SAVA Cassava Sciences Inc

Item 2.  Management’s Discu ssion and Analysis of Financial Condition and Results of Operations



This discussion and analysis should be read in conjunction with Cassava Sciences, Inc.’s (the “Company,”, “we,” “us,” or “ our ”) financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. Operating results are not necessarily indicative of results that may occur in future periods.



This Quarterly Report on Form 10-Q contains certain statements that are considered forward-looking statements within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.



The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to statements about:



Such forward-looking statements and our business involve risks and uncertainties, including, but not limited to the following :  



Please also refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 201 8 , as such risk factors may be amended, updated or modified periodically in our reports filed with the SEC for further information on these and other risks affecting us.

We caution you not to place undue reliance on forward-looking statements because our future results may differ materially from those expressed or implied by them. We do not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this prospectus, except as required by law.



Overview



Cassava Sciences, Inc. is a clinical-stage drug development company. Our expertise is to develop new product candidates and guide such candidates through various regulatory and development pathways in preparation for their potential commercialization. Since our inception, we have generally focused our drug development efforts on disorders of the central nervous system. We are currently conducting a Phase II clinical program for patients with Alzheimer’s disease.  By necessity, the conduct of drug development is complex, lengthy, expensive and risky. The U.S. Food and Drug Administration (the “FDA”) has not yet established the safety or efficacy of our product candidates.

  

Our overall strategy is to leverage our unique scientific/ clinical platform to develop a first-in-class program for treating neurodegeneration.  Our goal is to address Alzheimer’s disease and other neurodegenerative diseases, particularly those with a strong neuroinflammation component, with PTI-125, our drug product candidate to treat Alzheimer’s disease, and PTI-125Dx, our diagnostic product candidate to detect Alzheimer’s disease. 

  

We seek to develop and gain regulatory approval for PTI-125 for the treatment of Alzheimer’s disease and PTI-125Dx for the diagnosis of Alzheimer’s disease.  The following is a summary of our clinical-stage biopharmaceutical assets:

  

PTI-125 – PTI-125 is the name of our product candidate for the treatment of Alzheimer’s disease.  This proprietary small molecule drug represents an entirely new target to treat Alzheimer’s disease.  PTI-125 benefits from a strong scientific rationale, peer-reviewed publications in prestigious academic journals and multiple peer-reviewed research grant awards from the National Institutes of Health (“NIH”), the primary agency of the U.S. government for biomedical research. 

  

In 2018, we initiated a Phase II clinical program for patients with Alzheimer’s disease using PTI-125.   On April 15, 2019, we announced completion of patient enrollment for a Phase IIa study for PTI-125. We expect to announce top-line results of our Phase IIa study in the second half of 2019. Our Phase II clinical program with PTI-125 is substantially funded by research grant awards from NIH.  PTI-125 was discovered and designed in-house and was characterized by our academic collaborators during research activities that were conducted from approximately 2008 to date.  We own exclusive, worldwide rights to PTI-125, without royalty obligations to any third party.

  

PTI-125Dx – We are developing PTI-125Dx as a blood-based biomarker/diagnostic to detect Alzheimer ’ s disease. The goal of PTI-125Dx is to make the detection of Alzheimer’s disease as simple as getting a blood test. This clinical-stage program is substantially funded by research grant awards from NIH. PTI-125Dx was discovered and designed in-house and was characterized by our academic collaborators during research activities that were conducted from approximately 2008 to date.  We own exclusive, worldwide rights to PTI-125Dx, without royalty obligations to any third party.

  

Our scientific approach is different.  

  

For over 100 years, scientists have ascribed various neurodegenerative diseases to pathological proteins that misfold.  Misfolded proteins are also altered or they aggregate, such as amyloid and tau in the case of Alzheimer’s disease. Destruction of neuronal synapses, accelerated nerve cell death, and dysfunction of the brain support cells, are all widely believed to be a direct consequence of misfolded proteins. 

  

Historically, the drug industry has attempted to treat Alzheimer’s disease by developing drugs that block the synthesis of, or remove or dis-aggregate, beta amyloid and, more recently, tau. Essentially, the prevailing doctrine said that amyloid must be cleared out of the brain.  This scientific approach – known as the amyloid hypothesis - has been repeatedly tested by our competitors in late stage clinical trials using a variety of antibody backbones, epitopes, target conformations, biomarkers and in various stages of disease.  Such studies have all failed to yield therapeutic benefit for patients with Alzheimer’s disease.  More recently, experimental efforts have been proposed to ramp up the brain’s immune system in people with Alzheimer’s disease to remove amyloid or tau, an approach known as immunotherapy. Current attempts to use immunotherapy to treat Alzheimer’s disease may yet work, but for over 20 years this approach has also consistently failed due to lack of efficacy and/or for safety reasons. For example, older adults who receive active immunotherapy treatment often show reduced responsiveness of the immune system, and patients who do improve sometimes develop a life-threatening brain inflammation called aseptic meningitis. More generally, even when active or passive immunization against amyloid beta has reduced the brain’s amyloid load, such effects resulted in no therapeutic benefit to patients with Alzheimer’s disease.  

  

Since drug innovation is a trial-and-error process, clinical failures represent important learning opportunities.  In the case of Alzheimer’s disease, we believe the biopharmaceutical industry’s track record of persistent failure reflects a need to consider more recent and innovative approaches regarding the neurobiology of Alzheimer’s disease. We believe such scientific approaches may broaden the range of possible treatment approaches.

  

Over the last ten years, we have developed a new and promising scientific approach for the treatment and diagnosis of neurodegeneration, particularly Alzheimer’s disease. 

  

Importantly, we do not seek to clear amyloid out of the brain.  Our approach is to stabilize a critical protein in the brain.

  

“Proteopathy” refers to a disease in which a protein becomes structurally abnormal, assembles and aggregates, and therefore loses its normal function and disrupts or injures the function of surrounding cells, tissues and organs.  Through years of basic research, we have identified a structurally altered protein in the brain. We believe our experimental evidence demonstrates that this proteopathy plays a critical role in the development of neurodegenerative diseases, including the neurodegeneration observed in Alzheimer’s disease.  Using scientific insight and advanced tools in biochemistry, bioinformatics and imaging, we have elucidated this protein dysfunction. We have engineered a family of high-affinity small molecules to target the structurally altered protein and restore the protein to its normal shape and function. This family of small molecules, including PTI-125, was designed in-house and characterized by our academic collaborators.

  

The target of PTI-125 is an altered form of a scaffolding protein called filamin A (“FLNA”). Altered FLNA causes a cascade of toxic effects in the brain.  Altered FLNA is a proteopathy, which means that this protein is no longer capable of executing a stable, beneficial and protective role and instead becomes harmful and destructive to the brain.  By reversing the alteration of FLNA, its pathology ceases to adversely affect surrounding cells in the brain. In animal models of disease, restoring normal FLNA resulted in a multitude of therapeutic effects, including normalizing neurotransmission, decreasing neuroinflammation and restoring memory and cognition. By restoring function to multiple receptors and exerting powerful anti-inflammatory effects, we believe our approach has potential to slow the progression of neurodegeneration in humans.  Thus, we have designed product candidates, such as PTI-125, with the goal of slowing or, potentially, even reversing the deterioration of brain cells. We believe the ability to simultaneously improve many vital functions in the brain represents a new, different and crucial approach to address neurodegeneration.

  

Importantly, since PTI-125 has a unique mechanism of action, we believe its potential therapeutic effects may be additive or synergistic with that of other therapeutic candidates aimed at the treatment of neurodegeneration.



Our mission is to detect and treat Alzheimer’s disease.

  

Our lead therapeutic product candidate, called PTI-125, is initially aimed at Alzheimer’s disease.  PTI-125 is a small molecule drug with a novel mechanism of action.  This drug candidate has demonstrated both cognitive improvement and slowing of disease progression in animal models of disease.  PTI-125 is in Phase II clinical stage of development, with substantial support from the National Institute on Aging (“NIA”), a division of NIH.

  

The target of PTI-125 is an altered form of filamin A (“FLNA”).  FLNA is a scaffold protein that is widely found throughout the body.  The function of a scaffold protein is to bring multiple other proteins together for them to interact.  However, an altered, and highly toxic, form of FLNA is found in the Alzheimer’s brain. Altered FLNA contributes to Alzheimer’s disease by disrupting the normal function of neurons, leading to neurodegeneration and brain inflammation. Our product candidate, PTI-125, is aimed at countering the altered and toxic form of FLNA in the brain, thus restoring the normal function of this critical protein.

  

PTI-125 binds to altered FLNA with very high affinity.  In doing so, PTI-125 restores the normal shape of FLNA and the normal function of three brain receptors: the alpha-7 nicotinic acetylcholine receptor; the N-methyl-D-aspartate (“NMDA”) receptor; and the insulin receptor.  These receptors have pivotal roles in brain cell survival, cognition and memory.  In animal models, treatment with PTI-125 resulted in dramatic improvements in brain health, such as reduced amyloid and tau deposits, improved insulin receptor signaling and improved learning and memory.  In addition, PTI-125 has another beneficial treatment effect of significantly reducing inflammatory cytokines in the brain. In animal models of disease, treatment with PTI-125 abolished IL-6 production and suppressed TNF-alpha and IL-1beta levels by 86% and 80%, respectively, illustrating a powerful anti-neuroinflammatory effect.

  

Our science is published in peer-reviewed academic journals.  In addition, our research has been supported by NIH under multiple research grant awards. Each grant was awarded following an in-depth, competitive, peer-reviewed evaluation of our approach for scientific and technical merit by a panel of outside experts in the field.  Strong, long-term support from NIH has allowed us to advance our two product candidates for neurodegeneration, PTI-125 and PTI-125Dx, into clinical development.

  

Our science is based on stabilizing a critical protein in the brain.  

  

Our scientific approach is to treat neurodegeneration by targeting an altered form of a scaffolding protein called filamin A (“FLNA”).  Scaffolding proteins are essential for cell function because they participate in virtually every process within the cell.  If their function is impaired, the consequences can be devastating. Technological advances in medicine and improvements in lifestyle are making our lives longer.  But with age, genetic mutations and other factors conspire against healthy cells, resulting in altered proteins.  Sometimes a cell can rid itself of altered proteins. However, when disease changes the shape and function of critical proteins, multiple downstream processes are impaired.  There are many clinical conditions in which proteins become structurally altered and impair the normal function of cells, tissues and organs, leading to disease.   Conversely, restoring altered proteins back to health – which is called proteostasis – is a well-accepted therapeutic strategy in clinical medicine.

  

Accumulation of altered proteins is common in age-related brain disorders.  The most common is Alzheimer’s disease.  Altered proteins observed in the aging brain include hyperphosphorylated tau and beta amyloid, both hallmarks of Alzheimer’s disease.  Our scientists and outside collaborators have demonstrated that an altered, and highly toxic, form of the scaffolding protein FLNA exists in the Alzheimer’s brain. Critically, altered FLNA enables the toxicity of both beta amyloid and tau proteins.  This toxic cascade impairs brain health, leading to worsening symptoms of Alzheimer’s disease over time.  In addition to impairing brain cell function, altered FLNA enables persistent inflammation in the Alzheimer’s brain. We have shown that altered FLNA also promotes neuroinflammation via toll-like receptor 4 (“TLR4”), an immune receptor that causes release of pro-inflammatory cytokines.  Our therapeutic approach is designed to counteract these brain pathologies by restoring altered FLNA protein back to its normal, non-diseased conformation with PTI-125.   Treatment with PTI-125 has been shown to restore the normal function of three brain receptors critical to brain cell survival, cognition and memory, i.e., the alpha-7 nicotinic acetylcholine receptor; the NMDA receptor; and the insulin receptor. Treatment with PTI-125 has also been shown to dramatically reduce inflammatory cytokine levels in brains of mice with Alzheimer’s disease mutations, thus reducing the neuroinflammation that also characterizes Alzheimer’s disease.



Financial Overview



We have yet to generate any revenues from product sales. We have an accumulated deficit of $ 16 5 .3 million at March  3 1 , 201 9 . These losses have resulted principally from costs incurred in connection with research and development activities, salaries and other personnel-related costs and general corporate expenses. Research and development activities include costs of preclinical and clinical trials as well as clinical supplies associated with our drug candidates. Salaries and other personnel-related costs include non-cash stock-based compensation associated with options and other equity awards granted to employees and non-employees. Our operating results may fluctuate substantially from period to period as a result of the timing of preclinical activities, enrollment rates of clinical trials for our drug candidates and our need for clinical supplies.



We expect to continue to use significant cash resources in our operations for the next several years. Our cash requirements for operating activities and capital expenditures may increase substantially in the future as we:





Product revenue will depend on our ability to receive regulatory approvals for, and successfully market, our product candidates. If our development efforts result in regulatory approval and successful commercialization of our product candidates, we will generate revenue from direct sales of our products and/or, if we license our products to future collaborators, from the receipt of license fees and royalties from sales of licensed products. We conduct our research and development programs through a combination of internal and collaborative programs. We rely on arrangements with universities, our collaborators, contract research organizations and clinical research sites for a significant portion of our product development efforts.



We focus substantially all of our research and development efforts in the area of neurology. The following table summarizes expenses which have been reduced for reimbursements received for NIH grants (in thousands):



Research and development expenses include compensation, contractor fees and supplies as well as allocated common costs. Contractor fees and supplies generally include expenses for preclinical studies and clinical trials and costs for formulation and manufacturing activities. Other common costs include the allocation of common costs such as facilities. During the three months ended March 31, 2019 and 2018, we received $ 0.8 million and $ 0.4 million from research grants from NIH , respectively . These reimbursements were recorded as a reduction to our research and development expenses.



Our technology has been applied across certain of our drug candidates. Data, know-how, personnel, clinical results, research results and other matters related to the research and development of any one of our drug candidates also relate to, and further the development of, our other drug candidates. As a result, costs allocated to a specific drug candidate may not necessarily reflect the actual costs surrounding research and development of that drug candidate due to cross application of the foregoing .



Estimating the dates of completion of clinical development, and the costs to complete development, of our drug candidates would be highly speculative, subjective and potentially misleading. Pharmaceutical products take a significant amount of time to research, develop and commercialize. The clinical trial portion of the development of a new drug alone usually spans several years. We expect to reassess our future research and development plans based on our review of data we receive from our current research and development activities. The cost and pace of our future research and development activities are linked and subject to change .





Critical Accounting Policies



The preparation of our financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and interest income in our financial statements and accompanying notes. We evaluate our estimates on an ongoing basis, including those estimates related to agreements, research collaborations and investments. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following items in our financial statements require significant estimates and judgments:





We have granted share-based awards that vest upon achievement of certain performance criteria, or Performance Awards. We multiply the number of Performance Awards by the fair market value of our common stock on the date of grant to calculate the fair value of each award. We estimate an implicit service period for achieving performance criteria for each award. We recognize the resulting fair value as expense over the implicit service period when we conclude that achieving the performance criteria is probable. We periodically review and update as appropriate our estimates of implicit service periods and conclusions on achieving the performance criteria. Performance Awards vest and common stock is issued upon achievement of the performance criteria.







Results of Operations – Three Months ended March 3 1 , 201 9 and 201 8  



Research and Development Expense



Research and development expense consists primarily of costs of drug development work associated with our drug candidates, including:





Research and development expenses were $0. 6 million and $1. 1 million during the three months ended March  3 1 , 201 9 and 201 8 , respectively. The 4 6 %   decrease was due primarily to a $0.4 million increase in grant funding received from NIH a s well as a decrease in non-cash stock - based compensation expense s .   Receipts from NIH grants are recorded as a reduction in research and development expenses.   Research and development expenses included non-cash stock-related compensation expenses were $0. 1 million and $0. 4 million during the three months ended March  3 1 , 201 9 and 201 8 , respectively.



Our research and development expenses may fluctuate from period to period due to the timing and scope of our development activities and the results of clinical trials and pre - clinical studies.



General and Administrative Expense



General and administrative expenses consist of personnel costs, allocated expenses and other expenses for outside professional services, including legal, human resources, audit and accounting services. Personnel costs consist of salaries, bonus, benefits and stock-based compensation. Allocated expenses consist primarily of facility costs. We incur expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the U.S. Securities and Exchange Commission (the “ SEC ”) and Nasdaq Stock Market LLC (“Nasdaq”), additional insurance expenses, additional audit expenses, investor relations activities, Sarbanes-Oxley compliance expenses and other administrative expenses and professional services.



General and administrative expenses were $0. 9 million and $1. 1 million during the three months ended March 3 1 , 201 9 and 201 8 , respectively. The 20% decrease was due primarily to a decrease in non-cash stock based compensation related expense partially offset by an in crease in   compensation cost s from the hiring of a c hief f inancial o fficer in October 2018 .   General and administrative expenses included non-cash stock- bas ed compensation expenses of $0. 2 million and $0. 5 million during the three months ended March 3 1 , 201 9 and 201 8 , respectively .  



We expect our general and administrative expenses during the remainder of 201 9 to remain approximately the same as compared to 201 8 activities.



Interest Income



Interest and other income, net, was $ 92 ,000 and $7,000 during the three months ended March 31, 2019 and 2018 , respectively . The increase was due primarily to higher cash balances from our August 2018 stock offering as well as an increase in interest rates. We expect interest income to increase in 2019 compared to 2018 due to our higher cash and cash equivalent balances as well as a higher interest rate environment.



Liquidity and Capital Resources



Since inception, we have financed our operations primarily through public and private stock offerings, payments received under collaboration agreements and interest earned on our investments. We intend to continue to use our

capital resources to fund research and development activities, capital expenditures, working capital requirements and other general corporate purposes. As of March 3 1 , 201 9 , cash and cash equivalents were $ 19.1 million.



At - the - Market Common Stock Issuance



On February 8, 2018, we entered into a Capital on Demand™ Sales Agreement  ( the “ ATM Agreement ”) with JonesTrading. In accordance with the terms of the ATM Agreement ,   we  w ere able to offer and sell shares of our common stock, from time to time in one or more public offerings of our common stock, with JonesTrading acting as agent, in transactions pursuant to a shelf registration statement that was declared effective by the SEC on July 31, 2017.  On August 16, 2018, we suspended sales of our common stock under our ATM Agreement.



There were no common stock sales under the ATM Agreement during the three months ended March 31, 2019. During the three months ended March 31, 2018, we sold a total of 300,000 shares of our common stock under the ATM Agreement, in the open market at an average gross selling price of $6.70 per share for net proceeds of $1.9 million. We expensed approximately $0.1 million of cost for the offering, excluding JonesTrading commissions.



Net cash used in operating activities was $ 0.6 million for the three months ended March 3 1 , 201 9 , resulting primarily from the net loss reported of $1.3 million partially offset by non-cash stock based compensation expense of $ 0. 3 million and operating liabilities of $0.4 million .



  Net cash used in operating activities was $1.6 million for the three months ended March 31, 2018 , resulting primarily from the net loss reported of $2.2 million and changes in operating assets and liabilities of $0.3 million partially offset by non-cash stock - based compensation expense of $0.8 million.



Net cash used in investing activities was $18 ,000 for the three months ended March 31, 2019 , resulting primarily from the purchase of equipment.  There was no cash from investing activities during the three months ended March 3 1 , 201 8 .  



Net cash used in financing activities during the three months ended March 31, 2019 was $0.1 million , resulting primarily from the issuance costs incurred during the period .   Net cash provided by financing activities during the three months ended March 3 1 , 201 8 was $1 .9 million. Cash provided in 2018 was related to sale common stock, net of issuance costs ,   under our ATM facility .



Realization of our other deferred tax assets is dependent on future earnings, if any. We are uncertain about the timing and amount of any future earnings. Accordingly, we offset these net deferred tax assets with a valuation allowance.



We have a non-cancelable operating lease for approximately 6,000 square feet of office space in Austin, Texas that expires o n December 31, 2020. Minimum lease payments total $71,000 for the nine months ending December 31, 2019   and $99,000 for the full year ending December 31, 2020 .



We have an accumulated deficit of $ 16 5 .3 million as of   March 3 1 , 201 9 . We expect our cash requirements to be significant in the future. The amount and timing of our future cash requirements will depend on regulatory and market acceptance of our drug candidates, the resources we devote to researching and developing, formulating, manufacturing, commercializing and supporting our products and other corporate needs. We believe that our current resources should be sufficient to fund our operations for at least the next 12 months. We may seek additional future funding through public or private financing within this timeframe, if such funding is available and on terms acceptable to us.





Off-balanc e Sheet Arrangements



As of March 3 1 , 201 9 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.