axsm_Current Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

 

For the quarterly period ended September 30, 2018

 

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  001-37635


AXSOME THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

(State or other jurisdiction of

incorporation or organization)

45-4241907

(I.R.S. Employer

Identification No.)

 

25 Broadway

9th Floor

New York, New York

(Address of principal executive offices)

10004

(Zip Code)

Registrant’s telephone number, including area code:  (212) 332-3241

 

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

 

 

 

 

Common Stock, Par Value $0.0001 Per Share

(Title of Class)

Nasdaq Global Market

(Name of Each Exchange on Which Registered)

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

None

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     No 

 

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

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer 

Smaller reporting company 

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

 

There were 29,813,168  shares of the registrant’s common stock, $0.0001 par value, outstanding as of November 2, 2018.

 

 


 

Table of Contents

AXSOME THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER  30, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

 

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS 

 

 

 

PART I FINANCIAL INFORMATION 

 

 

 

ITEM 1 

Financial Statements

 

 

 

ITEM 2 

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

20 

 

 

 

ITEM 3 

Quantitative and Qualitative Disclosure About Market Risk

32 

 

 

 

ITEM 4 

Controls and Procedures

32 

 

 

 

PART II OTHER INFORMATION 

 

 

 

 

ITEM 1 

Legal Proceedings

33 

 

 

 

ITEM 1A 

Risk Factors

33 

 

 

 

ITEM 6 

Exhibits

92 

 

 

 

Signatures 

94 

 

 

 

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CAUTIONARY NOTE

REGARDING FORWARD‑LOOKING STATEMENTS

Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “estimate,” “may,” “expect” and similar expressions are generally intended to identify forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under the captions “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as other factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements. Such forward-looking statements include, but are not limited to, statements about our:

 

    expectations for increases or decreases in expenses;

    expectations for the clinical and preclinical development, manufacturing, regulatory approval, and commercialization of our pharmaceutical product candidates or any other products that we may acquire or in-license;

    estimates of the sufficiency of our existing capital resources combined with future anticipated cash flows to finance our operating requirements;

    expectations for incurring capital expenditures to expand our research and development and manufacturing capabilities;

    expectations for generating revenue or becoming profitable on a sustained basis;

    expectations or ability to enter into marketing and other partnership agreements;

    expectations or ability to enter into product acquisition and in-licensing transactions;

    expectations or ability to build our own commercial infrastructure to manufacture, market and sell our product candidates;

    expected losses;

    ability to obtain and maintain intellectual property protection for our product candidates;

    acceptance of our products by doctors, patients, or payors;

    stock price and its volatility;

    ability to attract and retain key personnel;

    the performance of third-party manufacturers;

    expectations for future capital requirements; and

    our ability to successfully implement our strategy.

 

The forward-looking statements contained in this report reflect our views and assumptions only as of the date that this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.

 

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

 

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Axsome Therapeutics, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

 

2017

 

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

15,220,764

 

$

34,021,123

 

Prepaid and other current assets

 

 

723,669

 

 

1,278,418

 

Total current assets

 

 

15,944,433

 

 

35,299,541

 

Equipment, net

 

 

64,039

 

 

68,071

 

Other assets

 

 

117,356

 

 

187,952

 

Total assets

 

$

16,125,828

 

$

35,555,564

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

4,167,369

 

$

3,435,456

 

Accrued expenses and other current liabilities

 

 

3,387,771

 

 

2,679,534

 

Loan payable, current portion

 

 

3,285,556

 

 

3,269,346

 

Warrant liability

 

 

102,000

 

 

2,791,000

 

Total current liabilities

 

 

10,942,696

 

 

12,175,336

 

Loan payable, long-term

 

 

4,440,375

 

 

6,663,005

 

Total liabilities

 

 

15,383,071

 

 

18,838,341

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value per share (10,000,000 shares authorized, none issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

 

 

 

Common stock, $0.0001 par value per share (150,000,000 shares authorized, 26,458,662 and 25,492,992 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

 

 

2,683

 

 

2,549

 

Additional paid-in capital

 

 

98,693,366

 

 

93,299,517

 

Accumulated deficit

 

 

(97,953,292)

 

 

(76,584,843)

 

Total stockholders’ equity

 

 

742,757

 

 

16,717,223

 

Total liabilities and stockholders’ equity

 

$

16,125,828

 

$

35,555,564

 

 

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

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Axsome Therapeutics, Inc.

Consolidated Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,040,780

 

$

4,471,126

 

$

16,343,823

 

$

15,463,706

 

General and administrative

 

 

2,202,679

 

 

1,826,290

 

 

7,052,439

 

 

5,256,481

 

Total operating expenses

 

 

8,243,459

 

 

6,297,416

 

 

23,396,262

 

 

20,720,187

 

Loss from operations

 

 

(8,243,459)

 

 

(6,297,416)

 

 

(23,396,262)

 

 

(20,720,187)

 

Interest and amortization of debt discount (expense)

 

 

(270,933)

 

 

(343,234)

 

 

(878,605)

 

 

(999,818)

 

Tax credit

 

 

217,418

 

 

207,114

 

 

217,418

 

 

207,114

 

Change in fair value of warrant liability

 

 

15,000

 

 

 —

 

 

2,689,000

 

 

 —

 

Net loss

 

$

(8,281,974)

 

$

(6,433,536)

 

$

(21,368,449)

 

$

(21,512,891)

 

Net loss per common share, basic and diluted

 

$

(0.31)

 

$

(0.27)

 

$

(0.83)

 

$

(0.97)

 

Weighted average common shares outstanding, basic and diluted

 

 

26,325,904

 

 

23,634,040

 

 

25,875,783

 

 

22,270,885

 

 

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

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Axsome Therapeutics, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(21,368,449)

 

$

(21,512,891)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

1,401,894

 

 

1,535,291

 

Amortization of debt discount

 

 

293,580

 

 

352,874

 

Change in fair value of warrants

 

 

(2,689,000)

 

 

 —

 

Depreciation

 

 

36,728

 

 

31,283

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

554,749

 

 

634,466

 

Other assets

 

 

70,596

 

 

(6,470)

 

Accounts payable

 

 

731,913

 

 

(1,138,174)

 

Accrued expenses and other current liabilities

 

 

708,237

 

 

(76,801)

 

Net cash used in operating activities

 

 

(20,259,752)

 

 

(20,180,422)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of equipment

 

 

(32,696)

 

 

(9,897)

 

Net cash used in investing activities

 

 

(32,696)

 

 

(9,897)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Repayment of principal on term loan

 

 

(2,500,000)

 

 

 —

 

Proceeds from issuance of common stock upon financing, net

 

 

3,959,589

 

 

14,781,092

 

Proceeds from issuance of common stock upon exercise of options

 

 

 —

 

 

309,219

 

Proceeds from issuance of common stock upon exercise of warrants

 

 

32,500

 

 

154,894

 

Net cash provided by financing activities

 

 

1,492,089

 

 

15,245,205

 

Net (decrease) increase in cash

 

 

(18,800,359)

 

 

(4,945,114)

 

Cash at beginning of period

 

 

34,021,123

 

 

36,618,497

 

Cash at end of period

 

$

15,220,764

 

$

31,673,383

 

 

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

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Axsome Therapeutics, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1. Nature of Business and Basis of Presentation

Axsome Therapeutics, Inc. (“Axsome” or the “Company”) is a clinical-stage biopharmaceutical company developing novel therapies for central nervous system (“CNS”) disorders for which there are limited treatment options. By focusing on this therapeutic area, the Company is addressing significant and growing markets where current treatment options are limited or inadequate. The Company’s core CNS portfolio includes four product candidates, AXS‑05, AXS-07, AXS-09, and AXS-12, which are being developed for multiple indications. The Axsome Pain and Primary Care business unit (“Axsome PPC”) houses Axsome’s pain and primary care assets, including AXS-02 and AXS-06, and intellectual property which covers these and related product candidates and molecules being developed by Axsome and others. The Company aims to become a fully integrated biopharmaceutical company that develops and commercializes differentiated therapies that expand the treatment options available to caregivers and improve the lives of patients living with CNS disorders. The Company was incorporated on January 12, 2012 in the State of Delaware and now has operations in the United States and Australia.

The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These interim consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 7, 2018.

In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, which are normal recurring adjustments, necessary for the fair presentation of the financial information for the interim periods. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future period.

Liquidity and Capital Resources

The Company has incurred operating losses since its inception, and expects to continue to incur operating losses for the foreseeable future and may never become profitable. As of September 30, 2018, the Company had an accumulated deficit of $98.0 million.

The Company’s primary sources of cash have been proceeds from the issuance and sale of its common stock in public offerings. The Company has not yet commercialized any of its product candidates and cannot be sure if it will ever be able to do so. The Company’s ability to achieve profitability depends on a number of factors, including its ability to obtain regulatory approval for its product candidates, successfully complete any post-approval regulatory obligations and successfully commercialize its product candidates alone or in partnership. The Company may continue to incur substantial operating losses even if it begins to generate revenues from its product candidates.

The Company believes its existing cash, which includes net proceeds of $8.8 million from the Registered Direct Offering completed in October 2018, along with other proceeds received subsequent to September 30, 2018 will be sufficient to fund its anticipated operating cash requirements into the first quarter of 2020. The actual amount of cash that the Company will need to operate is subject to many factors, including, but not limited to, the timing, design and conduct of clinical trials for its product candidates. The Company is dependent upon significant future financing to provide the cash necessary to execute its current operations, including the commercialization of any of its product candidates.

The Company’s common stock is listed on the Nasdaq Global Market and trades under the symbol “AXSM”.

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Note 2. Summary of Significant Accounting Policies

Significant Risks and Uncertainties

The Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s product candidates; the Company’s ability to obtain regulatory approval to market its products, if approved; competition from products manufactured and sold or being developed by other companies; the price of, and demand for, Company products, if approved; the Company’s ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products, if approved; and the Company’s ability to raise additional financing. If the Company does not successfully commercialize any of its product candidates, it will be unable to generate recurring product revenue or achieve and maintain profitability.

Use of Estimates

Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. In preparing these financial statements, management used significant estimates in the following areas, among others: stock‑based compensation expense; the determination of the fair value of the warrants; the accounting for research and development costs; and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

Foreign Currency Translation

Expenses denominated in foreign currency are translated into U.S. dollars at the exchange rate on the date the expense is incurred. Assets and liabilities of foreign operations are translated at period-end exchange rates. The effect of exchange rate fluctuations on translating foreign currency into U.S. dollars is included in the Statements of Operations and is not material to the Company’s financial statements.

Segment and Geographic Information

Operating segments are defined as components of an enterprise for which separate discrete information is available for evaluation by the chief operating decision maker or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business as one operating segment, which is the business of developing novel therapies for the management of CNS disorders.

Cash Equivalents

The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. Cash equivalents are valued at cost, which approximates their fair value. There were no cash equivalents at September 30, 2018 or December 31, 2017.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash. The Company maintains its cash at financial institutions, which at times, exceed federally insured limits. At September 30, 2018, the majority of the Company’s cash was held by one financial institution and the amount on deposit was in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not recognized any losses from credit risks on such accounts since inception. The Company believes it is not exposed to significant credit risk on cash.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three‑level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are unobservable for the asset or liability.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The carrying amounts reported in the accompanying consolidated financial statements for accounts payable and accrued expenses approximate their respective fair values due to their short‑term maturities. The fair value of the warrant liabilities are discussed in Note 3, “Fair Value Measurements.”

Research and Development Costs

Research and development expenses primarily consist of costs incurred in performing research and development activities, including preclinical studies, clinical trials, manufacturing costs, employee salaries and benefits, stock‑based compensation expense, contract services, including external research and development expenses incurred under arrangements with third parties, such as contract research organizations (“CROs”), facilities costs, overhead costs, depreciation, and other related costs.

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Generally, research and development costs are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. The Company makes estimates of costs incurred in relation to external CROs, and clinical site costs. The Company analyzes the progress of clinical trials, including levels of patient enrollment, invoices received and contracted costs when evaluating the adequacy of the amount expensed and the related prepaid asset and accrued liability. Significant judgments and estimates must be made and used in determining the accrued balance and expense in any accounting period. The Company reviews and accrues CRO expenses and clinical trial study expenses based on work performed and relies upon estimates of those costs applicable to the stage of completion of a study. Accrued CRO costs are subject to revisions as such trials progress to completion. Revisions are charged to expense in the period in which the facts that give rise to the revision become known. With respect to clinical site costs, the financial terms of these agreements are subject to negotiation and vary from contract to contract. Payments under these contracts may be uneven, and depend on factors such as the achievement of certain events, the successful recruitment of patients, the completion of portions of the clinical trial or similar conditions. The objective of our policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study or trial contract.

Income Taxes

Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, operating losses, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

The Company’s effective tax rates as of September  30, 2018 and September 30, 2017 were 0%, which differs from the statutory tax rate in effect due to the Company recording a full valuation allowance.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position as well as consideration of the available facts and circumstances. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. As of September 30, 2018, the Company does not believe any material uncertain tax positions are present. In the event the Company determines that accrual of interest or penalties are necessary in the future, the amount will be presented as a component of income tax expense.

The Tax Legislation significantly revised the United States tax code by, among other things, (i) reducing the corporate income tax rate from 35.0% to 21.0%, (ii) imposing a one-time transition tax on earnings of foreign subsidiaries deemed to be repatriated, (iii) implementing a modified territorial tax system, (iv) introducing a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations (known as “GILTI”) and (v) introducing a base erosion anti-abuse tax measure (known as “BEAT”) that taxes certain payments between United States corporations and their subsidiaries.

As of September  30, 2018, the Company has not completed its accounting for all the tax effects associated with the enactment of the Tax Act. However, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and recorded a provisional amount during the fourth quarter of 2017. The Company anticipates that the Internal Revenue Service will issue additional guidance related to the impacts of the Tax Act later in 2018. The Company may further adjust the provisional amounts recorded upon completion of its accounting for the tax effects associated with the enactment of the Tax Act and input from anticipated guidance interpreting the Tax Act under the permitted measurement period allowed under SAB 118. 

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Stock‑Based Compensation

For stock options issued to employees and members of the Company’s board of directors for their services, the Company estimates the grant date fair value of each option using the Black‑Scholes option pricing model. The Black-Scholes model takes into account the expected volatility of the Company’s common stock, the risk-free interest rate, the estimated life of the option, the closing market price of the Company’s common stock and the exercise price. The estimates utilized in the Black-Scholes calculation involve inherent uncertainties and the application of management judgment. In addition, the Company recognizes expense for equity awards over the vesting period and accounts for forfeitures as they occur. For awards subject to service-based vesting conditions, the Company recognizes stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to performance-based vesting conditions, the Company recognizes stock-based compensation expense using the accelerated attribution method when it is probable that the performance condition will be achieved. The expense related to the stock-based compensation is recorded within the same financial statement line item as the grantee’s cash compensation.

For stock‑based payments issued to non‑employees, compensation expense is determined at the “measurement date,” which is the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached or (ii) the date at which the counterparty’s performance is complete. The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records compensation expense based on the fair value of the award at the reporting date. The awards to non‑employees are then revalued, or the total compensation is recalculated based on the then‑current fair value, at each subsequent reporting date.

Basic and Diluted Net Loss per Common Share

Basic net loss per share of common stock is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as warrants and stock options, which would result in the issuance of incremental shares of common stock. As the impact of these items is anti‑dilutive during periods of net loss, there was no difference between basic and diluted net loss per share of common stock for the three and nine months ended September  30, 2018 and 2017.

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which supersedes FASB Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similarly to existing guidance for operating leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which makes 16 technical corrections to the new leases standard and other accounting topics, alleviating unintended consequences from applying the new standard. It does not make any substantive changes to the core provisions of principles of the new standard. In July 2018, the FASB also issued ASU No. 2018-11, Leases (Topic 842), which provides (1) optional transition method that entities can use when adopting the standard and (2) a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the potential impact of the new guidance.

 

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In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which is guidance to address diversity in practice with respect to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity that occurs in practice. The guidance is effective for annual and interim periods beginning after December 15, 2017. The Company has adopted this guidance effective January 1, 2018 and the adoption of the guidance did not have a material impact on the Company’s financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company has adopted this guidance effective January 1, 2018 and the adoption of the guidance did not have a material impact on the Company’s financial statements.

 

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting 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. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the potential impact of the new guidance. 

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements,  which provides technical corrections, clarifications, and other improvements to several topics in the FASB Accounting Standard Codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and were effective upon issuance of the ASU. Amendments that do not have transition guidance are effective for annual periods beginning after December 15, 2018. The Company has adopted this guidance effective September 30, 2018 and the adoption of the guidance did not have a material impact on the Company’s financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,  which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to the Financial Statements.  The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. The Company is currently evaluating the potential impact of the new guidance.  

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in stockholders’ equity. The final rule is effective on November 5, 2018. The Company is currently evaluating the potential impact of the new guidance.

 

 

 

 

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Note 3.Fair Value Measurements

2017 Warrants associated with Registered Direct Offering

In accordance with Accounting Standards  Codification (“ASC”) 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

Level 1—Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Inputs other than quoted prices in active markets that are observable for the asset or liability, either directly or indirectly.

Level 3—Inputs that are unobservable for the asset or liability.

In connection with the Company’s December 4, 2017 registered direct offering (the “Registered Direct Offering”), the Company issued common stock warrants (“Common Warrants”) to certain investors to purchase an aggregate of 1,783,587 shares of its common stock. The Common Warrants are exercisable at $5.25 per share and expire on December 11, 2018. Additionally, as part of the Registered Direct Offering, the Company issued warrants (the “Placement Agent Warrants’) to certain investors affiliated with H.C. Wainwright & Co., LLC, the placement agent in the Registered Direct Offering to purchase an aggregate of 107,015 shares of its common stock. The Placement Agent Warrants are exercisable at $6.6562 and expire on December 11, 2018. The Common Warrants and Placement Agent Warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, Derivatives and Hedging, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability.

The fair value of the Common Warrants at September  30, 2018 and December 31, 2017 was determined to be approximately $101,000 and $2,683,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.45 and $5.60, respectively; (2) a risk-free rate of 2.22% and 1.76%, respectively; and (3) an expected volatility of 70% and 62%, respectively. The change in the fair value between December 31, 2017 and September  30, 2018 is reported as a change in fair value of the warrant liability on the statement of operations.

The fair value of the Placement Agent Warrants at September  30, 2018 and December 31, 2017 were determined to be approximately $1,000 and $108,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.45 and $5.60, respectively; (2) a risk-free rate of 2.22% and 1.76%, respectively; and (3) an expected volatility of 70% and 62%, respectively. The change in the fair value between December 31, 2017 and September  30, 2018 is reported as a change in fair value of the warrant liability on the statement of operations.

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Level 3 Fair Value Sensitivity

Warrant liability

As of September  30, 2018, the fair value of the warrant liability utilizes inputs including: share price, expected volatility and risk-free rate.  

·

A  10% plus/minus change in share price will result in an estimated increase/decrease of $0.1 million in the value of the warrant liability,

·

A  10% plus/minus change in the expected volatility will result in an estimated increase/decrease of $0.1 million in the value of the warrant liability, and

·

A 10% plus/minus change in the risk-free interest rate will result in an immaterial change in the value of the warrant liability. 

The following table sets forth a summary of changes in the fair value of Level 3 liabilities for the three and nine months ended September  30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

    

Beginning of period

    

Issuances

    

Change in fair value

    

Extinguishments

    

End of period

Warrant liability

 

$

117,000

 

$

 

$

(15,000)

 

$

 —

 

$

102,000

Total

 

$

117,000

 

$

 —

 

$

(15,000)

 

$

 —

 

$

102,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

    

Beginning of period

    

Issuances

    

Change in fair value

    

Extinguishments

    

End of period

 

Warrant liability

 

$

2,791,000

 

$

 

$

(2,689,000)

 

$

 —

 

$

102,000

 

Total

 

$

2,791,000

 

$

 —

 

$

(2,689,000)

 

$

 —

 

$

102,000

 

 

 

Note 4. Accrued Expenses and Other Current Liabilities

At September  30, 2018 and December 31, 2017 accrued expenses and other current liabilities consisted of the following:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

 

2017

 

 

 

 

 

 

 

 

 

Research and development

 

$

2,294,338

 

$

1,642,154

 

Accrued compensation

 

 

617,959

 

 

704,556

 

Other

 

 

475,474

 

 

332,824

 

Total

 

$

3,387,771

 

$

2,679,534

 

 

 

 

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Note 5. Loan and Security Agreement

In November 2016, the Company entered into a $20.0 million Term Loan Agreement (“Term Loan”) with Silicon Valley Bank (“SVB”). The three-tranche Term Loan consists of an initial $10.0 million tranche triggered upon closing, with the remaining $10.0 million available to be drawn in two $5.0 million tranches, at the Company’s option, subject to the achievement of certain clinical and financial milestones.

The loan bears interest at an annual rate equal to 4.50% plus the prime rate, which is the greater of 3.50% or the Wall Street Journal prime rate, and is payable monthly. It matures in November 2020 and had an interest-only payment period until December 1, 2017, which was extendable to May 2018 upon the drawing of the second tranche. Following the interest-only payment period, the Company began making monthly payments of principal and interest and such payments will continue until the maturity date. Principal payments coming due within twelve months have been classified as current liabilities in the accompanying balance sheet. In addition, the Company is required to pay a final payment fee of 8.5% of the principal amount extended on the date of repayment of the Term Loan, which is being accreted and amortized into interest expense using the effective interest rate method over the term of the loan. Because the Company did not achieve the conditional criteria to access the second and third term advances before the specified dates, the $10.0 million in additional term loan advances expired and the Company began to repay principal in December 2017.

The Company may prepay all, but not less than all, of the Term Loan, subject to a prepayment premium of 3.0% of the outstanding principal if prepaid within two years of the effective date of the loan, 2.0% of the outstanding principal if prepaid during the third year of the loan, and 1.0% of the outstanding principal if prepaid after the third year. The Term Loan is collateralized by a security interest in all of the Company’s assets except intellectual property. The Company’s intellectual property is subject to a negative pledge.

Interest expense was $182,357 and $585,025 for the three and nine months ended September 30, 2018, as compared to $223,611 and $646,944 for the three and nine months ended September 30, 2017, respectively. 

Amortization of the final payment fee was $63,636 and $210,399 for the three and nine months ended September  30, 2018, as compared to $88,074 and $261,350 for the three and nine months ended September 30, 2017, respectively.  

The outstanding debt and unamortized debt discount balances are as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2018

    

2017

    

 

 

 

 

 

 

 

 

Outstanding principal amount

 

$

7,222,222

 

$

9,722,222

 

Debt discount, net of current portion

 

 

551,486

 

 

274,116

 

Long-term debt, net of debt discount

 

 

7,773,708

 

 

9,996,338

 

Less current portion of principal

 

$

(3,333,333)

 

$

(3,333,333)

 

Loan payable, long-term

 

$

4,440,375

 

$

6,663,005

 

Current portion of outstanding principal amount

 

 

3,333,333

 

 

3,333,333

 

Current portion of debt discount

 

 

(47,777)

 

 

(63,987)

 

Loan payable, current portion

 

$

3,285,556

 

$

3,269,346

 

 

In connection with the Term Loan, SVB and Life Science Loans, LLC received warrants to purchase an aggregate 65,228 shares of the Company’s common stock at an exercise price of $7.41 per share, which are exercisable for seven years from the date of issuance. The warrants were classified as a component of stockholders’ equity.

 

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The proceeds of $10.0 million were allocated based on the relative fair values of the debt instrument and the warrant instrument. The fair value of the warrants and the closing costs were recorded as debt discounts and are being amortized using the effective interest rate method over the term of the loan. Amortization of the debt discount was $24,940 and $83,181 for the three and nine months ended September  30, 2018, respectively, as compared to $31,549 and $91,523 for the three and nine months ended September 30, 2017, respectively.

 

Scheduled principal payments on outstanding debt, as of September  30, 2018, are as follows:

 

 

 

 

 

 

2018

 

$

833,333

 

2019

 

 

3,333,333

 

2020

 

 

3,055,556

 

Total

 

$

7,222,222

 

 

Note 6. Net Loss per Common Share

The following table sets forth the computation of basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2018

    

2017

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,281,974)

 

$

(6,433,536)

 

$

(21,368,449)

 

$

(21,512,891)

Weighted average common shares outstanding—basic and diluted

 

 

26,325,904

 

 

23,634,040

 

 

25,875,783

 

 

22,270,885

Net loss per common share—basic and diluted

 

$

(0.31)

 

$

(0.27)

 

$

(0.83)

 

$

(0.97)

 

The following potentially dilutive securities outstanding at September  30, 2018 and 2017 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti‑dilutive:

 

 

 

 

 

 

 

 

September 30, 

 

 

    

2018

    

2017

 

 

 

 

 

 

 

Stock options

 

2,758,499

 

2,341,995

 

Warrants

 

2,074,149

 

218,547

 

Total

 

4,832,648

 

2,560,542

 

















 

 

Note 7. Stockholders’ Equity

Capital Structure

On December 1, 2016, the Company filed a shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, rights, debt securities and units up to an aggregate amount of $150.0 million, which the Company refers to as the 2016 Shelf Registration Statement. On December 16, 2016, the 2016 Shelf Registration Statement was declared effective by the SEC.

In March 2017, the Company utilized the 2016 Shelf Registration Statement and completed an underwritten public offering, whereby it sold 4,304,813 shares of common stock at a public offering price of $3.74 per share. The Company received gross proceeds of approximately $16.1 million, of which net proceeds were approximately $14.8 million due to underwriting discounts and offering expenses.

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In October 2017, the Company entered into a sales agreement (the “Sales Agreement”) with Leerink Partners LLC ("Leerink"), pursuant to which the Company may sell up to $30 million in shares of its common stock from time to time through Leerink, acting as its sales agent, in one or more at-the-market offerings utilizing the 2016 Shelf Registration Statement. Leerink is entitled to receive a commission of 3.0% of the gross proceeds for any shares sold under the Sales Agreement. The Company received approximately $3.0 million in gross proceeds, of which net proceeds were approximately $2.9 million from the sales of its common stock to Leerink under the Sales Agreement during the nine months ended September  30, 2018. The Company received approximately $3.1 million in gross proceeds, of which net proceeds were approximately $3.0 million from the sales of its common stock to Leerink under the Sales Agreement since inception.

In December 2017, the Company utilized the 2016 Shelf Registration Statement and completed the Registered Direct Offering, whereby it sold an aggregate of $9.5 million worth of units (“Units”) at a purchase price of $5.325 per Unit with each Unit consisting of (i) one share of the Company’s common stock, and (ii) a warrant to purchase one share of common stock at an exercise price equal to $5.25 per share. The Company sold an aggregate of 1,783,587 Units for gross proceeds of approximately $9.5 million and net proceeds of approximately $8.8 million, net of underwriting discounts and offering expenses. Additionally, the Company issued 107,015 Placement Agent Warrants.

The Company incurred issuance costs associated with the Units offering of $745,856, which included $81,000 related to issuance of 107,015 Placement Agent Warrants, of which, $583,768 was allocated to the common stock sold and was recorded as a reduction to equity. The remaining amount was allocated to the Common Warrants and was expensed. The Placement Agent Warrants have the same terms as the Common Warrants, except for the exercise price of $6.6562 per share.

Each of the warrants issued in December 2017 in connection with the Registered Direct Offering are liabilities pursuant to ASC 815 because registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the consolidated balance sheet as a current liability. The initial fair value of the Common Warrants and Placement Agent Warrants was estimated to be approximately $2,145,000 and was deducted from the gross proceeds of the Unit offering with the residual amount recorded to equity.

The holders of shares of common stock are entitled to one vote for each share of common stock held at all meetings of stockholders and written actions in lieu of meetings. The holders of shares of common stock are entitled to receive dividends, if and when declared by the board of directors.

In the future, the Company may also periodically offer one or more of these securities in amounts, prices and terms to be announced when and if the securities are offered. At the time any of the securities covered by the 2016 Shelf Registration Statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

 

Equity Incentive Plans

 

There were 3,429,409 shares available for the issuance of stock options or stock-based awards under the Company’s 2015 Omnibus Incentive Compensation Plan at September  30, 2018.

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Stock Options

The following table sets forth the stock option activity for the nine months ended September  30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

Weighted

 

average

 

Aggregate

 

 

 

Number

 

average

 

contractual

 

intrinsic

 

 

 

of shares

 

exercise price

 

term

 

value

 

Outstanding at December 31, 2017

 

2,315,638

 

$

5.57

 

 

 

 

 

 

Granted

 

776,559

 

 

3.13

 

 

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

 

 

Forfeited

 

(307,925)

 

 

5.85

 

 

 

 

 

 

Expired

 

(25,773)

 

 

7.84

 

 

 

 

 

 

Outstanding at September 30, 2018

 

2,758,499

 

$

4.83

 

7.7

 

$

1,128,711

 

Vested and expected to vest at September 30, 2018

 

2,752,330

 

$

4.83

 

7.7

 

$

1,115,448

 

Exercisable at September 30, 2018

 

1,720,630

 

$

4.83

 

7.0

 

$

937,437

 

 

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model. The Company periodically remeasures the fair value of stock‑based awards issued to non‑employees and records the expense over the requisite service period. The expected term of the Company’s stock options has been determined utilizing the “simplified” method as described in the SEC’s Staff Accounting Bulletin No. 107 relating to stock‑based compensation. The simplified method was chosen because the Company has limited historical option exercise experience due to its short operating history. The risk‑free interest rate is based on the U.S. Treasury yield in effect at the time of grant for a period approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future. Expected volatility is based on historical volatilities of similar entities within the Company’s industry which were commensurate with the Company’s expected term assumption.

The weighted average grant date fair value of options granted was $1.98 and $3.21 per option for the nine months ended September 30, 2018 and 2017, respectively. As of September  30, 2018, there was $3.1 million of total unrecognized compensation cost related to non‑vested stock options which is expected to be recognized over a weighted average period of 2.4 years. These amounts do not include 19,024 options outstanding as of September  30, 2018, which are performance‑based and vest upon the achievement of certain corporate milestones. Stock‑based compensation will be measured and recorded if and when it is probable that the milestone will occur.

Stock‑based compensation expense recognized for the three and nine months ended September  30, 2018 and 2017 was allocated as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

 

    

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

90,891

 

$

127,322

 

$

311,753

 

$

408,077

 

 

General and administrative

 

 

301,774

 

 

260,723

 

 

1,090,141

 

 

1,127,214

 

 

Total

 

$

392,665

 

$

388,045

 

$

1,401,894

 

$

1,535,291

 

 

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Performance‑Based Awards

The Company did not issue any performance-based awards during the nine months ended September  30, 2018 and 2017. For awards granted to employees with performance conditions, no expense will be recognized, and no measurement date can occur, until the occurrence of the event is probable. For awards granted to non‑employees, the Company will recognize the lowest aggregate amount within the range of potential values as expense until the measurement date is established. For the nine months ended September  30, 2018,  the Company recognized income of $247 and for the nine months ended September 30, 2017, the Company recognized expense of $23,694,  related to performance‑based awards.

Warrants

The following table summarizes warrant activity for the nine months ended September  30, 2018:  

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

average

 

 

Warrants

 

exercise price

Outstanding at December 31, 2017

 

2,099,149

 

$

5.21

Issued

 

 —

 

 

 —

Exercised

 

(25,000)

 

 

1.30

Outstanding at September 30, 2018

 

2,074,149

 

$

5.27

 

 

 

 

 

 

Note 8. Subsequent Event

On September 27, 2018, the Company entered into a purchase agreement with certain institutional and accredited investors (collectively, the “RDO Investors”) for the sale by the Company directly to the RDO Investors of an aggregate of 2,966,667 shares of the Company’s common stock, at a purchase price of $3.00 per share (the “2018 Registered Direct Offering”), for gross proceeds of approximately $8.9 million. The 2018 Registered Direct Offering closed on October 1, 2018, and the Company received estimated net proceeds of approximately $8.8 million, after deducting estimated transaction expenses. The 2,966,667 shares of common stock sold in the 2018 Registered Direct Offering were offered and sold by the Company directly to the RDO Investors, without a placement agent, underwriter, broker or dealer, pursuant to a prospectus supplement to the 2016 Shelf Registration Statement.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Risk Factors.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth at the beginning of this report.

 

You should read the following discussion and analysis in conjunction with the unaudited condensed consolidated financial statements, and the related footnotes thereto, appearing elsewhere in this report, and in conjunction with management’s discussion and analysis and the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 which was filed with the Securities and Exchange Commission, or SEC, on March 7, 2018.

Overview

We are a clinical-stage biopharmaceutical company developing novel therapies for the management of central nervous system, or CNS, disorders for which there are limited treatment options. By focusing on this therapeutic area, we are addressing significant and growing markets where current treatment options are limited or inadequate. Our core CNS portfolio includes four CNS product candidates, AXS‑05, AXS-07, AXS-09, and AXS-12, which are being developed for multiple indications. The Axsome Pain and Primary Care business unit, or Axsome PPC, houses Axsome’s pain and primary care assets, including AXS-02 and AXS-06, and intellectual property which covers these and related product candidates and molecules being developed by Axsome and others. We are conducting a Phase 3 trial with AXS-05 in treatment resistant depression, or TRD, which we refer to as the STRIDE-1 study, a Phase 2/3 trial in agitation associated with Alzheimer's disease, or AD, which we refer to as the ADVANCE-1 study, and a Phase 2 trial in Major Depressive Disorder, or MDD, which we refer to as the ASCEND study. Additionally, AXS-05 is currently in a Phase 2 trial in smoking cessation. AXS-07 is being developed for the acute treatment of migraine. AXS-09 is being developed for CNS disorders. AXS-12 is being developed for the treatment of narcolepsy. We are also conducting a Phase 3 trial with AXS-02 in knee osteoarthritis, or OA, associated with bone marrow lesions, or BMLs, pursuant to a Special Protocol Assessment, or SPA, which we refer to as the COAST-1 study. We also plan to initiate a Phase 3 trial with AXS-02 in chronic low back pain, or CLBP, associated with Modic changes, or MCs. Lastly, AXS-06 is being developed for the treatment of osteoarthritis and rheumatoid arthritis and for the reduction of the risk of nonsteroidal anti-inflammatory drug, or NSAID, associated gastric ulcers. Additionally, we are currently evaluating other product candidates, which we intend to develop for CNS disorders. We aim to become a fully integrated biopharmaceutical company that develops and commercializes differentiated therapies that expand the treatment options available to caregivers and improve the lives of patients living with CNS disorders.

AXS-05 is a novel, oral, investigational medicine under development for the treatment of CNS disorders. AXS-05 consists of bupropion and dextromethorphan and utilizes Axsome’s metabolic inhibition technology. We are developing AXS‑05 initially for the following four indications: TRD, agitation associated with AD, MDD, and as an aid to smoking cessation. DM is active at multiple CNS receptors but is rapidly and extensively metabolized in humans. As a result, it is difficult to attain potential therapeutic plasma levels of DM when it is dosed as a single agent. AXS‑05 uses bupropion as a novel drug delivery method to inhibit DM metabolism and increase its bioavailability. We have demonstrated in three Phase 1 trials that DM plasma levels are substantially increased into a potentially therapeutic range with the co‑administration of bupropion. Bupropion is itself active at distinct CNS receptors providing the potential for an additive or synergistic effect. We intend to seek U.S. Food and Drug Administration, or FDA, approval for AXS‑05 utilizing the 505(b)(2) regulatory development pathway.

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AXS-07 is a novel, oral, investigational medicine consisting of MoSEIC™, or Molecular Solubility Enhanced Inclusion Complex, meloxicam and rizatriptan. We are developing AXS-07 initially for the acute treatment of migraine. Meloxicam is a long-acting nonsteroidal anti-inflammatory drug, or NSAID, with COX-2, an enzyme involved in inflammation and pain pathways, preferential inhibition and potent pain-relieving effects. However, standard meloxicam has an extended time to maximum plasma concentration, or Tmax, which delays its onset of action. AXS-07 utilizes our proprietary MoSEIC™ technology to substantially increase the solubility and speed the absorption of meloxicam while potentially maintaining durability of action. Meloxicam is a new molecular entity for migraine enabled by our MoSEIC™ technology. Rizatriptan is a 5-HT1B/D agonist that inhibits calcitonin gene-related peptide (CGRP)-mediated vasodilation, has been shown to have central trigeminal antinociceptive activity, and may reduce the release of inflammatory mediators from trigeminal nerves. Rizatriptan is approved as a single agent for the acute treatment of migraine. We intend to seek FDA approval for AXS-07 utilizing the 505(b)(2) regulatory development pathway.

AXS-09 is an oral, investigational medicine consisting of esbupropion and DM, which is being developed for the treatment of CNS disorders. AXS-09 contains esbupropion, the chirally pure S-enantiomer of bupropion, as compared to the company’s first generation product candidate AXS-05 which contains racemic bupropion, equal amounts of the S- and R-enantiomers. We have demonstrated in a Phase 1 trial that DM plasma levels are substantially increased into a potentially therapeutic range with repeated administration of AXS-09. Results of this Phase 1 trial coupled with preclinical data also indicate the potential for enhanced absorption and therapeutic effect of the S-enantiomer as compared to the R-enantiomer.

AXS-12, reboxetine, is a novel, oral, investigational medicine in development for treatment of narcolepsy. AXS-12 is a highly selective and potent norepinephrine reuptake inhibitor. The potential utility of AXS-12 in narcolepsy is supported by positive pre-clinical and preliminary clinical results in narcolepsy, and an extensive positive clinical safety record. Reboxetine, the active agent in AXS-12, significantly and dose-dependently reduced narcoleptic episodes in hypocretin (orexin)-deficient mice, a well-established genetic animal model of narcolepsy. 

AXS‑02, disodium zoledronate tetrahydrate, is a potentially first‑in‑class, oral, targeted, non‑opioid therapeutic for chronic pain. AXS‑02 is a potent inhibitor of osteoclasts, which are bone remodeling cells that break down bone tissue. We are initially developing AXS‑02 for the treatment of pain in the following two conditions: knee OA associated with BMLs and CLBP associated with type 1 or mixed type 1 and type 2 MCs. These conditions exhibit target lesions or specific pathology that we believe may be addressed by the mechanisms of action of AXS‑02, such as inhibition of osteoclast activity. These mechanisms may result in a reduction of pain in these conditions. We have successfully completed a Phase 1 trial of AXS‑02 to characterize the pharmacokinetics of zoledronic acid and its effects on markers of bone resorption after oral administration of AXS‑02. The results of our Phase 1 trial demonstrated that oral administration of AXS‑02 tablets resulted in rapid absorption of zoledronic acid, which is the active molecule in AXS‑02 and the free acid form of disodium zoledronate tetrahydrate, and substantial suppression of bone resorption markers, which are proteins indicative of bone tissue breakdown. We intend to seek FDA approval for AXS‑02 utilizing the 505(b)(2) regulatory development pathway.

AXS-06 is a novel, oral, non-opioid, investigational medicine consisting of MoSEIC™ meloxicam and esomeprazole. We are developing AXS-06 initially for the treatment of osteoarthritis and rheumatoid arthritis. Esomeprazole is a proton pump inhibitor which lowers stomach acidity and which has been shown to reduce the occurrence of NSAID-induced gastrointestinal ulcers. AXS-06 is designed to provide rapid, effective pain relief, and to reduce the risk of NSAID-induced ulcers, with convenient once-daily dosing. We have successfully completed a Phase 1 trial of AXS-06 to characterize the pharmacokinetics of meloxicam and esomeprazole after oral administration of AXS-06. The results of our Phase 1 trial demonstrated that the median Tmax for meloxicam, the trial’s primary endpoint, was nine times faster for AXS-06 as compared to standard meloxicam. We intend to seek FDA approval for AXS-06 utilizing the 505(b)(2) regulatory development pathway.

Since our incorporation in January 2012, our operations to date have included organizing and staffing our company, business planning, raising capital, developing our compounds, and engaging in other discovery and preclinical activities. Prior to our initial public offering, or IPO, in November 2015, we financed our operations primarily through private placements of our convertible notes.

 

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Our ability to become profitable depends on our ability to generate revenue. We do not expect to generate significant revenue unless and until we or our collaborators obtain marketing approval for and successfully commercialize one of our product candidates.

 

We have incurred significant operating and net losses since inception. We incurred net losses of $21.4 million and $21.5 million for the nine months ended September  30, 2018 and 2017, respectively. Our accumulated deficit as of September  30, 2018 was $98.0 million, and we expect to incur significant expenses and increasing operating losses for the foreseeable future. We expect our expenses to increase in connection with our ongoing activities, as we continue the development and clinical trials of, and seek regulatory approval for our current product candidates and any other product candidates that we develop or in‑license and advance to clinical development. If we obtain regulatory approval for a product candidate, we expect to incur significant expenses in order to create an infrastructure to support the commercialization of the product candidate, including manufacturing, sales, marketing, and distribution functions. Further, we have incurred and will continue to incur additional costs associated with operating as a public company. Accordingly, we will need additional financing to support our continuing operations. We will seek to fund our operations through public or private equity,  debt financings or other sources. Adequate additional financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy. We will need to generate significant revenue to achieve profitability, and we may never do so.

 

Year to Date and Recent Developments

In January 2018, we announced that an independent data monitoring committee, or IDMC, had conducted an interim efficacy analysis for our then-ongoing Phase 3 clinical trial of AXS-02 for the treatment of complex regional pain syndrome, or CRPS, which we referred to as the CREATE-1 trial and for the COAST-1 trial. Based on the recommendation we received from the IDMC, we will continue our COAST-1 trial to full enrollment and have discontinued our CREATE-1 trial for futility.

In February 2018, we announced that AXS-09 met the primary endpoint in a recently completed Phase 1 clinical trial, which contains the chirally pure S-enantiomer of bupropion and dextromethorphan.

In April 2018, we announced the enrollment of the first patient into a Phase 2 clinical trial of AXS-05 for smoking cessation treatment, which is being conducted under a research collaboration agreement between us and Duke University.

In April 2018, we announced that an IDMC had conducted an interim futility analysis for the STRIDE-1 study. Based on the results of the analysis, the IDMC recommended that the trial continue. The IDMC also reviewed the available safety information from the study and indicated that, based on the interim results, AXS-05 appears safe and well-tolerated.

As previously disclosed, in April 2018, our board of directors appointed Nick Pizzie, CPA, MBA, as our Chief Financial Officer, effective May 16, 2018. Prior to Mr. Pizzie’s appointment, in April 2018, we received a resignation letter from our prior Chief Financial Officer, John Golubieski, effective May 9, 2018.

In June 2018, we announced the enrollment of the first patient into the ASCEND trial, which is being conducted to evaluate the efficacy and safety of AXS-05 in patients with MDD.

In October 2018, we closed a registered direct offering, whereby we sold 2,966,667 shares of common stock to certain institutional and accredited investors at a  purchase price of $3.00 per share, for net proceeds of approximately $8.8 million, after deducting estimated transaction expenses. Please see the section entitled “Liquidity and Capital Resources” below for a further discussion.

 

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In October 2018, we announced that we will focus on our growing core CNS portfolio and as a result, we established a new business unit, Axsome PPC, which houses our pain and primary care assets, including AXS-02 and AXS-06, and intellectual property which covers these and related product candidates and molecules being developed by us and others.

In October 2018, we announced AXS-12 for the treatment of narcolepsy and that AXS-12 has been granted Orphan Drug Designation by the FDA for the indication.

Financial Overview

Revenue

We have not generated any revenue since we commenced operations and we do not expect to generate any revenue in the near future. To the extent we enter into licensing or collaboration arrangements, we may have sources of revenue in the future. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the amount and timing of payments that we may recognize upon the sale of our product candidates, to the extent that any product candidates are successfully commercialized, and the amount and timing of fees, reimbursements, and milestone and other payments received under any future licensing or collaboration arrangements. If we fail to complete the development of our product candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue, and our results of operations and financial position, would be materially and adversely affected.

Research and Development Expenses

Research and development expenses primarily include preclinical studies, clinical trials, manufacturing costs, employee salaries and benefits, stock‑based compensation expense; contract services, including external research and development expenses incurred under arrangements with third parties, such as contract research organizations, or CROs, facilities costs, overhead costs, depreciation, and other related costs.

Research and development activities are central to our business model. We will incur substantial costs beyond our present and planned clinical trials in order to file a new drug application, or NDA, for any of our product candidates. It is difficult to determine with certainty the costs and duration of our current or future clinical trials and preclinical studies, or if, when, or to what extent we will generate revenue from the commercialization and sale of our product candidates if we obtain regulatory approval. We may never succeed in achieving regulatory approval. The duration, costs, and timing of clinical trials and development of our product candidates will depend on a variety of factors, including the uncertainties of future clinical trials and preclinical studies, uncertainties in clinical trial enrollment rate, and significant and changing government regulation. In addition, the probability of success for each product candidate 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 product candidate, as well as an assessment of each product candidate’s commercial potential. Management considers many factors in developing the estimates and assumptions that are used in the preparation of these financial statements.

Management must apply significant judgment in this process. In addition, other factors may affect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made.

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The following table summarizes our research and development expenses for our primary programs for the three and nine months ended September 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

 

 

September 30, 

 

September 30, 

 

 

 

    

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AXS-02

 

$

34,539

 

$

1,260,775

 

$

507,074

 

$

5,884,906

 

 

AXS-05

 

 

3,453,303

 

 

2,378,716

 

 

9,847,722

 

 

7,062,448

 

 

AXS-06

 

 

3,671

 

 

68,087

 

 

63,844

 

 

478,085

 

 

AXS-07

 

 

1,226,328

 

 

 —

 

 

2,095,683

 

 

 —

 

 

AXS-12

 

 

7,914

 

 

 —

 

 

7,914

 

 

 —

 

 

Other research and development

 

 

1,224,134

 

 

636,226

 

 

3,509,833

 

 

1,630,190

 

 

Stock-based compensation

 

 

90,891

 

 

127,322

 

 

311,753

 

 

408,077

 

 

Total research and development expenses

 

$

6,040,780

 

$

4,471,126

 

$

16,343,823

 

$

15,463,706

 

 

Other research and development expenses primarily consist of employee salaries and benefits, and facilities and overhead costs. For the three and nine months ended September 30, 2018, all employee salaries and benefits were allocated to Other research and development expenses whereas for the three and nine months ended September 30, 2017, a majority of employee salaries and benefits were allocated to a program.

General and Administrative Expenses

General and administrative expenses primarily consist of salaries and related costs for personnel in executive, finance, and operational functions, including stock‑based compensation and travel expenses. Other general and administrative expenses include facility‑related costs, insurance expense, and professional fees for legal and accounting services and patent filing and prosecution costs. General and administrative expenses are expensed when incurred.

Interest and amortization of debt discount (expense)

Interest and amortization of debt discount (expense) primarily consists of cash interest and non‑cash costs related to our term loan with Silicon Valley Bank, or SVB, which was entered into in November 2016. We record costs incurred in connection with the issuance of debt as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as interest expense in our consolidated statement of operations.

Change in Fair Value of Warrant Liability

The warrants to purchase our common stock issued as part of the registered direct stock offering in December 2017 were classified as a warrant liability and recorded at fair value. The warrant liability is subject to re‑measurement at each balance sheet date and any change in fair value was recognized in our statements of operations as a change in fair value of the warrant liability.

Critical Accounting Policies and Significant Judgments and Estimates

This discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reported period. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

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There have been no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K filed with the SEC on March 7, 2018.

 

Results of Operations

The following table summarizes our results of operations for the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

  

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

6,040,780

 

$

4,471,126

 

$

16,343,823

 

$

15,463,706

General and administrative

 

 

2,202,679

 

 

1,826,290

 

 

7,052,439

 

 

5,256,481

Total operating expenses

 

 

8,243,459

 

 

6,297,416

 

 

23,396,262

 

 

20,720,187

Loss from operations

 

 

(8,243,459)

 

 

(6,297,416)

 

 

(23,396,262)

 

 

(20,720,187)

Interest and amortization of debt discount (expense)

 

 

(270,933)

 

 

(343,234)

 

 

(878,605)

 

 

(999,818)

Tax Credit

 

 

217,418

 

 

207,114

 

 

217,418

 

 

207,114

Change in fair value of warrant liability

 

 

15,000

 

 

 —

 

 

2,689,000

 

 

 —

Net loss

 

$

(8,281,974)

 

$

(6,433,536)

 

$

(21,368,449)

 

$

(21,512,891)

 

Comparison of the Three Months Ended September 30, 2018 and 2017

Research and Development Expenses.  Our research and development expenses for the three months ended September 30, 2018 were $6.0 million, compared to $4.5 million for the three months ended September 30, 2017, an increase of $1.5 million. The increase was primarily due to the progress of our STRIDE-1, ADVANCE-1, and ASCEND studies and costs related to our AXS-07 product candidate, which was partially offset by a reduction in the costs of our previously initiated clinical trials for AXS-02 and nonclinical work on AXS-05.

General and Administrative Expenses.  Our general and administrative expenses for the three months ended September 30, 2018 were $2.2 million, compared to $1.8 million for the three months ended September 30, 2017, an increase of $0.4 million. The increase was primarily due to higher intellectual property and legal expenses, external fees associated with operating as a public company, as well as an increase in personnel costs.

Interest and Amortization of Debt Discount (Expense).  Interest and amortization of debt discount expense was $0.3 million for each of the three month periods ended September 30, 2018 and 2017, which was associated with our loan and security agreement with SVB.

Tax Credit.  Tax credit income for the three months ended September 30, 2018 and 2017 was $0.2 million and represents the receipt by Axsome Therapeutics Australia PTY LTD, our Australian subsidiary, of the Australia Tax Incentive Credit related to the 2017 and 2016 research and development expenses incurred for our product candidates.  

Change in Fair Value of Warrant Liability.  We recorded income related to the change in fair value of our warrant liability for the three months ended September 30, 2018, which was less than $0.1 million.  There was no warrant liability outstanding during the three months ended September 30, 2017.

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Comparison of the Nine Months Ended September 30, 2018 and 2017

Research and Development Expenses.  Our research and development expenses for the nine months ended September 30, 2018 were $16.3 million, compared to $15.5 million for the nine months ended September 30, 2017, an increase of $0.8 million. The increase was primarily due to the progress of our STRIDE-1, ADVANCE-1, and ASCEND studies and costs related to our AXS-07 product candidate, which was partially offset by a reduction in the costs of our previously initiated clinical trials for AXS-02 and nonclinical work on AXS-05 and AXS-06.

General and Administrative Expenses.  Our general and administrative expenses for the nine months ended September 30, 2018 were $7.1 million, compared to $5.3 million for the nine months ended September 30, 2017, an increase of $1.8 million. The increase was primarily due to higher intellectual property and legal expenses, external fees associated with operating as a public company, as well as an increase in personnel costs.

Interest and Amortization of Debt Discount (Expense).  Interest and amortization of debt discount expenses for the nine months ended September 30, 2018 were $0.9 million, compared to $1.0 million for the nine months ended September 30, 2017. The decrease was primarily related to lower interest expense and amortization of the debt discount associated with our loan and security agreement with SVB due to a lower principal balance.

Tax Credit.  Tax credit income for the nine months ended September 30, 2018 and 2017 was $0.2 million and represents the receipt by Axsome Therapeutics Australia PTY LTD, our Australian subsidiary, of the Australia Tax Incentive Credit related to the 2017 and 2016 research and development expenses incurred for our product candidates.  

Change in Fair Value of Warrant Liability.  We recorded income related to the change in fair value of our warrant liability for the nine months ended September 30, 2018 of $2.7 million.  There was no warrant liability outstanding during the nine months ended September 30, 2017.

Liquidity and Capital Resources

In November 2016, we entered into a loan and security agreement with SVB for a term loan of up to $20.0 million. The initial tranche of $10.0 million was funded shortly after executing the loan agreement. Because we did not achieve the conditional criteria to access the second and third tranches before the specified dates, the $10.0 million in additional term loan advances expired.

On December 1, 2016, we filed a shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, rights, debt securities and units up to an aggregate amount of $150.0 million, which we refer to as the 2016 Shelf Registration Statement. On December 16, 2016, the 2016 Shelf Registration Statement was declared effective by the SEC. As discussed in greater detail below, we completed an offering of common stock in March 2017, entered into a sales agreement pursuant to which we may sell shares of our common stock from time to time in an at-the-market offering in October 2017, and completed a registered direct offering priced at the market in December 2017, each utilizing the 2016 Shelf Registration Statement. In the future, we may conduct additional offerings of one or more of these securities utilizing the 2016 Shelf Registration Statement in such amounts, prices and terms to be announced when and if the securities are offered. At the time any of our securities covered by the 2016 Shelf Registration Statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

In March 2017, we completed an underwritten public offering, whereby we sold 4,304,813 shares of our common stock at a public offering price of $3.74 per share. We received gross proceeds of approximately $16.1 million and net proceeds of approximately $14.8 million, net of underwriting discounts and offering expenses.

 

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In October 2017, we entered into a sales agreement, or the Sales Agreement, with Leerink Partners, LLC, or Leerink, pursuant to which we may sell up to $30 million in shares of our common stock from time to time through Leerink, acting as our sales agent, in one or more at-the-market offerings. Leerink is entitled to receive a commission of 3.0% of the gross proceeds for any shares sold under the Sales Agreement. We received approximately $3.0 million in gross proceeds, of which net proceeds were approximately $2.9 million from the sales of its common stock to Leerink under the Sales Agreement during the nine months ended September 30, 2018. The Company received approximately $3.1 million in gross proceeds, of which net proceeds were approximately $3.0 million from the sales of its common stock to Leerink under the Sales Agreement since inception.

In December 2017, we completed a registered direct offering priced at the market, whereby we sold an aggregate of $9.5 million worth of units, or Units, at a purchase price of $5.325 per Unit, with each Unit consisting of (i) one share of our common stock, and (ii) a warrant to purchase one share of our common stock, or Common Warrant, at an exercise price equal to $5.25 per share. We sold an aggregate of 1,783,587 Units in the offering for gross proceeds of approximately $9.5 million and net proceeds of approximately $8.8 million, net of underwriting discounts and offering expenses. Additionally, we issued warrants to purchase up to 107,015 shares of our common stock at an exercise price of $6.6562 per share to certain investors affiliated with H.C. Wainwright & Co., LLC, placement agent for the offering, which we refer to as the Placement Agent Warrants. The Placement Agent Warrants have the same terms as the Common Warrants, except for the difference in exercise price noted above.

On September 27, 2018, we entered into a purchase agreement with certain institutional and accredited investors, which we refer to as the RDO Investors, for the sale by us directly to the RDO Investors of an aggregate of 2,966,667 shares of the our common stock, at a purchase price of $3.00 per share, which we refer to as the 2018 Registered Direct Offering, for gross proceeds of approximately $8.9 million. The 2018 Registered Direct Offering closed on October 1, 2018, and we received estimated net proceeds of approximately $8.8 million, after deducting estimated transaction expenses. The 2,966,667 shares of common stock sold in the 2018 Registered Direct Offering were offered and sold by us directly to the RDO Investors, without a placement agent, underwriter, broker or dealer, pursuant to a prospectus supplement to the 2016 Shelf Registration Statement.

We believe our currently available cash will be sufficient to fund our anticipated operating cash requirements into the first quarter of 2020. Because the process of evaluating product candidates in clinical trials is costly and the timing of progress in these trials is uncertain, it is possible that the assumptions upon which we have based this estimate may prove to be wrong, and we could use our capital resources sooner than we currently expect.

 

Cash Flows

The following table summarizes our primary sources and uses of cash for the periods indicated:

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2018

 

2017

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by:

 

 

 

 

 

 

 

Operating activities

 

$

(20,259,752)

 

$

(20,180,422)

 

Investing activities

 

 

(32,696)

 

 

(9,897)

 

Financing activities

 

 

1,492,089

 

 

15,245,205

 

Net (decrease) increase in cash

 

$

(18,800,359)

 

$

(4,945,114)

 

Operating Activities.  Cash used in operating activities for the nine months ended September 30, 2018 was $20.3 million as compared to $20.2 million for the nine months ended September 30, 2017. The increase of $0.1 million in net cash used was primarily related to continued development on AXS-05 and AXS-07, which was partially offset by a reduction in the costs of our previously initiated clinical trials.

Investing Activities.  Cash used in investing activities for the purchase of property and equipment was less than $0.1 million for the nine months ended September 30, 2018 and 2017.

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Financing Activities.  Cash provided by financing activities was $1.5 million for the nine months ended September 30, 2018, which included net proceeds from the sale of common stock through our Sales Agreement with Leerink of $2.9 million and $1.1 million of the $8.9 million of cash received in connection with the Registered Direct Offering completed in October 2018, offset by the principal payments on our term loan with SVB of $2.5 million. Cash provided by financing activities was $15.2 million for the nine months ended September 30, 2017, which included the net proceeds from the sale of common stock in the March 2017 public offering of $14.8 million as well as $0.3 million from the exercise of options and warrants.

Funding requirements

We have not achieved profitability since our inception and we expect to continue to incur significant losses for the foreseeable future. We expect our losses to increase as we continue the development of and seek regulatory approvals for our product candidates and begin to commercialize any approved products. We are subject to all of the risks pertinent to the development of new product candidates, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors that may harm our business.

We anticipate that we will need to raise substantial additional financing in the future to fund our operations. In order to meet these additional cash requirements, we may incur debt, license certain intellectual property, and seek to sell additional equity or convertible securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of equity or convertible securities, these securities could have rights or preferences senior to those of our common stock and could contain covenants that restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all. Our future capital requirements will depend on many factors, including:

    the scope, rate of progress, results, and cost of our clinical studies and other related activities;

    our ability to enter into collaborative agreements for the development and commercialization of our product candidates;

    the number and development requirements of any other product candidates that we pursue;

    the costs, timing, and outcome of regulatory reviews of our product candidates;

    the costs and timing of future commercialization activities, including product manufacturing, marketing, sales, and distribution, for any of our product candidates for which we receive marketing approval;

    any product liability or other lawsuits related to our product candidates;

    the expenses needed to attract and retain skilled personnel;

    the general and administrative expenses related to being a public company;

    the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; and

    the costs involved in preparing, filing, and prosecuting patent applications, maintaining and enforcing our intellectual property rights, and defending our intellectual property‑related claims.

Please see “Risk Factors” for additional risks associated with our substantial capital requirements.

Contractual Obligations and Commitments

Under three exclusive license agreements with Antecip Bioventures II LLC, or Antecip, an entity owned by our Chief Executive Officer and Chairman of the Board, Herriot Tabuteau, M.D., we are obligated to make specified royalty payments ranging from 1.5% to 4.5%, subject to up to a 50% reduction depending on required payments to third parties, on net sales of licensed products. The amount, timing, and likelihood of such payments are not known.

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November 2016 Loan and Security Agreement—Silicon Valley Bank

In November 2016, we entered into a loan and security agreement with SVB for a term loan of up to $20.0 million. The initial tranche of $10.0 million was funded shortly after executing the loan agreement. We made interest only payments on the loan until December 1, 2017.  Under the terms of the loan, we had the opportunity, but not the obligation to, draw two additional tranches of $5.0 million each prior to November 9, 2017 and December 31, 2017, subject to the achievement of certain clinical and financial milestones. Because we did not achieve the conditional criteria to access the second and third tranches before the specified dates, the $10.0 million in additional term loan advances expired.

The SVB loan accrues interest at an annual rate equal to 4.50% plus the prime rate, which is the greater of 3.50% or the Wall Street Journal prime rate, and is payable monthly. Following the interest only payment period, we began making monthly payments of principal and interest and these payments will continue until the maturity date of November 1, 2020. In addition, we are required to pay a final payment fee of 8.5% of the principal amount extended to us on the date of repayment of the outstanding loan.

We may prepay all, but not less than all, of the SVB loan subject to a prepayment premium of 3.0% of the outstanding principal if prepaid within two years of the effective date of the loan, 2.0% of the outstanding principal if prepaid during the third year of the loan, and 1.0% of the outstanding principal if prepaid after the third year. The term loan is collateralized by a security interest in all of our assets except intellectual property. Our intellectual property is subject to a negative pledge.

In connection with the loan, SVB and Life Science Loans, LLC, received warrants to purchase an aggregate 65,228 shares of our common stock at an exercise price of $7.41 per share, which are exercisable for seven years from the date of issuance.

We allocated the proceeds of $10.0 million based on the relative fair values of the debt instrument and the warrant instrument. The relative fair value of the warrants of approximately $0.3 million at the time of issuance, which was determined using the Black-Scholes option-pricing model, was recorded as additional paid-in capital and reduced the carrying value of the debt. The discount on the debt is being amortized to interest expense over the term of the debt.

Off‑Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined by applicable SEC regulations.

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Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB,  issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), which supersedes FASB Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similarly to existing guidance for operating leases. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which makes 16 technical corrections to the new leases standard and other accounting topics, alleviating unintended consequences from applying the new standard. It does not make any substantive changes to the core provisions of principles of the new standard. In July 2018, the FASB also issued ASU No. 2018-11, Leases (Topic 842), which provides (1) optional transition method that entities can use when adopting the standard and (2) a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. We are currently evaluating the potential impact of the new guidance.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which is guidance to address diversity in practice with respect to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity that occurs in practice. The guidance is effective for annual and interim periods beginning after December 15, 2017. We have adopted this guidance effective January 1, 2018 and the adoption of the guidance did not have a material impact to our financial statements.

In May 2017, the FASB issued No. ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. We have adopted this guidance effective January 1, 2018 and the adoption of the guidance did not have a material impact to our financial statements.

In June 2018, the FASB issued No. ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting 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. The standard will be effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. We are currently evaluating the potential impact of the new guidance.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, which provides technical corrections, clarifications, and other improvements to several topics in the FASB Accounting Standard Codification. The transition and effective date guidance is based on the facts and circumstances of each amendment. Some of the amendments do not require transition guidance and were effective upon issuance of the ASU. Amendments that do not have transition guidance are effective for annual periods beginning after December 15, 2018. We have adopted this guidance effective September 30, 2018 and the adoption of the guidance did not have a material impact on our financial statements.

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In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to the Financial Statements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. We are currently evaluating the potential impact of the new guidance.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. The changes are generally expected to reduce or eliminate certain disclosures; however, the amendments did expand interim period disclosure requirements related to changes in stockholders’ equity. The final rule is effective on November 5, 2018. We are currently evaluating the potential impact of the new guidance.  

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We had cash of $15.2 million and $34.0 million as of September  30, 2018 and December 31, 2017, respectively. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short‑term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and, accordingly, we do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates.

Foreign Currency Exchange Risk

We contract with vendors and third‑party manufacturers in several foreign countries. Several of these contracts are denominated in Euros, British pounds, and Australian dollars. We are therefore subject to fluctuations in foreign currency rates in connection with these agreements, and recognize foreign exchange gains or losses in our statement of operations. We have not historically hedged our foreign currency exchange rate risk. To date, we have not incurred any material effects from foreign currency changes on these contracts.

We do not believe a 10% change in these currencies on September  30, 2018 would have had a material effect on our results of operations or financial condition.

Inflation Risk

Inflation generally affects us by increasing our cost of labor and pricing of contracts. We do not believe that inflation has had a material effect on our business, financial condition, or results of operations during the nine months ended September  30, 2018.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures.  Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective, at the reasonable assurance level, in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Control over Financial Reporting. There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

We, and our subsidiaries, are not a party to, and our property is not the subject of, any material pending legal proceedings; however, we may become involved in various claims and legal actions arising in the ordinary course of business.

 

ITEM 1A. RISK FACTORS.

Investing in our common stock involves a high degree of risk.  You should carefully consider the risk factors set forth below as well as the other information contained in this Quarterly Report on Form 10-Q and in our other public filings in evaluating our business. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently view to be immaterial may also materially adversely affect our business, financial condition or results of operations. In these circumstances, the market price of our common stock would likely decline.

RISKS RELATED TO OUR FINANCIAL CONDITION AND CAPITAL REQUIREMENTS

We have incurred significant losses since our inception, anticipate that we will incur substantial and increasing losses for the foreseeable future, and may never achieve or maintain profitability.

We are a clinical stage biopharmaceutical company with a limited operating history. For the last several years, we have focused our efforts primarily on developing AXS-02, AXS-05, AXS-06, AXS-07,  AXS-09, and AXS-12, which we refer to herein as our product candidates, with the goal of achieving regulatory approval. Since inception, we have incurred significant operating losses. Our net losses were $21.4 million and $28.9 million for nine months ended September  30, 2018 and the year ended December 31, 2017, respectively. As of September  30, 2018, we had an accumulated deficit of $98.0 million. To date, we have not received regulatory approvals for any of our product candidates or generated any revenue from the sale of products, and we do not expect to generate any revenue in the foreseeable future. We expect to continue to incur substantial and increasing expenses and operating losses over the next several years, as we continue to develop our current and future product candidates. In addition, we expect to incur significant sales, marketing, and manufacturing expenses related to the commercialization of our current and future product candidates, if they are approved by the U.S. Food and Drug Administration, or FDA. As a result, we expect to continue to incur significant losses for the foreseeable future. We anticipate that our expenses will increase substantially as we:

·

conduct our Phase 3 clinical trials with AXS‑02 for the treatment of pain associated with knee osteoarthritis, or OA, associated with bone marrow lesions, or BMLs;

·

conduct our Phase 3 clinical trials with AXS‑05 for the treatment of treatment resistant depression, or TRD;

·

conduct our Phase 2/3 clinical trials with AXS‑05 for the treatment of agitation associated with Alzheimer’s disease, or AD agitation;

·

conduct our Phase 2 clinical trial with AXS-05 for the treatment of major depressive disorder, or MDD;

·

continue to evaluate, plan for, and conduct, clinical trials for AXS-05 for smoking cessation treatment, AXS-06 for the treatment of osteoarthritis and rheumatoid arthritis, AXS-07 for the acute treatment of migraine, AXS-09 for the treatment of CNS disorders, and AXS-12 for the treatment of narcolepsy;

·

in‑license or acquire additional product candidates;

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·

conduct late‑stage clinical trials for any product candidates that successfully complete early‑stage clinical trials;

·

seek regulatory approval for any product candidates that successfully complete late‑stage clinical trials;

·

conduct additional non‑clinical studies with any product candidates;

·

conduct clinical studies with any additional product candidates;

·

increase manufacturing batch sizes of our product candidates to satisfy FDA requirements for a marketing application submission;

·

establish a sales, marketing, and distribution infrastructure, and scale up external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval and that we choose not to license to a third party;

·

require larger quantities of product;

·

maintain, expand, and protect our intellectual property portfolio;

·

hire additional clinical, quality control, and scientific personnel; and

·

add operational, financial, and management information systems and personnel, including personnel to support our product candidate development and planned future commercialization efforts.

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. We do not expect to generate significant revenue unless and until we are able to obtain marketing approval for and successfully commercialize one or more of our product candidates. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials of our product candidates, discovering additional product candidates, potentially entering into collaboration and license agreements, obtaining regulatory approval for product candidates and manufacturing, marketing, and selling any products for which we may obtain regulatory approval, achieving market acceptance of our products, satisfying any post‑marketing requirements, maintaining appropriate distribution, setting prices, and obtaining reimbursement for our products from private insurance or government payors. We are only in the preliminary stages of some of these activities. We may never succeed in these activities and, even if we do, may never achieve profitability.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses we may incur or when, or if, we will be able to achieve profitability. If we are required by the FDA or comparable foreign regulatory authorities to perform studies in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of any of our product candidates, our expenses could increase.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings, or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

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We will need additional funding to conduct our future clinical trials and to complete development and commercialization of our product candidates. If we are unable to raise capital when needed, we would be forced to delay, reduce, or eliminate our product development programs or commercialization efforts.

Conducting clinical trials, pursuing regulatory approvals, establishing outsourced manufacturing relationships, and successfully manufacturing and commercializing our product candidates is, and will be, a very time‑consuming, expensive, and uncertain process that takes years to complete. We will need to raise additional capital to:

·

fund our future clinical trials for our current product candidates, especially if we encounter any unforeseen delays or difficulties in our planned development activities;

·

fund our operations and continue our efforts to hire additional personnel and build a commercial infrastructure to prepare for the commercialization of our current and future product candidates, if approved by the FDA or other comparable foreign regulatory authorities;

·

qualify and outsource the commercial‑scale manufacturing of our products under current good manufacturing practices, or cGMP;

·

develop additional product candidates; and

·

in‑license other product candidates.

We believe our currently available cash will be sufficient to fund our anticipated operating cash requirements into the first quarter of 2020. We have based this estimate on assumptions that may prove to be wrong and we could spend our available financial resources faster than we currently expect. Further, we may not have sufficient financial resources to meet all of our objectives if any product candidate is approved, which could require us to postpone, scale back, or eliminate some, or all, of these objectives, including our potential launch activities relating to our product candidates. Our future funding requirements will depend on many factors, including, but not limited to:

·

the rate of progress and costs related to the development of our product candidates;

·

the costs associated with conducting additional non-clinical studies with any of our product candidates;

·

the potential for delays in our efforts to seek regulatory approval for our product candidates, and any costs associated with such delays;

·

the costs of establishing a commercial organization to sell, market, and distribute our product candidates;

·

the rate of progress and costs of our efforts to prepare for the submission of a new drug application, or NDA, for any product candidates that we may in‑license or acquire in the future, and the potential that we may need to conduct additional clinical or preclinical trials to support applications for regulatory approval;

·

the costs of filing, prosecuting, defending, and enforcing any patent claims and other intellectual property rights associated with our product candidates;

·

the cost and timing of manufacturing sufficient supplies of our product candidates in preparation for commercialization;

·

the effect of competing technological and market developments;

·

revenue, if any, received from commercial sales of our product candidates, subject to the receipt of regulatory approval;

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·

the terms and timing of any collaborative, licensing, co‑promotion, or other arrangements that we may establish; and

·

the success of the commercialization of any of our current or future product candidates.

Future capital requirements will also depend on the extent to which we acquire or invest in additional businesses, products, and technologies. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings, royalties, and corporate collaboration and licensing arrangements, as well as through interest income earned on cash and investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our development programs or our commercialization efforts.

Our operating activities may be restricted as a result of covenants related to the outstanding indebtedness under our loan agreement and we may be required to repay the outstanding indebtedness in an event of default, which could have a materially adverse effect on our business.

In November 2016, we entered into a loan and security agreement, referred to herein as the SVB Loan, with Silicon Valley Bank, or SVB, for a term loan facility in the aggregate principal amount of up to $20.0 million, of which $10.0 million was funded shortly after closing. Availability of $5.0 million under the second term advance was conditioned upon the achievement of both a clinical and financial milestone on or prior to November 9, 2017. The clinical milestone required our receipt of positive interim results of our then-ongoing CREATE-1 study of AXS-02 in CRPS, while the financial milestone required that we receive unrestricted and unencumbered net cash proceeds of at least $30.0 million from the issuance and sale of our equity securities to investors. Availability of $5.0 million under the third term advance was tied to achievement of the clinical and financial milestones described above, as well as our receipt of positive data with respect to our then-ongoing CREATE-1 study by December 31, 2017 sufficient to file a new drug application with the FDA.  Because we did not achieve the conditional criteria to access the second and third term advances before the specified dates, the $10.0 million in additional term loan advances expired.

The loan advances mature on November 1, 2020 and had an interest‑only monthly payment period until December 1, 2017. Following the interest-only payment period, we began making monthly payments of principal and interest and will continue to do so until the maturity date. Interest will accrue on the unpaid principal balance of the outstanding loan advances at a floating per annum rate of 4.50% above the prime rate.  

The SVB Loan subjects us to various customary covenants, including requirements as to financial reporting and insurance, and restrictions on our ability to dispose of our business or property, change our line of business, liquidate or dissolve, enter into any change in control transaction, merge or consolidate with any other entity or acquire all or substantially all the capital stock or property of another entity, incur additional indebtedness, incur certain types of liens on our property, including our intellectual property, pay any dividends or other distributions on our capital stock other than dividends payable solely in capital stock or redeem our capital stock. Our business may be adversely affected by these restrictions on our ability to operate our business.

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Additionally, we may be required to repay the outstanding indebtedness under the SVB Loan if an event of default occurs under the SVB Loan. Under the SVB Loan, an event of default will occur if, among other things, we fail to make payments under the SVB Loan; we breach any of our covenants under the SVB Loan, subject to specified cure periods with respect to certain breaches; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they become due; or we default on contracts with third parties which would permit SVB to accelerate the maturity of such indebtedness or that could have a material adverse effect on us. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In that case, we may be required to delay, limit, reduce or terminate our product candidate development or commercialization efforts or grant to others rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. SVB could also exercise its rights as collateral agent to take possession and dispose of the collateral securing the loan for its benefit, which collateral includes all of our property other than our intellectual property. Our business, financial condition and results of operations could be materially adversely affected as a result of any of these events. Our management has broad discretion in the application of the proceeds from the SVB Loan, subject to the covenants and limitations described in the SVB Loan.

We have a limited operating history and no history of commercializing products, which may make it difficult to evaluate our business and prospects.

We commenced operations in 2012, and our operations to date have been limited to organizing and staffing our company, business planning, raising capital, and developing our product candidates, including undertaking preclinical studies and conducting clinical trials of our product candidates. We have not yet demonstrated an ability to obtain regulatory approval for, or successfully commercialize, a product candidate. In addition, as a relatively nascent business, we may encounter unforeseen expenses, difficulties, complications, delays, and other known and unknown difficulties. If our product candidates are approved by the FDA, we will need to expand our capabilities to support commercial activities. We may not be successful in adding such capabilities. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

RISKS RELATED TO OUR BUSINESS AND THE DEVELOPMENT OF OUR PRODUCT CANDIDATES

We are substantially dependent on the success of our product candidates and cannot guarantee that any of our product candidates will successfully complete any planned or ongoing Phase 3 clinical trials, receive regulatory approval, or be successfully commercialized.

We currently have no products approved for commercial distribution. We have invested a significant portion of our efforts and financial resources in the development of our product candidates. Our business depends entirely on the successful development and commercialization of our product candidates, which may never occur. Our ability to generate revenues in the near term is substantially dependent on our ability to develop, obtain regulatory approval for, and then successfully commercialize our product candidates. We currently generate no revenues from sales of any products, and we may never be able to develop or commercialize a marketable product. Furthermore, given the nature of our business, the biopharmaceutical industry in general and the uncertainty and costs associated with developing our product candidates within a complicated and costly regulatory regime, our goals, plans and assumptions with respect to our product candidates may evolve or change. For example, we may not continue to emphasize, focus our research and development efforts on or direct resources to certain of our product candidates, and we may shift our focus and resources to our other current or future product candidates. Any such change in our business strategy could harm our business, cause uncertainty or confusion in the marketplace or harm the clinical prospects of our product candidates.

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