Ovid Therapeutics Inc. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

OR

For the transition period from ______________________ to ______________________

Commission File Number: 001-38085

Ovid Therapeutics Inc.

(Exact Name of Registrant as Specified in its Charter)

Registrant’s telephone number, including area code: (646) 661-7661

Securities registered pursuant to Section 12(b) of the Act:

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 every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.

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 November 6, 2019, the registrant had 47,816,434 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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:

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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

OVID THERAPEUTICS INC.

Condensed Consolidated Balance Sheets

See accompanying notes to these unaudited condensed consolidated financial statements

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OVID THERAPEUTICS INC.

Condensed Consolidated Statements of Operations

(unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements

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OVID THERAPEUTICS INC.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements

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OVID THERAPEUTICS INC.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements

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OVID THERAPEUTICS INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to these unaudited condensed consolidated financial statements

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OVID THERAPEUTICS INC.

NOTES TO CONDENSED CONSOLIDATED 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 of 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 is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development and regulatory success, 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.

In October 2019, the Company sold 9,000,000 shares of its common stock and 4,000 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) at a public offering price of $2.50 and $2,500 per share, respectively, for gross proceeds of $32.5 million and estimated net proceeds of $30.5 million after deducting underwriting discounts and commission and other offering expenses payable by the Company (“October Offering”).  In addition, the Company granted the underwriters a 30-day option to purchase an additional 1,350,000 shares of common stock offered in the common stock offering.  On November 5, 2019, the underwriters fully exercised the 30-day option shares at an offering price of $2.50 for gross proceeds of $3.4 million and net proceeds of $3.2 million after deducting underwriting discounts and commission and other offering expenses.

In February 2019, the Company sold 13,993,778 shares of its common stock and 2,500 shares of Series A Preferred Stock at a public offering price of $2.00 and $2,000 per share, respectively, for gross proceeds of $33.0 million and net proceeds of $30.5 million after deducting underwriting discounts and commission and other offering expenses payable by the Company (“February Offering”).

The Company has not generated any revenue since inception. As a result, the Company has incurred recurring losses and requires significant cash resources to execute its business plans. The Company has an accumulated deficit of $196.2 million as of September 30, 2019 and had cash outflows from operating activities of $34.2 million for the nine months ended September 30, 2019.

The Company has incurred operating losses since inception and 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 through either equity offerings, debt financings, collaborations, strategic alliances, or licensing agreements or a combination of any such transactions. Management believes that the Company’s existing cash, and cash equivalents as of September 30, 2019, combined with the proceeds from the October Offering, 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.  If the Company is unable to raise capital, it 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 7, 2019. There have been no material changes to the significant accounting policies during the period ended September 30, 2019, except for items mentioned below.

(A) Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet at September 30, 2019, the condensed statements of operations, comprehensive loss and stockholders’ equity for the three and nine months ended September 30, 2019 and 2018, and the condensed statements of cash flows for the nine months ended September 30, 2019 and 2018 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

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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 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 nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2019 or for any other future annual or interim period. The balance sheet as of December 31, 2018 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 as of and for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

(B) Basis of Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in conformity with GAAP and include the accounts of Ovid Therapeutics Inc. and its wholly owned subsidiary, Ovid Therapeutics Hong Kong Limited.  All intercompany transactions and balances have been eliminated in consolidation.

(C) Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ materially from those estimates.

(D) 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:

The carrying amounts reported in the balance sheets for cash and cash equivalents, related party receivables, other current assets, accounts payable, accrued expenses, and current related party payables approximate their fair value based on the short-term maturity of these instruments.

(E) Recent Accounting Pronouncements

Recent accounting standards which have been adopted

On June 20, 2018, the FASB issued Accounting Standards Update (“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 Accounting Standards Codification (“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, which is the same as the measurement date for employee equity awards and for performance-based awards, an entity is now required to recognize any cost on the basis of the probable outcome of the performance conditions using the

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grant-date fair value of the award. The adoption of ASU 2018-07 on January 1, 2019 did not have a material impact on the Company’s 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 was applicable to the Company beginning on January 1, 2019.  The adoption of ASU 2017-08 did not have a material impact on the Company’s 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 adoption of ASU 2016-02 did not have a material impact on the Company’s financial statements.

New accounting standards which have not yet been adopted

On August 29, 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40), - which amends ASC 350-40 to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement (“CCA”) that is a service contract. ASU No. 2018-15 aligns the accounting for costs incurred to implement a CCA that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract. According to the standard the balance sheet line item for the presentation of capitalized implementation costs should be the same as that for the prepayment of fees related to the hosting arrangement and the manner in which an entity classifies the cash flows related to capitalized implementation costs should be the same as that in which it classifies the cash flows for the fees related to the hosting arrangement. ASU 2018-15 is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods therein. Entities are permitted to apply either a retrospective or prospective transition approach to adopt the guidance. When prospective transition is chosen, entities must apply the transition requirements to any eligible costs incurred after adoption. The Company is in the process of assessing the impact of this standard on its financial statements.

On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.  This standard changes the fair value measurement disclosure requirements of ASC 820. The new standard eliminates certain disclosures, adds new disclosures with regard to unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, as well as modifies certain disclosure. ASU 2018-13 is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted. The ASU requires application of the prospective method of transition for the aforementioned new disclosure requirements and for modified disclosure with regard to measurement uncertainty while all other amendments made by the ASU must be applied retrospectively to all periods presented. 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 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 does not expect this standard to have a material impact on its financial statements due to the immaterial level of its unrealized losses on available-for-sale securities and its immaterial level of loans and receivables.

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NOTE 3 – 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 September 30, 2019 and December 31, 2018:

As of September 30, 2019 and December 31, 2018, the aggregate fair value of securities that were in an unrealized loss position for less than 12 months was zero and $5.0 million, respectively. The Company did not hold any securities in an unrealized loss position for more than 12 months as of September 30, 2019.

NOTE 4 – PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS

Property and equipment is summarized as follows:

Depreciation expense was $28,000 and $26,000 for the nine months ended September 30, 2019 and 2018, respectively.  Depreciation expense was $10,000 and $7,000 for the three months ended September 30, 2019 and 2018, respectively.

Intangible assets, net of accumulated amortization, were $351,000 and $392,000 as of September 30, 2019 and December 31, 2018, respectively, and are included in other assets. Amortization expense was $173,000 and $61,000 for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense was $46,000 and $25,000 for the three months ended September 30, 2019 and 2018, respectively.

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NOTE 5 – ACCRUED EXPENSES

Accrued expenses consist of the following:

NOTE 6 – STOCKHOLDERS’ EQUITY AND PREFERRED STOCK

The Company’s capital structure consists of common stock and preferred stock. Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue up to 125,000,000 shares of common stock and 10,000,000 shares of preferred stock.

The holders of common stock are entitled to one vote for each share held. The holders of common stock have no preemptive or other subscription rights, and there are no redemption or sinking fund provisions with respect to such shares. The common stock is subordinate to all series of Preferred Stock with respect to dividend rights and rights upon liquidation, winding up and dissolution of the Company. The holders of common stock are entitled to liquidation proceeds after all liquidation preferences for the Preferred Stock are satisfied.

In September 2019, the Company entered into an exchange agreement with entities affiliated with Biotechnology Value Fund, L.P., pursuant to which the Company exchanged an aggregate of 1,262,000 shares of the Company’s common stock, owned by the Exchanging Stockholders for an aggregate of 1,262 shares of the Company’s Series A Convertible Preferred Stock. The Exchange Shares were issued without registration under the Securities Act of 1933, as amended, in reliance on the exemption from registration contained in Section 3(a)(9) of the Securities Act.  None of these expenses consisted of payments made by the Company to directors, officers or persons owning 10% or more of the Company’s common stock or to their associates, or to the Company’s affiliates.

In February 2019, the Company sold 13,993,778 shares of its common stock and 2,500 shares of Series A Preferred Stock at a public offering price of $2.00 and $2,000 per share, respectively, for gross proceeds of $33.0 million and net proceeds of $30.5 million, after deducting underwriting discounts and commission and other offering expenses payable by the Company. None of these expenses consisted of payments made by the Company to directors, officers or persons owning 10% or more of the Company’s common stock or to their associates, or to the Company’s affiliates. Each share of non-voting Series A Preferred Stock is convertible into 1,000 shares of common stock, provided that conversion will be prohibited, subject to certain exceptions, if, as a result, the holder and its affiliates would beneficially own more than 9.99% or 14.99%, at the holder’s election, of the common stock then outstanding.

Dividends

No dividends on the common stock shall be declared and paid unless dividends on the Preferred Stock have been declared and paid. Through September 30, 2019, the Company has not declared any dividends.

NOTE 7 – STOCK-BASED COMPENSATION

On August 29, 2014, the Company’s Board of Directors adopted and approved the 2014 Equity Incentive Plan (the “2014 Plan”), which authorized the Company to grant shares of common stock in the form of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock and restricted stock units.

The Company's Board of Directors adopted and the Company's stockholders approved the 2017 equity incentive plan (“2017 Plan”), which became effective immediately 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. On January 1, 2019, an additional 1,232,705

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shares were reserved for issuance under the 2017 Plan. As of September 30, 2019, there were 3,726,302 shares of the Company’s common stock reserved and available 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 Company’s initial public offering 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 months ended September 30, 2019 and 2018, 35,416 and 22,142 shares were purchased under the ESPP and the Company recorded expense of $35,000 and $30,000, respectively. During the nine months ended September 30, 2019 and 2018, 80,542 and 32,114 shares were purchased under the ESPP and the Company recorded expense of $100,000 and $77,000, 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 common 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, 2019, an additional 246,541 shares were reserved for issuance under the 2017 ESPP. As of September 30, 2019, there were 659,016 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 generally 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 terms, with vesting commencing on the date the performance condition is achieved and expire in accordance with the specific terms of the agreement. At September 30, 2019, there were 665,375 performance-based options outstanding and unvested that include options to be granted upon the achievement of certain research and development milestones.  

The fair value of options granted during the nine months ended September 30, 2019 and 2018 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. 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 No. 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 175,000 and zero stock options to nonemployee consultants for services rendered during the nine months ended September 30, 2019 and 2018, respectively. There were 152,073, and 12,356 unvested nonemployee options outstanding as of September 30, 2019, and 2018, respectively. Total expense recognized related to the nonemployee stock options for the three months ended September 30, 2019 and 2018 was $35,000 and $40,730, respectively. Total expense recognized related to the nonemployee stock options for the nine months ended September 30, 2019 and 2018 was $17,000 and $133,000, respectively. Total unrecognized compensation expenses related to the nonemployee stock options was $339,475 as of September 30, 2019. During the nine months ended September 30, 2019 and 2018, the Company recognized no expense for nonemployee performance-based option awards.

The Company granted 1,781,115 and 1,352,578 stock options to employees during the nine months ended September 30, 2019 and 2018 respectively. There were 2,615,208 and 2,493,308 unvested employee options outstanding as of September 30, 2019, and 2018, respectively. Total expense recognized related to the employee stock options for the three months ended September 30, 2019 and 2018 was $1.1 million and $1.6 million, respectively.  Total expense recognized related to the employee stock options for the nine months ended September 30, 2019 and 2018 was $4.0 million and $5.1 million, respectively.  Total unrecognized compensation expense related to employee stock options was $6.3 million as of September 30, 2019. During the nine months ended September 30, 2019 and 2018, the Company recognized $9,000 and zero, respectively in expenses for employee performance-based option awards.

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

The fair value of employee options granted during the three and nine months ended September 30, 2019 and 2018 was estimated by utilizing the following assumptions:

The fair value of nonemployee options granted and remeasured during the three and the nine months ended September 30, 2019 and 2018 was estimated by utilizing the following assumptions:

The following table summarizes the number of options outstanding and the weighted average exercise price:

At September 30, 2019 there was approximately $6.6 million of unamortized share–based compensation expense, which is expected to be recognized over a remaining average vesting period of 2.01 years.

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NOTE 8 – INCOME TAXES

The Company did not record a federal or state income tax provision for the periods presented as it has incurred net losses since inception. In addition, the net deferred tax assets generated 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 nine months ended September 30, 2018, the Company recorded a $186,000 refundable credit towards future New York City tax expense as a reduction to operating expenses. The credit is for qualified emerging technology companies focused on biotechnology located in New York City.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

License Agreements

On March 26, 2015, the Company entered into an exclusive agreement with H. Lundbeck A/S (“Lundbeck”) for a worldwide perpetual licensing right related the research, development and commercialization of OV101 (the “Lundbeck Agreement”). On May 10, 2019, the parties agreed to amend the Lundbeck License.

Pursuant to the amended Lundbeck license agreement, the Company agreed to make milestone payments totaling up to $189.0 million upon the achievement of certain development, regulatory and sales milestones. As amended, the first payment of $1.0 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 called for the Company to pay royalties for an initial term based on a low double-digit percentage of sales. The Lundbeck Amendment reduced such royalties from a low-double digit percentage of sales to single-digit and a low-double digit percentage of sales. In addition, the Lundbeck Agreement, as amended, removed the right of first negotiation that was granted by the Company to Lundbeck.  Finally, the Lundbeck Agreement, as amended, removed the distinction for countries in the Asian Major Markets, now the Asian Major Markets will be treated the same as the rest of the world and the Company agreed to add certain regulatory milestones in the Asian Major Markets and such additional regulatory milestones are included in the total milestone payments of $189.0 million reported above.

In December 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 (the “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.  

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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.

As of September 30, 2019, none of these contingent payments were considered probable.

Contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. The Company is not currently involved in any legal matters arising in the normal course of business.

Under the terms of their respective employment agreements, certain of our executive officers are 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 executive officer’s delivery to the Company of a satisfactory release of claims, and subject to the executive officer’s compliance with non-competition and non-solicitation restrictive covenants.

Pursuant to the Northwestern agreement, Northwestern granted the Company an exclusive license to certain patent rights and know-how, including a patent application covering a specified composition of matter (the “Patent Application”).  Northwestern previously entered into a license agreement with Catalyst Pharmaceuticals, Inc. (“Catalyst”), dated August 27, 2009, pursuant to which Northwestern granted Catalyst rights under certain intellectual property rights covering a different composition of matter (the “Catalyst License”).  In addition, the Company is a party to a confidential disclosure agreement with Catalyst, dated September 16, 2016 (the “CDA”). On June 25, 2018, Catalyst sent a letter to Northwestern and the Company alleging, among other things, that Northwestern breached the Catalyst License by licensing the Patent Application to the Company. Catalyst’s letter also asserted that the Company had breached its obligations under the CDA by allegedly failing to disclose that the Company had a license to the Patent Application, and that a further breach would occur if the Company makes any use of information obtained under the CDA in connection with its development program arising from the rights granted under the license agreement.  Catalyst has asserted that the combined conduct of Northwestern and the Company gives rise to various claims, including breach of contract, fraud, and tortious interference. The Company believes that Catalyst’s claims are without merit and responded by letter dated June 28, 2018, which denies any and all liability to Catalyst, and further denies that Catalyst has been damaged in any way. On May 20, 2019, the Company entered into a Settlement Agreement with Catalyst, pursuant to which Catalyst released the Company from any and all claims, known or unknown, arising from or related to the dispute between Catalyst and Northwestern, the License Agreement, and/or the claims that Catalyst asserted against the Company in the June 25, 2018 letter.  Under the settlement the Company retains all rights and privileges previously granted to the Company under the Northwestern Licensing Agreement.

NOTE 10 – COLLABORATION AGREEMENT

Takeda Collaboration

On January 6, 2017, the Company entered into a license and collaboration with Takeda to jointly develop and commercialize the compound TAK-935, which the Company has licensed from Takeda and now refers to as OV935 (soticlestat), in certain territories. 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 (including preferred stock on an as-converted basis) on the issuance date or (b) $50.0 million divided by the applicable share price. 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.  In the event a payment settled in shares of the Company’s common stock would cause Takeda to own over 19.99% of the Company’s outstanding capital stock or certain other events occur, such payment must be paid in cash.  None of these potential milestone payments mentioned above are deemed probable at September 30, 2019.

During the nine months ended September 30, 2019, the Company recognized a credit in research and development expenses of $3.6 million representing costs to be reimbursed to the Company from Takeda.  During the nine months ended September 30, 2018, the Company recognized a credit of $681,000 in research and development expenses representing expenses reimbursed to the Company from Takeda in respect of this collaboration agreement. During the three months ended September 30, 2019, the Company recognized a credit of $725,000 in research and development expenses representing costs reimbursable to the Company from Takeda. During the three months ended September 30, 2018, the Company recognized a credit of $776,000 research and development expenses representing costs reimbursed to the Company from Takeda.

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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 the Company, and Takeda will grant the Company an exclusive, royalty-bearing license under certain patents and other intellectual property controlled by Takeda to commercialize OV935 and products containing OV935 for the treatment of certain rare neurological disorders.

NOTE 11 – RELATED PARTY TRANSACTIONS

As part of the Company’s collaboration agreement with Takeda the Company recognized a long-term liability representing long-term prepaid expenses to be reimbursed to Takeda.

On March 24, 2019, the Company entered into a separation and consulting agreement with Dr. Matthew During in connection with Dr. During’s resignation as President and Chief Scientific Officer with the Company effective as of April 1, 2019. Pursuant to the separation and consulting agreement, Dr. During agreed to non-solicit and non-compete covenants through such time as he remains a consultant to the Company, as well as a general release of claims in connection therewith. Dr. During agreed to a three-year consulting arrangement, pursuant to which he will be paid, amongst other specific milestone and meeting related fees, $150,000 per year for his role as the Chairman of our Scientific Advisory Board and $150,000 per year for other advisory and consulting services. Further, Dr. During was granted options to acquire 100,000 shares of common stock at an exercise price of $1.76 per share, the fair market value on April 1, 2019, which options shall vest in full upon completion of a specific clinical milestone, subject to Dr. During’s continued service through such vesting date. In the event such option does not vest by December 31, 2020, the stock option will expire. Provided further, in recognition of Dr. During’s service on the Scientific Advisory Board, Dr. During was granted options to acquire 75,000 shares of common stock at an exercise price equal to $1.76 per share, the fair market value on April 1, 2019.

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. Under the terms of the Series A Preferred Stock issued in 2019, Preferred stockholders do not share in losses of the Company and have no obligation to fund losses or transfer assets.  Since there is a loss, diluted EPS should be computed in the same manner as basic EPS and because no potential common shares shall be included in the computation of any diluted per-share amounts when a loss exists, the Series A Preferred Stock should be excluded from the computation of basic and diluted EPS.  There was no Preferred Stock issued or outstanding in 2018.

The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding as they would be anti-dilutive:

NOTE 13 – SUBSEQUENT EVENTS

Public Stock Offering

On October 4, 2019, the Company sold 9,000,000 shares of its common stock and 4,000 shares of Series A Convertible Preferred Stock at a public offering price of $2.50 and $2,500 per share, respectively, for gross proceeds of $32.5 million and estimated net proceeds of $30.5 million after deducting underwriting discounts and commission and other offering expenses payable by the

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Company. None of these expenses consisted of payments made by the Company to directors, officers or persons owning 10% or more of the Company’s common stock or to their associates, or to the Company’s affiliates. Each share of non-voting Series A Preferred Stock is convertible into 1,000 shares of common stock, provided that conversion will be prohibited, subject to certain exceptions, if, as a result, the holder and its affiliates would beneficially own more than 9.99% or 14.99%, at the holder’s election, of the common stock then outstanding.  On November 5, 2019, the underwriters fully exercised the 30-day option shares at an offering price of $2.50 for gross proceeds of $3.4 million and net proceeds of $3.2 million after deducting underwriting discounts and commission and other offering expenses.

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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 consolidated 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, 2018, which was filed with the Securities and Exchange Commission (“SEC”) on March 7, 2019. 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 late-stage clinical 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 and only now is being appreciated 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 also building a deep knowledge of the diseases and the clinically meaningful endpoints required for development of a compound in these rare neurological disorders. We continue to execute on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions. We have developed a robust pipeline of first-in-class and only-in-class clinical assets with an initial focus on neurodevelopmental disorders and developmental and epileptic encephalopathies (“DEE”).

The following table sets forth the status and mechanism of action of our product candidates and key milestones expected within the next 12 months:

Our most advanced candidate is OV101 (gaboxadol). We have successfully completed a Phase 2 trial in adults and adolescents with Angelman syndrome, which we refer to as the STARS clinical trial. As previously announced, the STARS clinical trial achieved its primary endpoint of safety and tolerability and showed a statistically significant improvement in the once-daily OV101 dosing group on the pre-specified physician-rated Clinical Global Impressions-Improvement (“CGI-I”) exploratory endpoint as well as improvements in relevant symptoms such as sleep, motor function and behavior.  Following the STARS study we conducted a post hoc analysis of the STARS data which demonstrated that the study subjects in the once-daily dosing group of OV101 showed (i) improvements on the CGI-I scale increasing over time for the once-daily dosing group versus placebo, and (ii) improvements on the CGI-I scale being more robust in younger patients for the once-daily dosing group.

Following discussion of the STARS clinical trial with the U.S. Food and Drug Administration (“FDA”) and German regulatory authorities, we designed and initiated a pivotal Phase 3 clinical trial in OV101 for Angelman syndrome in June 2019, which we refer

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to as the NEPTUNE clinical trial. NEPTUNE is a 12-week, two-arm, double-blind, placebo-controlled trial with approximately 60 patients aged 4 to 12 years randomized to either once daily, weight-based dose of OV101 or to placebo. A few patients aged 2-3 years will also be enrolled for safety assessments only. The primary endpoint is the change in the overall CGI-I-AS score at 12-weeks versus baseline between the OV101 and placebo groups.  In September 2019, we announced that the first patient had been randomized in NEPTUNE, and we expect to report data from this trial by mid-2020. There are no other drug candidates in clinical development, or drugs approved, for treatment of Angelman syndrome.  

Based on the STARS clinical trial data, we also initiated an open-label extension study (ELARA) which enrolled its first patient in February 2019, and enrollment in this study is ongoing.  In June 2019, the European Commission granted OV101 orphan drug designation for the treatment of Angelman syndrome based on the results of the STARS clinical trial.

We also are currently conducting a Phase 2 trial evaluating OV101 in adolescent and young male adults with Fragile X Syndrome, which we refer to as the ROCKET clinical trial. The primary endpoint of ROCKET 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 efficacy endpoint evaluates changes in behavior during 12 weeks of treatment with OV101 using the Aberrant Behavior Checklist that has been used in previous trials for Fragile X syndrome. We expect to report data from ROCKET in early 2020.

In addition, we are in a license and collaboration with Takeda Pharmaceutical Company Limited (“Takeda”) to jointly develop and commercialize TAK-935, which we have licensed from Takeda and refer to as OV935 (soticlestat). We are initially studying OV935 for those suffering from severe and often intractable forms of DEE, including Dravet syndrome, Lennox-Gastaut syndrome (“LGS”) and CDKL5 Deficiency Disorder and Duplication 15q (Dup15Q) syndrome. Each of these disorders either has limited or no therapeutic options. We completed a Phase 1b/2a clinical trial of OV935 in a heterogeneous group of adults with DEE and announced the results in December 2018. The trial achieved its primary endpoint of safety and tolerability, dose proportional reduction in a potential plasma biomarker called 24HC, and a robust reduction in seizure frequency (61% at day 92) with two study subjects becoming seizure-free at the end of the treatment period.

Following this trial, we reported the initial data from the ENDYMION Phase 2 open-label extension study of OV935 in six study subjects who previously completed our 12-week Phase 1b/2a clinical trial of OV935 in adults with DEE.  The longer-term data from ENDYMION out to 48 weeks suggest increased seizure reduction with prolonged treatment of OV935 and is consistent with the believed mechanism of action of OV935. Median seizure frequency reductions were 84% following 25 to 36 weeks (n=6) and 90% following 37 to 48 weeks (n=4) of treatment. In general, a greater reduction in seizure frequency was observed in those with higher baseline seizure frequency.  

OV935 is currently in multiple Phase 2 clinical trials and we expect to report data in these trials in 2020. The FDA has granted orphan drug designation for OV935 for the treatment of Dravet syndrome and LGS.  Ovid and Takeda continue to enroll study subjects in two additional clinical trials: a Phase 2 clinical trial in pediatric patients with Dravet syndrome or LGS (ELEKTRA) and a Phase 2 clinical trial in pediatric patients with CDKL5 deficiency disorder or Duplication 15q syndrome (ARCADE).  Further, all study subjects who have completed the ARCADE and ELEKTRA trials have the opportunity to enroll in the ENDYMION trial and to date all study subjects have enrolled in ENDYMION.

Additionally, Takeda elected to initiate a placebo-controlled trial of TAK-935 to treat study subjects with chronic complex regional pain syndrome, or CRPS. This trial will look at the efficacy, safety and tolerability of TAK-935 as an adjunctive therapy in participants with CRPS. Pursuant to our agreement with Takeda, we have a one-time right to opt into this program but until we exercise our opt in rights we are not responsible for funding this trial. We also have early research programs exploring OV329 in infantile spasm/rare epilepsies and OV881 as a potential microRNA gene therapy for the treatment of Angelman syndrome.

Since our inception in April 2014, we have devoted, 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 September 30, 2019, we have raised net proceeds of $172.8 million from the sale of common stock and convertible preferred stock. As of September 30, 2019, we had $37.9 million in cash and cash equivalents.  We recorded net losses of $43.5 million and $39.1 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, we had an accumulated deficit of approximately $196.2 million.

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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:

Recent Events

On October 4, 2019, we sold 9,000,000 shares of our common stock and 4,000 shares of Series A Convertible Preferred Stock at a public offering price of $2.50 and $2,500 per share, respectively, for gross proceeds of $32.5 million and estimated net proceeds of $30.5 million after deducting underwriting discounts and commission and other offering expenses payable by us, the October Offering. None of these expenses consisted of payments made by us to directors, officers or persons owning 10% or more of our common stock or to their associates, or our affiliates. Each share of non-voting Series A Preferred Stock is convertible into 1,000 shares of common stock, provided that conversion will be prohibited, subject to certain exceptions, if, as a result, the holder and its affiliates would beneficially own more than 9.99% or 14.99%, at the holder’s election, of the common stock then outstanding.  On November 5, 2019, the underwriters fully exercised the 30-day option shares at an offering price of $2.50 for gross proceeds of $3.4 million and net proceeds of $3.2 million after deducting underwriting discounts and commission and other offering expenses.

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:

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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: