UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number: 001-35112

 

 

Aevi Genomic Medicine, Inc.
(Exact name of registrant as specified in its charter)

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)
98-0217544
(I.R.S. Employer
Identification No.)
   
435 Devon Park Drive, Suite 715
Wayne, Pennsylvania
(Address of Principal Executive Offices)
19087
(Zip Code)

 

(610) 254-4201
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class Trading Symbol(s) Name of exchange on which
registered
Common stock, par value $0.0001 per share GNMX Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x   Smaller reporting company x
Emerging growth company ¨      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of August 9, 2019, the registrant had 64,766,882 shares of common stock, $0.0001 par value, outstanding.

 

 

 

     

 

 

AEVI GENOMIC MEDICINE, INC.
FORM 10-Q
TABLE OF CONTENTS

 

  Page
   
PART I - FINANCIAL INFORMATION 1
   
ITEM 1. Financial Statements 1
   
CONDENSED CONSOLIDATED BALANCE SHEETS 1
   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 2
   
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 3
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 4
   
NOTES TO THE FINANCIAL STATEMENTS 5
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
   
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 19
   
ITEM 4. Controls and Procedures 19
   
PART II - OTHER INFORMATION 20
   
ITEM 1. Legal Proceedings 20
   
ITEM 1A. Risk Factors 20
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
   
ITEM 3. Defaults Upon Senior Securities 20
   
ITEM 4. Mine Safety Disclosures 20
   
ITEM 5. Other Information 20
   
ITEM 6. Exhibits 21

 

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to the “Company,” “Aevi Genomic Medicine,” “we,” “us” and “our” refer to Aevi Genomic Medicine, Inc., a Delaware corporation organized on January 27, 2000, and its wholly-owned subsidiaries, Medgenics Medical (Israel) Ltd., neuroFix, LLC and Aevi Genomic Medicine Europe BVBA/SPRL. We use the Aevi Genomic Medicine logo as a trademark in the United States and elsewhere. All other trademarks or trade names referred to in this document are the property of their respective owners.

 

  - i -  

 

 

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

    June 30,
2019
    December 31,
2018
 
    Unaudited     Audited  
ASSETS                
                 
CURRENT ASSETS:                
                 
Cash and cash equivalents   $ 3,437     $ 12,076  
Prepaid expenses and other current assets     572       170  
                 
Total current assets     4,009       12,246  
                 
LONG-TERM ASSETS:                
                 
Lease deposits     11       11  
Property and equipment, net     1       20  
                 
Total long-term assets     12       31  
                 
Total assets   $ 4,021     $ 12,277  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES:                
                 
Trade payables   $ 302     $ 1,582  
Other accounts payable and accrued expenses     3,387       2,763  
                 
Total current liabilities     3,689       4,345  
                 
Total liabilities     3,689       4,345  
                 
STOCKHOLDERS’ EQUITY:                
                 
Common stock - $0.0001 par value; 200,000,000 shares authorized; 64,766,882 shares issued and outstanding at June 30, 2019 and December 31, 2018   $ 7     $ 7  
Additional paid-in capital     254,562       253,678  
Accumulated deficit     (254,237 )     (245,753 )
                 
Total stockholders’ equity     332       7,932  
                 
Total liabilities and stockholders’ equity   $ 4,021     $ 12,277  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

  - 1 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)

 

    Six months ended
June 30,
    Three months ended
June 30,
 
    2019     2018     2019     2018  
    Unaudited     Unaudited  
Research and development expenses   $ 5,403     $ 12,308     $ 2,234     $ 5,747  
                                 
General and administrative expenses     3,100       4,678       1,415       2,504  
                                 
Operating loss     (8,503 )     (16,986 )     (3,649 )     (8,251 )
Financial income, net     19       86       4       60  
                                 
Net loss   $ (8,484 )   $ (16,900 )   $ (3,645 )   $ (8,191 )
                                 
Basic and diluted loss per share   $ (0.13 )   $ (0.28 )   $ (0.06 )   $ (0.14 )
Weighted average number of common stock used in computing basic and diluted loss per share     64,766,882       59,336,547       64,766,882       59,338,255  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

  - 2 -  

 

 

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited – In thousands, except share and per share data)

 

    Common stock     Additional
paid-in
capital
    Accumulated
deficit
    Total
stockholders’
equity
 
    Shares     Amount                    
Balance as of December 31, 2017     59,332,265     $ 6     $ 245,593     $ (214,978 )   $ 30,621  
Stock-based compensation related to options and warrants granted to consultants, directors and employees     -       -       749       -       749  
Exercise of warrants and options     5,000       (* )     34       -       34  
Net loss     -       -       -       (8,709 )     (8,709 )
Balance as of March 31, 2018     59,337,265     $ 6     $ 246,376     $ (223,687 )   $ 22,695  
Stock-based compensation related to options and warrants granted to consultants, directors and employees     -       -       786       -       786  
Exercise of warrants and options     3,466       (* )     -       -       -  
Net loss     -       -       -       (8,191 )     (8,191 )
Balance as of June 30, 2018     59,340,731     $ 6     $ 247,162     $ (231,878 )   $ 15,290  
                                         
Balance as of December 31, 2018     64,766,882     $ 7     $ 253,678     $ (245,753 )   $ 7,932  
Stock-based compensation related to options and warrants granted to consultants, directors and employees     -       -       628       -       628  
Net loss     -       -       -       (4,839 )     (4,839 )
Balance as of March 31, 2019     64,766,882     $ 7     $ 254,306     $ (250,592 )   $ 3,721  
Stock-based compensation related to options and warrants granted to consultants, directors and employees     -       -       256       -       256  
Net loss     -       -       -       (3,645 )     (3,645 )
Balance as of June 30, 2019     64,766,882     $ 7     $ 254,562     $ (254,237 )   $ 332  

 

(*) Represents an amount lower than $1.

 

  - 3 -  

 

 

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

    Six months ended
June 30,
 
    2019     2018  
    Unaudited  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (8,484 )   $ (16,900 )
Adjustments to reconcile loss to net cash used in operating activities:                
Depreciation     19       32  
Stock-based compensation     884       1,535  
Changes in operating assets and liabilities:                
Prepaid expenses and other current assets     (402 )     38  
Trade payables     (1,280 )     520  
Other accounts payable and accrued expenses     624       283  
Other long term assets     -       43  
Net cash used in operating activities   $ (8,639 )   $ (14,449 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Net cash provided by (used in) investing activities   $ -     $ -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from exercise of options and warrants     -       34  
Deferred offering costs     -       (163 )
Net cash provided by financing activities   $ -     $ (129 )
                 
Decrease in cash and cash equivalents     (8,639 )     (14,578 )
                 
Balance of cash and cash equivalents at the beginning of the period     12,076       33,729  
                 
Balance of cash and cash equivalents at the end of the period   $ 3,437     $ 19,151  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

  - 4 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share and per share data)

 

NOTE 1: GENERAL

 

a. Aevi Genomic Medicine Inc. (the “Company”) was incorporated in January 2000 in Delaware as Medgenics, Inc. The Company has two wholly-owned subsidiaries (the “Subsidiaries”): Medgenics Medical Israel Ltd. (the “Israeli Subsidiary”), which was incorporated in Israel in March 2000 and Aevi Genomics Medicine Europe BVBA/SPRL, which was incorporated in Belgium in December 2018. The Company is a clinical stage biopharmaceutical company with an emphasis on genomic medicine.

 

Since October 21, 2016, the Company’s common stock (the “Common Stock”) has been traded on the NASDAQ Global Market.

 

b. As reflected in the accompanying financial statements, the Company incurred a net loss and negative cash flow from operating activities for the six-month period ended June 30, 2019 of $8,484 and $8,639, respectively. The accumulated deficit as of June 30, 2019 was $254,237. As of June 30, 2019, the Company had cash and cash equivalents of $3,437, which it believes will provide funding for its operations into late in the third quarter of 2019. The Company and the Subsidiaries have not yet generated revenues from product sales. See Note 3 below, for additional information regarding liquidity risks and management’s plans.

 

c. 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.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

 

a. The accompanying unaudited condensed financial statements of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”) as filed with the SEC. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in the 2018 Form 10-K have been omitted.

 

b. Recently issued accounting pronouncements:

 

In 2016, the FASB issued ASU 2016-02, Leases, which replaced existing leasing guidance. ASU 2016-02 requires lessees to recognize operating and financing lease liabilities and related right-of-use assets, in addition to increased disclosures as to the nature of cash flows arising from a lease. We have adopted the new standard effective January 1, 2019, electing not to restate comparative periods. Adoption has not changed the classification of any of our leases. As a result of adopting ASU 2016-02, the primary impact on the Company’s financial statements was the recognition of a right-of-use asset and a corresponding current lease liability of approximately $42 on the Company’s Condensed Consolidated Balance Sheet, as of January 1, 2019.

 

In June 2018, the FASB issued ASU 2018-07, Compensation–Stock Compensation (Topic 718): Improvements to Nonemployee Shared-Based Payment Accounting. This guidance is intended to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. This guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual reporting periods, and early adoption is permitted. The Company does not anticipate a material impact to the consolidated financial statements as a result of the adoption of this guidance.

 

  - 5 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

NOTE 3: LIQUIDITY RISKS AND MANAGEMENT’S PLANS

 

The future success of the Company is dependent on its ability to develop its product candidates and ultimately upon its ability to attain profitable operations. The Company is subject to a number of risks similar to other early-stage life science companies, including, but not limited to, successful discovery and development of its product candidates, raising additional capital with favorable terms, development by its competitors of new technological innovations, protection of proprietary technology and market acceptance of the Company’s products. The successful discovery and development of product candidates requires substantial working capital which may not be available to the Company on favorable terms.

 

The Company has financed its operations primarily through issuance of equity and grants from third parties. As of June 30, 2019, the Company had cash and cash equivalents of $3,437 and liabilities of $3,689. The Company has incurred recurring operating losses since inception. For the quarter ended June 30, 2019, the Company incurred a net loss of $3,645 and as of June 30, 2019 the Company has an accumulated deficit of $254,237. The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to research, development of its product candidates and its preclinical programs, and its administrative organization. The Company will require substantial additional financing to fund its operations and to continue to execute its strategy. These conditions raise substantial doubt about its ability to continue as a going concern within one year after the date that the financial statements are issued.

 

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 the Company’s stockholders. If the Company raises additional funds through strategic collaborations and alliances or licensing agreements with third parties, which may include existing collaboration partners, the Company 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 the Company. To the extent that the Company raises additional capital through the sale of equity, the ownership interest of its 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, the Company is unable to raise sufficient capital through such transactions, it will not have sufficient cash resources and liquidity to fund its business operations for at least the next year following the date the financial statements are issued. Accordingly, management has concluded that substantial doubt exists with respect to the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

 

NOTE 4: COMMITMENTS AND CONTINGENCIES

 

The offices of the Company were rented under an operating lease agreement and committed through April 2019. In March 2019, the Company agreed to extend the operating lease through April 2020. Both the Company and the landlord have the right to terminate the lease 60 days after written notice is provided.

 

In November 2014, the Company entered into a license agreement (the “License Agreement”), and a sponsored research agreement (the “Research Agreement”), each with the Children’s Hospital of Philadelphia (“CHOP”). Under the terms of the License Agreement, CHOP granted the Company (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. A License Issuance Fee of $500 was paid and expensed in 2014. Beginning in 2016 and continuing through 2020, the Company paid, and is contractually required to pay, to CHOP an annual license maintenance fee of $100. This annual license maintenance fee increases to $200 beginning in 2021. The Company is required to pay to CHOP certain milestone payments, ranging from $250 to $500; low single-digit royalties on net sales of all licensed products and a percentage of amounts received from sublicensing activities.

 

  - 6 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

The License Agreement terminates upon the expiration date of the last-to-expire royalty term under the License Agreement. The Company may terminate the License Agreement at any time with six months’ prior written notice to CHOP, and CHOP may terminate the License Agreement upon (i) an uncured default by the Company of the License Agreement, (ii) the failure by the Company to meet certain development and/or commercialization milestones under the License Agreement, or (iii) the Company entering into liquidation, having a receiver or administrator appointed over any assets related to the License Agreement, makes any voluntary assignment of our assets for the benefit of creditors, ceases to carry on business, files for bankruptcy under Chapter 7 of the US Bankruptcy Code or has an involuntary petition under Chapter 7 of the US Bankruptcy Code filed against us.

 

In February 2017, the Company amended the License Agreement. The amendment allows the Company to extend the period of its exclusive commercial access to the Biobank for rolling two-year periods. The cost of the first extension was $198 with each subsequent extension costing $125. The Company has exercised such option in each of 2017 and 2018.

 

In December 2015, the Company entered into an amendment to the Research Agreement, which amendment, amongst other things, granted it the right to extend the term of the Research Agreement until November 12, 2017. In February 2017, the Company 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 the Company 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, the Company extended the term of the Research Agreement through June 30, 2019, and in June 2018, it extended the term of the Research Agreement through June 30, 2020. $5,937 was due under the Research Agreement in 2018. $4,750 will be due under the Research Agreement in 2019, and in the first half of 2020, $2,375 will be due.

 

In March 2019, the Company reached agreement with CHOP to further amend the Research Agreement and the License Agreement (the “CHOP Amendments”). The CHOP Amendments allow the Company 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 the Company’s Common Stock calculated based on the price of the Company’s 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 the Company’s Common Stock (after giving effect to such conversion), then CHOP would only receive the number of shares of the Company 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 the Company’s 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 the Company has to exercise its options to license new intellectual property of CHOP and to negotiate the terms of any such license and requires the Company 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, until the later of repayment in full of the Note or June 30, 2020, the Company has 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 the Company’s 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.

 

CHOP is the Company’s largest shareholder, and the CHOP Foundation has the right to nominate one of the Company’s Board of Directors. Expenses related to CHOP, within the Research Agreement or otherwise, were $1,233 and $2,563 for the three and six months periods ended June 30, 2019, respectively, and $1,898 and $4,486 for the three and six months periods ended June 30, 2018, respectively. As of June 30, 2019, the Company had total payables related to CHOP, inclusive of those related to the Research Agreement, of $2,011, allocated between accrued expenses and trade payables.

 

  - 7 -  

 

 

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

NOTE 5:- STOCKHOLDERS’ EQUITY

 

a. Issuance of stock options and warrants to employees and directors:

 

A summary of the Company’s activity for options and warrants granted to employees and directors is as follows:

 

    Six months ended
June 30, 2019
 
    Number of
options and
warrants
    Weighted
average
exercise
price
    Weighted
average
remaining
contractual
terms (years)
    Aggregate
intrinsic
value
 
Outstanding at December 31, 2018     10,308,328     $ 3.84       6.85     $ -  
                                 
Granted     -     $ -                  
                                 
Exercised     -     $ -                  
                                 
Forfeited     (558,216 )   $ 2.50                  
                                 
Outstanding at June 30, 2019     9,750,112     $ 3.92       6.24     $ -  
                                 
Vested and expected to vest at June 30, 2019     9,750,112     $ 3.92       6.24     $ -  
                                 
Exercisable at June 30, 2019     8,143,169     $ 4.32       5.77     $ -  

 

As of June 30, 2019, there was $1,234 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted to employees and directors. That cost is expected to be recognized over a weighted-average period of 1.48 years.

 

b. Issuance of options and warrants to consultants:

 

A summary of the Company’s activity for warrants and options granted to consultants is as follows:

 

    Six months ended
June 30, 2019
 
    Number of
options and
warrants
    Weighted
average
exercise
price
    Weighted
average
remaining
contractual
terms (years)
    Aggregate
intrinsic
value
 
Outstanding at December 31, 2018     10,000     $ 4.82       7.84     $ -  
                                 
Granted     -     $ -                  
                                 
Exercised     -     $ -                  
                                 
Forfeited     -     $ -                  
                                 
Outstanding at June 30, 2019     10,000     $ 4.82       7.34     $ -  
                                 
Exercisable at June 30, 2019     10,000     $ 4.82       7.34     $ -  

 

As of June 30, 2019, there was no unrecognized compensation cost related to non-vested stock-based compensation arrangements granted to consultants.

 

c. Stock-based compensation expense:

 

Compensation expense related to warrants and options granted to employees, directors and consultants was recorded in the Consolidated Statement of Operations in the following line items:

 

  - 8 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

    Six months ended
June 30,
    Three months ended
June 30,
 
    2019     2018     2019     2018  
Research and development expenses   $ 363     $ 646     $ 137     $ 314  
General and administrative expenses     521       889       119       472  
Total stock-based compensation expense   $ 884     $ 1,535     $ 256     $ 786  

 

d. Summary of shares to be issued upon exercise of options and warrants:

 

A summary of shares to be issued upon exercise of all the options and warrants, segregated into ranges, as of June 30, 2019 is presented in the following table:

 

          As of June 30, 2019  
Options / Warrants   Exercise
price
per share ($)
    Shares to be issued
upon exercise of
options and
warrants
outstanding
    Shares to be issued
upon exercise of
options and
warrants
exercisable
    Weighted average
remaining
contractual terms of
options and
warrants (in years)
 
Options:                                
Granted to employees and directors                                
      1.07-2.66        3,208,364       1,794,588       8.6  
      3.14-4.91        4,283,000       4,097,000       5.4  
      5.22-8.80        2,117,538       2,110,371       4.7  
              9,608,902       8,001,959          
                                 
Granted to consultants     4.82        10,000       10,000       7.3  
                                 
Total shares to be issued upon exercise of options             9,618,902       8,011,959          
                                 
Warrants:                                
                                 
Issued to employees and directors     2.84        141,210       141,210       3.3  
                                 
Issued to investors     2.84        3,812,694       3,812,694       3.3  
                                 
Total shares to be issued upon exercise of warrants             3,953,904       3,953,904          
                                 
Total shares to be issued upon exercise of options and warrants             13,572,806       11,965,863          

 

NOTE 6: LOSS PER SHARE

 

The Company computes basic net loss per share by dividing net loss by the weighted average number of shares outstanding, which includes stock issued and outstanding. The Company computes diluted net loss per share by dividing net loss by the weighted average number of shares and potential shares from outstanding stock options. Since the Company had a net loss for all periods presented, the effect of all potentially dilutive securities is anti-dilutive.

 

The following table presents anti-dilutive shares for the six and three months ended June 30, 2019 and 2018:

 

    Six months ended
June 30,
    Three months ended
June 30,
 
    2019     2018     2019     2018  
Weighted-average anti-dilutive shares related to:                                
Outstanding stock options     10,053,166       10,014,390       9,947,620       9,753,033  
Outstanding warrants     3,953,904       4,825,838       3,953,904       4,053,904  
Total weighted-average anti-dilutive shares     14,007,070       14,840,228       13,901,524       13,806,937  

 

  - 9 -  

 

  

AEVI GENOMIC MEDICINE, INC. AND ITS SUBSIDIARIES

 

NOTE 7: SUBSEQUENT EVENTS

 

On April 2, 2019, the Company received a notification from the NASDAQ Stock Market (“NASDAQ”) stating that the Company no longer complies with the minimum stockholders’ equity requirement under NASDAQ Listing Rule 5450(b)(1)(A) for continued listing on The NASDAQ Global Market because the Company’s stockholder’s equity, as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, had fallen below $10,000. The notification also indicated that the Company did not meet the alternative compliance standards set forth in NASDAQ Listing Rule 5450(b).

 

On August 6, 2019, the Company received a written notice (the “Notice”) from NASDAQ. As described in the Notice, the Company has 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 the Company has filed a preliminary proxy statement for stockholder approval of, and intends to implement, a reverse stock split, the Company needs 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 at the opening of business 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. 

 

In July 2019, the Company entered into an exclusive license agreement with OSI Pharmaceuticals, LLC, an indirect wholly-owned subsidiary of Astellas Pharma Inc. (“Astellas”) for the worldwide development and commercialization of Astellas’ novel, second generation mTORC1/2 inhibitor, AEVI-006. Under the terms of the license agreement, the Company will pay Astellas an up-front license fee of $500 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. The Company will be fully responsible for the development and commercialization of the program.

 

In July 2019, the Company 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 (each individually, an “Investor” and collectively, the “Investors”), in exchange for a one-time aggregate payment of $2,000 (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, the Company may exercise, at its sole discretion, a buyout option that terminates the Company’s further obligations under the Royalty Agreement in exchange for a payment to the investors of an aggregate of 75% of the net present value of the royalty payments.

 

In August 2019, the Company obtained the right to exercise an exclusive global license from Medimmune Limited, a subsidiary of AstraZeneca (“AZ”), for a Phase 2-ready fully human monoclonal antibody that targets interleukin 18, or IL-18, AEVI-007. Under the terms of the agreement, the Company will have the right to exercise an exclusive global license to develop and commercialize AEVI-007. Upon exercise of the option, the Company will pay AstraZeneca a combined mid-single digit millions in cash and equity, up to $162,000 upon achievement of certain development and sales-related milestones and tiered low double-digit royalties on global annual product sales. Exercising the option is contingent on the Company securing additional funding. Upon exercise of the option, the Company will be fully responsible for the development and commercialization of the program.

 

  - 10 -  

 

 

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.

 

  - 11 -  

 

 

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.

 

  - 12 -  

 

 

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.

 

  - 13 -  

 

 

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.

 

  - 14 -  

 

 

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.

 

  - 15 -  

 

 

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.

 

  - 16 -  

 

 

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.

 

  - 17 -  

 

 

 

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.

 

  - 18 -  

 

 

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.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

There has been no significant change in our exposure to market risk during the six months ended June 30, 2019. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

ITEM 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

As required by Rule 13a-15(b) of the Exchange Act, in connection with the filing of this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2019, the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the first quarter of 2019, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  - 19 -  

 

 

PART II - OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

We are not currently a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, are expected by us to have a material effect on our business, financial condition or results of operation if determined adversely to us.

 

ITEM 1A. Risk Factors

 

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner.

 

Business-Related Risks

 

If we fail to comply with the continued listing requirements of the NASDAQ Global Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

 

Our common stock is listed for trading on the NASDAQ Global Market. We must satisfy NASDAQ’s continued listing requirements, including, among other things, a minimum closing bid price requirement of $1.00 per share for our common stock and a minimum stockholders’ equity of $10 million. On February 6, 2019, we received a notification from NASDAQ that the closing bid price for our common stock had been below $1.00 for 30 consecutive business days and, on April 2, 2019, we received notification from NASDAQ that 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. On August 6, 2019, we received a written delisting notice from NASDAQ notifying us that our common stock has been scheduled for delisting from the NASDAQ Global Market. We have requested an oral hearing to appeal NASDAQ’s decision to delist our common stock, accordingly the delisting action has been stayed, pending a final written decision by NASDAQ’s Hearing Panel.  

 

A delisting of our common stock from NASDAQ could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Recent Sales of Unregistered Securities

 

None

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None

 

ITEM 3. Defaults Upon Senior Securities

 

None

 

ITEM 4. Mine Safety Disclosures

 

Not applicable

 

ITEM 5. Other Information

 

On August 12, 2019, the Company entered into a fourth amendment to that certain Sponsored Research Agreement, dated as of November 12, 2014, by and between the Company and the Children's Hospital of Philadelphia (“ CHOP ”), (as amended, the “ SRA ”), and a third amendment to that certain License Agreement, dated as of November 12, 2014, by and between the Company and CHOP (as amended, the “ License Agreement ”), which modified the manner in which the Company may exercise certain extension rights under the SRA (collectively, the “ Amendments ”). Pursuant to the terms of the SRA, the SRA may be automatically extended for an additional one year term if the Company provides written notice to CHOP of such extension by June 30, 2019 (the “ 2019 SRA Extension Notice ”). Pursuant to the terms of the License Agreement, the Company has the option to extend the period of time during which it is granted certain rights under the License Agreement (the “ Extension Option ”). The Amendments grant the Company until September 30, 2019 to provide the 2019 SRA Extension Notice and to exercise the Extension Option.

 

The foregoing descriptions of the Amendments are subject to and qualified in their entirety by reference to the full text of the Amendments, copies of which are filed as Exhibits 10.3 and 10.4 to this Quarterly Report on Form 10-Q.

  - 20 -  

 

  

ITEM 6. Exhibits

 

Exhibit
No.
Description
10.1* Exclusive License Agreement, dated as of July 15, 2019, by and between Aevi Genomic Medicine, Inc. and OSI Pharmaceuticals, LLC
10.2* Royalty Agreement, dated as of July 19, 2019, between and among Aevi Genomic Medicine, Inc., 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
10.3 Amendment No. 3 to License Agreement, dated as of August 12, 2019, by and between Medgenics Medical Israel Ltd. and The Children's Hospital of Philadelphia.
10.4 Amendment No. 4 to Sponsored Research Agreement, dated as of August 12, 2019, by and between Medgenics Medical Israel Ltd. and The Children's Hospital of Philadelphia.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101 Interactive Data File (filed herewith).

* Certain confidential portions of this exhibit were omitted in accordance with Item 601(b)(10) of Regulation S-K.

 

  - 21 -  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 13, 2019 AEVI GENOMIC MEDICINE, INC.  
       
  By: /s/ Michael F. Cola  
    Michael F. Cola  
    President and Chief Executive Officer  
    (Principal Executive Officer)  
       
Date: August 13, 2019      
  By: /s/ Michael H. McInaw  
    Michael H. McInaw  
    Interim Chief Financial Officer and Corporate Secretary  
    (Principal Financial Officer)  

 

  - 22 -  

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