Ovid Therapeutics Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K. You should carefully read the “Risk Factors” section of this Annual Report on Form 10-K to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward-Looking Statements.” Overview We are a biopharmaceutical company focused on drug discovery and development for epilepsies and rare CNS disorders in a manner that is scientifically driven, patient focused, and is coupled with an integrated and disciplined approach to research, clinical development and business development. Our team has significant experience and understanding of rare epilepsies and seizure-related neurological conditions, and we continue to build insight into the way the different molecular mechanisms and pathways underlying these disorders impact the symptoms patients suffer. Ovid has set out to be a leader in the field, and has developed a differentiated pipeline containing three novel mechanisms of action to target different causes of epilepsies and seizures. Our knowledge of epilepsy disease biology and pathology, which was acquired through our small molecule development programs, now contributes to our pursuit of additional relevant genetic targets and molecular pathways that are the cause of seizures. Over time, we have built a scalable scientific platform and efficient development capabilities in epilepsies that focus on clear, clinical endpoints. We are initially pursuing therapeutic assets for rare disorders as they can leverage accelerated development programs. If successfully developed and marketed in rare conditions, we intend to explore these assets for broader neurologic indications. Our cohesive focus in epilepsies and seizures reinforces our belief that we can develop and produce multiple novel medicines, scale our infrastructure, and thereby succeed in our mission. 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. During the years ended December 31, 2022 and 2021, we generated $1.5 million and $208.4 million of license and other revenue, respectively. The revenue generated in the year ended December 31, 2021 was primarily through the license and collaboration agreement with Takeda. We have otherwise funded our business primarily through the sale of our capital stock. Through December 31, 2022, we have raised net proceeds of $275.4 million from the sale of our convertible preferred stock and common stock. As of December 31, 2022, we had $129.0 million in cash, cash equivalents and marketable securities. We recorded a net loss of $54.2 million and net income of $122.8 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $225.5 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. 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 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; • seek marketing approvals for our current and future drug candidates that successfully complete clinical trials; 59 Table of Contents • establish a sales, marketing and distribution infrastructure to commercialize any drug candidate for which we may obtain marketing approval; • develop, maintain, expand and protect our intellectual property portfolio; • implement operational, financial and management systems; and • attract, hire and retain additional administrative, clinical, regulatory, manufacturing, commercial and scientific personnel. Significant Risks and Uncertainties The global economic slowdown, the overall disruption of global healthcare systems and other risks and uncertainties associated with public health crises and the ongoing war between Russia and Ukraine may have a material adverse effect on our business, financial condition, results of operations and growth prospects. The resulting high inflation rates may materially affect our business and corresponding financial position and cash flows. Inflationary factors, such as increases in the cost of our clinical trial materials and supplies, interest rates and overhead costs may adversely affect our operating results. Rising interest rates also present a recent challenge impacting the U.S. economy and could make it more difficult for us to obtain traditional financing on acceptable terms, if at all, in the future. Furthermore, economic conditions have produced downward pressure on share prices. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience increases in the near future (especially if inflation rates remain high or begin to rise again) on our operating costs, including our labor costs and research and development costs, due to supply chain constraints, the global geopolitical tension as a result of the ongoing war between Russia and Ukraine, worsening global macroeconomic conditions and employee availability and wage increases, which may result in additional stress on our working capital resources. In addition, we are subject to other challenges and risks specific to our business and our ability to execute on our strategy, as well as risks and uncertainties common to companies in the pharmaceutical industry with development and commercial operations, including, without limitation, risks and uncertainties associated with: identifying, acquiring or in-licensing products or product candidates; obtaining regulatory approval of product candidates; pharmaceutical product development and the inherent uncertainty of clinical success; and the challenges of protecting and enhancing our intellectual property rights; complying with applicable regulatory requirements. Financial Operations Overview Revenue We generated revenue under the RLT Agreement and under the Angelini License Agreement, as well as nominal amounts from other licensing agreements. We have not generated any revenue from commercial drug sales and we do not expect to generate any further revenue unless or until we obtain regulatory approval and commercialize one or more of our current or future drug candidates or if we become entitled to revenue from our licensing agreements. 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. Research and Development Expenses 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: • employee-related expenses, including salaries, benefits and stock-based compensation expense; • fees paid to consultants for services directly related to our drug development and regulatory effort; • expenses incurred under agreements with contract research organizations, as well as contract manufacturing organizations and consultants that conduct preclinical studies and clinical trials; • costs associated with preclinical activities and development activities; • costs associated with technology and intellectual property licenses; • milestone payments and other costs and payments under licensing agreements, research agreements and collaboration agreements; and • depreciation expense for assets used in research and development activities. 60 Table of Contents Costs incurred in connection with research and development activities are expensed as incurred. Costs for certain development activities, such as clinical trials, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations or other information provided to us by our vendors. Research and development activities are and will continue to be central to our business model. We expect our research and development expenses to increase for the foreseeable future as we advance our current and future drug candidates through preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. It is difficult to determine with certainty the duration and costs of any preclinical study or clinical trial that we may conduct. The duration, costs and timing of clinical trial programs and development of our current and future drug candidates will depend on a variety of factors that include, but are not limited to, the following: • number of clinical trials required for approval and any requirement for extension trials; • per patient trial costs; • number of patients who participate in the clinical trials; • number of sites included in the clinical trials; • countries in which the clinical trial is conducted; • length of time required to enroll eligible patients; • number of doses that patients receive; • drop-out or discontinuation rates of patients; • potential additional safety monitoring or other studies requested by regulatory agencies; • duration of patient follow-up; and • efficacy and safety profile of the drug candidate. In addition, the probability of success for any of our current or future drug candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each drug candidate, as well as an assessment of each drug candidate’s commercial potential. General and Administrative Expenses General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation expense, related to our executive, finance, business development and support functions. 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. Other Income (Expense), net Other income (expense), net consists primarily of interest income earned on our cash, cash equivalents and marketable securities and accretion of discount on our short-term investments. Reclassifications Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. 61 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2022 and 2021 The following table summarizes the results of our operations for the periods indicated: Year Ended December 31, 2022 Year Ended December 31, 2021 Change $ (in thousands) Revenue: License and other revenue $ 1,503 $ 12,383 $ (10,880) License revenue - related party — 196,000 (196,000) Total revenue 1,503 208,383 (206,880) Operating expenses: Research and development 24,618 46,940 (22,322) General and administrative 32,433 37,234 (4,410) Total operating expenses 57,051 84,174 (26,732) (Loss) income from operations (55,548) 124,209 (180,148) Other income (expense), net 1,379 (46) 1,425 (Loss) income before provision for income taxes (54,169) 124,163 (178,723) Provision for income taxes — 1,329 (1,329) Net (loss) income $ (54,169) $ 122,834 $ (177,394) Revenue Revenue of $1.5 million for the year ended December 31, 2022 related to licensing and other agreements. Revenue was $208.4 million for the year ended December 31, 2021 as a result of the RLT Agreement and the termination of the Angelini License Agreement. Research and Development Expenses Year Ended December 31, 2022 Year Ended December 31, 2021 Change $ (in thousands) Preclinical and development expenses $ 9,715 $ 30,386 $ (20,671) Payroll and payroll-related expenses 11,498 13,454 (1,956) Other expenses 3,405 3,101 304 Total research and development $ 24,618 $ 46,940 $ (22,322) Research and development expenses were $24.6 million for the year ended December 31, 2022 compared to $46.9 million for the year ended December 31, 2021. The decrease of $22.3 million was primarily due to a decrease in activities related to our ongoing development programs, including the termination of the development of OV101 and the transfer of the development of OV935, which was assumed by Takeda, partially offset by $12.3 million in expenses relating to the licensing of small molecule KCC2 compounds from AstraZeneca in 2021. During the year ended December 31, 2022, research and development expenses consisted of $9.7 million in preclinical and development expenses, $11.5 million in payroll and payroll-related expenses, of which $1.8 million related to stock-based compensation, and $3.4 million in other expenses. During the year ended December 31, 2021, research and development expenses consisted of $30.4 million in preclinical and development expenses, $13.5 million in payroll and payroll-related expenses, of which $1.7 million related to stock-based compensation, and $3.1 million in other expenses. 62 Table of Contents General and Administrative Expenses Year Ended December 31, 2022 Year Ended December 31, 2021 Change $ (in thousands) Payroll and payroll-related expenses $ 16,071 $ 14,008 $ 2,063 Legal and professional fees 9,253 17,071 (7,818) General office expenses 7,108 6,154 1,345 Total general and administrative $ 32,432 $ 37,234 $ (4,409) General and administrative expenses were $32.4 million for the year ended December 31, 2022 compared to $37.2 million for the year ended December 31, 2021. The decrease of $4.4 million was primarily due to reduced legal and professional fees, partially offset by an increase in non-cash compensation expenses, and increased expenses related to the new office lease. Income Taxes The provision recorded for income taxes for the years ended December 31, 2022 and 2021 is zero and $1.3 million, respectively, with effective rates of 0.00% and 1.07%, respectively. The provision for income taxes in 2021 was due to the significant one-time, upfront payment from Takeda pursuant to the RLT Agreement, as well as disallowed use of net operating losses. We have historically incurred operating losses and maintain a full valuation allowance against net deferred tax assets. The valuation allowance was approximately $73.7 million and $63.3 million at December 31, 2022 and 2021, respectively. Liquidity and Capital Resources Overview As of December 31, 2022, we had total cash, cash equivalents and marketable securities of $129.0 million as compared to $187.8 million of cash and cash equivalents as of December 31, 2021. We believe that our cash, cash equivalents and marketable securities as of December 31, 2022 will fund our projected operating expenses and capital expenditure requirements for at least 12 months from the issuance of this Annual Report on Form 10-K. Similar to other development-stage biotechnology companies, we have generated limited revenue. Revenue in the year ended December 31, 2021 was primarily due to a significant one-time, upfront payment from Takeda pursuant to the RLT Agreement. Otherwise, we have incurred losses and experienced negative operating cash flows in most years 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 $54.2 million and net income of approximately $122.8 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $225.5 million and working capital of $124.4 million. Future Funding Requirements We believe that our available cash, cash equivalents and marketable securities are sufficient to fund existing and planned cash requirements into the first quarter of 2025. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, clinical costs, legal and other regulatory expenses and general overhead costs. We have based our estimates on assumptions that may prove to be incorrect, and we could use our capital resources sooner than we currently expect. Additionally, the process of testing drug candidates in clinical trials is costly, and the timing of progress in these trials is uncertain. We cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or whether, or when, we may achieve profitability. As of December 31, 2022, we had no long-term debt and no material non-cancelable purchase commitments with service providers, as we have generally contracted on a cancelable, purchase order basis. We cannot estimate whether we will receive or the timing of 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 agreements with AstraZeneca AB and Northwestern. Pursuant to these license 63 Table of Contents 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 from the consolidated financial statements given that the timing, probability, and amount, if any, of such payments cannot be reasonably estimated at this time. In September 2021, we entered into a 10-year lease agreement for our corporate headquarters with a term commencing March 10, 2022, for approximately 19,000 square feet of office space at Hudson Commons in New York, New York. The lease provides for monthly rental payments over the lease term. The base rent under the lease is currently $2.3 million per year. Rent payments commenced January 10, 2023, and will continue for ten years following the rent commencement date. We issued a letter of credit in the amount of $1.9 million in association with the execution of the lease agreement, which is reflected as restricted cash on the consolidated balance sheets. Payment obligations under the lease agreement include approximately $1.7 million in the 12 months subsequent to December 31, 2022 and approximately $23.5 million over the term of the agreement. For additional information see Note 5 to our consolidated financial statements under the heading 'Leases.' We have no products approved for commercial sale and have not generated any product revenues from product sales to date. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings and additional funding from license and collaboration arrangements. Except for any obligations of our collaborators to reimburse us for research and development expenses or to make milestone or royalty payments under our agreements with them, we will not have any committed external source of liquidity. 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. Debt and equity financings, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. There can be no assurance that such financings will be obtained on terms acceptable to us, if at all. Additionally, while the long-term economic impact of either the COVID-19 pandemic or the conflict between Russia and Ukraine is difficult to assess or predict, each of these events has caused significant disruptions to the global financial markets and contributed to a general global economic slowdown. Furthermore, inflation rates have increased recently to levels not seen in decades. In addition, the U.S. Federal Reserve has raised, and is expected to further raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may further increase economic uncertainty and heighten these risks. If the disruptions and slowdown deepen or persist, we may not be able to access additional capital on favorable terms, or at all, which could in the future negatively affect our ability to pursue our business strategy. 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. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. See "Risk Factors" for additional risks associated with our capital requirements. At-the-Market Offering Program In November 2020, we filed a 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, 2022, we had $250.0 million available under our S-3 Registration Statement, including $75.0 million available pursuant to our ATM program. 64 Table of Contents Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2022 Year Ended December 31, 2021 (in thousands) Net cash (used in) provided by: Operating activities $ (55,170) $ 118,612 Investing activities (87,940) (1,821) Financing activities 181 904 Net (decrease) increase in cash, cash equivalents, and restricted cash $ (142,930) $ 117,694 Net Cash (Used in) Provided by Operating Activities Net cash used in operating activities was $55.2 million for the year ended December 31, 2022, which consisted of net loss of $54.2 million offset by a net of $1.0 million of various non-cash charges and operating cash changes, most significantly $6.6 million in stock-based compensation and an $8.3 million decrease in accounts payable and accrued expenses. Net cash provided by operating activities was $118.6 million for the year ended December 31, 2021, which consisted of net income of $122.8 million offset by various non-cash charges and cash changes, primarily related to $12.3 million related to an asset acquisition via stock issuance and cash, stock-based compensation expense of $5.0 million, and $12.4 million of deferred revenue reversal. Net Cash Used in Investing Activities Net cash used in investing activities was $87.9 million for the year ended December 31, 2022, which was primarily related to our net investment in U.S. treasury funds and the purchase of a long-term equity investment. For the year ended December 31, 2021, $1.8 million was used in investing activities, primarily comprised of the purchase of a long-term equity investment. Net Cash Provided by Financing Activities Net cash provided by financing activities of $0.2 million and $0.9 million for the years ended December 31, 2022 and 2021, respectively, primarily related to proceeds from the exercise of options and purchases made under the employee stock purchase plan. Critical Accounting Estimates and Policies Our management’s discussion and analysis of 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 assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the revenue and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies. Our critical accounting policies are described in greater detail in Note 2 to our audited consolidated financial statements included in this Annual Report on Form 10-K. We have listed below our critical accounting estimates that we believe to have the greatest potential impact on our consolidated financial statements. Historically, our assumptions, judgments and estimates relative to our critical accounting estimates have not differed materially from actual results. 65 Table of Contents Revenue Recognition We recognize revenue under sublicense agreements in accordance with ASC 606, Revenue Recognition, which is applicable to the Angelini License Agreement and the RLT Agreement. The terms of the agreements 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, upfront 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. For the RLT Agreement that closed on March 29, 2021, we received an upfront payment of $196.0 million. We determined that the transaction price was equal to the upfront fee of $196.0 million and was associated with several material conditions that were satisfied at the closing date. We recognized the full upfront payment of $196.0 million as revenue at the closing date upon the satisfaction of the material conditions outlined in the termination agreement. On March 29, 2021, we received a notice of termination of the Angelini License Agreement. Subsequently, we and Angelini mutually agreed to waive the six-month termination notice provisions and the Angelini License Agreement terminated effective March 31, 2021. We have been released from our performance obligations and will not be entitled to any future milestone payments under the Angelini License Agreement. As a result of being released from the performance obligations, we recognized $12.4 million of revenue at the termination date, consisting of $5.4 million of license revenue related to ongoing trials and $7.0 million related to the potential 35% funding of the cost for Angelini's future trials. During the year ended December 31, 2022, we recognized revenue of approximately $1.5 million related to licensing agreements we entered into during the period. Research and Development Accrual When preparing our consolidated financial statements, we are required to estimate our accrued research and development 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 the actual cost. Payments under certain contracts we have with third parties depend on factors, such as the successful enrollment of certain numbers of patients, site initiation and the completion of clinical trial milestones. When accruing research and development expenses, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If possible, we obtain information regarding unbilled services directly from our service providers. 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 research and development expenses have approximated actual expense incurred. Smaller Reporting Company Status We are a smaller reporting company as defined in the Exchange Act. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter or (ii) our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter. As a smaller reporting company, we are permitted to comply with scaled-back disclosure obligations in our SEC filings compared to other issuers, including with respect to disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have elected to adopt the accommodations available to smaller reporting companies, including but not limited to: • reduced disclosure obligations regarding executive compensation arrangements; and • being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure. 66 Table of Contents