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, 2018, 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 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 rare and orphan diseases for which there are limited therapeutic options currently available, with a primary focus on pediatric
patients. This strategy begins with identifying and validating a therapeutic target and using biomarkers 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 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.
We have successfully added two phase 2 ready
programs to our development pipeline, AEVI-006 and AEV-007, and we continue to pursue discussions related to potentially expanding
the Company’s pipeline of development programs through the in-license or acquisition of future product development candidates.
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 have
incurred net losses of approximately $3.65 million for the three-month period ended June 30, 2019. As of June 30, 2019, we had
cash and cash equivalents of $3.44 million, which we believe will provide funding for us into late in the third quarter of 2019.
We are unable to predict the extent of any future losses or when we will become profitable, if at all.
The Children’s Hospital of Philadelphia
Foundation (the “CHOP Foundation”) is our largest stockholder. As of June 30, 2019, the CHOP Foundation and certain
related parties beneficially owned 21,311,586 shares of our Common Stock. The shares of Common Stock beneficially owned by the
CHOP Foundation and certain related parties represent approximately 31.5% of our outstanding shares of Common Stock. In March 2019,
we amended our Research Agreement and License Agreement with CHOP to allow us to defer the monthly payments due under the Research
Agreement for the period from February 1, 2019 through September 30, 2019 in exchange for a non-interest bearing convertible note
in the amount of such deferral. Such note matures September 30, 2019 and is secured by all of our intellectual property and other
assets. See Note 4 to our March 2019 Financial Statements for more information.
AEVI-004 (novel co-crystal version
of AEVI-001)
AEVI-004 is a co-crystal of AEVI-001, with
enhanced physical and chemical properties. The new molecule 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.
Given the negative outcomes of the ASCEND
trial, there are no current clinical development plans for AEVI-004 in ADHD. However, we are currently working with the National
Institutes of Health (NIH) to evaluate the potential anti-seizure activity of AEVI-004 in a preclinical model as part of the NIH
Epilepsy Treatment Screening Program.
AEVI-002 (Anti-LIGHT Monoclonal Antibody)
The second program arising out of our genomic
research collaboration with CHOP is the development candidate AEVI-002, a potential first-in-class anti-LIGHT monoclonal antibody,
or the Antibody, being developed for use in Pediatric Onset Crohn’s disease. Pediatric Onset Crohn’s disease has a
more aggressive phenotype at younger ages. The genomic rationale for the use of anti-LIGHT antibody in Crohn’s disease was
validated by CAG research showing the association to a loss of function mutation in decoy receptor 3 (DcR3).
In June 2016, we entered into a Clinical
Development and Option Agreement, or the Development and Option Agreement, with Kyowa Hakko Kirin Co., Ltd., or KHK, pursuant to
which we acquired certain rights with respect to the development and potential commercialization of the Antibody. Under the Development
and Option Agreement, we received an exclusive option for exclusive rights to develop products containing the Antibody, or an Antibody
Licensed Product, exclusive rights to commercialize Antibody Licensed Product in various countries and to conduct various development
activities with respect to the Antibody Licensed Product, including the conduct of a signal finding study testing the Antibody
in Severe Pediatric Onset Inflammatory Bowel Disease.
An 8-week Phase Ib proof-of-concept study
has been initiated, with the goal of enrolling up to 12 patients with a Pediatric Onset Crohn’s disease diagnosis with most
patients being refractory to treatment with TNF-α inhibitors, with or without a DcR3 mutation. The endpoints of the trial
include endoscopic evaluation, Crohn’s Disease Activity Index ratings and safety. Active recruitment for the trial has been
underway for approximately two years, and thus far we have been unable to enroll any patients into the trial. The ability to produce
initial data from the trial is directly dependent on successful patient recruitment; thus, continued difficulties in recruitment
could cause an extensive delay or an inability to deliver any initial data for the program.
AEVI-005 (Monoclonal Antibody)
AEVI-005 is the second monoclonal antibody
we are developing as part of our ongoing collaboration with KHK. We are studying AEVI-005 in an undisclosed ultra-orphan auto-immune
pediatric disease. We initiated a preclinical research program with AEVI-005 in the second quarter of 2018.
AEVI-006 (mTORC1/2 Inhibitor)
In July 2019, we entered into an exclusive
license agreement with OSI Pharmaceuticals, LLC, an indirect wholly-owned subsidiary of Astellas Pharma Inc., or Astellas, for
the worldwide development and commercialization of Astellas’ novel, second generation mTORC1/2 inhibitor, AEVI-006.
We plan to initially develop AEVI-006 for
use in congenital Lymphatic Malformations, which includes a number of rare and orphan diseases. Lymphatic Malformations are rare
congenital and potentially life-threatening diseases of the lymphatic system. Some of the diseases involved are Generalized Lymphatic
Anomaly (GLA), Kaposiform lymphangiomatosis (KLA), and Gorham-Stoudt disease (GSD). Most lymphatic malformations are evident at
birth or within the first two years of age. The exact prevalence of lymphatic malformations in the general population is unknown,
but is thought to be approximately 1 in every 4,000 live births. There may be as many as 30,000 to 60,000 Americans living with
congenital lymphatic malformations. In some cases, the disease may be familial and have a recognizable genetic cause. In most cases
it appears to be sporadic, although genetic mutations are often present. The mTORC1/2 pathway is believed to be involved in greater
than 80% of patients with congenital Lymphatic Malformations.
There are currently no approved drug therapies
for Lymphatic Malformations. AEVI-006 is a new targeted therapy that may address the underlying cause in the majority of these
patients.
We are in the process of requesting a pre-IND
meeting with FDA to discuss the path forward for development of AEVI-006 for the treatment of lymphoid malformations. We plan to
propose to open the IND with a 4-week phase 1/2 PK/PD, safety and POC study in adult patients with lymphatic malformations and
begin enrollment in 2020. Detailed study design will be based on FDA and investigator feedback.
AEVI-007 (Anti-IL18 Monoclonal Antibody)
In August 2019, we obtained the right to
exercise an exclusive global license from Medimmune Limited, the global biologics research and development arm of AstraZeneca plc,
for a Phase 2-ready fully human monoclonal antibody that targets interleukin 18, or IL-18, AEVI-007.
Upon exercise of the option after obtaining
additional funding, we initially plan to develop AEVI-007 for adult onset Still’s disease, or AOSD, a serious rare and orphan
rheumatological disease. AOSD is a rare and severe autoinflammatory disease affecting adults. The disease is similar to systemic
onset juvenile idiopathic arthritis that affects children. The etiology of AOSD is unknown with both genetic and infectious factors
being implicated. The hallmarks of the disease are persistent daily fever, rash and arthralgias. Many patients suffer complications
including splenomegaly, heart and liver disease. Some AOSD patients develop macrophage activation syndrome, a severe acute complication
that may cause rapid multi-organ failure and even death. There are currently no approved biologic therapies in the United States
for the treatment of AOSD.
Upon exercise of the option which is contingent
upon additional financing, we would intend to request a pre-IND meeting with FDA to discuss the path forward for development of
AEVI-007 for the treatment of AOSD. We plan to propose to open the IND with a 12-week phase 1/2 PK/PD, safety and POC study in
adult patients with AOSD and potentially begin enrollment in 2020. Detailed study design and the ability to meet the enrollment
initiation timeline will be based on FDA and investigator feedback.
Current Strategy
In light of our decision to discontinue
the AEVI-001 program in ADHD, our board of directors has commenced and continues to review to explore and evaluate potential strategic
alternatives to enhance stockholder value. These alternatives could include, among others, continuing to execute on our business
plan such as the recent additions of AEVI-006 and AEVI-007 to our development program, issuing or transferring shares of our common
stock or other equity securities, the license, sale or disposition of certain assets or programs, the formation of a joint venture,
a strategic business combination, a transaction that results in private ownership or the sale of the Company, or some combination
of these. There can be no assurance that the review of strategic alternatives will result in the identification or consummation
of any transaction or that our board of directors will determine that continuing our current business operations is in the best
interests of our stockholders.
We have successfully added two phase 2 ready
programs to our development pipeline, AEVI-006 and AEV-007, and we continue to pursue discussions related to potentially expanding
the Company’s pipeline of development programs through the in-license or acquisition of future product development candidates.
Financial Operations Overview
We have generated significant losses to
date, and we expect to continue to generate losses as we progress towards the commercialization of our product candidates. We incurred
net losses of approximately $8.48 million for the six-month period ended June 30, 2019. As of June 30, 2019, we had stockholders’
equity of approximately $0.33 million. As of June 30, 2019, we had cash and cash equivalents of $3.44 million. We believe that
cash on hand will be sufficient to enable us to fund our operating expenses and capital expenditure requirements into late in the
third quarter of 2019, however, our current resources would not enable us to repay the CHOP Note if CHOP elected to be paid
in cash. 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 the Company’s ability to continue as a going concern, the board of directors has commenced a review to explore
and evaluate potential strategic alternatives to enhance stockholder value. These alternatives could include, among others, continuing
to execute the Company’s business plan, issuing or transferring shares of its common stock or other equity securities, the
license, sale or disposition of certain assets or programs, the formation of a joint venture, a strategic business combination,
a transaction that results in private ownership or the sale of the Company, or some combination of these. There can be no assurance
that the review of strategic alternatives will result in the identification or consummation of any transaction or that our board
of directors will determine that continuing our current business operations is in the best interest of our stockholders. 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 its technologies or product candidates, including
AEVI-002, AEVI-005, AEVI-006, AEVI-007 and other product candidates, or grant licenses on terms that are not favorable to us. To
the extent that we raise additional capital through the sale of equity, the ownership interest of our existing shareholders will
be diluted and other preferences may be necessary that adversely affect the rights of existing shareholders. If none of these alternatives
is available, or if available, 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 one year after 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 that the financial statements are issued.
In light of our decision to discontinue
the AEVI-001 program in ADHD, our board of directors has commenced a review to explore and evaluate potential strategic alternatives
to enhance stockholder value. These alternatives could include, among others, continuing to execute the Company’s business
plan, issuing or transferring shares of our common stock or other equity securities, the license, sale or disposition of certain
assets or programs, the formation of a joint venture, a strategic business combination, a transaction that results in private ownership
or the sale of the Company, or some combination of these. There can be no assurance that the review of strategic alternatives will
result in the identification or consummation of any transaction or that our board of directors will determine that continuing our
current business operations is in the best interests of our stockholders.
Research and Development Expense
Research and development expense consists
of: (i) internal costs associated with our development activities; (ii) payments we make to third party contract research organizations,
contract manufacturers, clinical trial sites and consultants; (iii) technology and intellectual property license costs; (iv) manufacturing
development costs; (v) personnel related expenses, including salaries, and other related costs, including stock-based compensation
expense, for the personnel involved in product development; (vi) activities related to regulatory filings and the advancement of
our product candidates through preclinical studies and clinical trials; and (vii) facilities and other allocated expenses, which
include direct and allocated expenses for rent, facility maintenance, as well as laboratory and other supplies. All research and
development costs are expensed as incurred.
Conducting a significant amount of development
is central to our business model. Product candidates in later-stage clinical development generally have higher development costs
than those in earlier stages of development, primarily due to the significantly increased size and duration of the clinical trials.
The process of conducting pre-clinical studies
and clinical trials necessary to obtain regulatory approval is costly and time consuming. The probability of success for each product
candidate and clinical trial may be affected by a variety of factors, including, among others, the quality of the product candidate’s
early clinical data, investment in the program, competition, manufacturing capabilities and commercial viability. As a result of
these uncertainties, together with the uncertainty associated with clinical trial enrollments and the risks inherent in the development
process, we are unable to determine the duration and completion costs of current or future clinical stages of our product candidates
or when, or to what extent, we will generate revenues from the commercialization and sale of any of our product candidates. Development
timelines, probability of success and development costs vary widely. We are concurrently focusing on pursuing clinical and pre-clinical
research and development in targeted orphan and rare disease.
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, costs associated with industry and trade shows, and professional fees
for legal services and accounting services. We expect that our general and administrative expenses will increase and decrease as
personnel increase and decrease.
Results of Operations for the Six Months Ended June 30,
2019 and 2018
Research and Development Expenses
Research and development expenses for the
six months ended June 30, 2019 were $5.40 million, decreasing from $12.31 million for the same period in 2018 primarily driven
by a reduction of expenses relating to development of AEVI-001 in ADHD.
General and Administrative Expenses
General and administrative expenses for
the six months ended June 30, 2019 were $3.10 million, decreasing from $4.68 million for the same period in 2018, due in part to
a reduction in the scale of our operations.
Financial Income and Expenses
Financial income and expense for the six
months ended June 30, 2019 and 2018 were de minimis.
Results of Operations for the Three Months Ended June 30,
2019 and 2018
Research and Development Expenses
Research and development expenses for the
three months ended June 30, 2019 were $2.23 million, decreasing from $5.75 million for the same period in 2018 primarily driven
by a reduction of expenses relating to development of AEVI-001 in ADHD.
General and Administrative Expenses
General and administrative expenses for
the three months ended June 30, 2019 were $1.42 million, decreasing from $2.50 million for the same period in 2018, due in part
to a reduction in the scale of our operations.
Financial Income and Expenses
Financial income and expense for the three
months ended June 30, 2019 and 2018 were de minimis.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily
through issuance of equity and grants from other third parties.
Cash Flows
We had cash and cash equivalents of $3.44
million at June 30, 2019, compared to $12.08 million as of December 31, 2018. The decrease in cash during the six months ended
June 30, 2019 primarily reflected our cash expenses for operations.
Net cash used in operating activities of
$8.64 million for the six months ended June 30, 2019 and $14.45 million for the six months ended June 30, 2018 primarily reflected
our cash expenses for operations.
Net cash provided by and used in investing
activities for the six months ended June 30, 2019 and 2018 were de minimis.
Net cash provided by and used in financing
activities for the six months ended June 30, 2019 and 2018 were de minimis.
Funding Requirements
Our future capital requirements will depend
on a number of factors, including our success in targeting rare and orphan disease candidates, the timing and outcome of clinical
trials and regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent
claims and other intellectual property rights, the acquisition of licenses to new products or compounds, the status of competitive
products, the availability of financing, and our success in developing markets for our product candidates.
We believe that cash on hand will be sufficient
to enable us to fund our operating expenses and capital expenditure requirements (not including repayment of the CHOP Note) into
late in the third 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. Because of the numerous risks and uncertainties associated with the development and
commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures
associated with our current and anticipated clinical trials.
We do not anticipate that we will generate
revenue from the sale of products for several years, if at all, or more 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 in 2019. 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. We may seek to 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.
In light of our decision to discontinue
the AEVI-001 program in ADHD, our board of directors has commenced a review to explore and evaluate potential strategic alternatives
to enhance stockholder value. These alternatives could include, among others, continuing to execute the Company’s business
plan, issuing or transferring shares of our common stock or other equity securities, the license, sale or disposition of certain
assets or programs, the formation of a joint venture, a strategic business combination, a transaction that results in private ownership
or the sale of the Company, or some combination of these. There can be no assurance that the review of strategic alternatives will
result in the identification or consummation of any transaction or that our board of directors will determine that continuing our
current business operations is in the best interests of our stockholders.
On April 2, 2019, we received a notification
from the NASDAQ Stock Market (“NASDAQ”) stating that we no longer comply with the minimum stockholders’ equity
requirement under NASDAQ Listing Rule 5450(b)(1)(A) for continued listing on The NASDAQ Global Market because our stockholder’s
equity, as reported in our Annual Report on Form 10-K for the year ended December 31, 2018, had fallen below $10 million. The notification
also indicated that we did not meet the alternative compliance standards set forth in NASDAQ Listing Rule 5450(b).
On August 6, 2019, we received a
written notice (the “Notice”) from NASDAQ. As described in the Notice, we have not regained compliance with
NASDAQ’s minimum bid price rule, Listing Rule 5550(a)(2) or minimum stockholders’ equity requirement under NASDAQ
Listing Rule 5450(b)(1)(A). Although we have filed a preliminary proxy statement for stockholder approval to enable us to
implement a reverse stock split, we need to maintain a bid price of $1 or greater for a minimum of 10 consecutive
business days in order to regain compliance with the rules.
Accordingly, NASDAQ determined that the
Company’s securities will be scheduled for delisting from the NASDAQ Global Market and will be suspended on August 15, 2019.
On August 13, 2019, the Company requested an oral hearing to appeal the decision of NASDAQ to delist the
Company’s securities. Accordingly, the delisting action referenced in the Notice has been stayed, pending a final written
decision by the NASDAQ Hearings Panel. The hearing has yet to be scheduled.
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 six months ended June 30, 2019 and 2018, we used the Binomial options pricing model.
To determine the risk-free interest rate, we utilized the U.S. Treasury yield curve in effect at the time of grant with a term
consistent with the contractual life of our awards. We estimated the expected life of the options granted based on anticipated
exercises in the future periods assuming the success of our business model as currently forecast. The expected dividend yield reflects
our current and expected future policy for dividends on our common stock. The expected stock price volatility for our stock options
was calculated by examining historical volatilities for publicly traded industry peers and blending in our historical volatility.
We will continue to analyze the expected stock price volatility as more historical data for our common stock becomes available.
After adoption of ASU 2016-09 in the first quarter of 2017, we recognize forfeitures as they occur.
Off-Balance Sheet Arrangements
CHOP License Agreement and Research
Agreement
In November 2014, we entered
into a license agreement, or the License Agreement, and a sponsored research agreement, or the Research Agreement, each with CHOP.
Under the terms of the License Agreement, CHOP granted us (i) an exclusive, sublicensable license to use certain patent rights
covering potential diagnostic and therapeutic targets, (ii) an exclusive, non-sublicensable license to use certain biospecimen
and phenotypic data collected from patients with rare and orphan diseases and their family members, or the Biobank. In February
2017, we amended the License Agreement. The amendment allows us to extend the period of our exclusive commercial access to the
Biobank for rolling two-year periods. The cost of the first extension was $197,603 with each subsequent extension costing $125,000.
We have exercised such option in each of 2017 and 2018. The amendment also allows us to extend the Research Agreement for rolling
two-year periods in connection with us extending our exclusive commercial access to the Biobank under the License Agreement.
In December 2015, we entered
into an amendment to the Research Agreement, which amendment (i) set the payment schedule under such agreement through March 2017
and (ii) granted us the right to extend the term of the Research Agreement until November 12, 2017
.
In February 2017, we
entered into a second amendment to the Research Agreement, which extended the term of the Research Agreement through June 30, 2018.
This amendment also granted us rights to continually extend the term of the Research Agreement by one year by giving CHOP written
notice of extension no later than one year prior to the expiration of the then-current term of the Research Agreement. In June
2017, we extended the term of the Research Agreement through June 30, 2019, and in June 2018, we extended the term of Research
Agreement through June 30, 2020. $5.94 million was due for the Research Agreement in 2018. $4.75 million will be due under the
Research Agreement in 2019, and in the first half of 2020, $2.38 million will be due.
In March 2019, we reached agreement
with CHOP to further amend the Research Agreement and the License Agreement (the “CHOP Amendments”). The CHOP Amendments
allow us to defer the monthly payments due under the Research Agreement for the period from February 1, 2019 through September
30, 2019 in exchange for a non-interest bearing note in the amount of such deferral. Such note matures September 30, 2019 and is
secured by all of the Company’s intellectual property and other assets (the “Note”). At maturity, and at CHOP’s
option, the Note will be payable in cash or a number of shares of our common stock calculated based on the price of our common
stock at such time; provided, however, if conversion upon such election would cause CHOP and its affiliates including the CHOP
Foundation to own, in the aggregate, in excess of 47.5% of the then-outstanding shares of our common stock (after giving effect
to such conversion), then CHOP would only receive the number of shares of our common stock such that CHOP and its affiliates including
the CHOP Foundation would own, in the aggregate, 47.5% of the then outstanding shares of our common stock (after giving effect
to such conversion), and the balance of the Note would be payable to CHOP in cash. Depending on the price of the Company’s Common Stock at the time of such conversion, the percentage conversion cap discussed
above may result in a significant amount of the Note payable to CHOP in cash. In such case, depending on the amount, the Company
may not have enough cash on hand for such cash payment.
The CHOP Amendments with respect
to the Research Agreement and the License Agreement prohibits the assignment or sublicense of CHOP’s intellectual property
without CHOP’s prior written consent, allows CHOP to terminate the Research Agreement and the License Agreement upon a change
of control without CHOP’s prior written consent, reduces the period of time during which we have to exercise its options
to license new intellectual property of CHOP and to negotiate the terms of any such license and requires us to meet certain diligence
requirements related to acquiring rights to and commencing a clinical trial for a viable molecule that addresses the optioned intellectual
property.
Furthermore, we have agreed until the later
of repayment in full of the Note or June 30, 2020, we have agreed to only undertake an equity financing (including convertible
notes) if the net proceeds of such financing provide at least six months of cash to sustain our operations; provided, that CHOP
will have a right of first refusal to purchase any or all equity proposed to be issued in such financing on equivalent terms.
Development and Option Agreement,
with Kyowa Hakko Kirin Co., Ltd. (KHK) related to AEVI-002
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.
Research Collaboration and Option
Agreement with Kyowa Hakko Kirin Co., Ltd. (KHK) related to AEVI-005
During 2018, we expanded our collaboration
with KHK by entering a Research Collaboration and Option Agreement related to AEVI-005. AEVI- 005 is the second monoclonal antibody
we are developing as part of our ongoing collaboration with KHK. We are studying AEVI-005 in an undisclosed ultra-orphan auto-immune
pediatric disease. We initiated a preclinical research program with AEVI-005 in the second quarter of 2018.
Exclusive License Agreement with OSI
Pharmaceuticals, LLC, a subsidiary of Astellas Pharma Inc., or Astellas
In July 2019, we entered into an exclusive
license agreement with OSI Pharmaceuticals, LLC, an indirect wholly-owned subsidiary of Astellas Pharma Inc., or Astellas, for
the worldwide development and commercialization of Astellas’ novel, second generation mTORC1/2 inhibitor, AEVI-006. Under
the terms of the license agreement, we will pay Astellas an up-front license fee of $500,000 and Astellas will be eligible to receive
milestones payments based upon the achievement of specified development and regulatory milestones. Upon commercialization, Astellas
will be entitled to a tiered, single-digit royalty on worldwide annual net sales. We are fully responsible for the development
and commercialization of the program.
Royalty Agreement with Certain Related
Parties
In July 2019, we entered into a royalty
agreement with Michael F. Cola, Joseph J. Grano, Jr., Kathleen Jane Grano, Joseph C. Grano, The Grano Children’s Trust, Joseph
C. Grano, trustee and LeoGroup Private Investment Access, LLC on behalf of Garry A. Neil in exchange for a one-time aggregate payment
of $2 million, which we refer to as the Royalty Agreement. Collectively, the investors will be entitled to an aggregate amount
equal to a low-single digit percentage of the aggregate net sales of the OSI Products. At any time beginning three years after
the date of the first public launch of an OSI Product we may exercise, at our sole discretion, a buyout option that terminates
any further obligations under the Royalty Agreement in exchange for a payment to Investors of an aggregate of 75% of the net present
value of the royalty payments.
Option to Exercise an Exclusive License
Agreement with AstraZeneca
In August 2019, we obtained the right
to exercise an exclusive global license from Medimmune Limited, a subsidiary of AstraZeneca, for a
Phase 2-ready fully human monoclonal antibody that targets interleukin 18, or IL-18, AEVI-007. Under the terms of the
agreement, we will have the right to exercise an exclusive global license to develop and commercialize AEVI-007. Contingent
upon raising additional capital, we intend to exercise the option and we would be required to pay AstraZeneca a combined
mid-single digit millions in cash and equity upon execution of the option, up to $162 million upon achievement of certain
development and sales-related milestones and tiered low double-digit royalties on global annual product sales. We will be
fully responsible for the development and commercialization of the program.
OCS Agreements
Under agreements with the OCS in Israel
regarding research and development projects, the 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 the Israeli Subsidiary as participation in the research and development program, plus interest at LIBOR. The obligation to pay
these royalties is contingent on actual income. Proceeds from any potential transactions relating to the Israeli Subsidiary’s
research and development program may be subject to the terms and conditions of the OCS agreement. As of December 31, 2018, the
principal amount of the aggregate contingent liability amounted to approximately $13.97 million.