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.
AEVI-001 (mGluR+
Genetic Subset Attention Deficit Hyperactivity Disorder) and AEVI-004
Our lead program, AEVI-001, is an oral,
non-stimulant glutamatergic neuromodulator which completed a Phase 2/3 trial (SAGA) in adolescent Attention Deficit Hyperactivity
Disorder (ADHD), patients with specific mutations in their mGluR gene network, which we refer to as mGluR+ ADHD, in the first quarter
of 2017. Although AEVI-001 did not meet the primary endpoint of reduction on the ADHD Rating Scale (ADHD-RS) compared to placebo,
in the SAGA trial, the drug did demonstrate statistically significant and clinically meaningful improvement compared to placebo
in a pre-specified responder analysis of ADHD-RS improvement of 30% or more [ADHD-RS reduction of 17.6, p < .005]. In a second
pre-specified responder analysis of Clinical Global Impression of Improvement scale (CGI-I), a key secondary endpoint, AEVI-001
demonstrated a statistically significant and clinically meaningful improvement compared to placebo [57% of patients treated with
AEVI-001 achieved a score of much improved or very much improved compared to 32% 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 initially identified nine genes that appeared to be predictive of
clinically meaningful and statistically significant response on the ADHD-RS scales and CGI-I scales. Subsequent to a validation
process using a comparator methodology, one identified gene, Neuro Gene E, could not be verified, thus reducing the subset to eight
genes (genetic subset). These eight genes include certain glutamate metabotropic receptors and neurodevelopmental genes that are
found in approximately 8-10% 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 are currently conducting a Phase 2 trial (the “ASCEND”
trial) in the mGluR mutation positive genetic subset ADHD (“mGluR+ Genetic Subset ADHD”) to confirm genetic responders
to AEVI-001. Part A of the ASCEND trial includes subjects determined to have one of eight specific gene mutation(s) implicated
in glutamatergic signaling and neuronal connectivity. Part B of the ASCEND trial will assess subjects who do not have any
of the specific gene mutation(s) implicated in glutamatergic signaling and neuronal connectivity. Once subjects are confirmed
as eligible for each part of the study, they are randomized to one of two treatment groups (AEVI-001 or placebo) in a 1:1 ratio.
In August 2018, we announced the completion
of enrollment of a genetic subset of pediatric and adolescent mGLuR+ ADHD patients (n=64) in Part A of the trial. In June 2018,
we increased the sample size from 42 to 64 patients in accordance with a protocol-defined sample size re-estimation design, which
allowed an adjustment in the sample size after an interim analysis of the placebo arm to ensure the trial is appropriately powered.
In October 2018, we announced the
completion of enrollment in Part B of the ASCEND trial. We expect that the accelerated enrollment in Part B will allow us to
provide data for both Parts A and B of the ASCEND trial in January 2019. Individual and pooled analysis of Parts A and B of
the ASCEND trial will be conducted simultaneously, and will inform the design of the planned Phase 3 development program in
ADHD, expected to utilize AEVI-004.
We
are also exploring a development opportunity for AEVI-001 for the treatment of mGluR+ ADHD patients with ASD to better
define the patient phenotype and have initiated work on a proof-of-concept program, which could have a study start in early
2019, assuming we have raised the required funding for the program. In 2014, approximately 1 in 59 children were diagnosed
with ASD in the United States, increasing from 1 in 150 in 2000. There are currently limited pharmacotherapy options
available to treat ASD and as a result 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.
AEVI-004
(improved version (fasoracetam co-crystal) of AEVI-001)
In June 2018 we announced that we received
positive feedback from the United States Food and Drug Administration (the “FDA”) on an improved version of our lead
development molecule, AEVI-001, identified as AEVI-004.
Following 2016 FDA regulatory guidance on
co-crystalization of active drugs, we created a co-crystal of fasoracetam (AEVI-001) with enhanced physical and chemical properties.
The new molecule, AEVI-004, has comparatively greater stability and a higher melting point than AEVI-001. The molecule was engineered
to maintain solubility, dissolution and pharmacokinetics substantially similar to AEVI-001.
We have received feedback from the FDA provisionally
indicating that AEVI-004 is a co-crystal of AEVI-001 and a novel drug substance. The FDA also provisionally indicated that existing
toxicology and pathology studies can support clinical development with minimal preclinical bridging studies for AEVI-004.
Assuming positive results from the ongoing
Phase 2 ASCEND clinical trial, and following minimal bridging preclinical and clinical pharmacological studies requested by the
FDA, we anticipate progressing the molecule directly into Phase 3 clinical trials.
AEVI-004
is expected to have composition of matter patents extending to 2039 and should be listed as a new chemical entity in the FDA Orange
Book.
AEVI-002 (Anti-LIGHT Monoclonal Antibody)
Our second program is 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 (POC)
study was initiated at CHOP in 2017, 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 POC study include endoscopic evaluation, Crohn’s Disease Activity Index ratings and safety. Active recruitment for
the POC study has been expanded to four clinical trial sites in the United States, although the identification and recruitment
of patients into the POC study has been extremely challenging, and to date no patients have been enrolled. To address the continued
enrollment challenges for this program, we are evaluating the addition of clinical trial sites outside the United States. Assuming
a small number of patients can be enrolled by the end of the first quarter 2019, initial data from a small number of patients would
be expected by mid-year 2019.
AEVI-005
AEVI-005
is the second monoclonal antibody in development as part of our ongoing collaboration with KHK. This program will focus on an undisclosed,
first-in-class monoclonal antibody targeting a specific cell surface marker implicated in an auto-immune ultra-orphan disease that
primarily affects children. We are currently progressing a preclinical research program for AEVI-005.
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 $24.15 million for the nine-month period ended September 30, 2018. As of September 30, 2018, we had
stockholders’ equity of approximately $13.75 million. As of September 30, 2018, we had cash and cash equivalents of $19.60
million. Based upon current management projections, we expect the current cash balance to fund operations 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 on 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 the issuance
of equity and/or debt securities, strategic collaborations and license arrangements. 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 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. 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,
such as CHOP, 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,
as well as cost of development and manufacturing of the drug supply for such studies. Research and development expenses will likely
increase as we raise funding to 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 studies and 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.
General and Administrative Expense
General and administrative expense consists
primarily of salaries and other related costs, including stock-based compensation expense, for persons serving as our directors
and in our executive, finance and accounting functions. Other general and administrative expense includes facility-related costs
not otherwise included in research and development expense and professional fees for legal services and accounting services.
Results of Operations for the Nine Months Ended September
30, 2018 and 2017
Research and Development Expenses
Research and development expenses for the
nine months ended September 30, 2018 were $17.43 million, decreasing from $19.91 million for the same period in 2017 mainly related
to decreased clinical development and research activities.
General and Administrative Expenses
General and administrative expenses for
the nine months ended September 30, 2018 were $6.85 million, decreasing from $7.63 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 expenses for the nine
months ended September 30, 2018 and 2017 were de minimis.
Results of Operations for the Three Months Ended September
30, 2018 and 2017
Research and Development Expenses
Research and development expenses for the
three months ended September 30, 2018 were $5.13 million, decreasing from $6.30 million for the same period in 2017 mainly related
to decreased clinical development and research activities.
General and Administrative Expenses
General and administrative expenses for
the three months ended September 30, 2018 were $2.17 million, approximately equivalent to $2.27 million for the same period in
2017.
Financial Income and Expenses
Financial income and expenses for the three
months ended September 30, 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 third parties. On May 15, 2018, we entered 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”).
For the quarter ended September 30, 2018, we sold 5,426,151 shares of common stock for gross proceeds of $5.28 million under the
ATM Facility.
Cash Flows
We had cash and cash equivalents of $19.60
million at September 30, 2018, compared to $33.73 million as of December 31, 2017. The decrease in cash during the nine months
ended September 30, 2018 was primarily related to the advancement of our AEVI-001 program.
Net cash used in operating activities of
$19.12 million for the nine months ended September 30, 2018 and $24.90 million for the nine months ended September 30, 2017 primarily
reflected our cash expenses for our operations.
Net cash provided by and used in investing
activities for the nine months ended September 30, 2018 and 2017 were de minimis.
Net
cash provided by financing activities of $5.00 million for the nine months ended September 30, 2018 and net cash used in financing
activities in the nine months ended September 30, 2017 was de minimis. The increase was primarily related to the receipt of proceeds
from the issuance of common stock through our ATM Facility.
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. 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.
Based upon current management projections,
we expect the current cash balance to fund operations into the first quarter of 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. We do not anticipate that
we will generate revenue from the sale of products for several years or more, if at all, given the uncertainty of drug development.
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. We do not currently have any commitments for future external funding. We
may need to raise additional funds more quickly if one or more of our assumptions prove to be incorrect or if we choose to expand
our product development efforts more rapidly than we presently anticipate, and we may decide to raise additional funds even before
we need them if the conditions for raising capital are favorable. We may seek to encourage holders of our warrants to exercise,
sell additional equity or debt securities or obtain a bank credit facility. The sale of additional equity or debt securities, if
convertible, could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed obligations
and could also result in covenants that would restrict our operations. If we are unable to successfully raise sufficient additional
capital, through future financings or through strategic and collaborative arrangements, we will not have sufficient cash to fund
additional clinical trials and future operations.
Our plans include seeking additional investments
and commercial agreements to continue our operations. However, there is no assurance that we will be successful in our efforts
to raise the necessary capital and/or reach such commercial agreements to continue our planned research and development activities.
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 nine months ended September 30, 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 June 2017, we entered into an
amendment to the Research Agreement, which extended the Research Agreement through June 30, 2019, for which payments totaling $1.19
million are due in the last quarter of 2018 and $2.38 million will be due in the first half of 2019. In June 2018, we again extended
the Research Agreement, with an amendment covering the period from July 1, 2019 through June 30, 2020, for which incremental payments
totaling $2.38 million will be due in the second half of 2019 and $2.38 million will be due in the first half of 2020.
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.