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Item 7. Management’s Discussion and Analysis

2021-03-15 compared with 2020-03-11 · 107 added, 101 removed, 153 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

This discussion and analysis and other parts of this Annual Report on Form 10-K contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections.

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Please also see the section entitled “Special Note Regarding Forward-Looking Statements.”

We are a late-stage clinical biopharmaceutical company focused exclusively on developing impactful medicines for patients and families living with rare neurological disorders.

We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years and only now is being appreciated by the industry.

Our experienced team began with a vision to integrate the biology and symptomology of rare neurological conditions to employ innovative research and clinical strategies for the development of our drug candidates.

Based on recent scientific advances in genetics and the biological pathways of the brain, we created a proprietary map of disease-relevant pathways and used it to identify and acquire novel compounds for the treatment of rare neurological disorders.

We are also building a deep knowledge of the diseases and the clinically meaningful endpoints required for development of a compound in these rare neurological disorders.

We continue to execute on our strategy by in-licensing and collaborating with leading biopharmaceutical companies and academic institutions.

We have developed a robust pipeline of first-in-class and only-in-class clinical assets with an initial focus on neurodevelopmental disorders and developmental and epileptic encephalopathies, or DEE.

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

Our most advanced candidate is OV101 (gaboxadol).

We have successfully completed a Phase 2 trial in adults and adolescents with Angelman syndrome, which we refer to as the STARS clinical trial.

As previously announced, the STARS clinical trial achieved its primary endpoint of safety and tolerability and showed a statistically significant improvement in the once-daily OV101 dosing group on the pre-specified physician-rated Clinical Global Impressions-Improvement (“CGI-I”) exploratory endpoint as well as improvements in relevant symptoms such as sleep, motor function and behavior.

Following the STARS study we conducted a post hoc analysis of the STARS data which demonstrated that the study subjects in the once-daily dosing group of OV101 showed (i) improvements on the CGI-I scale increasing over time for the once-daily dosing group versus placebo, and (ii) improvements on the CGI-I scale being more robust in younger patients for the once-daily dosing group.

Following discussion of the STARS clinical trial with the U.

Food and Drug Administration (“FDA”) and German regulatory authorities, we designed and initiated a pivotal Phase 3 clinical trial in OV101 for Angelman syndrome in June 2019, which we refer

to as the NEPTUNE clinical trial.

NEPTUNE is a 12-week, two-arm, double-blind, placebo-controlled trial with approximately 60 patients aged 4 to 12 years randomized to either once daily, weight-based dose of OV101 or to placebo.

A few patients aged 2-3 years will also be enrolled for safety assessments only.

The primary endpoint is the change in the overall CGI-I-AS score at 12-weeks versus baseline between the OV101 and placebo groups.

In September 2019, we announced that the first patient had been randomized in NEPTUNE, and we expect to report topline data from this trial by mid-2020.

There are no other drug candidates in clinical development, or drugs approved, for treatment of Angelman syndrome.

Based on the STARS clinical trial data, we also initiated ELARA, an open-label extension trial which enrolled its first patient in February 2019, and enrollment is ongoing.

In June 2019, the European Commission granted OV101 orphan drug designation for the treatment of Angelman syndrome based on the results of the STARS clinical trial.

We also are currently conducting a Phase 2 trial evaluating OV101 in adolescent and young male adults with Fragile X syndrome, which we refer to as the ROCKET clinical trial.

The primary endpoint of ROCKET is safety and tolerability of OV101 over 12 weeks of treatment in three different cohorts of either 5mg once daily, 5mg twice daily or 5mg three times daily.

A secondary efficacy endpoint evaluates changes in behavior during 12 weeks of treatment with OV101 using the Activities-specific Balance Confidence Scale that has been used in previous trials for Fragile X syndrome.

We expect to report data from ROCKET early in the second quarter of 2020.

We are also conducting an observational non-drug study, known as SKYROCKET, to assess the suitability of scales for the measurement of behavior, sleep and functioning in individuals with Fragile X syndrome.

W e expect to report data from SKYROCKET early in the second quarter of 2020.

In addition, we are in a license and collaboration with Takeda Pharmaceutical Company Limited (“Takeda”) to jointly develop and commercialize TAK-935, which we have licensed from Takeda and refer to as OV935 (soticlestat).

We are initially studying OV935 for those suffering from severe and often intractable forms of DEE, including Dravet syndrome, Lennox-Gastaut syndro me (“LGS”) and CDKL5 Deficiency Disorder and Duplication 15q, or Dup15q, syndrome.

Each of these disorders either has limited or no therapeutic options.

We completed a Phase 1b/2a clinical trial of OV935 in a mixed group of adults with DEE and announced the results in December 2018.

The trial achieved its primary endpoint of safety and tolerability, dose proportional reduction in a potential plasma biomarker called 24HC, and a robust reduction in seizure frequency (61% at day 92), with two patients becoming seizure-free at the end of the treatment period.

Following this trial, we reported the initial data from the ENDYMION Phase 2 open-label extension study of OV935 in six study subjects who previously completed our 12-week Phase 1b/2a clinical trial of OV935 in adults with DEE.

The longer-term data from ENDYMION out to 48 weeks suggest increased seizure reduction with prolonged treatment of OV935 and is consistent with the believed mechanism of action of OV935.

Median seizure frequency reductions were 84% following 25 to 36 weeks (n=6) and 90% following 37 to 48 weeks (n=4) of treatment.

In general, a greater reduction in seizure frequency was observed in those with higher baseline seizure frequency.

OV935 is currently in multiple Phase 2 clinical trials and we expect to report data in these trials in 2020.

The FDA has granted orphan drug designation for OV935 for the treatment of Dravet syndrome and LGS.

Ovid and Takeda continue to enroll study subjects in two additional clinical trials:

a Phase 2 clinical trial in pediatric patients with Dravet syndrome or LGS (ELEKTRA) and a Phase 2 clinical trial in pediatric patients with CDKL5 deficiency disorder or Dup15q syndrome (ARCADE).

Further, all study subjects who have completed the ARCADE and ELEKTRA trials have the opportunity to enroll in the ENDYMION trial and to date all study subjects have enrolled in ENDYMION.

Additionally, Takeda elected to initiate a placebo-controlled trial of TAK-935 to treat study subjects with chronic complex regional pain syndrome, or CRPS.

This trial will look at the efficacy, safety and tolerability of TAK-935 as an adjunctive therapy in participants with CRPS.

Pursuant to our agreement with Takeda, we have a one-time right to opt into this program but until we exercise our opt in rights we are not responsible for funding this trial.

We also have early research programs exploring OV329 in infantile spasm/rare epilepsies and OV881 as a potential microRNA gene therapy for the treatment of Angelman syndrome.

We are a biopharmaceutical company focused on developing impactful medicines for patients and families living with rare neurological disorders.

We believe these disorders represent an attractive area for drug development as the understanding of the underlying biology has grown meaningfully over the last few years and today represent a substantial opportunity medically and commercially.

Based on the rapid increase in scientific understanding of the role of genetics and key biological pathways relevant to diseases of the brain, we aim to identify, discover and develop novel compounds for the treatment of rare neurological disorders.

We have built a deep knowledge of such diseases, how to treat them and how to develop the clinically meaningful endpoints required for development of a compound in these disorders.

As a result of this knowledge, we have developed a pipeline of first-in-class compounds and programs and have demonstrated our model by progressing compounds through to late-stage development.

We continue to execute on our strategy to build this pipeline by discovering in-licensing and collaborating with leading biopharmaceutical companies and academic institutions.

Our latest pipeline includes two late-stage programs and several earlier stage programs.

Since our inception in April 2014, we have devoted substantially all of our efforts to organizing and planning our business, building our management and technical team, acquiring operating assets and raising capital.

We have not generated any revenue and have funded our business primarily through the sale of our capital stock.

During the year ended December 31, 2020, we generated $12.6 million of license and other revenue through our Collaboration and License Agreement, or the Angelini License Agreement, with Angelini Pharma Rare Diseases AG, or Angelini, and have otherwise funded our business primarily through the sale of our capital stock.

Through December 31, 2020, we have raised net proceeds of $275.4 million from the sale of our convertible preferred stock and our common stock.

As of December 31, 2019, we had $76.7 million in cash, cash equivalents and short-term investments.

As of December 31, 2020, we had $72.0 million in cash and cash equivalents.

We recorded net losses of $81.0 million and $60.5 million for the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2019, we had an accumulated deficit of approximately $213.2 million.

As of December 31, 2020, we had an accumulated deficit of $294.2 million.

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years.

Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our

other research and development and commercial development activities.

Our net losses may fluctuate significantly from period to period, depending on the timing of our planned clinical trials and expenditures on our other research and development and commercial development activities.

We expect our expenses will increase substantially over time as we:

continue the ongoing and planned preclinical and clinical development of our drug candidates;

build a portfolio of drug candidates through the acquisition or in-license of drugs, drug candidates or technologies;

build a portfolio of drug candidates through the development, acquisition or in-license of drugs, drug candidates or technologies;

initiate preclinical studies and clinical trials for any additional drug candidates that we may pursue in the future;

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implement operational, financial and management systems;

attract, hire and retain additional administrative, clinical, regulatory and scientific personnel.

Recent Events

In November and December 2019, we sold 4,003,000 shares of our common stock and 2,890,888 shares of our common stock pursuant to the ATM agreement (as defined below) at a price per share of $2.50 and $4.5001, respectively, for aggregate net proceeds of $22.3 million after deducting sales agent commissions and other offering expenses payable by us.

attract, hire and retain additional administrative, clinical, regulatory, manufacturing, commercial and scientific personnel.

Recent Developments

Royalty, License and Termination Agreement with Takeda

On March 2, 2021, we entered into a royalty, license and termination agreement, or the Takeda License and Termination Agreement , with Takeda, relating to the Takeda collaboration agreement described above in Item 1.

Business section.

Under the terms of the Takeda License and Termination Agreement , upon closing of the transaction, the Takeda collaboration agreement will be terminated by mutual agreement, and Takeda will secure rights to our 50% global share in soticlestat, and an exclusive license under our relevant intellectual property rights, in exchange for an upfront payment, development and commercial milestone payments, and royalties.

Takeda will assume all responsibility for, and costs of, both development and commercialization of soticlestat following closing.

At closing, we will receive an upfront payment of $196.0 million and are eligible to receive up to an additional $660.0 million in development, regulatory and sales milestones.

In addition, if soticlestat achieves regulatory approval, we will receive tiered royalties on net sales of soticlestat at percentages ranging from the low double-digits up to 20%, subject to standard reductions in certain circumstances.

Royalties are payable on a country-by-country and product-by-product basis during the period beginning on the date of the first commercial sale of such product in such country and ending on the later to occur of the expiration of patent rights covering the product in such country and a specified anniversary of such first commercial sale.

The Takeda License and Termination Agreement will remain in effect until Takeda’s cessation of commercialization of soticlestat.

We expect to close the Takeda License and Termination Agreement in the first half of 2021, subject to the satisfaction of customary closing conditions, including regulatory review by the appropriate regulatory agencies under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

The Takeda License and Termination Agreement may be terminated upon the mutual agreement of the parties, or by either Takeda or the Company, if the closing has not occurred on or before May 14, 2021.

COVID-19 Update

We have implemented business continuity plans designed to address and mitigate the impact of the ongoing COVID-19 pandemic on our employees and our business.

We continue to operate normally with the exception of enabling all of our employees to work productively at home and abiding by travel restrictions issued by federal, state and local governments.

Our current plans to return to the office remain fluid as federal, state and local guidelines, rules and regulations continue to evolve .

Financial Operations Overview

We have not generated any revenue from commercial drug sales and do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates.

We have generated limited revenue under the Angelini License Agreement and expect to recognize additional revenue as we satisfy our performance obligations .

We have not generated any revenue from commercial drug sales and do not expect to generate any further revenue unless or until we obtain regulatory approval of and commercialize one or more of our current or future drug candidates.

In the future, we may also seek to generate revenue from a combination of research and development payments, license fees and other upfront or milestone payments.

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Research and development expenses consist primarily of costs incurred for our research activities, including our product discovery efforts and the development of our product candidates, which include, among other things:

fees related to the acquisition of the rights to OV101 and OV935;

employee-related expenses, including salaries, benefits and stock-based compensation expense;

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Other general and administrative expenses include costs associated with operating as a public company described below, travel expenses, conferences, professional fees for auditing, tax and legal services and facility-related costs.

We expect that general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization of our product candidates.

Interest Income

Interest income consists of interest income earned on our cash and cash equivalents maintained in money market funds and short-term investments that were maintained in U.S.

Other Income, Net

Other income consists of interest income earned on our cash and cash equivalents maintained in money market funds and prior short-term investments that were maintained in U.S.

treasury notes.

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(in thousands)

License and other revenue

Operating expenses:

Research and development

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Loss from operations

Interest income

Other income, net

Total revenue was $12.6 million for the year ended December 31, 2020 as a result of revenue recorded in connection with the Angelini License Agreement.

We did not generate any revenue during the year ended December 31, 2019.

Research and Development Expenses

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Total research and development

Research an d development expenses were $ 42.

2 million for the year ended December 31, 2019 compared to $ 33.8 million for the year ended December 31, 2018 .

The increase of $ 8.

4 million was primarily due to an increase in development activities related to our ongoing development programs .

During the year ended December 31, 2019, total research and development expenses consisted of $27.0 million in preclinical and development expenses, including a credit of $ 4.7 million representing costs reimburs able to the Company from Takeda in respect of the Takeda collaboration, $11 .5 million in payroll and payroll-related expenses, of which $2.4 million related to stock-based compensation, and $3.6 million in other expen ses.

Research and development expenses were $63.4 million for the year ended December 31, 2020 compared to $42.2 million for the year ended December 31, 2019.

The increase of $21.3 million was primarily due to an increase in development activities related to our ongoing development programs .

During the year ended December 31, 2020, total research and development expenses consisted of $43.6 million in preclinical and development expenses, including a credit of $0.7 million representing costs reimbursable to the Company from Takeda in respect of the Takeda collaboration, $15.4 million in payroll and payroll-related expenses, of which $2.8 million related to stock-based compensation, and $4.4 million in other expenses.

During the year ended December 31, 2019, total research and development expenses consisted of $27.0 million in preclinical and development expenses, including a credit of $4.7 million representing costs reimbursed to us from Takeda in respect of the Takeda collaboration, $11.5 million in payroll and payroll-related expenses, of which $2.4 million related to stock-based compensation, and $3.6 million in other expenses .

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General and administrative expenses were $30.6 million for the year ended December 31, 2020 compared to $19.3 million for the year ended December 31, 2019.

The increase of $0.1 million primarily consisted of an increase in legal and professional fees of $0.9 million offset by decreases in general office expenses of $0.2 and payroll and payroll-related expenses of $0.6 million driven by a decrease in stock-based compensation expense.

Interest Income

Interest income was $0.9 million for the year ended December 31, 2019 and $1.0 million for the year ended December 31, 2018.

The increase of $11.4 million primarily consisted of increases in legal fees, compliance and pre-commercialization expenses and professional fees of $8.2 million and payroll-related expenses of $3.5 million.

Other Income, Net

Other income includes interest income of $0.4 million for the year ended December 31, 2020 and $0.9 million for the year ended December 31, 2019.

There was no provision for income taxes for the years ended December 31, 2020 and 2019 because we have historically incurred operating losses and we maintain a full valuation allowance against our net deferred tax assets.

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As of December 31, 2020, we had total cash, cash equivalents and short-term investments of $72.0 million as compared to $76.7 million as of December 31, 2019.

On July 9, 2020, we entered into the Angelini License Agreement with Angelini, pursuant to which we granted to Angelini exclusive rights to develop and commercialize OV101 in the European Territory.

Under the Angelini License Agreement, Angelini made an upfront payment and a milestone payment related to the transfer of a specified amount of compound and related information to the Company of $25.0 million during the year ended December 31, 2020.

In addition, Angelini will be required to make additional milestone payments to us upon the completion of the specified components of the technology transfer, and achievement of specified regulatory milestones for OV101 in Angelman syndrome of up to $55.0 million in the aggregate, as well as up to €162.5 million ($199.9 million) in sales milestone payments for achievement of specified levels of net sales in the European Territory.

Angelini also will be required to pay tiered royalties on net sales by Angelini, its affiliates or sublicensees at double-digit percentages above the teens, subject to certain standard reductions and offsets.

In November 2020, we filed a new shelf registration statement on Form S-3 (Registration No.

333-250054) that allows us to sell up to an aggregate of $250.0 million of our common stock, preferred stock, debt securities and/or warrants (the “S-3 Registration Statement”), which includes a prospectus covering the issuance and sale of up to $75.0 million of common stock pursuant to an at-the-market (“ATM”) offering program.

As of December 31, 2020, we had $250.0 million available under our S-3 Registration Statement, including $75.0 million available pursuant to our ATM program.

In August 2020, we sold 6,250,000 shares of our common stock at a public offering price of $8.00 per share, for net proceeds of $46.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by us, or the August 2020 Offering.

In February 2019, we sold 13,993,778 shares of our common stock and 2,500 shares of Series A Convertible Preferred Stock at a public offering price of $2.00 and $2,000 per share, respectively, for net proceeds of $30.5 million, after deducting underwriting discounts and commissions and other offering expenses payable by us, or the February 2019 Offering.

In October and November 2019, we sold 10,350,000 shares of our common stock, which included the full exercise of the underwriters’ option to purchase additional shares, and 4,000 shares of Series A Convertible Preferred Stock at a public offering price of $2.50 and $2,500 per share, respectively, for net proceeds of $33.5 million after deducting underwriting discounts and commissions and other offering expenses payable by us, or the October 2019 Offering.

In June 2018, we entered into a sales agreement, or the ATM agreement, with Cowen and Company, LLC, or Cowen, under which we may offer and sell in “at the market offerings,” from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Cowen acting as our sales agent, or the ATM Offering.

During the year ended December 31, 2019, we sold 6,893,888 shares of our common stock under the ATM agreement for net proceeds of $22.3 million after deducting sales agent commissions and other offering expenses payable by us .

Similar to other development stage biotechnology companies, we have not generated any revenue since inception.

We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses and negative operating cash flows for at least the next several years.

We incurred net losses of $60.5 million and $52.0 million for the years ended December 31, 2019 and 2018, respectively.

During the year ended December 31, 2019, we sold 6,893,888 shares of our common stock under our previous ATM program for net proceeds of $22.3 million after deducting sales agent commissions and other offering expenses payable by us, or the ATM Offering.

Similar to other development-stage biotechnology companies, we have generated limited revenue, which has been through the Angelini License Agreement.

We have incurred losses and experienced negative operating cash flows since our inception and anticipate that we will continue to incur losses for at least the next several years.

We incurred net losses of approximately $81.0 million and $60.5 million for the year ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, we had an accumulated deficit of $294.2 million and working capital of $52.8 million.

We believe that our existing cash , cash equivalents , and short-term investments as of December 31, 2019 will be sufficient to fund our current operating plans through at least the next 12 months from the filing of this A nnual R eport on Form 10-K.

We plan to finance our cash needs through either equity offerings, debt financings, collaborations, strategic alliances, or licensing agreements or a combination of any such transactions.

Management has identified these conditions or events, which, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern, including the risk that we will be unable to raise adequate additional capital to fund operations through at least the next 12 months from the date of filing of this Annual Report on Form 10-K.

Management’s response to these conditions and events is that the successful closing of the Takeda License and Termination Agreement with Takeda (see note 12 of our Consolidated Financial Statements) will provide the liquidity needed to alleviate the substantial doubt referred to above.

As described in note 12 of our Consolidated Financial Statements, there are certain conditions to close the Takeda License and Termination Agreement, however, management has determined that the likelihood of not closing in the first half of 2021 is remote.

In the event that we are unable to close the Takeda License and Termination Agreement, we will need to raise additional capital in order to

alleviate substantial doubt about our ability to continue as a going concern .

The failure to raise capital as and when needed could have a negative impact on our financial condition and ability to pursue our business strategy.

If we are unable to raise capital, we may be required to delay, reduce the scope of or eliminate research and development programs, or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently.

In addition to the proceeds we expect to receive upon closing of the Takeda License and Termination Agreement, we plan to finance our cash needs through either equity offerings, debt financings, collaborations, strategic alliances, or licensing agreements or a combination of any such transactions.

To the extent that we raise additional capital through future equity offerings or debt financings, ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder.

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There can be no assurance that such financings will be obtained on terms acceptable to us, if at all.

The ongoing COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets.

If the disruption persists and deepens, we could experience an inability to access additional capital, which could in the future negatively affect our operations.

If we raise additional funds through collaborations, strategic alliances or licensing agreements with third parties for one or more of our current or future drug candidates, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or drug candidates or to grant licenses on terms that may not be favorable to us.

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Financing activities

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Net Cash Used in Operating Activities

Net cash used in operating activities was $51.1 million for the year ended December 31, 2019, which consisted of net losses of $60.5 million offset by $9.4 million of net non-cash charges and changes in operating asset and liabilities compared to $45.6 million for the year ended December 31, 2018 , which consisted of net losses of $52.0 million offset by $6.4 million of net non-cash charges and changes in operating assets and liabilities.

The increase of $5.4 million in net cash used in operating activities was primarily due to an increase in our costs and upfront payments related to our research and development programs and an increase in our payroll and payroll-related expenses as the result of increased headcount as we continue to build our management team and expand our operations.

Net Cash Used in Investing Activities

Net cash used in investing activities was $30.0 million for the year ended December 31, 2019, compared to $5.4 million for the year ended December 31, 2018.

The increase in net cash used in investing activities was primarily due to purchases of short-term investments during the year ended December 31, 2019 compared to maturities and purchases during the year ended December 31, 2018.

Net cash used in operating activities was $51.6 million for the year ended December 31, 2020, which consisted of a net loss of $81.0 million offset by a net of $29.5 million of non-cash charges and indirect cash changes, primarily related to $7.5 million of stock-based compensation expense and $12.4 million of deferred revenue.

Net cash used in operating activities was $51.1 million for the year ended December 31, 2019, which consisted of a net loss of $60.5 million offset by a net of $9.4 million of non-cash charges and indirect cash changes, primarily related to $5.2 million of stock-based compensation expense.

Net Cash Provided by ( Used in) Investing Activities

Net cash provided by investing activities was $34.6 million for the year ended December 31, 2020, compared to $30.0 million used in investing activities for the year ended December 31, 2019.

The change in net cash provided by investing activities was primarily due to the higher maturities of short-term investments during the year ended December 31, 2020 compared to net purchases during the year ended December 31, 2019.

Net Cash Provided by Financing Activities

Net cash provided by financing activities of $47.0 million for the year ended December 31, 2020 was primarily due to the net proceeds from the August 2020 Offering.

Net cash provided by financing activities of $86.5 million for the year ended December 31, 2019 was primarily due to the net proceeds from the February 2019 Offering, October 2019 Offering and ATM Offering.

Net cash provided by financing activities of $0.3 million for the year ended December 31, 2018 was primarily due to the proceeds from the exercise of stock options and purchases of shares under the 2017 employee stock purchase plan.

Contractual Obligations and Commitments

As of December 31, 2019, we had no contractual obligations or commitments.

We had no long-term debt, operating leases, or capital leases and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis.

We excluded any potential contingent payments upon the achievement by us of clinical, regulatory and commercial events, as applicable, or royalty payments that we may be required to make under license agreements we have entered into with various entities pursuant to which we have in-licensed certain intellectual property as contractual obligations or commitments, including our license agreement with H.

Lundbeck A/S, our license agreement with Northwestern, and our Takeda collaboration.

As of December 31, 2020, we agreed to continue certain studies that were ongoing at the time of signing the Angelini License Agreement.

In March 2021, we entered into the Takeda License and Termination Agreement under which Takeda will secure global rights at closing from us to develop and commercialize the investigational medicine OV935 for the treatment of developmental and epileptic encephalopathies, including DS and LGS .

Closing of the Takeda License and Termination Agreement is subject to satisfaction of customary closing conditions, including regulatory review by the appropriate regulatory agencies under the HSR Act .

We had no other material contractual obligations or commitments.

We had no long-term debt or leases and no material non-cancelable

purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis.

Lundbeck A/S, Northwestern, and our Takeda license agreement.

Pursuant to these license agreements, we have agreed to make milestone payments up to an aggregate of $ 279.3 million upon the achievement of certain development, regulatory and sales milestones.

We excluded these contingent payments given that the timing and amount, if any, of such payments cannot be reasonably estimated at this time.

See the section titled “Business—License and Collaboration Agreements—License Agreement with H.

Lundbeck A/S”, Business—License and Collaboration Agreements—

Northwestern License,” and “Business—License and Collaboration Agreement s—License and Collaboration Agreement with Takeda” for additional information.

We excluded these contingent payments given that the timing, probability, and amount, if any, of such payments cannot be reasonably estimated at this time.

Off-Balance Sheet Arrangements

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Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more detail in Note 2 to our audited financial statements appearing elsewhere in this Annual Report on Form 10-K.

We believe the following critical accounting policies are most important to understanding and evaluating our reported financial results.

During the year ended December 31, 2020, we recognized revenue.

In addition, see Note 2 of our Consolidated Financial Statements under the heading “Recent Accounting Pronouncements” for new accounting pronouncements or changes to the accounting pronouncements during the year ended December 31, 2020.

Accrued Clinical Expenses

When preparing our consolidated financial statements, we are required to estimate our accrued clinical expenses.

This process involves reviewing open contracts and communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost.

otherwise notified of actual cost.

Payments under some of the contracts we have with third parties depend on factors, such as successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones.

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If possible, we obtain information regarding unbilled services directly from our service providers.

we may be required to estimate the cost of these services based only on information available to us.

If we underestimate or overestimate the cost associated with a trial or service at a given point in time, a djustments to research and development expenses may be necessary in future periods.

However, we may be required to estimate the cost of these services based only on information available to us.

If we underestimate or overestimate the cost associated with a trial or service at a given point in time, adjustments to research and development expenses may be necessary in future periods.

Historically, our estimated accrued clinical expenses have approximated actual expense incurred.

Stock-Based Compensation

We account for stock-based compensation awards in accordance with the Financial Accounting Standards Board Accounting Standards Codification, or ASC, Topic 718, Compensation—Stock Compensation , or ASC 718 (see note 2).

ASC 718 requires all stock-based compensation awards to be recognized as expense based on their grant date fair values.

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Management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions at each reporting date.

We measure the grant-date fair value based on the Black-Scholes option-pricing model, which uses subjective assumptions.

These assumptions include:

We measure the grant-date fair value based on the Black-Scholes option-pricing model, which uses subjective assumptions and other inputs.

These assumptions and inputs include:

Expected Volatility.

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The dividend yield assumption is zero since we have never paid cash dividends and do not plan to pay cash dividends in the foreseeable future.

We expect the impact of our stock-based compensation expense for stock options granted to employees and non-employees to grow in future periods due to the potential increases in the value of our common stock and in headcount.

Revenue Recognition

We recognize revenue under sublicense agreements in accordance with the ASC 606.

We currently have one such agreement, the Angelini License Agreement .

The terms of the agreement within this scope may contain multiple performance obligations, including but not limited to licenses and research and development activities.

ASC 606 requires that we evaluate these agreements to determine the distinct performance obligations.

Non-refundable, up-front fees that are not contingent on any future performance and require no consequential continuing involvement by us, are recognized as revenue when the license term commences and the licensed data, technology or product is delivered.

We defer recognition of non-refundable upfront fees if the performance obligations are not satisfied.

Prior to recognizing revenue, we make estimates of the transaction price, including variable consideration that is subject to a constraint.

Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Variable consideration may include all or portions of upfront license fees, payments for research and development activities, reimbursement of certain third-party costs, payments based upon the achievement of specified milestones, royalty payments based on product sales derived from collaboration and other payments.

If there are multiple distinct performance obligations, we allocate the transaction price to each distinct performance obligation based on its relative standalone selling price.

For the Angelini License Agreement, t he transaction price was allocated based on the standalone selling prices of the license and ongoing trials .

The portion of the upfront payment allocated to the license was recognized in full as it was non-refundable and not contingent on any future performance and requires no consequential continuing involvement by the Company.

Revenue related to ongoing trials is recognized by measuring the progress toward complete satisfaction of the performance obligations over time based on the portion of estimated total trial costs to be incurred.

Milestone payments are considered contingent variable consideration which are not accounted for until the contingencies are met.

Quantitative and Qualitat ive Disclosures About Market Risk.

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Item 7. Management’s Discussion and Analysis