Axsome Therapeutics(AXSM) - 2021 Q2 - Quarterly Report

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section cautions that the report contains forward-looking statements, with actual results potentially differing materially due to various factors including identified risk factors - The report contains forward-looking statements regarding expectations for expenses, clinical development, regulatory approval, commercialization of product candidates, capital resources, revenue generation, partnership agreements, intellectual property, product acceptance, stock price volatility, key personnel, third-party manufacturers, and strategic implementation[7][8] - Actual results may differ materially due to various factors, including those discussed under 'Risk Factors' and 'Management's Discussion and Analysis of Financial Condition and Results of Operations'[7] PART I — FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents Axsome Therapeutics, Inc.'s unaudited consolidated financial statements for the quarter ended June 30, 2021, including the balance sheets, statements of operations, statements of stockholders' equity, and statements of cash flows, accompanied by detailed notes on the company's business, accounting policies, and specific financial line items Consolidated Balance Sheets This section presents the unaudited consolidated balance sheets, highlighting assets, liabilities, and stockholders' equity as of June 30, 2021, and December 31, 2020 Consolidated Balance Sheet Highlights | Item | June 30, 2021 (Unaudited) | December 31, 2020 | | :-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------------------ | :---------------- | | Assets | | | | Cash and cash equivalents | $141,219,090 | $183,876,453 | | Total current assets | $141,654,894 | $184,024,826 | | Total assets | $143,264,750 | $186,134,323 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $22,863,668 | $23,437,858 | | Loan payable, long-term | $48,882,599 | $48,321,848 | | Total liabilities | $71,828,130 | $72,341,414 | | Total stockholders' equity | $71,436,620 | $113,792,909 | | Total liabilities and stockholders' equity | $143,264,750 | $186,134,323 | Consolidated Statements of Operations This section provides the unaudited consolidated statements of operations, detailing research and development, general and administrative expenses, and net loss for various periods Consolidated Statements of Operations Highlights (Unaudited) | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $14,503,326 | $10,542,957 | $31,099,014 | $38,064,357 | | General and administrative | $16,344,361 | $7,235,877 | $27,592,734 | $12,205,934 | | Total operating expenses | $30,847,687 | $17,778,834 | $58,691,748 | $50,270,291 | | Loss from operations | $(30,847,687)$ | $(17,778,834)$ | $(58,691,748)$ | $(50,270,291)$ | | Interest and amortization of debt discount (expense) income | $(1,436,522)$ | $(548,158)$ | $(2,852,431)$ | $(540,847)$ | | Net loss | $(32,284,209)$ | $(18,326,992)$ | $(61,544,179)$ | $(50,811,138)$ | | Net loss per common share, basic and diluted | $(0.86)$ | $(0.49)$ | $(1.64)$ | $(1.37)$ | | Weighted average common shares outstanding | 37,595,069 | 37,100,770 | 37,512,716 | 37,081,064 | Consolidated Statements of Stockholders' Equity This section presents the unaudited consolidated statements of stockholders' equity, showing changes in common stock, additional paid-in capital, and accumulated deficit Consolidated Statements of Stockholders' Equity Highlights (Unaudited) | Item | Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | | :-------------------------------------------- | :--------- | :------------------ | :------------------------- | :------------------ | :------------------------- | | Balance at December 31, 2020 | 37,374,088 | $3,737 | $392,585,265 | $(278,796,093)$ | $113,792,909 | | Stock-based compensation | — | — | $3,731,097 | — | $3,731,097 | | Issuance of common stock upon exercise of options | 94,000 | $10 | $1,913,289 | — | $1,913,299 | | Issuance of common stock upon financing | 93,877 | $9 | $6,115,855 | — | $6,115,864 | | Net loss | — | — | — | $(29,259,970)$ | $(29,259,970)$ | | Balance at March 31, 2021 | 37,563,882 | $3,756 | $404,345,506 | $(308,056,063)$ | $96,293,199 | | Stock-based compensation | — | — | $5,456,242 | — | $5,456,242 | | Issuance of common stock upon exercise of options | 68,503 | $7 | $958,888 | — | $958,895 | | Issuance of common stock upon financing | 16,419 | $2 | $1,096,501 | — | $1,096,503 | | Net loss | — | — | — | $(32,284,209)$ | $(32,284,209)$ | | Balance at June 30, 2021 | 37,648,948 | $3,765 | $411,773,127 | $(340,340,272)$ | $71,436,620 | Consolidated Statements of Cash Flows This section outlines the unaudited consolidated statements of cash flows, summarizing cash movements from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (Unaudited) | Cash Flows From Operating Activities | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(61,544,179)$ | $(50,811,138)$ | | Net cash used in operating activities | $(52,609,042)$ | $(42,168,466)$ | | Cash Flows From Investing Activities | | | | Net cash used in investing activities | $(48,872)$ | $(10,759)$ | | Cash Flows From Financing Activities | | | | Net cash provided by financing activities | $10,000,551 | $12,895,167 | | Net (decrease) increase in cash | $(42,657,363)$ | $(29,284,058)$ | | Cash at beginning of period | $183,876,453 | $219,966,167 | | Cash at end of period | $141,219,090 | $190,682,109 | Notes to Consolidated Financial Statements (Unaudited) This section provides detailed notes accompanying the unaudited consolidated financial statements, explaining the company's business, accounting policies, and specific financial line items Note 1. Nature of Business and Basis of Presentation Axsome Therapeutics, a biopharmaceutical company developing CNS therapies, has an accumulated deficit of $340.3 million as of June 30, 2021, but expects existing cash to fund operations for at least twelve months, with no material COVID-19 impact on liquidity - Axsome Therapeutics is a biopharmaceutical company developing novel therapies for central nervous system (CNS) disorders, with a core portfolio of five product candidates: AXS-05, AXS-07, AXS-09, AXS-12, and AXS-14[25] - The company has incurred operating losses since inception, with an accumulated deficit of $340.3 million as of June 30, 2021[27] - Existing cash resources are believed to be sufficient to fund anticipated operating cash requirements for at least twelve months from the filing date[28] - The COVID-19 pandemic has not had a material impact on the company's current investment liquidity[29] Note 2. Summary of Significant Accounting Policies This note outlines significant accounting policies, including management estimates, fair value measurement of cash equivalents, expensing R&D costs, a 0% effective tax rate, and stock-based compensation, noting no material impact from recent accounting pronouncement adoptions - Management applies significant judgment in developing estimates for financial statements, particularly for stock-based compensation, fair value of warrants, research and development costs, and recoverability of net deferred tax assets[32] - The company views its operations and manages its business as one operating segment, focused on developing novel therapies for CNS disorders[34] - Cash and cash equivalents, totaling $141.2 million as of June 30, 2021, are measured at fair value using Level 1 inputs (quoted market prices)[35] - Research and development costs, including personnel, third-party services, and product license fees, are expensed as incurred[43] - The company estimates an annual effective tax rate of 0% for 2021 and has recorded a full valuation allowance against its deferred tax assets[46] - Stock-based compensation for options is estimated using the Black-Scholes model, and for restricted stock units (RSUs) based on market closing price on the grant date, expensed over the vesting period[47][48] - The company adopted ASU 2019-12 and ASU 2020-10 on January 1, 2021, with no significant impact on its consolidated financial statements[56][57] Note 3. Accrued Expenses and Other Current Liabilities This note provides a detailed breakdown of accrued expenses and other current liabilities, showing a total of $10.16 million as of June 30, 2021, an increase from $8.71 million as of December 31, 2020, primarily driven by higher accrued general and administrative expenses Accrued Expenses and Other Current Liabilities | Item | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :------------ | :---------------- | | Accrued research and development | $2,195,033 | $4,293,522 | | Accrued compensation | $3,034,669 | $2,870,261 | | Accrued general and administrative | $4,551,879 | $1,155,508 | | Accrued interest | $381,250 | $393,958 | | Total | $10,162,831 | $8,713,249 | Note 4. Loan and Security Agreement This note details the $225.0 million Loan and Security Agreement with Hercules Capital, Inc., outlining the multi-tranche structure, interest rates (currently 9.15%), and repayment schedule, with the company in compliance with all covenants as of June 30, 2021 - In September 2020, Axsome entered into a Loan and Security Agreement with Hercules Capital, Inc. for up to $225.0 million in term loans, with an initial $50.0 million funded[61] - The term loans bear interest at an annual rate equal to the greater of (i) prime rate + 5.90% or (ii) 9.15%, with options for paid-in-kind interest deferral[62] - Repayment of principal and interest is scheduled to commence on May 1, 2023, through October 1, 2025, with potential extensions based on achieving AXS-05 and AXS-07 regulatory milestones[63] - The company granted Hercules a senior security interest in all its property, including intellectual property, as collateral for the obligations[64] - Financial covenants, applicable upon certain drawdowns, include maintaining minimum cash balances and achieving market capitalization or net product revenue targets[66] Loan Interest Expense and Amortization | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest expense | $1,156,458 | $379,167 | $2,300,208 | $758,334 | | Amortization of final payment fee | $149,281 | $119,014 | $292,870 | $238,028 | | Amortization of debt discount (warrants) | $132,508 | $59,998 | $267,882 | $118,636 | Outstanding Debt and Unamortized Debt Discount Balances | Item | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Total Outstanding Debt | $50,000,000 | $50,000,000 | | Add: accreted liability of final payment fee | $444,783 | $151,912 | | Less: unamortized debt discount, long-term | $(1,562,184)$ | $(1,830,064)$ | | Loan payable, long-term | $48,882,599 | $48,321,848 | - The company was in compliance with all covenants and requirements of its financing arrangements as of and during the six months ended June 30, 2021[74] Note 5. Net Loss per Common Share This note details the computation of basic and diluted net loss per common share, which were identical due to the anti-dilutive effect of outstanding stock options, restricted stock units, and warrants during periods of net loss Net Loss per Common Share (Basic and Diluted) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(32,284,209)$ | $(18,326,992)$ | $(61,544,179)$ | $(50,811,138)$ | | Weighted average common shares outstanding | 37,595,069 | 37,100,770 | 37,512,716 | 37,081,064 | | Net loss per common share | $(0.86)$ | $(0.49)$ | $(1.64)$ | $(1.37)$ | Anti-Dilutive Securities Outstanding | Security | June 30, 2021 | June 30, 2020 | | :------------------- | :------------ | :------------ | | Stock options | 4,461,985 | 3,979,607 | | Restricted stock units | 309,126 | 150,143 | | Warrants | 15,541 | 37,042 | | Total | 4,786,652 | 4,166,792 | Note 6. Commitments and Contingencies This note outlines the company's operating lease expenses, totaling $286,923 for the three months ended June 30, 2021, and future minimum lease payments of $1,205,000 over a remaining lease term of 1.1 years Operating Lease Expense | Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total operating lease expense | $286,923 | $— | $573,846 | $— | Future Minimum Lease Payments (as of June 30, 2021) | Year | Amount | | :--------- | :------------ | | 2021 | $575,000 | | 2022 | $630,000 | | 2023 | — | | 2024 | — | | 2025 | — | | Thereafter | — | | Total Lease Payments | $1,205,000 | | Less imputed interest | $(34,296)$ | | Present value of operating lease liabilities | $1,170,704 | - As of June 30, 2021, the remaining lease term for operating leases was 1.1 years with a discount rate of 6.0%[80] Note 7. Stockholders' Equity This note details the company's capital structure, including common stock issuances, stock option and RSU activity with unrecognized compensation costs, and warrants issued in connection with debt financing - For the six months ended June 30, 2021, the company received approximately $7.4 million in gross proceeds from the sale of 110,296 shares through the December 2019 Sales Agreement[82] - As of June 30, 2021, 4,572,808 shares were available for issuance under the 2015 Omnibus Incentive Compensation Plan[87] Stock Option Activity (Six Months Ended June 30, 2021) | Item | Number of Shares | Weighted Average Exercise Price | | :--------------------------------- | :--------------- | :------------------------------ | | Outstanding at December 31, 2020 | 3,725,648 | $16.36 | | Granted | 955,213 | $66.05 | | Exercised | (162,503) | $17.67 | | Forfeited | (55,727) | $63.58 | | Expired | (646) | $87.76 | | Outstanding at June 30, 2021 | 4,461,985 | $26.35 | | Vested and expected to vest | 4,455,816 | $26.38 | | Exercisable | 2,670,402 | $13.19 | - As of June 30, 2021, total unrecognized compensation cost related to non-vested stock options was $57.0 million, expected to be recognized over a weighted average period of 3.3 years[91] Restricted Stock Unit (RSU) Activity (Six Months Ended June 30, 2021) | Item | Number of Shares | Weighted Average Grant Date Fair Value | | :--------------------------------- | :--------------- | :------------------------------------- | | Outstanding at December 31, 2020 | 136,067 | $36.82 | | Granted | 182,187 | $49.92 | | Vested | (3,378) | $47.54 | | Forfeited | (5,750) | $71.48 | | Outstanding at June 30, 2021 | 309,126 | $43.78 | - As of June 30, 2021, total unrecognized compensation cost related to unvested RSUs was $11.5 million, expected to be recognized over a weighted-average period of 3.4 years[92] Stock-Based Compensation Expense Allocation | Expense Category | Three Months 2021 | Three Months 2020 | Six Months 2021 | Six Months 2020 | | :----------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Research and development | $2,302,504 | $1,037,530 | $3,836,899 | $1,671,905 | | General and administrative | $3,153,738 | $3,110,495 | $5,350,440 | $4,609,650 | | Total | $5,456,242 | $4,148,025 | $9,187,339 | $6,281,555 | - Warrants to purchase 15,541 shares of common stock were issued to Hercules Capital Inc. at an exercise price of $80.43 per share, with a fair value of approximately $0.9 million recorded as additional paid-in capital[98] Note 8. License Agreements This note details exclusive license agreements with Pfizer Inc. for AXS-12 and AXS-14, involving upfront payments and potential milestones, and with Antecip Bioventures II LLC for AXS-02, AXS-04, and AXS-05, which include royalty obligations on net sales - In January 2020, Axsome entered an exclusive license agreement with Pfizer Inc. for reboxetine (AXS-12) and esreboxetine (AXS-14), paying $3.0 million cash and issuing 82,019 shares of common stock (fair value $7.2 million)[100] - Pfizer is eligible for up to $323 million in regulatory and sales milestones, plus tiered mid-single to low double-digit royalties on future sales of AXS-12 and AXS-14[101] - Axsome has three exclusive license agreements with Antecip Bioventures II LLC (owned by the CEO) for AXS-02, AXS-04, and AXS-05, with royalty obligations of 4.5% for AXS-02, 3.0% for AXS-05, and 1.5% for AXS-04 on net sales[102] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section offers management's analysis of Axsome Therapeutics' financial condition, operational results, and future outlook, covering product candidates, clinical developments, expenses, liquidity, and the impact of external factors Overview Axsome Therapeutics is a biopharmaceutical company focused on developing novel therapies for central nervous system (CNS) conditions, with five product candidates in various stages of clinical development. The company has incurred significant operating losses since inception, with an accumulated deficit of $340.3 million as of June 30, 2021, and expects to continue incurring substantial losses as it advances its pipeline and prepares for commercialization - Axsome is developing five CNS product candidates: AXS-05 (MDD, AD agitation, smoking cessation), AXS-07 (migraine), AXS-09 (CNS disorders), AXS-12 (narcolepsy), and AXS-14 (fibromyalgia)[107] - AXS-05 has FDA Breakthrough Therapy designation for MDD and AD agitation, and Fast Track designations for AD agitation and treatment-resistant depression[108] - The company has incurred net losses of $61.5 million for the six months ended June 30, 2021, and an accumulated deficit of $340.3 million as of June 30, 2021, expecting continued significant losses[117] Year to Date and Recent Developments This section highlights key clinical and regulatory milestones for Axsome's product candidates, including FDA acceptance of the NDA for AXS-05, submission of an NDA for AXS-07, rescission of AXS-12's Breakthrough Therapy Designation, and planned NDA submission for AXS-14 - FDA accepted the NDA for AXS-05 for the treatment of MDD, granting Priority Review with a PDUFA target action date of August 22, 2021[118] - AXS-05 achieved primary and key secondary endpoints in the MERIT Phase 2 Trial for treatment-resistant depression[118] - An NDA for AXS-07 for the acute treatment of migraine was submitted in June 2021[118] - The FDA rescinded Breakthrough Therapy Designation for AXS-12 for the treatment of cataplexy in narcolepsy due to the approval of an additional drug product for this indication[118] - The company plans to submit an NDA for AXS-14 for the management of fibromyalgia in the fourth quarter of 2022[119] Financial Overview This section provides an overview of the company's financial performance, noting no revenue generation, detailing research and development and general and administrative expenses, and explaining interest and amortization of debt discount - The company has not generated any revenue since inception and does not expect to until regulatory approval of its product candidates[120] - Research and development expenses are expensed as incurred, covering preclinical studies, clinical trials, manufacturing, personnel, and third-party services[121] - General and administrative expenses include salaries, pre-commercialization costs, facility costs, insurance, and professional fees[126] - Interest and amortization of debt discount (expense) income primarily consists of cash interest and non-cash costs related to term loans, and interest income on cash[127] Research and Development Expenses by Program | Program | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | AXS-05 | $2,184,776 | $5,257,477 | $12,228,922 | $14,575,299 | | AXS-07 | $7,290,067 | $2,920,493 | $9,821,616 | $8,930,771 | | AXS-12 | $819,569 | $153,901 | $1,553,427 | $5,710,963 | | AXS-14 | $4,039 | $— | $4,039 | $5,077,669 | | Other research and development | $1,902,371 | $1,173,556 | $3,654,111 | $2,097,750 | | Stock-based compensation | $2,302,504 | $1,037,530 | $3,836,899 | $1,671,905 | | Total research and development expenses | $14,503,326 | $10,542,957 | $31,099,014 | $38,064,357 | Critical Accounting Policies and Significant Judgments and Estimates This section states that no material changes have occurred to the company's critical accounting policies since the beginning of the fiscal year, with further details available in the annual report - No material changes to critical accounting policies have occurred since December 31, 2020[130] Results of Operations This section provides a comparative analysis of operating results, highlighting increased R&D and G&A expenses for the three-month period due to NDA filings and pre-commercial activities, while R&D decreased for the six-month period due to a one-time charge in 2020 Summary of Results of Operations | Operating Expenses | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $14,503,326 | $10,542,957 | $31,099,014 | $38,064,357 | | General and administrative | $16,344,361 | $7,235,877 | $27,592,734 | $12,205,934 | | Total operating expenses | $30,847,687 | $17,778,834 | $58,691,748 | $50,270,291 | | Loss from operations | $(30,847,687)$ | $(17,778,834)$ | $(58,691,748)$ | $(50,270,291)$ | | Interest and amortization of debt discount (expense) income | $(1,436,522)$ | $(548,158)$ | $(2,852,431)$ | $(540,847)$ | | Net loss | $(32,284,209)$ | $(18,326,992)$ | $(61,544,179)$ | $(50,811,138)$ | - For the three months ended June 30, 2021, research and development expenses increased by $4.0 million to $14.5 million, and general and administrative expenses increased by $9.1 million to $16.3 million, primarily due to NDA filings, pre-commercial activities, and personnel costs[133] - For the six months ended June 30, 2021, research and development expenses decreased by $7.0 million to $31.1 million, mainly due to a one-time $10.2 million Pfizer license agreement charge in the comparable 2020 period, offset by NDA filing costs in 2021[135] - Interest and amortization of debt discount expense increased by $0.9 million for the three-month period and $2.4 million for the six-month period, primarily due to a higher outstanding principal amount on debt in 2021[134][137] Liquidity and Capital Resources This section discusses the company's historical funding through equity and debt, expecting current cash and committed capital to fund operations into at least 2024, with an active shelf registration and at-the-market sales agreement for future capital raises - Since inception through June 30, 2021, operations have been financed primarily through proceeds from equity offerings and debt borrowings[138] - The company believes its current cash, along with committed capital from the Hercules term loan facility, will be sufficient to fund anticipated operating cash requirements, including commercial launch of AXS-05 and AXS-07, into at least 2024[151][153] - The company has an automatic shelf registration statement (2019 Shelf Registration) for the issuance of an unlimited amount of securities and a December 2019 Sales Agreement for up to $80 million in common stock sales[148][149] - The September 2020 Loan Agreement with Hercules provides for term loans up to $225.0 million under multiple tranches, with $50.0 million initially funded[150] Cash Flows This section summarizes cash flow activities, noting a $10.4 million increase in net cash used in operating activities to $52.6 million in 2021 due to commercial build-out, while financing activities decreased to $10.0 million Summary of Cash Flows | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------ | :----------------------------- | :----------------------------- | | Operating activities | $(52,609,042)$ | $(42,168,466)$ | | Investing activities | $(48,872)$ | $(10,759)$ | | Financing activities | $10,000,551 | $12,895,167 | | Net increase (decrease) in cash | $(42,657,363)$ | $(29,284,058)$ | - Net cash used in operating activities increased by $10.4 million to $52.6 million for the six months ended June 30, 2021, mainly due to the build-out of the commercial function and related commercialization costs[155] - Cash provided by financing activities was $10.0 million for the six months ended June 30, 2021, primarily from common stock sales ($7.2 million) and employee stock option exercises ($2.9 million)[156] Funding requirements This section outlines the company's expectation of continued significant losses and the need for additional future financing to fund ongoing operations and commercialization, with potential delays if capital is unavailable on acceptable terms - The company expects to incur significant losses for the foreseeable future and will need to raise additional financing to fund its operations, product development, and commercialization efforts[157][206] - Future capital requirements depend on factors such as the scope and cost of clinical studies, regulatory reviews, commercialization activities (manufacturing, marketing, sales), intellectual property maintenance, and the success of collaborative agreements[158][210] - Failure to raise capital as and when needed could force the company to delay, reduce the scope of, or eliminate one or more of its product development programs or commercialization efforts[206][211] Contractual Obligations and Commitments This section details significant contractual obligations, including potential milestone payments and royalties under license agreements, and the $225.0 million Hercules Loan and Security Agreement, outlining its structure, interest terms, repayment schedule, collateral, and financial covenants - The license agreement with Pfizer includes potential regulatory and sales milestones up to $323 million and tiered mid-single to low double-digit royalties on future sales of AXS-12 and AXS-14[161] - License agreements with Antecip Bioventures II LLC (owned by the CEO) obligate the company to pay royalties ranging from 1.5% to 4.5% on net sales of licensed products (AXS-02, AXS-04, AXS-05)[161] - The September 2020 Loan Agreement with Hercules provides for term loans up to $225.0 million across multiple tranches, with $50.0 million initially funded and additional tranches contingent on regulatory approvals (AXS-05 MDD, AXS-07 migraine) and lender discretion[163] - The Hercules loan bears interest at a variable rate (currently 9.15%) and has an initial interest-only payment period of 30 months, extendable to up to 48 months[164] - Financial covenants for the Hercules loan, applicable upon certain drawdowns, include maintaining minimum cash balances and achieving market capitalization or net product revenue targets[166][168] Employees and Human Capital Management This section highlights that as of August 2, 2021, Axsome Therapeutics had 93 full-time employees, emphasizing efforts to attract and retain key personnel through competitive compensation, equity, and development programs, while ensuring employee health and safety during COVID-19 - As of August 2, 2021, the company had 93 full-time employees, with many holding advanced degrees and experience in drug development[171] - The company provides competitive salaries, bonuses, equity ownership opportunities, development programs, and a robust employment package to attract and retain key personnel[171] - Proactive steps have been taken to protect employee health and safety throughout the COVID-19 pandemic[171] Impact of the CARES Act The company evaluated the CARES Act but does not expect any of its provisions to result in a material cash benefit or have a material impact on its financial statements or internal controls over financial reporting - The CARES Act includes changes to tax provisions, such as permitting net operating loss (NOL) carryovers and carrybacks to offset 100% of taxable income for certain years, and allowing NOLs incurred in 2018-2020 to be carried back five years[172] - The company does not expect any provision of the CARES Act to result in a material cash benefit or have a material impact on its financial statements or internal controls over financial reporting[172] Impact of COVID-19 on our Business This section discusses the unknown impact of COVID-19, noting no material effect on current investment liquidity, implemented measures for employee safety and clinical trials, and the company's strong position to manage through the crisis into at least 2024 - The COVID-19 pandemic has resulted in significant disruption of global financial markets, but has not had a material impact on the company's current investment liquidity[175] - The company has implemented proactive measures to protect employee health and safety and manage clinical trials, including remote monitoring of patients and sites[175][353] - Despite economic uncertainty, the company believes its current cash reserves and access to additional capital (December 2019 Sales Agreement, Hercules Loan Agreement) position it well to manage its business through the crisis into at least 2024[176][151] - The FDA's evolving policies on facility inspections due to COVID-19 could impact future applications and product candidates[352] Off-Balance Sheet Arrangements The company states that it did not have, and does not currently have, any off-balance sheet arrangements as defined by applicable SEC regulations during the periods presented - The company did not have, and does not currently have, any off-balance sheet arrangements as defined by applicable SEC regulations[178] Recent Accounting Pronouncements This section refers to Note 2 for a discussion of recently issued accounting pronouncements, specifically mentioning the adoption of ASU 2019-12 and ASU 2020-10 on January 1, 2021, which had no significant impact on the company's consolidated financial statements - Refer to Note 2 – Summary of Significant Accounting Policies for a discussion of recently issued accounting pronouncements[179] ITEM 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's exposure to market risks, primarily interest rate fluctuations on its debt borrowings and cash holdings, and foreign currency exchange risk from international vendor contracts, concluding that an immediate 100 basis point interest rate increase or 10% currency change would not materially affect financial condition or results - The company is exposed to interest rate risk on its debt borrowings and cash holdings, but due to the short-term nature of its investment portfolio and debt agreement, an immediate 100 basis point increase in interest rates is not expected to have a material effect[181] - Foreign currency exchange risk exists from contracts denominated in Euros, British pounds, and Australian dollars, but has not resulted in any material effects to date[182] - Inflation has not had a material effect on the company's business, financial condition, or results of operations during the three months ended June 30, 2021[182] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with a new ERP system implementation expected to bring changes to financial reporting in the second half of 2021, though no material changes occurred in the current period - Management concluded that disclosure controls and procedures were effective as of June 30, 2021[184] - The company is implementing a new Enterprise Resource Planning (ERP) system, with changes to general ledger and consolidated financial reporting expected in the second half of 2021, which could result in changes to internal control over financial reporting[185] - No material changes in internal control over financial reporting occurred during the period covered by this report[186] PART II — OTHER INFORMATION ITEM 1. Legal Proceedings The company and its subsidiaries are not currently involved in any material pending legal proceedings, although they may encounter various claims and legal actions in the ordinary course of business - The company and its subsidiaries are not currently a party to any material pending legal proceedings[188] ITEM 1A. Risk Factors This section details a comprehensive set of risks associated with investing in Axsome Therapeutics' common stock, spanning financial condition, business operations, product development, commercialization, intellectual property, and legal matters, highlighting the high degree of risk involved Risk Factors Summary This summary provides a high-level overview of significant risks facing Axsome Therapeutics, including its history of losses, funding needs, operating restrictions, limited operating history, dependence on product success, regulatory challenges, competition, reliance on third parties, and intellectual property issues - The company has incurred significant losses since inception and anticipates substantial future losses, potentially never achieving profitability[190] - Additional funding is required for future clinical trials and commercialization; inability to raise capital could delay or eliminate product development programs[190] - Operating activities may be restricted by covenants related to outstanding indebtedness, and default could lead to acceleration of repayment[190] - The company has a limited operating history and no history of commercializing products, making business evaluation difficult[191] - Substantial dependence on the success of product candidates (AXS-05, AXS-07, AXS-09, AXS-12, AXS-14), with no guarantee of successful completion of trials, regulatory approval, or commercialization[191] - Breakthrough Therapy and Fast Track designations do not guarantee faster development or approval and will not increase the likelihood of marketing approval[192] - Significant competition from other pharmaceutical and biotechnology companies could adversely affect operating results[192] - Inability to establish effective marketing, sales, and distribution capabilities or partnerships could prevent product revenue generation[193] - Reliance on third parties to conduct preclinical studies, clinical trials, and manufacturing, with risks of unsatisfactory performance or non-compliance[195] - Business operations, financial condition, results of operations, and cash flows may be adversely affected by health epidemics, including the COVID-19 pandemic[196] RISKS RELATED TO OUR FINANCIAL CONDITION AND CAPITAL REQUIREMENTS This section highlights Axsome Therapeutics' history of significant operating losses and accumulated deficit, with expectations of continued losses due to ongoing development and commercialization efforts, emphasizing the substantial need for additional funding and potential operating restrictions from debt covenants - The company has incurred net losses of $61.5 million for the six months ended June 30, 2021, and an accumulated deficit of $340.3 million, expecting to incur substantial losses for the foreseeable future[202] - Achieving profitability depends on successfully developing, obtaining regulatory approval for, and commercializing products, which is a challenging and uncertain process[204] - The company will need to raise additional capital to fund future clinical trials, build commercial infrastructure, qualify commercial-scale manufacturing, and develop or acquire additional product candidates[207] - Debt covenants under the Hercules Loan Agreement limit the company's ability to incur additional indebtedness, create liens, sell assets, make investments, and engage in certain corporate changes, and require maintaining minimum cash balances[213][214] - A breach of debt covenants could result in acceleration of outstanding amounts and enforcement against collateral, materially harming the business[216] - The company has a limited operating history since 2012 and no history of commercializing products, making it difficult to evaluate its business and prospects[217] RISKS RELATED TO OUR BUSINESS AND THE DEVELOPMENT OF OUR PRODUCT CANDIDATES This section addresses inherent risks in pharmaceutical product development, including dependence on product candidate success, lengthy and unpredictable regulatory approval processes, potential undesirable side effects, challenges in patient enrollment, and complexities of combination therapies and international regulatory hurdles - The business is entirely dependent on the successful development and commercialization of its product candidates (AXS-05, AXS-07, AXS-09, AXS-12, AXS-14), with no guarantee of regulatory approval or marketability[218][219] - Potential conflicts of interest exist due to license agreements with Antecip Bioventures II LLC, an entity owned by the CEO, which could impact business decisions[226][227] - Reliance on the 505(b)(2) regulatory pathway for most product candidates carries risks if the FDA disagrees with reliance on reference drug data or published literature, potentially requiring additional costly trials[233][239] - Product candidates may have undesirable side effects (e.g., AXS-05: dry mouth, nausea, insomnia, dizziness; AXS-07: fatigue, confusion, dry mouth, diarrhea; AXS-12/AXS-14: decreased appetite, insomnia, agitation) that could delay or prevent approval or lead to restrictive labeling[236][237][238][266][268] - The regulatory approval process is lengthy, time-consuming, and unpredictable, with potential for delays due to additional studies, slow patient enrollment, or changes in regulatory policies[247][248][252][257] - Fast Track and Breakthrough Therapy designations do not guarantee faster development or approval, and can be rescinded (e.g., AXS-12)[280][283] - Regulatory approval is limited to specific indications, and impermissible 'off-label' promotion could lead to significant penalties and reputational damage[285][289] - International commercialization faces additional risks, including differing regulatory requirements, parallel importing, data privacy laws (GDPR), and challenges in intellectual property enforcement[298][300] RISKS RELATED TO THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES This section outlines significant challenges in commercializing product candidates, including intense competition from major pharmaceutical companies and the impact of generic alternatives. It emphasizes the need to establish effective marketing and sales capabilities, the critical importance of broad market acceptance by physicians, patients, and payors, and the risks associated with product liability exposure - The company faces significant competition from major pharmaceutical and biotechnology companies with greater financial resources and expertise in CNS disorders[304][305][309] - Generic forms of active ingredients in product candidates (e.g., dextromethorphan, bupropion, meloxicam, rizatriptan, reboxetine) are available and could be used off-label, adversely affecting profitability[308][329] - If generic or similar versions of approved products are introduced, or if appropriate data exclusivity periods are not granted, sales of the company's products could be adversely affected[310][311][314] - Orphan Drug Designation (received for AXS-12) does not guarantee protection from competition or assure corresponding benefits, and can be lost[316][317][318] - The company is building a commercial infrastructure and sales force, which is expensive, time-consuming, and carries risks related to recruitment, training, market access, and compliance[320][322][323] - Broad market acceptance by physicians, patients, and third-party payors is crucial for revenue generation, but is uncertain and depends on factors like efficacy, safety, cost-effectiveness, and reimbursement[326][328] - Product liability claims from clinical trials or commercial sales pose a significant risk, potentially leading to substantial liabilities, reputational harm, and limitations on commercialization[330][331][333] RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES This section details Axsome Therapeutics' extensive reliance on third parties for critical functions, including preclinical studies, clinical trials, manufacturing, and commercialization services, highlighting risks such as unsatisfactory performance, supply chain disruptions, and the adverse impact of health epidemics - The company relies heavily on third-party Contract Research Organizations (CROs) to conduct, supervise, and monitor its preclinical studies and clinical trials, which reduces control and poses risks of delays, non-compliance, and unreliable data[334][335][336][340] - All manufacturing of product candidates is outsourced to third parties, leading to risks of supply shortages, inability to establish commercial supply agreements, and non-compliance with cGMP regulations[343][344][345][348] - Health epidemics, such as COVID-19, can adversely affect business operations, clinical trial enrollment, and the operations of third-party manufacturers and CROs[349][350][354] - Reliance on third-party service providers for commercialization functions (warehousing, distribution, government price reporting, customer service, adverse event reporting) exposes the company to risks of non-compliance, data inaccuracies, and regulatory sanctions[355][356][357] - Collaboration arrangements may not be successful, as collaborators may not perform as expected, may delay or terminate development, or may develop competing products[360][361][363] - The company is dependent on third parties like HMOs, long-term care facilities, and Pharmacy Benefit Managers (PBMs) to utilize its product candidates and make them readily available at the point of care[366][367] RISKS RELATED TO INTELLECTUAL PROPERTY This section discusses the challenges and costs associated with protecting intellectual property, including the limited lifespan of patents, the complexities of patent prosecution and enforcement, and the impact of recent patent reform legislation. It also addresses the difficulties in safeguarding trade secrets, the risks of potential infringement lawsuits, and the company's dependence on licensed intellectual property, particularly from Pfizer and Antecip Bioventures II LLC - Protecting proprietary rights is difficult and costly, with no guarantee of obtaining or maintaining valid and enforceable patents or trade secrets[368][370] - Patents have a limited lifespan (typically 20 years from filing), and delays in obtaining regulatory approvals can reduce the effective patent protection period[372] - The Leahy-Smith America Invents Act (first-to-file system) increases uncertainties and costs in patent prosecution and enforcement, and third parties can challenge patent rights[374][375][376] - Reliance on trade secrets is risky due to potential unintentional or willful disclosure by employees or third parties, and independent discovery by competitors[379][396] - The company faces risks of patent infringement lawsuits from third parties, which can be costly, time-consuming, and result in substantial damages or injunctions[382][383][384][386] - Dependence on licensed intellectual property (e.g., from Pfizer, Antecip) means that termination of these licenses could materially harm the business[389][390][392][393] - Protecting intellectual property rights globally is expensive and challenging, as laws vary and enforcement may be weaker in some countries[397][398] RISKS RELATED TO LEGAL AND COMPLIANCE MATTERS This section covers Axsome Therapeutics' extensive legal and regulatory compliance obligations, including federal and state healthcare fraud and abuse laws, transparency laws, and data privacy regulations, highlighting risks of substantial penalties for non-compliance and adverse effects from inadequate coverage and reimbursement - The company is subject to federal and state healthcare laws (e.g., Anti-Kickback Statute, False Claims Act, Physician Payments Sunshine Act), and non-compliance could lead to significant penalties, fines, and exclusion from healthcare programs[399][400][402] - Sales of future products depend on adequate coverage and reimbursement from third-party payors (Medicare, Medicaid, private insurers), which may disfavor new drugs or impose restrictive access controls[404] - Reimbursement rates may not be adequate, and securing favorable terms may require price concessions, impacting revenue and profitability[404][405][408][409] - New legislation and regulatory proposals (e.g., ACA, drug pricing controls) may increase compliance costs, restrict marketing, and adversely affect profitability[413][414][416][417] - Governments outside the U.S. often impose strict price controls, which could adversely affect international revenues[420][421] - Employee misconduct or noncompliance with regulatory standards could lead to investigations, sanctions, and reputational harm[422][423] - Third-party manufacturers' use of hazardous materials requires compliance with environmental laws, with risks of fines, penalties, and business interruptions from accidents or non-compliance[424][425][426] RISKS RELATED TO OUR BUSINESS OPERATIONS This section addresses operational risks, including the need to scale the organization, difficulties in managing growth and retaining key personnel, the importance of maintaining effective internal controls, vulnerability to system failures and data breaches, and challenges of complying with international data protection laws - The company needs to substantially expand its managerial, commercial, financial, manufacturing, and other personnel resources to manage operations and prepare for commercialization[428][429] - Inability to attract and retain qualified management and scientific personnel due to intense competition could impede development objectives and business strategy[433][435] - As a public company, significant legal, accounting, and compliance expenses are incurred, and failure to maintain effective internal control over financial reporting could adversely affect investor confidence and stock value[436][437][438][440] - Internal computer systems and those of third parties are vulnerable to damage from cyber-attacks, natural disasters, and other system failures, which could disrupt operations and delay regulatory approval efforts[445] - Failure to comply with international data protection laws (e.g., GDPR) could lead to government enforcement actions and significant penalties[448] - State and national data protection laws (e.g., CCPA) impose additional privacy and security obligations, increasing risks of data breaches and potential liabilities[450] RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK This section discusses risks pertinent to the company's common stock, including potential market price volatility influenced by various factors, the impact of analyst reports, and fluctuations in operating results. It also covers dilution from future equity issuances, the significant control exerted by principal stockholders, limitations on net operating loss carryforwards, and the effects of anti-takeover provisions and forum selection clauses in corporate documents - The market price of common stock is highly volatile and influenced by numerous factors, including clinical trial results, regulatory approvals, competition, and economic conditions[452][454] - Lack of a sustained active trading market could make it difficult for stockholders to sell shares without depressing the market price[451] - Unfavorable equity research reports or cessation of coverage could cause the stock price and trading volume to decline[456] - Raising additional funds by issuing equity securities will dilute existing stockholders' ownership, and debt financing may involve restrictive covenants[458][459][461] - Principal stockholders and management own approximately 43% of outstanding common stock, enabling them to exert significant control over matters requiring stockholder approval[462] - Sales of a substantial number of common stock shares in the public market by existing stockholders could depress the market price[464] - The use of net operating loss carryforwards and research tax credits may be limited under Sections 382 and 383 of the Code due to ownership changes[469] - The company does not intend to pay dividends on its common stock, limiting stockholder returns to any increase in stock value[471] - Provisions in corporate charter documents and Delaware law (Section 203 DGCL) may prevent or frustrate attempts by stockholders to change management or acquire a controlling interest[472][473][474] - The amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain stockholder actions, potentially limiting stockholders' ability to obtain a favorable judicial forum[476][477][478] ITEM 6. Exhibits This section lists the exhibits filed as part of the Quarterly Report on Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, as well as various Inline XBRL documents - The exhibits include certifications from the Principal Executive Officer (31.1, 32.1) and Principal Financial Officer (31.2, 32.2), along with Inline XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Linkbase Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE) and the Cover Page Interactive Data File (104)[482] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, duly executed by the President and Chief Executive Officer and the Chief Financial Officer of Axsome Therapeutics, Inc. - The report was signed by Herriot Tabuteau, M.D., President and Chief Executive Officer, and Nick Pizzie, Chief Financial Officer, on August 9, 2021[485]