Quarterly Report (10-q)

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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, 2019

☐ 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	45-4241907
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

200 Broadway 3rd Floor New York, New York	10038
(Address of principal executive offices)	(Zip Code)

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

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 ☒

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

Title of each class:

Trading Symbol(s)

Name of each exchange on which registered:

Common Stock, Par Value $0.0001 Per Share

AXSM

The Nasdaq Global Market

There were 34,508,626 shares of the registrant’s common stock, $0.0001 par value, outstanding as of November 1, 2019.

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AXSOME THERAPEUTICS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

		Page
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS		3
PART I — FINANCIAL INFORMATION
ITEM 1	Financial Statements	4
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
ITEM 3	Quantitative and Qualitative Disclosure About Market Risk	35
ITEM 4	Controls and Procedures	35
PART II — OTHER INFORMATION
ITEM 1	Legal Proceedings	36
ITEM 1A	Risk Factors	36
ITEM 6	Exhibits	97
Signatures		99

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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;

our 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;

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

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

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

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

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

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

our expected losses;

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

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

our stock price and its volatility;

our ability to attract and retain key personnel;

the performance of our third-party manufacturers;

our 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,
	2019		2018
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,641,861	$	13,968,742
Prepaid and other current assets		594,345		1,246,360
Total current assets		44,236,206		15,215,102
Equipment, net		34,554		51,832
Other assets		168,969		112,345
Total assets	$	44,439,729	$	15,379,279
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,447,359	$	3,687,245
Accrued expenses and other current liabilities		8,413,107		3,843,299
Loan payable, current portion		648,523		3,291,394
Total current liabilities		18,508,989		10,821,938
Loan payable, long-term		19,108,144		3,619,420
Total liabilities		37,617,133		14,441,358
Stockholders’ equity:
Preferred stock, $0.0001 par value per share (10,000,000 shares authorized, none issued and outstanding at September 30, 2019 and December 31, 2018, respectively)		—		—
Common stock, $0.0001 par value per share (150,000,000 shares authorized, 34,496,846 and 30,087,213 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively)		3,450		3,009
Additional paid-in capital		157,907,655		108,485,219
Accumulated deficit		(151,088,509)		(107,550,307)
Total stockholders’ equity		6,822,596		937,921
Total liabilities and stockholders’ equity	$	44,439,729	$	15,379,279

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,
	2019		2018		2019		2018

Operating expenses:
Research and development	$	15,835,573	$	6,040,780	$	34,441,796	$	16,343,823
General and administrative		3,111,662		2,202,679		8,375,131		7,052,439
Total operating expenses		18,947,235		8,243,459		42,816,927		23,396,262
Loss from operations		(18,947,235)		(8,243,459)		(42,816,927)		(23,396,262)
Interest and amortization of debt discount (expense)		(327,825)		(270,933)		(860,723)		(878,605)
Tax credit		139,448		217,418		139,448		217,418
Change in fair value of warrant liability		—		15,000		—		2,689,000
Net loss	$	(19,135,612)	$	(8,281,974)	$	(43,538,202)	$	(21,368,449)
Net loss per common share, basic and diluted	$	(0.56)	$	(0.31)	$	(1.29)	$	(0.83)
Weighted average common shares outstanding, basic and diluted		34,445,489		26,325,904		33,771,671		25,875,783

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

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Axsome Therapeutics, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common stock
				Additional		Accumulated		Total stockholders’
	Shares	Amount		paid-in capital		deficit		equity

Balance at December 31, 2017	25,492,992		2,549		93,299,517		(76,584,843)		16,717,223
Stock-based compensation	—		—		534,570		—		534,570
Issuance of common stock upon financing	56,900		6		139,914		—		139,920
Net loss	—		—		—		(4,805,559)		(4,805,559)
Balance at March 31, 2018	25,549,892	$	2,555	$	93,974,001	$	(81,390,402)	$	12,586,154
Stock-based compensation	—		—		474,659		—		474,659
Issuance of common stock upon financing	702,970		70		2,228,932		—		2,229,002
Net loss	—		—		—		(8,280,916)		(8,280,916)
Balance at June 30, 2018	26,252,862	$	2,625	$	96,677,592	$	(89,671,318)	$	7,008,899
Stock-based compensation	—		—		392,665		—		392,665
Issuance of common stock upon exercise of warrants	25,000		3		32,497		—		32,500
Issuance of common stock upon financing	180,800		55		1,590,612		—		1,590,667
Net loss	—		—		—		(8,281,974)		(8,281,974)
Balance at September 30, 2018	26,458,662	$	2,683	$	98,693,366	$	(97,953,292)	$	742,757

Balance at December 31, 2018	30,087,213		3,009		108,485,219		(107,550,307)		937,921
Stock-based compensation	—		—		1,256,310		—		1,256,310
Issuance of common stock upon exercise of options	52,819		5		410,157		—		410,162
Issuance of warrants upon debt financing	—		—		426,000		—		426,000
Issuance of common stock upon financing	3,164,015		316		24,983,366		—		24,983,682
Net loss	—		—		—		(10,640,376)		(10,640,376)
Balance at March 31, 2019	33,304,047	$	3,330	$	135,561,052	$	(118,190,683)	$	17,373,699
Stock-based compensation	—		—		888,556		—		888,556
Issuance of common stock upon exercise of options	59,720		6		205,330		—		205,336
Issuance of common stock upon exercise of warrants	24,389		2		144,868		—		144,870
Issuance of warrants upon debt financing	—		—		(39,000)		—		(39,000)
Issuance of common stock upon financing	942,285		95		19,471,603		—		19,471,698
Net loss	—		—		—		(13,762,214)		(13,762,214)
Balance at June 30, 2019	34,330,441	$	3,433	$	156,232,409	$	(131,952,897)	$	24,282,945
Stock-based compensation	—		—		1,156,435		—		1,156,435
Issuance of common stock upon exercise of options	129,218		13		483,825		—		483,838
Issuance of common stock upon exercise of warrants	37,187		4		34,986		—		34,990
Net loss	—		—		—		(19,135,612)		(19,135,612)
Balance at September 30, 2019	34,496,846	$	3,450	$	157,907,655	$	(151,088,509)	$	6,822,596

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,
	2019		2018

Cash flows from operating activities
Net loss	$	(43,538,202)	$	(21,368,449)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,301,301		1,401,894
Amortization of debt discount		471,742		293,580
Change in fair value of warrants		—		(2,689,000)
Depreciation		31,938		36,728
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		652,015		554,749
Other assets		(56,624)		70,596
Accounts payable		5,760,114		731,913
Accrued expenses and other current liabilities		4,569,808		708,237
Net cash used in operating activities		(28,807,908)		(20,259,752)
Cash flows from investing activities
Purchases of equipment		(14,660)		(32,696)
Net cash used in investing activities		(14,660)		(32,696)
Cash flows from financing activities
Proceeds from issuance of common stock upon financing, net		44,455,380		3,959,589
Proceeds from issuance of term loan		20,000,000		—
Repayment of principal on term loan		(7,238,889)		(2,500,000)
Proceeds from issuance of common stock upon exercise of options		1,099,336		—
Proceeds from issuance of common stock upon exercise of warrants		179,860		32,500
Net cash (used in) provided by financing activities		58,495,687		1,492,089
Net (decrease) increase in cash		29,673,119		(18,800,359)
Cash at beginning of period		13,968,742		34,021,123
Cash at end of period	$	43,641,861	$	15,220,764
Supplemental disclosures of cash flow information:
Interest paid	$	979,167	$	585,025
Supplemental disclosures of non-cash financing activity:
Issuance of warrants in connection with debt financing	$	387,000	$	—

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 unaudited 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, 2018 filed with the SEC on March 15, 2019.

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 three and nine months ended September 30, 2019 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, 2019, the Company had an accumulated deficit of $151.1 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 will be sufficient to fund its anticipated operating cash requirements for at least twelve months following the date of this filing. 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, the Company’s 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. The Company’s cash and cash equivalents includes holdings in checking and overnight sweep accounts. The Company’s cash equivalents, which are money market funds held in a sweep account, are measured at fair value on a recurring basis. As of September 30, 2019, the balance of cash and cash equivalents was $43.6 million, which approximates fair value and was determined based upon Level 1 inputs. The sweep account is valued using quoted market prices with no valuation adjustments applied. Accordingly, these securities are categorized as Level 1.

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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, 2019, 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 Company’s financial instruments are cash, accounts payable, accrued liabilities, and current and long-term debt. The carrying values for cash, accounts payable and accrued liabilities reported in the accompanying consolidated financial statements approximate their respective fair values due to their short‑term maturities. The carrying value of debt, the 2019 Term Loan (see Note 4 – Loan and Security Agreement), is estimated to approximate its fair value as the interest rate approximates the market rate for loans with similar terms and risk characteristics.

Debt Issuance Costs

Debt issuance costs consist of costs incurred in obtaining long-term financing. These costs are classified on the consolidated balance sheet as a direct deduction from the carrying amount of the related debt liability. These expenses are deferred and amortized as part of interest expense in the consolidated statement of operations using the effective interest rate method over the term of the debt agreement.

Equipment

Equipment consists primarily of computer equipment and is recorded at cost. Equipment is depreciated on a straight‑line basis over its estimated useful life, which the Company estimates to be three years. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in operating expenses.

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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.

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 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 clinical trial study expenses based on work performed and relies upon estimates of those costs applicable to the stage of completion of a study. 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 the Company’s policy is to match the recording of expenses in its financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical site costs are recognized based on the Company’s 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 estimates an annual effective tax rate of 0% for the year ending December 31, 2019 and has not recorded an income tax benefit for the nine months ended September 30, 2019 and 2018 since it determined that a full valuation allowance is required against the Company’s deferred tax assets.

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, 2019, 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.

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Stock‑Based Compensation

For stock options issued, 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, expected dividends 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’s judgment. In addition, the Company recognizes expense for equity awards 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.

The Company’s policy upon exercise of stock options is that shares will be issued as new shares from the Company’s 2015 Omnibus Incentive Compensation Plan available share pool.

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, 2019 and 2018.

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), requires that assets and liabilities arising under leases be recognized on the balance sheet as well as additional quantitative and qualitative disclosures that provide the amount, timing, and uncertainty of cash flows related to lease agreements. 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 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company elected to use the transition method approved by the FASB in accordance with ASU No. 2018-11, Leases, which allows companies to apply the provisions of the new leasing standard as of January 1, 2019, without adjusting the comparative periods presented by recognizing a cumulative-effect adjustment to the opening balance of retained earnings. The Company applied a policy election to exclude short-term leases from balance sheet recognition and also elected certain practical expedients at adoption. As permitted under these expedients, the Company did not reassess whether existing contracts are or contain leases, the lease classification for any existing leases, initial direct costs for any existing lease and whether existing land easements and rights of way, that were not previously accounted for as leases, are or contain a lease. The Company has adopted this guidance effective January 1, 2019. The Company evaluated its contracts and concluded that the contracts are not leases and do not contain a lease and the adoption of this guidance did not impact its financial statements.

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.

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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. The Company early adopted this guidance effective October 1, 2018 and the adoption did not have a material impact on the Company’s financial statements.

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 January 1, 2019 and the adoption of the guidance did not have a material impact on the Company’s financial statements.

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 was effective on November 5, 2018. The Company adopted this guidance on its effective date and presented the changes in shareholders’ equity in the interim financial statements in quarterly reports on Form 10-Q. See the consolidated statement of stockholders’ equity.

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.

Note 3. Accrued Expenses and Other Current Liabilities

At September 30, 2019 and December 31, 2018 accrued expenses and other current liabilities consisted of the following:


	September 30,		December 31,
	2019		2018

Research and development	$	6,625,638	$	2,266,285
Accrued compensation		995,181		1,051,401
Other		792,288		525,613
Total	$	8,413,107	$	3,843,299

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Note 4. Loan and Security Agreement

Current Term Loan

2019 Term Loan

In March 2019, the Company entered into a $24.0 million growth capital term loan facility (the “2019 Term Loan”) with Silicon Valley Bank (“SVB”) and WestRiver Innovation Lending Fund VIII, L.P (“WestRiver”). The two-tranche loan agreement consists of an initial $20.0 million tranche (the “Term A Loan Advance”), which was funded upon closing, with the remaining $4.0 million (the “Term B Loan Advance”) initially available to be drawn, at the Company’s option, subject to the achievement of positive data, on or prior to August 15, 2019 (which was extended to December 31, 2019, in connection with the First Amendment to the 2019 Term Loan, as discussed below), with respect to the Company’s ongoing Phase 2 clinical trial for AXS-12 in narcolepsy, sufficient to submit a Phase 3 protocol to FDA, provided that the Company has not received any objections from the FDA within thirty days after submission of such Phase 3 protocol (the “Milestone Event”). A portion of the first tranche was used to satisfy the Company’s existing obligations under the 2016 Amended Term Loan (as defined below) with SVB, which consisted of $5.6 million in outstanding principal balance and $0.85 million as a final payment fee, and such obligations are considered to be fully repaid and performed.

The loan bears interest at an annual rate equal to the greater of (i) seven and one-half of one percent (7.50%) and (ii) two percent (2%) above the Prime Rate. The loan advances mature in February 2023 and initially had an interest-only payment period of 12 months (which was extended to 18 months in connection with the First Amendment to the 2019 Term Loan, as discussed below), extendable to 18 months upon the drawing of the Term B Loan Advance (which is now extendable to 24 months as a result of the First Amendment to the 2019 Term Loan). Principal payments coming due within twelve months have been classified as current liabilities in the accompanying balance sheet. In addition, the Company was initially required to pay a final payment fee of 6.0% of the principal amount extended on the date of repayment of the 2019 Term Loan (which was increased to 6.3% in connection with the First Amendment to the 2019 Term Loan, as discussed below), which is being accreted and amortized into interest expense using the effective interest rate method over the term of the loan.

The Company could initially prepay all, but not less than all, of the 2019 Term Loan, subject to a prepayment premium of 3.0% of the outstanding principal if prepaid within one year of the effective date of the loan, 2.0% of the outstanding principal if prepaid after the first anniversary of the effective date but on or prior to the second anniversary of the effective date, and 1.0% of the outstanding principal if prepaid after the second anniversary of the effective date. The 2019 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.

First Amendment to the 2019 Term Loan

On July 25, 2019 (the “First Amendment Effective Date”), the Company entered into the first amendment to the 2019 Term Loan (the “First Amendment to the 2019 Term Loan”). Under the First Amendment to the 2019 Term Loan, the interest-only monthly payment period was extended to 18 months after the date of the 2019 Term Loan, which may be further extended to 24 months upon receipt by the Company of the Term B Loan Advance. The Company’s ability to draw down the Term B Loan Advance was extended to December 31, 2019, subject to the Company’s achievement of the Milestone Event prior to or on December 31, 2019. The Term B Loan Advance and the Term A Loan Advance (together, the “Loan Advances”) mature on February 1, 2023 (the “Maturity Date”).

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Pursuant to the 2019 Term Loan, as amended by the First Amendment to the 2019 Term Loan, following the interest-only payment period, the Company will begin making monthly payments of principal in equal monthly installments for 30 consecutive months (provided, that, upon the occurrence of the Milestone Event, the repayment schedule will be decreased to 24 consecutive months) and monthly payments of interest, until the Maturity Date. Interest will accrue on the unpaid principal balance of the outstanding Loan Advances at a floating per annum rate equal to the greater of (i) seven and one-half of one percent (7.50%) and (ii) two percent (2.0%) above the prime rate. The First Amendment to the 2019 Term Loan increased the final payment fee, payable upon the Company’s repayment of the Loan Advances from 6.0% to 6.3% of the original principal amount of the Loan Advances.

The Company may prepay all, but not less than all of the Loan Advances, subject to a prepayment fee of 3.0% of any amount prepaid prior to the first anniversary of the First Amendment Effective Date, 2.0% of the amount prepaid if the prepayment occurs after the first anniversary of the First Amendment Effective Date through and including the second anniversary of the First Amendment Effective Date, or 1.0% of the amount prepaid if the prepayment occurs after the second anniversary of the First Amendment Effective Date, but prior to the Maturity Date. These percentages are unchanged from the original 2019 Term Loan.

The Company evaluated whether the First Amendment to the 2019 Term Loan entered into in July 2019 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt – Modifications and Extinguishments. As the present value of the cash flows under the terms of the First Amendment to the 2019 Term Loan is less than 10% different from the remaining cash flows under the terms of the 2019 Term Loan, the First Amendment to the 2019 Term Loan was accounted for as a debt modification. Therefore, the unamortized balance of debt discount costs incurred in connection with 2019 Term Loan are being amortized through maturity in February 2023 utilizing the effective interest rate method.

Previous Term Loan

Prior to the 2019 Term Loan, the Company had a $20.0 million Term Loan Agreement with SVB which was executed in November 2016 (“2016 Original Term Loan”). The three-tranche term loan consisted 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 Company did not achieve the conditional criteria to access the second and third tranches before the specified dates and the $10.0 million in additional term loan advances subsequently expired.

The 2016 Original Term Loan bore 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 was payable monthly. It was to mature 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. 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. Following the interest-only payment period, the Company began making monthly payments of principal and interest and such payments would continue until the maturity date. Principal payments coming due within twelve months had been classified as current liabilities in the accompanying balance sheet. In addition to principal and interest payments under the 2016 Original Term Loan, the Company was required to pay a final payment fee of 8.5% of the principal amount extended on the date of repayment of the 2016 Original Term Loan. The Company accrued the final payment fee into interest expense using the effective interest rate method until the entry into the 2019 Term Loan in March 2019, at which time the Company paid SVB $0.85 million in satisfaction of all final payment fee liabilities due under the 2016 Original Term Loan.

The Company was permitted to prepay all, but not less than all, of the 2016 Original 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 2016 Original Term Loan was collateralized by a security interest in all of the Company’s assets except intellectual property. The Company’s intellectual property was subject to a negative pledge.

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In November 2018, the Company amended the 2016 Original Term Loan with SVB to provide an additional $4.0 million growth capital loan. The additional capital was available to be drawn on the amendment effective date which was November 26, 2018 through May 31, 2019, at the Company’s option, conditioned upon the achievement of a clinical milestone, which required the Company’s receipt of positive data of the Company’s Phase 2 clinical trial of AXS-12 for the treatment of narcolepsy, sufficient to submit a Phase 3 protocol to the FDA and to proceed to a Phase 3 trial (“2016 Amended Term Loan”). The financial terms for this additional growth capital were more favorable than those of the 2016 Original Term Loan. All other terms and conditions from the 2016 Original Term Loan agreement remained in place. The additional $4.0 million growth capital loan had to be drawn by May 31, 2019 and would bear interest at an annual rate equal to the greater of the prime rate plus 2.00%, or 7.25%, if drawn. The Company’s obligations under the 2016 Amended Term Loan, along with the ability of the Company to draw down on the additional $4.0 million tranche, were considered performed and completed in connection with the establishment of the 2019 Term Loan.

The Company evaluated whether the 2019 Term Loan entered into in March 2019 represented a debt modification or extinguishment in accordance with ASC 470-50, Debt – Modifications and Extinguishments. As the present value of the cash flows under the terms of the 2019 Term Loan is less than 10% different from the remaining cash flows under the terms of the 2016 Original Term Loan and the 2016 Amended Term Loan, the 2019 Term Loan was accounted for as a debt modification. Since the borrowing capacity of the 2019 Term Loan is greater than the borrowing capacity from the 2016 Original Term Loan and the 2016 Amended Term Loan, the unamortized balance of debt discount costs incurred in connection with those loans and additional debt discount costs incurred in connection with entry into the 2019 Term Loan, are being amortized through maturity in February 2023 utilizing the effective interest rate method.

Loan Interest Expense and Amortization

The Company incurred interest expense of $383,334 and $979,167 for the three and nine months ended September 30, 2019, respectively, as compared to $182,357 and $585,025 for the three and nine months ended September 30, 2018, respectively. In addition, amortization of the final payment fee was $120,322 and $316,246 for the three and nine months ended September 30, 2019, respectively, as compared to $63,636 and $210,399 for the three and nine months ended September 30, 2018, respectively.

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


	September 30,		December 31,
	2019		2018

Total Outstanding Debt	$	20,000,000	$	6,388,889
Add: accreted liability of final payment fee		284,042		663,459
Less: unamortized debt discount, long-term		(509,231)		(99,595)
Less: current portion of long-term debt		(666,667)		(3,333,333)
Loan payable, long-term	$	19,108,144	$	3,619,420

Current portion of long-term debt	$	666,667	$	3,333,333
Less: current portion of unamortized debt discount		(18,144)		(41,939)
Loan payable, current portion	$	648,523	$	3,291,394

In connection with the 2016 Original 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. In September 2019, SVB exercised in full the 32,614 warrants it received in connection with the 2016 Original Term Loan via a cashless exercise. The Company issued SVB 24,328 shares of its common stock in connection with the warrant exercise, and did not receive any cash proceeds in connection with the warrant exercise.

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Additionally, in connection with the 2016 Amended Term Loan, SVB and WestRiver Innovation Lending Fund VIII, L.P. received warrants to purchase an aggregate 15,750 shares of the Company’s common stock at an exercise price of $3.06 per share, which are exercisable for seven years from the date of issuance. Both of these warrants were classified as a component of stockholders’ equity. Prior to entering into the 2019 Term Loan, the fair value of these warrants and the closing costs were recorded as debt discounts and were being amortized using the effective interest rate method over the term of the loan. In August 2019, SVB exercised in full the 7,875 warrants it received in connection with the 2016 Amended Term Loan via a cashless exercise. The Company issued SVB 6,969 shares of its common stock in connection with the warrant exercise, and did not receive any cash proceeds in connection with the warrant exercise.

Due to the debt modification upon entry of the 2019 Term Loan, the unamortized balance of the deferred debt issuance costs incurred with the 2016 Amended Term Loan will continue to be amortized through maturity in February 2023 along with the debt issuance costs of the 2019 Term Loan utilizing the effective interest rate method.

In connection with the 2019 Term Loan, SVB and WestRiver received warrants to purchase an aggregate 70,000 shares of the Company’s common stock at a price per share equal to $8.10 (the “March 2019 Warrants”). The warrants would initially be earned based upon the usage of the facility and are exercisable until March 4, 2026. The warrants were classified as a component of stockholder’s equity, of which 58,332 warrants were immediately exercisable and the remaining 11,668 warrants could be earned based on usage of the second tranche of the 2019 Term Loan. The additional warrants were initially immediately exercisable if and when the Term B Loan Advance was funded (however, the March 2019 Warrants were amended in connection with the First Amendment to the 2019 Term Loan, as discussed below). The relative fair value of the warrants of approximately $0.4 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 utilizing the effective interest rate method.

In connection with the First Amendment to the 2019 Term Loan, the March 2019 Warrants were amended to fix the number of shares that may be issued upon exercise of each such March 2019 Warrant at 29,167 shares of common stock, and SVB and WestRiver were issued new warrants (the “July 2019 Warrants”), which become exercisable only upon funding of the Term B Loan Advance, to purchase 5,750 shares of the Company’s common stock at a price per share equal to $25.71. The July 2019 Warrants replace the portion of the March 2019 Warrants that could originally be earned by SVB and WestRiver upon funding of the Term B Loan Advance. The July 2019 Warrants, if earned, will be exercisable until July 24, 2026 and will be exercised automatically on a net issuance basis if not exercised prior to the expiration date and if the then-current fair market value of one share of the Company’s common stock is greater than the exercise price then in effect.

Amortization of the debt discount in relation to warrants issued as described above was $56,602 and $155,496 for the three and nine months ended September 30, 2019, respectively, as compared to $24,940 and $83,181 for three and nine months ended September 30, 2018, respectively.

Scheduled Principal Payments on Outstanding Debt, as of September 30, 2019, are as follows:


2020	$	2,666,667
2021		8,000,000
2022		8,000,000
2023		1,333,333
Total principal payments outstanding	$	20,000,000

The Company was in compliance with all covenants and requirements of its financing arrangements as of and during the nine months ended September 30, 2019.

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Note 5. 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,
	2019		2018		2019		2018

Basic and diluted net loss per common share:
Net loss	$	(19,135,612)	$	(8,281,974)	$	(43,538,202)	$	(21,368,449)
Weighted average common shares outstanding—basic and diluted		34,445,489		26,325,904		33,771,671		25,875,783
Net loss per common share—basic and diluted	$	(0.56)	$	(0.31)	$	(1.29)	$	(0.83)

The following potentially dilutive securities outstanding at September 30, 2019 and 2018 have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti‑dilutive:


	September 30,
	2019	2018

Stock options	3,184,842	2,758,499
Warrants	110,603	2,074,149
Total	3,295,445	4,832,648

Note 6. Stockholders’ Equity

Capital Structure

On December 1, 2016, the Company filed a shelf registration statement (the “2016 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. On December 16, 2016, the 2016 Shelf Registration Statement was declared effective by the SEC. The 2016 Shelf Registration Statement is currently the Company’s only active shelf registration statement. There is approximately $57.4 million of securities that remain available for future issuance under the 2016 Shelf Registration as of the date of this filing, which includes the amount remaining on the 2019 Sales Agreement with Leerink (as defined below). All of the securities issued by the Company in the transactions discussed in this note were registered under the 2016 Shelf Registration Statement.

In March 2017, the Company completed an underwritten public offering of its common stock, whereby it sold 4,304,813 shares of its 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 after deducting underwriting discounts and offering expenses.

In October 2017, the Company entered into a sales agreement (the “2017 Sales Agreement”) with SVB Leerink (formerly Leerink Partners LLC) ("Leerink"), pursuant to which the Company could sell up to $30.0 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. In January 2019, the Company raised approximately $25.8 million in gross proceeds through the sale of 3,164,015 shares under the 2017 Sales Agreement, which resulted in utilizing the full $30.0 million facility. Upon completion of the final sale fully exhausting the $30 million of shares allowed to be sold, the 2017 Sales Agreement was automatically terminated. Leerink received a commission of 3.0% of the gross proceeds for all shares sold under the Sales Agreement.

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In December 2017, the Company completed a registered direct offering (the “2017 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 the Company’s common stock at an exercise price equal to $5.25 per share (the “Common Warrants”). 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, after deducting placement agent fees and offering expenses. Additionally, the Company issued 107,015 warrants at an exercise price of $6.6562 per share to certain investors affiliated with H.C. Wainwright & Co., LLC, placement agent for the 2017 Registered Direct Offering (the “Placement Agent Warrants”). The Company incurred issuance costs associated with the 2017 Registered Direct Offering of $745,856, which included $81,000 related to issuance of the 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 had the same terms as the Common Warrants, except for the exercise price of $6.6562 per share. The Common Warrants priced at $5.25 and Placement Agent Warrants priced at $6.6562 utilized the 2016 Shelf Registration Statement for a total of $9.4 million and $712,313, respectively. Both the Common Warrants and the Placement Agent Warrants were not exercised and subsequently were terminated in December 2018.

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 net proceeds of approximately $8.8 million, after deducting 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.

In May 2019, the Company entered into a new sales agreement (the “2019 Sales Agreement”) with Leerink, pursuant to which the Company may sell up to $50.0 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 2019 Sales Agreement. The Company received approximately $20.1 million in gross proceeds through the sale of 942,285 shares, of which net proceeds were approximately $19.5 million during the nine months ended September 30, 2019.

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 3,668,590 shares available for the issuance of stock options or stock-based awards under the Company’s 2015 Omnibus Incentive Compensation Plan at September 30, 2019.

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Stock Options

The following table sets forth the stock option activity for the nine months ended September 30, 2019:


				Weighted
		Weighted		average	Aggregate
	Number	average		contractual	intrinsic
	of shares	exercise price		term	value
Outstanding at December 31, 2018	2,282,636	$	5.06
Granted	1,197,231		15.57
Exercised	(241,757)		4.55
Forfeited	(53,268)		7.50
Expired	—		—
Outstanding at September 30, 2019	3,184,842	$	9.01	8.0	$	36,930,345
Vested and expected to vest at September 30, 2019	3,168,673	$	9.05	8.0	$	36,632,902
Exercisable at September 30, 2019	1,612,322	$	6.34	6.6	$	22,428,613

The fair value of each stock option grant is estimated on the date of grant using the Black‑Scholes option pricing model. 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 $11.55 and $1.98 per option for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was $12.9 million of total unrecognized compensation cost related to non‑vested stock options which is expected to be recognized over a weighted average period of 3.3 years. These amounts do not include 20,971 options outstanding as of September 30, 2019, which are performance‑based and vest upon the achievement of certain corporate milestones. The total intrinsic value of options exercised (the difference in the market price of the Company’s common stock on the exercise date and the price paid by the optionee to exercise the option) was approximately $4.3 million for the nine months ended September 30, 2019. There were no options exercised for the nine months ended September 30, 2018.

Stock‑based compensation expense recognized for the three and nine months ended September 30, 2019 and 2018 was allocated as follows:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018

Research and development	$	286,234	$	90,891	$	652,666	$	311,753
General and administrative		870,201		301,774		2,648,635		1,090,141
Total	$	1,156,435	$	392,665	$	3,301,301	$	1,401,894

Performance‑Based Awards

The Company did not issue any performance-based awards during the nine months ended September 30, 2019 and 2018. For awards granted with performance conditions, no expense will be recognized, and no measurement date can occur, until the occurrence of the event is probable. For the three and nine months ended September 30, 2019, the Company recognized expense of $9,514 and $29,378, respectively, and for the three and nine months ended September 30, 2018, the Company recognized expense of $24 and income of $247, respectively, related to performance‑based awards.

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Warrants

The following table summarizes warrant activity for the nine months ended September 30, 2019:


		Weighted
		average
	Warrants	exercise price
Outstanding at December 31, 2018	123,037	$	6.35
Issued	58,334		8.10
Exercised	(70,768)		6.30
Outstanding at September 30, 2019	110,603	$	7.31

Warrants associated with 2017 Registered Direct Offering

The change in the fair value of warrant liability for the nine months ended September 30, 2018 was $2,689,000. This relates to the Company’s 2017 Registered Direct Offering. As described in further detail above, the Company issued Common Warrants to certain investors to purchase an aggregate of 1,783,587 shares of its common stock. The Common Warrants were exercisable at $5.25 per share and expired on December 11, 2018. Additionally, as part of the 2017 Registered Direct Offering, the Company issued Placement Agent Warrants to certain investors affiliated with H.C. Wainwright & Co., LLC, the placement agent in the 2017 Registered Direct Offering to purchase an aggregate of 107,015 shares of its common stock. The Placement Agent Warrants were exercisable at $6.6562 and expired on December 11, 2018. The Common Warrants and Placement Agent Warrants were analyzed and it was determined that they required 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 classified these derivative warrant liabilities on the consolidated balance sheet as a current liability and the change in fair value of the warrant liability was reported on the statement of operations.

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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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 “Cautionary Note 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 interim 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, 2018 which was filed with the Securities and Exchange Commission, or SEC, on March 15, 2019.

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. AXS-05 is currently in a Phase 3 trial in treatment resistant depression, or TRD, which we refer to as the STRIDE-1 study, a Phase 3 trial in major depressive disorder, or MDD, which we refer to as the GEMINI study, a Phase 3 open-label safety trial in patients with TRD and MDD; and a Phase 2/3 trial in agitation associated with Alzheimer's disease, or AD, which we refer to as the ADVANCE-1 study. We have completed a Phase 2 trial in MDD, which we refer to as the ASCEND study and a Phase 2 trial in smoking cessation. AXS-07 is currently in two Phase 3 trials for the acute treatment of migraine, which we refer to as the MOMENTUM and the INTERCEPT studies, and a Phase 3 open-label safety trial in patients with migraine. AXS-12 is currently in a Phase 2 trial in narcolepsy, which we refer to as the CONCERT study. The Axsome Pain and Primary Care business unit, or Axsome PPC, 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. AXS-02 is being developed for the treatment of knee osteoarthritis, or OA, associated with bone marrow lesions, or BMLs. 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 gastrointestinal 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 NMDA receptor antagonist with multimodal activity under development for the treatment of CNS disorders. AXS-05 consists of bupropion and dextromethorphan, or DM, and utilizes our 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. The DM component of AXS-05 is a non-competitive N-methyl-D-aspartate, or NMDA, receptor antagonist, also known as a glutamate receptor modulator. The DM component of AXS-05 is also a sigma-1 receptor agonist, nicotinic acetylcholine receptor antagonist, and inhibitor of the serotonin and norepinephrine transporters. The bupropion component of AXS-05 serves to increase the bioavailability of dextromethorphan, and is a norepinephrine and dopamine reuptake inhibitor, and a nicotinic acetylcholine receptor antagonist. 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 with distinct dual mechanisms of action 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 T_max, 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-HT_1B/Dagonist that inhibits calcitonin gene-related peptide-, or 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 a novel, 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-, or orexin-deficient mice, a well-established genetic animal model of narcolepsy.

The 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. AXS-02 is being developed for the treatment of knee osteoarthritis, or OA, associated with bone marrow lesions, or BMLs, and 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 NSAID-associated gastrointestinal ulcers.

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 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 intend to seek FDA approval for AXS‑02 utilizing the 505(b)(2) regulatory development pathway.

AXS-06, is a novel, oral, non-opioid, fixed-dose combination 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-associated gastrointestinal ulcers. AXS-06 is designed to provide rapid, effective pain relief, and to reduce the risk of NSAID-associated gastrointestinal 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 T_max 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.

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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 and subsequent to our IPO, through proceeds from sales of our common stock and warrants to purchase shares of our common stock to equity investors and debt borrowings. For a further discussion, see the section entitled “Liquidity and Capital Resources” below.

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 expenses and net losses since inception. We incurred net losses of $43.5 million and $21.4 million for the nine months ended September 30, 2019 and 2018, respectively. Our accumulated deficit as of September 30, 2019 was $151.1 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 2019, we announced that AXS-05 met the prespecified primary endpoint and significantly improved symptoms of depression in the ASCEND study.

In January 2019, we received approximately $25.8 million in gross proceeds, of which net proceeds were approximately $25.0 million through the sale of 3,164,015 shares under the existing at-the-market facility with SVB Leerink (formerly Leerink Partners LLC), or Leerink. Upon completion of the final sale fully exhausting the $30 million of shares available for sale, the Sales Agreement was automatically terminated. Please see the section entitled “Liquidity and Capital Resources” below for a further discussion.

In January 2019, we initiated the CONCERT study, a Phase 2 randomized, double-blind, controlled trial to evaluate the efficacy and safety of AXS-12 in narcolepsy.

In March 2019, we initiated the MOMENTUM study, a Phase 3, randomized, double-blind, multicenter, controlled trial to assess the efficacy and safety of AXS-07 in the acute treatment of migraine.

In March 2019, we entered into a $24.0 million growth capital term loan facility, which we refer to as the 2019 Term Loan, with Silicon Valley Bank, or SVB, and WestRiver Innovation Lending Fund VIII, L.P., or WestRiver. Further, in July 2019, the 2019 Term Loan was amended. Please see the section entitled “Liquidity and Capital Resources” below for a further discussion.

In March 2019, we received FDA Breakthrough Therapy designation for AXS-05 for the treatment of MDD.

In April 2019, we announced that AXS-05 met the prespecified primary endpoint in Phase 2 trial in smoking cessation.

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In May 2019, we announced expedited development and pivotal status for AXS-05 for the treatment of MDD based on an FDA Breakthrough Therapy meeting.

In May 2019, we announced the acceleration of the timeline for reporting topline results from the MOMENTUM Phase 3 trial of AXS-07 for the acute treatment of migraine.

In May 2019, we entered into a new sales agreement with Leerink with respect to an at the market offering program, which we refer to as the 2019 Sales Agreement, under which we may, from time to time in our sole discretion, issue and sell through Leerink, acting as agent, up to $50.0 million of shares of our common stock. We received approximately $20.1 million in gross proceeds through the sale of 942,285 shares, of which net proceeds were approximately $19.5 million during the nine months ended September 30, 2019.

In June 2019, we initiated the GEMINI study, a Phase 3, randomized, double-blind, multicenter, placebo-controlled trial of AXS-05 in the treatment of MDD.

In July 2019, we announced that we are enrolling two open-label studies in order to build safety databases of patients to support the filing of a New Drug Application, or NDA for (i) AXS-05 in the treatment of MDD and (ii) AXS-07 in the acute treatment of migraine.

In August 2019, we announced that David Marek has been appointed as our Chief Commercial Officer.

In September 2019, we announced positive results from a Phase 1 pharmacokinetic trial of AXS-07, a novel, oral, investigational medicine with distinct dual mechanisms of action being developed for the acute treatment of migraine.

In October 2019, we announced the completion of patient enrollment in our GEMINI and CONCERT studies.

In October 2019, we initiated the INTERCEPT study, a Phase 3, randomized, double-blind, multicenter, placebo-controlled trial evaluating the early treatment of migraine with AXS-07.

In October 2019, we announced the results of the MINDSET physician survey, which affirms the unmet need and favorable profile of AXS-07 in the acute treatment of migraine.

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.

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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 an 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 our unaudited interim consolidated 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 our unaudited interim consolidated 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.

The following table summarizes our research and development expenses for our primary programs for the three and nine months ended September 30, 2019 and 2018:


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018

AXS-05	$	7,829,826	$	3,453,303	$	15,491,879	$	9,847,722
AXS-07		6,177,098		1,226,328		13,914,286		2,095,683
AXS-12		487,703		7,914		1,363,852		7,914
AXS-02		174,253		34,539		264,155		507,074
AXS-06		3,650		3,671		8,126		63,844
Other research and development		876,809		1,224,134		2,746,832		3,509,833
Stock-based compensation		286,234		90,891		652,666		311,753
Total research and development expenses	$	15,835,573	$	6,040,780