UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10‑Q

Commission File Number: 001-38410

BioXcel Therapeutics, Inc

(Exact Name of Registrant as Specified in its Charter)

(475)  238‑6837

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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 7(a)(2)(B) of the Securities Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at November 7, 2018 was 15,645,545.

Table of Contents

BIOXCEL THERAPEUTICS, INC.

BALANCE SHEETS

(amounts in thousands, except shares and per share data)

The accompanying notes are an integral part of these financial statements.

BIOXCEL THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(amounts in thousands, except shares and per share data)

(unaudited)

The accompanying notes are an integral part of these financial statements.

BIOXCEL THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

The accompanying notes are an integral part of these financial statements.

BIOXCEL THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

Note 1. Organization and Principal Activities

BioXcel Therapeutics, Inc. (the “Company” or “BTI”) is a clinical stage biopharmaceutical company utilizing novel artificial intelligence-based approaches to identify the next wave of medicines across neuroscience and immuno-oncology. The Company’s drug re-innovation approach leverages existing approved drugs and/or clinically validated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indices. The Company is a majority-owned subsidiary of BioXcel Corporation (“BioXcel” or “Parent”) and was incorporated under the laws of the State of Delaware on March 29, 2017. The Company’s principal office is in New Haven, Connecticut. Unless otherwise indicated or the context requires otherwise, references in this report to “we,” “our,” “us” and similar expressions refer to BioXcel Therapeutics, Inc.

The unaudited financial information for the three and nine months ended September 30, 2018 and 2017 is presented on the same basis as the financial statements included in the Company’s registration statement on Form S-1 relating to its initial public offering of its common shares.

The Company’s primary activities have been the development of a clinical plan and pre-clinical research and development of two advanced programs: BXCL501, a sublingual thin film formulation of dexmedetomidine designed for acute treatment of agitation resulting from neurological and psychiatric disorders, and BXCL701, an immuno-oncology agent designed for treatment of a rare form of prostate cancer and for treatment of pancreatic cancer. These two programs and two emerging programs BXCL502 and BXCL702 (together, the “BTI Business”) have been contributed to the Company from the Parent pursuant to a contribution agreement.

Note 2. Initial Public Offering

On March 7, 2018, the Company’s registration statement on Form S‑1 relating to its initial public offering of its common shares (the “IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). The IPO closed on March 12, 2018, and the Company issued and sold 5,454,545 common shares at a public offering price of $11.00 per share. Gross proceeds totaled $60,000 and net proceeds totaled $54,102 after deducting underwriting discounts and commissions of $4,200 and other offering expenses of approximately $1,698.

In connection with and effective upon the completion of its IPO, the Company effectuated a 237 to one stock split. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements have been adjusted retroactively, where applicable, to reflect the stock split.

Also, in connection with the completion of its IPO, the Company amended its articles of incorporation to authorize the issuance of up to 50,000,000 shares of common stock with a par value of $.001 each and 10,000,000 shares of preferred stock with a par value of $.001 each.

Note 3. Basis of Presentation and Liquidity

Basis of Presentation

The financial statements of the Company for the period through June 30, 2017 are derived by carving out the historical results of operations and historical cost basis of the assets and liabilities associated with the BTI Business that have been contributed to the Company by BioXcel, from the financial statements of BioXcel.

These results reflect amounts specifically attributable to the BTI Business under a contribution agreement, effective June 30, 2017, as amended and restated on November 7, 2017, or the Contribution Agreement, for the period from

January 1, 2015 until June 30, 2017. The Company has also entered into a separation and shared services agreement with BioXcel that took effect on June 30, 2017, as amended and restated on November 7, 2017, or the Services Agreement, pursuant to which BioXcel provides the Company with certain general and administrative and development support services. However, consistent with accounting regulations, it has been assumed that the Company was a separate business since January 1, 2015, and accordingly the assets, liabilities and expenses relating to the BTI Business have been separated from the Parent in the financial statements for periods prior to and post incorporation through June 30, 2017. The financial statements for the nine-month period ended September 30, 2017, include reasonable allocations for assets and liabilities and expenses attributable to the BTI Business.

For the three and nine months ended September 30, 2018, the results are on a stand-alone entity basis. All assets and liabilities contributed by BioXcel to the Company have been recorded at historical book value.

The balance sheet information as of December 31, 2017, was derived from the audited financial statements which include the accounts of BioXcel Therapeutics Inc. but does not include all disclosures required by accounting principles generally accepted in the United States (“GAAP”). The unaudited financial information should be read in conjunction with the financial statements and notes included in the Company’s S-1.

Liquidity and Going Concern

In accordance with Accounting Standards Update (“ASU”) 2014‑15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205‑40), management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

Management believes that as a result of the proceeds received in connection with its IPO and a review of projected project timing that it has sufficient liquidity to meet its obligations as they come due for at least eighteen months.

Note 4. Summary of Significant Accounting Policies

Use of Estimates

The Company’s financial statements are prepared in accordance with GAAP. The preparation of BioXcel’s financial statements requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses in its financial statements and the accompanying notes. The most significant estimates in the financial statements relate to the fair value of equity awards and valuation allowance related to the Company’s deferred tax assets and liabilities. For the nine months ended September 30, 2018 and 2017, the most significant estimates include the valuation of the Parent’s common stock, allocation of expenses, assets and liabilities from the Parent. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates.

Unaudited Interim Financial Information

The accompanying unaudited financial statements do not include all of the information and footnotes required by GAAP. The accompanying year-end balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2018, and the results of its operations for the three and nine months ended September 30, 2018 and 2017 and its cash flows for the nine months ended September 30, 2018 and 2017, respectively. The results for the nine months ended September 30, 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2018, any other interim periods or any future year or period.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of September 30, 2018, cash equivalents were comprised of money market funds.

Deferred Offering Costs

The Company capitalized certain legal, professional accounting and other third-party fees that were directly associated with in-process equity financings as deferred offering costs until the equity financing was consummated. After consummation of an equity financing, these costs were recorded in shareholders’ equity (deficit) as a reduction of proceeds generated as a result of the offering. As of December 31, 2017, the Company recorded deferred offering costs relating to its IPO of $461. The Company’s IPO was completed in March 2018, and these costs, as well as additional IPO costs including commissions of $4,200 and an additional $1,237 of other expenses incurred in 2018, were recorded as a reduction to shareholders’ equity.

Equipment

Equipment consists of computers and related equipment and furniture that are stated at cost and depreciated using the straight-line method over estimated useful life of 5 years. Leasehold improvements will be amortized over the life of the lease.

The Company follows the guidance provided by FASB ASC Topic 360‑10, Property, Plant, and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated. Impairment charges are recognized at the amount by which the carrying amount of an asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

Since its inception, the Company has not recognized any impairment or disposition of long lived assets.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense based on estimated fair market values for all share-based awards made to employees and directors, including stock options. The Company’s stock-based compensation plan was adopted and became effective in August 2017. Prior to the Company adopting its stock-based compensation plan the Parent granted stock options to its employees. As a result, related stock-based compensation expense has been allocated to the Company over the required service period over which these BioXcel stock option awards vest in the same manner salary costs of employees have been allocated to the BTI Business in the carve-out process.

Both BioXcel and the Company’s stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The estimated fair value of stock option awards was determined using the Black-Scholes option pricing model on the date of grant. Significant judgment and estimates were used to estimate the fair value of these awards, as they were not publicly traded. Stock awards granted by the Company subsequent to the IPO are valued using market prices at the date of grant.

Stock-based awards to non-employees are re-measured at fair value each financial reporting date until performance is complete.

ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The Black-Scholes option-pricing model was used as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, the expected stock price volatility over the term of the awards, and

actual and projected employee stock option exercise behaviors. The value of the award is recognized as an expense in the statement of operations over the requisite service period. The periodic expense is then determined based on the valuation of the options.

The Company adopted FASB ASU 2016-09 as of January 1, 2018 and has elected to account for forfeitures as they occur, by reversing compensation cost when the award is forfeited.

Research and Development Costs

Research and development expenses include wages, benefits, facilities, supplies, external services, clinical study and manufacturing costs and other expenses that are directly related to its research and development activities. At the end of the reporting period, the Company compares payments made to third party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs. The Company expenses research and development costs as incurred.

Patent Costs

Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.

Fair Value Measurements

ASC 820 “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below:

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk in its assessment of fair value.

The carrying amounts of cash, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.

Net Loss per Share

The Company computes basic net loss per share by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The potential dilutive securities included outstanding options (for both employees and non-employees) for the three and nine months ended September 30, 2018 and 2017. Such securities have not been included in the loss per share calculation since their impact would be anti-dilutive. There were 2,682,545 and 2,525,811 shares of options that were excluded from the calculation of the loss per share for the three and nine months ended September 30, 2018, respectively. The Company was incorporated on March 29, 2017 and net loss per common share for the three and nine months ending September 30, 2017, was calculated as if the shares to the Parent were issued at formation.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014‑09 Revenue from Contracts with Customers. Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what the entity expects to receive in exchange for the goods or services. This new guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company adopted this guidance beginning on January 1, 2018. The guidance allows the selection of one of two methods of adoption, either the full retrospective approach, meaning the guidance would be applied to all periods presented, or modified retrospective approach, meaning the cumulative effect of applying the guidance would be recognized as an adjustment to opening accumulated deficit balance. There was no impact to the Company as a result of the adoption. 

In February 2016, the FASB issued ASU 2016‑02 Lease Accounting Topic 842. This ASU requires the Company to record all leases longer than one year on its balance sheet. Under the new guidance, when the Company records leases on its balance sheet it will record a liability with a value equal to the present value of payments it will make over the life of the lease and an asset representing the underlying leased asset. The new accounting guidance requires the Company to determine if its leases are operating or financing leases, similar to current accounting guidance. The Company will record expense for operating type leases on a straight-line basis as an operating expense and it will record expense for finance type leases as interest expense. The new lease standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The Company must adopt the new standard on a modified retrospective basis, which requires it to reflect its leases on its balance sheet for the earliest comparative period presented. There was no impact to the Company as a result of the adoption.

The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the tax effects of the U.S. tax reform announced on December 22, 2017 by the U.S. Government commonly referred to as the Tax Cuts and Jobs Act. SAB 118 provides a measurement period that should not extend beyond one year from the U.S. tax reform enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the U.S. tax reform for which the accounting under ASC 740 is complete. Specifically, the Company revalued its U.S. deferred tax assets and liabilities due to the federal income tax rate reduction from 35 percent to 21 percent. Since the Company has provided a full valuation allowance against its deferred tax assets, the revaluation of the deferred tax assets did not have a material impact on any period presented.

In June 2018 the FASB issued ASU 2018-07 Compensation - Stock Compensation Topic 718. This ASU was issued as part of the FASB’s simplification initiative. The amendments in this Update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based

payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The Company is currently assessing the timing of adoption as well as the effects it will have on its financial statements and disclosures.

Note 5. Transactions with BioXcel

The Company has entered into an asset contribution agreement, effective June 30, 2017, with BioXcel, as amended and restated on November 7, 2017, or the Contribution Agreement, pursuant to which BioXcel agreed to contribute BioXcel’s rights, title and interest in BXCL501, BXCL701, BXCL502 and BXCL702, and all of the assets and liabilities associated in consideration for (i) 9,480,000 shares of our common stock, (ii) $1,000 upon completion of an initial public offering, (iii) $500 upon the later of the 12 month anniversary of an initial public offering and the first dosing of a patient in the bridging bioavailability/ bioequivalence study for the BXCL501 program, (iv) $500 upon the later of the 12 month anniversary of an initial public offering and the first dosing of a patient in the Phase 2 PoC open label monotherapy or combination trial with Keytruda for the BXCL701 program and (v) a one-time payment of $5,000 within 60 days after the achievement of $50,000 in cumulative net sales of any product or combination of products resulting from the development and commercialization of any one of the Candidates or a product derived therefrom. With the completion of the Company’s IPO in March 2018, $1 million was charged to Research and Development costs in connection with (ii) above and was paid on April 5, 2018.

We entered into a separation and shared services agreement with BioXcel that took effect on June 30, 2017, as amended and restated on November 7, 2017, or the Services Agreement, pursuant to which BioXcel will allow us to continue to use the office space, equipment, services and leased employees based on the agreed upon terms and conditions for a payment of defined monthly and/or hourly fees. The parties have agreed that the services and office space provided under the Services Agreement shall decrease over time until the 12-month anniversary of the date of the Services Agreement. The office space and equipment portion of the Services Agreement ended effectively on April 30, 2018 when the Company moved to new office space to accommodate additional personnel that had been hired.  Services to be provided by BioXcel through its subsidiary in India, were originally expected to decrease through June 30, 2019 provided such dates may be extended upon mutual agreement between the parties.  The parties are currently discussing extending the term of these services provided however no definitive agreement has been agreed upon as of the date hereof.  There can be no assurance that the parties will agree to any extension to the Services Agreement in the future.

On or before December 31, 2019, the Company will have the option to enter into a collaborative services agreement with BioXcel pursuant to which BioXcel shall perform product identification and related services for us utilizing EvolverAI. We have agreed that this agreement will be negotiated in good faith and that such agreement will incorporate reasonable market-based terms, including consideration for BioXcel reflecting a low, single-digit royalty on net sales and reasonable development and commercialization milestone payments, provided that (i) development milestones shall not exceed $10 million in the aggregate and not be payable prior to proof of concept in humans and (ii) commercialization milestones shall be based on reaching annual net sales levels, be limited to 3% of the applicable net sales level, and not exceed $30 million in the aggregate. BioXcel shall continue to make such product identification and related services available to us for at least five years from June 30, 2017.  The parties are currently discussing extending the product identification and related services that BioXcel would provide however no definitive agreement has been agreed upon as of the date hereof.  There can be no assurance that the parties will agree to any extension to the collaborative services agreement in the future.

In connection with the Services Agreement, BioXcel had agreed to provide the Company a line of credit, which was capped at $1,000, or the Total Funding Amount, pursuant to the terms of a grid note, or the Grid Note. The Grid Note was payable upon the earlier of (i) the completion of an initial public offering and (ii) December 31, 2018, together with interest on the unpaid balance of each advance made under the Grid Note, which would accrue at a rate per annum equal to the applicable federal rate for short-term loans as of the date hereof, in each case calculated based on a 365‑day year and actual days elapsed. As of December 31, 2017, the Company had drawn down $371 under the Grid Note.

All amounts due to BioXcel under the line of credit, the Grid Note, and for expenses paid on the Company’s behalf were paid following the completion of the Company’s IPO on March 20, 2018.

Note 6. Equipment

Note 7. Commitments and Contingencies

The Company is required to pay to BioXcel $5,000 within 60 days after the achievement of $50,000 in cumulative net sales of any product or combination of products resulting from the development and commercialization of any one of the candidates BXCL501, BXCL701, BXCL502, and BXCL702 or a product derived therefrom.

The Company is also required to pay to BioXcel $2,000 in connection with the IPO, (x) the first $1,000 was charged to Research and Development expenses during the three months ended March 31, 2018 and paid to BioXcel on April 5, 2018  and (y) the second $1,000, (i) $500 of which is payable upon the later of the 12 month anniversary of an offering and the first dosing of a patient in the bridging bioavailability/bioequivalence study for the BXCL501 program and (ii) $500 of which is payable upon the later of the 12 month anniversary of an offering and the first dosing of a patient in the Phase 2 PoC open label monotherapy or combination trial with Keytruda for the BXCL701 program.

Note 8. Accrued Expenses

Accrued expenses consist of the following:

Note 9. Stockholders’ Equity (Deficit)

Authorized Capital

The Company is authorized to issue up to 10,000,000 preferred shares with a par value of $0.001 per share. No preferred shares are issued and outstanding.

The Company is authorized to issue up to 50,000,000 shares of common stock with a par value of $0.001 per share. The Company had 15,645,545 shares of common stock outstanding as of September 30, 2018.

Description of Common Stock

Each share of common stock has the right to one vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board of directors.

Common Stock Issuances

On March 7, 2018, the Company’s registration statement on Form S-1 relating to the Company’s IPO was declared effective by the SEC. The IPO closed on March 12, 2018, and the Company issued and sold 5,454,545 shares of common stock at a public offering price of $11.00 per share, for gross proceeds of $60,000 and net proceeds of $54,102 after deducting underwriting discounts and commissions of $4,200 and other offering expenses of $1,698.

In January and February 2018, the Company issued 283,452 shares of common stock with an issuance price of $6.88 per share for gross and net proceeds of $1,950.

In October 2017, the Company sold 271,839 shares of common stock with an issuance price of $4.82 per share with gross and net proceeds of $1,311.

In September 2017, the Company sold 155,709 shares of common stock with an issuance price of $4.82 per share with gross and net proceeds of $751.

Note 10. Stock-Based Compensation

Stock Options

The Company’s 2017 Stock Incentive Plan (the “2017 Stock Plan”) became effective in August 2017 and will expire in August 2027. Under the 2017 Stock Plan, the Company may grant incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards.

As of September 30, 2018, there were 3,462,570 shares of the Company’s common stock authorized for issuance under the 2017 Stock Plan. Options granted under the 2017 Stock Plan have a term of ten years with vesting term determined by the board of directors, which is generally four years.

The fair value of options granted during the nine months ended September 30, 2018 was estimated using the Black-Scholes option-pricing model with the following assumptions.

Employees

Non-Employees

Since the Company recently completed its IPO, it does not have a history of market prices of its common stock and, as such, volatility was estimated using historical volatilities of similar public companies. The expected term of the employee awards is estimated based on the simplified method, which calculates the expected term based upon the midpoint of the term of the award and the vesting period. The Company uses the simplified method because it does not have sufficient option exercise data to provide a reasonable basis upon which to estimate the expected term. The expected term of non-employee awards represents the awards contractual term. The expected dividend yield is 0% as the Company has no history of paying dividends nor does management expect to pay dividends over the contractual terms of these options. The risk-free interest rates are based on the United States Treasury yield curve in effect at the time of grant, with maturities approximating the expected term of the stock options.

The following table summarizes information about stock option activity during the period the Plan was in effect (in thousands, except share and per share data):

Employee Options

Non-employee Options

The Company granted 468,613 options to purchase shares of common stock during the nine months ended September 30, 2018. No options were exercised during the nine months ended September 30, 2018. There were 696,242 shares available for grant as of September 30, 2018.

The Company recognized stock-based compensation expense under the 2017 Stock Plan of $917 and $2,778 for the three and nine months ended September 30, 2018. The Company recognized stock-based compensation expense under the 2017 Stock Plan of $230 for the three and nine months ended September 30, 2017.

The total grant-date fair value of options was $4,081 and $1,311 for employees and non-employees, respectively, for the nine months ended September 30, 2018.

Unrecognized compensation expense related to unvested awards as of September 30, 2018 was $3,249 for employees and $1,636 for non-employees and will be recognized over the remaining vesting periods of the underlying awards. The weighted-average period over which such compensation is expected to be recognized is 1.9 years for employees and 1.5 years for non-employees.

BioXcel Charges

BioXcel has granted stock options to its employees under its own Equity Incentive Plan (“BioXcel Plan”). Stock-based compensation expense from the BioXcel Plan is allocated to the Company over the period over which those stock option awards vest and are based the on the percentage of time spent on Company activities compared to BioXcel activities, which is the same basis used for allocation of salary costs. The BioXcel stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The estimated fair value of these BioXcel stock option awards was determined using the Black Scholes option pricing model on the date of grant. Significant judgment and estimates were used to estimate the fair value of these awards, as they are not publicly traded.

Share based compensation expense (income), net of forfeitures, recognized by the Company in its statements of operations related to BioXcel equity awards totaled approximately $(27) and $86 for the three months ended September 30, 2018 and 2017, respectively and $172 and $286 for the nine months ended September 30, 2018 and 2017, respectively.

Total share based compensation charges were approximately $889 and $316 for the three months ended September 30, 2018 and 2017, respectively and $2,949 and $516 for the nine months ended September 30, 2018 and 2017, respectively.

Note 11. Income Taxes

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

As a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s net deferred tax assets is appropriate. No income tax liabilities existed as of September 30, 2018 and December 31, 2017 due to the Company’s continuing operating losses.

Note 12. Leases

The Company entered into a “Swing Space” agreement on June 21, 2018 to lease approximately 5,300 square feet of office space on the 5th floor (the “5th Floor Lease”) of the building located at 555 Long Wharf Drive, New Haven, Connecticut. On August 20, 2018, the Company entered into an agreement to lease approximately 11,040 square feet of space (the “12th Floor Lease”)

The term of the 5th Floor Lease is through the earlier of the date the Company conducts business in the 12th Floor space, or April 30, 2019. No base rent is payable during this period, however, the Company is obligated to pay a pro-rata electricity charge each month.

The landlord is required to deliver the 12th Floor premises to the Company as soon as practicable after the current tenant vacates the premises (the “Commencement Date”). 

The initial term of the 12th floor lease continues from the Commencement Date through the last day of the calendar month immediately following the seventh (7th) anniversary of the date which the earliest of (x) ninety (90) days from the Commencement Date, (y) the date on which Tenant’s Work (as defined in the Lease) is substantially completed and (z) the date on which the Company first occupies any portion of the Premises for the conduct of its business (the “Rent Commencement Date”). 

The Company’s improvement costs are expected to aggregate approximately $600.

Future minimum lease payments under this non-cancelable operating lease are as follows as of the Rent Commencement Date:

The Company has an option to renew the lease for one additional five-year term at 95% of the then prevailing market rates but not less than the rental rate at the end of the initial lease term.    

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or this Quarterly Report, contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•our plans to initiate clinical trials for BXCL501, BXCL701 and our other product candidates;

•our plans for 505(b)(2) regulatory path approval;

•our plans to research, develop and commercialize our current and future product candidates;

•our plans to seek to enter into collaborations for the development and commercialization of certain product candidates;

•the potential benefits of any future collaboration;

•the timing of and our ability to obtain and maintain regulatory approvals for our product candidates;

•the rate and degree of market acceptance and clinical utility of any products for which we receive marketing approval;

•our commercialization, marketing and manufacturing capabilities and strategy;

•our intellectual property position and strategy;

•our estimates regarding expenses, future revenue, capital requirements and need for additional financing;

•developments relating to our competitors and our industry;

•the impact of government laws and regulations; and

•risks associated with our relationship with BioXcel.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Quarterly Report and our final prospectus for our initial public offering filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act, with the Securities and Exchange Commission, or the SEC, on March 9, 2018. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

All dollar amounts in this discussion and analysis are to the nearest thousand unless otherwise noted.

Overview

We are a clinical stage biopharmaceutical company utilizing novel artificial intelligence-based approaches to identify the next wave of medicines across neuroscience and immuno-oncology. Our drug re-innovation approach leverages existing approved drugs and/or clinically validated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indices. We believe that this differentiated approach has the potential to reduce the cost and time of drug development in diseases with substantial unmet medical need. Our two most advanced clinical development programs are BXCL501, a sublingual thin film formulation of the adrenergic receptor agonist dexmedetomidine, or Dex, for acute treatment of agitation resulting from neurological and psychiatric disorders, and BXCL701, an immuno-oncology agent for treatment of a rare form of prostate cancer and pancreatic cancer.

During the third quarter of 2018, the Company made several advances in the development of its two lead clinical programs, BXCL501, a proprietary sublingual thin film formulation of dexmedetomidine (Dex), and BXCL701, an orally-available systemic innate-immune activator.

(BXCL501)-Neuroscience Program

The Company began planning for a first-in-human pharmacokinetic (bioavailability) and safety study for the sublingual thin film formulation of Dex that is expected to be initiated by the end of 2018 following approval of the investigational new drug (IND) application. A data read-out from this study is expected in the first half of 2019.

In addition, the Company;

In June 2018, the Company announced positive results from its Phase 1b pharmacokinetic, or PK safety study using the IV formulation of Dex in healthy elderly subjects. This was the first part of a trial supporting potential dosing strengths for the sublingual thin film for Dex. We also announced the initiation of Phase 1b PK safety study using the IV formulation of Dex in schizophrenia patients and senile dementia of the Alzheimer’s type (SDAT) or SADT, patients. We expect to report data from both schizophrenia and SDAT studies during the fourth quarter of 2018.

(BXCL701)-Immuno-Oncology Program-

In September 2018 we filed an IND application with the FDA for a Phase 1b/2 clinical study to evaluate BXCL 701 in combination with pembrolizumab (Keytruda®) in treatment emergent neuroendocrine prostate cancer, (tNEPC). In October we received notice from the FDA that the Company may proceed with its planned human clinical investigation, which we expect to initiate prior to year-end. Data from the pharmacokinetic safety and efficacy study of BXCL701 in tNEPC is expected to be available throughout 2019.

In connection with this trial the Company also:

Also, in September 2018, we entered an immuno-oncology partnership with Nektar Therapeutics to develop combination of BXCL701, Nektar Therapeutics’ NKTR-214 and a checkpoint inhibitor as a potential treatment for pancreatic cancer. Under the terms of the expanded collaboration agreement, the Company will be responsible for initiating and managing the clinical program. The Company and Nektar will share the cost of trials. The primary objectives of the study are to evaluate safety and efficacy of the triplet combination of BXCL701, NKTR-214 and a checkpoint inhibitor for the treatment of patients with unresectable or metastatic pancreatic cancer. Additionally, correlative immune activation markers will also be evaluated in blood and tumor tissue. This trial will commence following approval of an IND application.  

We were formed to develop first-in-class, high value therapeutics by leveraging EvolverAI, a research and development engine created and owned by our parent, BioXcel Corporation, or BioXcel. We believe the combination of our therapeutic area expertise, our ability to generate product candidates through our exclusive collaborative relationship with BioXcel in the areas of neuroscience and immuno-oncology gives us a significant competitive advantage. EvolverAI was developed over the last decade and integrates millions of fragmented data points using artificial intelligence and proprietary machine learning algorithms. After evaluating multiple product candidates using EvolverAI, we selected our lead programs because our analysis indicated these drugs may have utility in new therapeutic indices where there is substantial unmet medical needs and limited competition. By focusing on clinical candidates with relevant human data, we believe our approach will help us design more efficient clinical trials, thereby accelerating our product candidates’ time to market. We retain global development and commercialization rights to these two programs.

Since our inception in March 2017, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, acquiring and developing product candidates and related intellectual property rights, planning for commercialization, and conducting research and development activities for our product candidates. We do not have any products approved for sale and have not generated any revenue from product sales. Prior to our IPO in March 2018, we funded our operations primarily through the sales of approximately $4.0 million of common shares through private placement and loans from our Parent.

On March 7, 2018, our registration statement on Form S-1 relating to our IPO was declared effective by the SEC. The IPO closed on March 12, 2018 and we issued and sold 5,454,545 shares of common stock at a public offering price of $11.00 per share. Gross proceeds totaled $60.0 million and net proceeds were $54.1 million after deducting underwriting discounts and commissions of $4.2 million and other offering expenses of approximately $1.7 million.  All offering costs directly associated with the offering were recorded in stockholders’ equity as a reduction of the gross proceeds.  The other offering expenses included legal, accounting, printing and filing fees.

To date, we have not generated any revenue, we have incurred net losses and all of our operations have been financed by loans and advances from BioXcel and sales of our common stock. Our net losses were approximately $12.2 million and $2.0 million for the nine months ended September 30, 2018 and 2017, respectively.

Our net losses have resulted from costs incurred in developing the drugs in our pipeline, planning, preparing and conducting clinical trials and general and administrative activities associated with our operations. We expect to continue

to incur significant expenses and corresponding increased operating losses for the foreseeable future as we continue to develop our pipeline. Our costs may further increase as we conduct clinical trials and seek regulatory approval for and prepare to commercialize our candidates. We expect to incur significant expenses to continue to build the infrastructure necessary to support our expanded operations, clinical trials, commercialization, including manufacturing, marketing, sales and distribution functions.

We will not generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. We expect to continue to incur significant expenses for at least the next several years as we advance our product candidates from discovery through preclinical development and clinical trials and seek regulatory approval and pursue commercialization of any approved product candidate. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. In addition, we may incur expenses in connection with the in-license or acquisition of additional product candidates. We also expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company.

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the public or private sale of equity, debt financings or other capital sources, including collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of September 30, 2018, we had cash of approximately $47.1 million, which we believe will enable us to fund our operating expenses and capital expenditure requirements for at least eighteen months from the date of this Quarterly Report on Form 10-Q. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.

We were incorporated on March 29, 2017, as a wholly-owned subsidiary of BioXcel. Prior to our March 2018 IPO our activities were funded by BioXcel and a series of private placements of shares of our common stock which include the following:

In January and February 2018, we issued 283,452 shares of common stock with an issuance price of $6.88 per share for gross and net proceeds of $1,950.

In October 2017 we sold 271,839 shares of common stock with an issuance price of $4.82 per share with gross and net proceeds of $1,311.

On September 29, 2017, we sold 155,709 shares of common stock with an issuance price of $4.82 per share with gross and net proceeds of $751.

Relationship with BioXcel

We entered into an asset contribution agreement, effective June 30, 2017, with BioXcel, as amended and restated on November 7, 2017, or the Contribution Agreement, pursuant to which BioXcel agreed to contribute to us, and we agreed to acquire from BioXcel, all of BioXcel’s rights, title and interest in and to BXCL501, BXCL701, BXCL502 and BXCL702, collectively, the Candidates, and all of the assets and liabilities associated with the Candidates, in

consideration for (i) 9,480,000 shares of our common stock, (ii) $1.0 million upon completion of our IPO, (iii) $500.0 upon the later of the 12 month anniversary of our IPO and the first dosing of a patient in the bridging bioavailability/bioequivalence study for the BXCL501 program, (iv) $500.0 upon the later of the 12 month anniversary of our IPO and the first dosing of a patient in the Phase 2 PoC open label monotherapy or combination trial with Keytruda for the BXCL701 program and (v) a one-time payment of $5.0 million within 60 days after the achievement of $50.0 million in cumulative net sales of any product or combination of products resulting from the development and commercialization of any one of the Candidates or a product derived therefrom. In addition, pursuant to the Contribution Agreement, upon completion of our IPO, BioXcel granted us a first right to negotiate exclusive rights to any additional product candidates in the fields of neuroscience and immuno-oncology that BioXcel may identify on its own, excluding the Candidates, and not in connection with BioXcel’s provision of services to us under the Services Agreement as defined and described below. This option for first negotiation shall be valid for a period of five years from the date of our IPO. With the completion of our IPO in March 2018, $1.0 million was charged to Research and Development costs and included in accounts payable in connection with the Contribution Agreement and was paid on April 5, 2018.

We entered into a separation and shared services agreement with BioXcel that took effect on June 30, 2017, as amended and restated on November 7, 2017, or the Services Agreement, pursuant to which BioXcel will allow us to continue to use the office space, equipment, services and leased employees based on the agreed upon terms and conditions for a payment of defined monthly and/or hourly fees. The parties have agreed that the services and office space provided under the Services Agreement shall decrease over time until the 12-month anniversary of the date of the Services Agreement. The office space and equipment portion of the Services Agreement ended effectively on April 30, 2018 when the Company moved to new office space to accommodate additional personnel that had been hired.  Services to be provided by BioXcel through its subsidiary in India, were originally expected to decrease through June 30, 2019 provided such dates may be extended upon mutual agreement between the parties.  The parties are currently discussing extending the term of these services provided however no definitive agreement has been agreed upon as of the date hereof.  There can be no assurance that the parties will agree to any extension to the Services Agreement in the future.

On or before December 31, 2019, we shall have the option to enter into a collaborative services agreement with BioXcel pursuant to which BioXcel shall perform product identification and related services for us utilizing EvolverAI. We have agreed that this agreement will be negotiated in good faith and that such agreement will incorporate reasonable market-based terms, including consideration for BioXcel reflecting a low, single-digit royalty on net sales and reasonable development and commercialization milestone payments, provided that (i) development milestones shall not exceed $10 million in the aggregate and not be payable prior to proof of concept in humans and (ii) commercialization milestones shall be based on reaching annual net sales levels, be limited to 3% of the applicable net sales level, and not exceed $30 million in the aggregate. BioXcel shall continue to make such product identification and related services available to us for at least five years from June 30, 2017. The parties are currently discussing extending the product identification and related services that BioXcel would provide however no definitive agreement has been agreed upon as of the date hereof.  There can be no assurance that the parties will agree to any extension to the collaborative services agreement in the future.

In connection with the Services Agreement, BioXcel agreed to provide us a line of credit, which was capped at $1.0 million, or the Total Funding Amount, pursuant to the terms of a grid note, or the Grid Note. The Grid Note was payable upon the earlier of (i) the completion of an IPO and (ii) December 31, 2018, together with interest on the unpaid balance of each advance made under the Grid Note, which shall accrue at a rate per annum equal to the applicable federal rate for short-term loans as of the date hereof, in each case calculated based on a 365-day year and actual days elapsed.

All amounts due to BioXcel under the line of credit, the Grid Note, and for expenses paid on our behalf were paid to the Parent following the completion of our IPO on March 20, 2018.

Basis of Presentation

For periods prior to June 30, 2017, our financial statements are presented on a carve-out basis from the financial records of BioXcel. The carve-out includes reasonable allocations of assets and liabilities and expenses attributable to our business

These results reflect amounts specifically attributable to the BTI Business, which include expenses, assets and liabilities of BioXcel relating to the Candidates that were contributed to us by BioXcel under the Contribution Agreement for the period from January 1, 2015 until June 30, 2017. The Services Agreement provides us with certain general and administrative and development support services that became effective June 30, 2017.

However, consistent with accounting regulations, we have assumed that we were a separate business within BioXcel and we have reflected the related assets, liabilities and expenses in our results for periods prior to and post incorporation. These financial statements are presented on a carve-out basis and have been derived from the financial statements and accounting records of BioXcel and include reasonable allocations for assets and liabilities and expenses attributable to the business of the product candidates that were contributed.

Management believes the assumptions underlying the allocations of indirect expenses in the carve-out financial information are reasonable, however, our financial position, results of operations and cash flows may have been materially different if it had operated as a stand-alone entity. For the nine month period ending September 30, 2017 results include carve-out amounts from our parent for the period January 1, 2017 through June 30, 2017 and as a standalone entity for the period July 1, 2017 through September 30, 2017. For the nine months ended September 30, 2018 the results are on a stand-alone entity basis.

Components of Our Results of Operations

Revenues

We have not recognized any revenue since inception.

Operating Costs and Expenses

Research and Development

Research and development expenses consist primarily of costs incurred for the research and development of our clinical and pre-clinical candidates, which includes payments to BioXcel, our Parent.

We expense research and development costs to operations as incurred. Historically we have not segmented costs associated with our various development programs, however, beginning January 1, 2018, we have begun assigning costs to our individual development candidates.

Our research and development costs by program for the nine months ended September 30, 2018 are as follows:

Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of these or other current or future clinical trials of BXCL501, BXCL701 or our other product candidates. However, we do expect that our research and development costs will increase as we plan for and begin clinical trials for our current and future product candidates. We may never succeed in achieving regulatory approval for BXCL501, BXCL701 or any of our other product candidates. 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 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.

General and Administrative

General and administrative expenses consist primarily of salaries and related costs for employees in executive, finance and administration, corporate development and administrative support functions, including stock-based compensation expenses and benefits. Other significant general and administrative expenses include accounting and legal services, the cost of various consultants, occupancy costs and information systems costs.

We expect that our general and administrative expenses will increase as we operate both as an independent entity and as a public company. We also expect increased administrative costs, including payroll and related expenses, as we continue to increase our headcount to support the expected growth in our business, expand our operations and organizational capabilities  These increases will likely include increased costs for director and officer liability insurance, hiring additional personnel to support future market research and future product commercialization efforts and increased fees for outside consultants, attorneys and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls, investor relations and disclosures and similar requirements applicable to public companies.

Summary Results of Operations

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

Research and Development Expense

Research and development expenses for the three months ended September 30, 2018 were $3,821, compared to $619 for the three months ended September 30, 2017. The increase of $3,202 is attributable to the costs described in the table below:

Salaries, bonus and related costs increased due to higher bonus accruals, increases in headcount, payroll taxes, recruiting fees and travel related costs.

Non-cash stock-based compensation has increased as a result of options granted to a significantly increased headcount in the six months following our IPO.

Professional research, project related costs, clinical trials expenses and CMC costs increased due to the acceleration of research and development activities.

General and Administrative Expense

General and administrative expenses for the three months ended September 30, 2018 were $1,298, compared to $298 for the three months ended September 30, 2017. The increase of $1,000 is attributable to the costs described in the table below:

Salaries, bonus and related costs increased due to higher bonus accruals, increases in headcount, payroll taxes, recruiting fees and travel related costs.

Non-cash stock-based compensation has increased as a result of options granted to a significantly increased headcount in the six months following our IPO.

Professional fees increased due to expanding operations and operating as a public company. Higher legal, audit, investor relations, licensing and information technology costs were incurred during the current period.

Insurance costs increased primarily due to Director and Officer liability insurance.

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

Research and development expenses

Research and development expenses for the nine months ended September 30, 2018 were $8,540, compared to $1,264 for the nine months ended September 30, 2017. The increase of $7,276 is attributable to the costs described in the table below:

Salaries, bonus and related costs increased due to higher bonus accruals, increases in headcount, payroll taxes, recruiting fees and travel related costs.

Non-cash stock-based compensation has increased as a result of options granted to a significantly increased headcount in the six months following our IPO.

Professional research, project related costs, clinical trials expenses and CMC costs increased due to the acceleration of research and development activities.

Drug acquisition expenses included a payment to Bioxcel of $1,000 pursuant to an asset contribution agreement for the BTI business programs.

General and Administrative Expense

General and administrative expenses for the nine months ended September 30, 2018 were $4,109, compared to $747 for the nine months ended September 30, 2017. The increase of $2,362 is attributable to the costs described in the table below:

Salaries, bonus and related costs increased due to higher bonus accruals, increases in headcount, payroll taxes, recruiting fees and travel related costs.

Non-cash stock-based compensation has increased as a result of options granted to a significantly increased headcount in the six months following our IPO.

Professional fees increased due to expanding operations and operating as a public company. Higher legal, audit, investor relations, licensing and information technology costs were incurred during the current period.

Insurance costs increased primarily due to Director and Officer liability insurance.

Liquidity and Capital Resources

We reported losses of approximately $12,195 and $2,011 for the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, the Company had shareholders’ equity of $45,823, working capital of $45,595 and cash of $47,122.

We have not yet generated any revenues and we have not yet achieved profitability. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability.

Sources of Liquidity

We have focused our efforts on raising capital and building the products in our pipeline. Since our inception, and through our recently completed IPO, all our operations have been financed by our Parent, BioXcel, or the sales of our common stock in a series of private placements and a public offering. We have not yet established an ongoing source of revenue sufficient to cover our operating costs and will need to do so in future periods.

Cash Flows