are mutations in genes in the mGluR receptors or in genes that directly influence mGluR signaling. Seven patients had Tier 2 mutations,
which are mutations in genes that encode proteins that influence mGluR. The remaining six patients had more distal Tier 3 mutations,
which are mutations in genes that encode proteins that influence Tier 1 and Tier 2 genes.
Part 1 of the study measured safety and
the pharmacokinetic profile of single ascending doses of 50-800mg of AEVI- 001. Part 2 of the study was single-blinded to patients
and caregivers. Dosing was one week with placebo followed by four weeks of ascending doses from 50mg BID to 400mg BID of AEVI-001.
The study used the Clinical Global Impression of Symptom Improvement (CGI-I) and the Vanderbilt Parent Rating Score (similar to
the ADHD Rating Scale) to assess efficacy. Despite not being powered to show efficacy, the study demonstrated dose and duration-dependent
improvements and response rates.
The treatment effect was more robust over
time and at higher doses. AEVI-001 showed weekly improvements in mean CGI-I for all patients from 3.79 during week 1 on placebo
(baseline), 3.13 during week 2 (50mg BID), 2.79 during week 3 (100mg BID), 2.79 during week 4 (200mg BID) and 2.21 during week
5 (400mg BID). AEVI-001 likewise showed weekly improvements in mean Vanderbilt scores for all patients from 29.1 during week 1
on placebo (baseline), 26.4 during week 2 (50mg BID), 24.0 during week 3 (100mg BID), 23.3 during week 4 (200mg BID) and 22.5 during
week 5 (400mg BID).
The GREAT study also confirmed the previously
observed pharmacokinetic profile of AEVI-001, showing the therapy to be well tolerated with no treatment-related serious adverse
effects. Following the conclusion of the study, a majority of patients enrolled in an open label long-term safety study. Full data
from the study was presented at the American Academy of Child and Adolescent Psychiatry meeting in October 2015.
Development of AEVI-001 in 22q Deletion Syndrome
(22q DS)
We completed work on a signal-finding trial
for the treatment of the psychiatric symptoms of 22q Deletion Syndrome (22q DS) in 2017. 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. Enrolling patients into the signal-finding study was difficult, with only two patients enrolled
by the time the study ended. Due to the limited enrollment, it was not feasible to meaningfully interpret the resulting data, and
the program was terminated.
Future Development of AEVI-001 in ASD
We are exploring a development opportunity
for AEVI-001 for the treatment of mGluR+ patients with ASD to better define the patient phenotype and intend to initiate work on
a proof-of-concept study to begin in the second half of 2018. In 2012, 1 in 68 children were diagnosed with ASD in the United States,
increasing from 1 in 150 in 2000. There is a high unmet need for pharmaceutical treatments for ASD as currently approved medications
are indicated only for the symptoms of irritability in ASD patients. There are currently limited pharmacotherapy options available
to treat ASD.
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 potential first-in-class anti-LIGHT monoclonal antibody,
or the Antibody, being developed for use in Pediatric Onset Crohn’s disease. Pediatric Onset Crohn’s disease has a
more aggressive phenotype at younger ages. The genomic rationale for the use of anti-LIGHT antibody in Crohn’s disease was
validated by CAG research showing the association to a loss of function mutation in decoy receptor 3 (DcR3).
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 a signal finding study testing the Antibody
in Severe Pediatric Onset Inflammatory Bowel Disease.
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
with most patients being refractory to treatment with TNF-α inhibitors, with or without a DcR3 mutation. 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 year-end 2018, at which point we will make a determination on our option to license exclusive rights to the
Antibody for further development. Active recruitment for the trial is underway, although the identification and recruitment of
patients into the proof-of-concept study has been extremely challenging, and to date no patients have been enrolled. The ability
to produce initial data by year-end 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 working to initiate three additional trial sites for the program.
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 $8.71 million for the three-month period ended March 31, 2018. As of March 31, 2018, we had stockholders’
equity of approximately $22.70 million. As of March 31, 2018, we had cash and cash equivalents of $26.52 million. We believe that
cash on hand will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into the first
quarter of 2019. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related
to research, development of our product candidates and preclinical programs, and our administrative organization. We will require
substantial additional financing to fund our operations and to continue to execute our strategy. These conditions raise substantial
doubt about our ability to continue as a going concern within one year after the date of the filing of this Quarterly Report on
Form 10-Q. We are unable to predict the extent of any future losses or when we will become profitable, if at all.
To alleviate the conditions that raise substantial
doubt about our ability to continue as a going concern, management is exploring various sources of funding such as strategic collaborations,
license arrangements, and issuance of equity and/or debt securities. If we raise additional funds through strategic collaborations
and alliances or licensing agreements 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. To the extent that we raise additional capital through the sale of equity, the ownership interest of our existing
shareholders will be diluted and other preferences may be necessary that adversely affect the rights of existing shareholders.
If none of these alternatives is available, or if available, if we are unable to raise sufficient capital through such transactions,
we will not have sufficient cash resources and liquidity to fund our business operations for at least the next year following the
date of the filing of this Quarterly Report on Form 10-Q. Accordingly, management has concluded that substantial doubt exists with
respect to our ability to continue as a going concern within one year after the date of the filing of this Quarterly Report on
Form 10-Q.
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 Three Months Ended March
31, 2018 and 2017
Research and Development Expenses
Research and development expenses for the
three months ended March 31, 2018 were $6.56 million, decreasing from $7.95 million for the same period in 2017 mainly related
to decreasing clinical trial/development activities.
General and Administrative Expenses
General and administrative expenses for
the three months ended March 31, 2018 were $2.17 million, decreasing from $2.99 million for the same period in 2017 primarily due
to decreased costs following the closure of our operations in Israel.
Financial Income and Expenses
Financial income and expense for the three
months ended March 31, 2018 and 2017 were de minimis.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through issuance of equity and grants from other third parties.
Cash Flows
We had cash and cash equivalents of $26.52
million at March 31, 2018, compared to $33.73 million as of December 31, 2017. The decrease in cash during the three months ended
March 31, 2018 was primarily related to the advancement of our AEVI-001 program.
Net cash used in operating activities of
$7.24 million for the three months ended March 31, 2018 and $10.65 million for the three months ended March 31, 2017 primarily
reflected our cash expenses for our operations.
Net cash provided by and used in investing
activities for the three months ended March 31, 2018 and 2017 were de minimis.
Net cash provided by financing activities
for the three months ended March 31, 2018 and 2017 were de minimis.
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.
We believe that cash on hand will be sufficient
to enable us to fund our operating expenses and capital expenditure requirements into the first quarter 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. 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 in 2018. 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. Concurrent with the filing of this Quarterly Report on Form 10-Q, we intend
to enter into an Equity Distribution Agreement pursuant to which we may from time-to-time issue and sell shares of our common stock
having an aggregate offering price of up to $20,000,000 in an “at the market offering” as defined in Rule 415(a)(4)
promulgated under the Securities Act (the “ATM Facility”). 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.
We will require substantial additional financing
to fund our operations and to continue to execute our strategy. These conditions raise substantial doubt about our ability to continue
as a going concern within one year after the date of the filing of this Quarterly Report on Form 10-Q. We are unable to predict
the extent of any future losses or when we will become profitable, if at all.
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 three months ended March 31, 2018 and 2017, 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.
Development and Option Agreement, with
Kyowa Hakko Kirin Co., Ltd. (KHK)
In June 2016, we entered into the Development
and Option Agreement with KHK pursuant to which we acquired certain rights with respect to the development and potential commercialization
of AEVI-002, the Antibody. If we exercise our option under the Development and Option Agreement, KHK has 60 days to select one
of two development and commercialization structures as follows:
PLAN A: Co-Development/Co-Commercialization
Arrangement
If KHK selects the co-development/co-commercialization
arrangement (Plan A), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products
in the Field in the United States and Canada. We will also be responsible for development and regulatory approval of the first
Antibody Licensed Product in the European Union and then transferring such regulatory approval to KHK or its designee. We will
be responsible for the manufacture of the Antibody Licensed Products for use by the parties in clinical trials as well as for commercialization
in their respective fields and/or territories, with KHK purchasing the Antibody Licensed Products from us.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the co-development/co-commercialization arrangement becoming effective.
We may pay KHK up to an additional $18 million upon the achievement of certain regulatory milestones related to the Antibody Licensed
Products. The parties will share the anticipated costs of development of the first Antibody Licensed Product in the Field in the
United States, Canada and the European Union with us being responsible for any costs in excess of an agreed cap. The parties will
split profits from our sales of Antibody Licensed Products in the United States and Canada equally. KHK will pay us low double-digit
royalties for sales of Antibody Licensed Products outside the United States and Canada and outside the Field in the United States
and Canada.
PLAN B: Licensing Arrangement
If KHK selects the licensing arrangement
(Plan B), we will have the exclusive right to develop, manufacture and commercialize the Antibody Licensed Products in the Field
in the United States, Canada and the European Union. We will be responsible for the manufacture of the Antibody Licensed Products
for use by the parties in clinical trials as well as for commercialization in their respective fields and/or territories.
We will be required to pay KHK an initial
license fee in the low single-digit millions of dollars upon the licensing arrangement becoming effective. We may pay KHK up to
an additional $28 million upon the achievement of certain regulatory milestones related to the Antibody Licensed Products. The
parties will split profits from our sales of Antibody Licensed Products in the United States, Canada and the European Union with
us being entitled to approximately 74% of such profits and KHK being entitled to approximately 26% of such profits. KHK will pay
us low double-digit royalties for sales of Antibody Licensed Products outside the United States, Canada and the European Union
and outside the Field in the United States, Canada and the European Union. We will be responsible for costs of development of Antibody
Licensed Products in the United States, Canada and the European Union. KHK will have the right to purchase the Antibody Licensed
Products from us.
OCS Agreements
Under agreements with the OCS in Israel
regarding research and development projects, our Israeli subsidiary committed to pay royalties to the OCS at rates between 3.5%
and 5% of the income resulting from this research and development, at an amount not to exceed the amount of the grants received
by our subsidiary as participation in the research and development program, plus interest at LIBOR. The obligation to pay these
royalties is contingent on actual income and in the absence of such income no payment is required. As of December 31, 2017, the
principal amount of the aggregate contingent liability amounted to approximately $13.97 million.