Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures are effective at the reasonable assurance level.
Management’s Annual Report on Internal Controls Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
In September 2020, we were the victim of an email-based wire fraud which involved two electronic communications impersonating one of our vendors, resulting in our sending wires totaling $1.9 million to accounts controlled by the impersonator. As a result of the foregoing, we identified a material weakness due to our internal controls having not been adequately designed to prevent or timely detect unauthorized cash disbursements. Specifically, certain members within our finance organization failed to exercise appropriate skepticism and oversight for disbursement of Company-owned funds , and our cash disbursement process was not adequately designed to identify unauthorized payment requests. We do not believe that this breach had a material adverse effect on our business.
Management took immediate action to remediate the material weakness, including enhancing and formalizing cash disbursement controls to prevent and timely detect unauthorized cash disbursements and significantly enhancing our information technology infrastructure and security measures. We have also added additional members to the finance and information technology teams with greater experience in the area of internal controls and security. Management has concluded that the material was remediated during the fourth quarter of 2020 and, based on management’s assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control–Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission, concluded that, as of December 31, 2020, our internal control over financial reporting was effective .
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Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm on internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”
Changes in Internal Control over Financial Reporting
Except for the remediation efforts described above taken to address the material weakness, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to our annual meeting of stockholders to be held in 2021 (the “2021 Annual Meeting of Stockholders”), which we intend to file with the SEC within 120 days of the year ended December 31, 2020.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the year ended December 31, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the year ended December 31, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the year ended December 31, 2020.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the year ended December 31, 2020.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements:
Report of Independent Registered Public Accounting Firm
F-1
Balance Sheets as of December 31, 2020 and 2019
F-2
Statements of Operations for the Years Ended December 31, 2020 and 2019
F-3
Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2020 and 2019
F-4
Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
F-5
Notes to Financial Statements
F-6
(2) Financial Statement Schedules :
All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the financial statements or the notes thereto.
(3) Exhibits.
Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed/
Furnished
Herewith
3.1
Amended and Restated Certificate of Incorporation.
8-K
001-38410
3.1
3/13/2018
3.2
Amended and Restated Bylaws
8-K
001-38410
3.2
3/13/2018
4.1
Description of the Registrant’s Securities Registered Under Section 12 of the Exchange Act
10-K
001-38410
4.1
3/09/2020
4.2
Specimen Stock Certificate evidencing the shares of common stock
S-1/A
333-222990
4.2
2/26/2018
10.1
Stock Purchase Agreement, dated February 18, 2020, between BioXcel Corporation and BioXcel Therapeutics, Inc.
8-K
001-38410
10.1
2/21/2020
10.2^
Second Amended and Restated Separation and Shared Services Agreement, dated March 6, 2020 , by and between BioXcel Corporation and BioXcel Therapeutics, Inc.
10-K
001-38410
10.2
3/09/2020
10.3#
F irst Amendment to Second Amended and Restated Separation and Shared Services Agreement, dated March 3, 2021, by and between BioXcel LLC and BioXcel Therapeutics Inc.
*
101
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Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed/
Furnished
Herewith
10.4#
Amended and Restated Asset Contribution Agreement, effective November 7, 2017, by and between BioXcel Corporation and BioXcel Therapeutics, Inc.
S-1/A
333-222990
10.2
2/12/2018
10.5
Lease Agreement, dated as of August 20, 2018, by and between Fusco Harbour Associates, LLC, as Landlord, and BioXcel Therapeutics, Inc., as Tenant
8-K
001-38410
10.1
8/23/2018
10.6
First Amendment, dated August 19, 2020, to Lease Agreement, dated as of August 20, 2018, by and between Fusco Harbour Associates, LLC, as Landlord, and BioXcel Therapeutics, Inc., as Tenant.
10-Q
001-38410
10.1
11/12/2020
10.7†
2017 Equity Incentive Plan
S-1/A
333-222990
10.3
2/12/2018
10.8†
Form of Incentive Stock Option Agreement under the 2017 Equity Incentive Plan
S-1/A
333-222990
10.4
2/12/2018
10.9†
Form of Non-Statutory Stock option Agreement under the 2017 Equity Incentive Plan
S-1/A
333-222990
10.5
2/12/2018
10.10†
BioXcel Therapeutics, Inc. 2020 Incentive Award Plan and forms of award agreements thereunder
10-Q
001-38410
10.1
8/14/2020
10.11†
BioXcel Therapeutics, Inc. 2020 Employee Stock Purchase Plan
10-Q
001-38410
10.2
8/14/2020
10.12†
Form of Indemnification Agreement with directors and executive officers
S-1/A
333-222990
10.6
2/12/2018
10.13†
Employment Agreement, dated March 7, 2018 by and between BioXcel Therapeutics, Inc. and Vimal Mehta
8-K
001-38410
10.1
3/13/2018
10.14†
Employment Agreement, dated February 12, 2018, by and between BioXcel Therapeutics, Inc. and Frank Yocca
S-1/A
333-222990
10.11
2/12/2018
10.15†
Employment Agreement, effective October 2, 2017, by and between BioXcel Therapeutics, Inc. and Richard Steinhart
S-1/A
333-222990
10.12
2/12/2018
10.16†
Employment Agreement, dated June 1, 2018, by and between BioXcel Therapeutics, Inc. and Dr. Vincent O’Neill, M.D.
8-K
001-38410
10.1
6/07/2018
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Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed/
Furnished
Herewith
10.17†
Employment Agreement between William Kane and BioXcel Therapeutics, Inc., dated May 15, 2020.
10-Q
001-38410
10.3
8/14/2020
10.18†
Employment Agreement between Reina Benabou and BioXcel Therapeutics, Inc., dated June 21, 2020.
10-Q
001-38410
10.4
8/14/2020
10.19†
Employment Agreement between Javier Rodriguez and BioXcel Therapeutics, Inc., dated February 15, 2021.
*
10.20†
Non-Employee Director Compensation Program
10-Q
001-38410
10.1
5/12/2020
21.1
Subsidiaries of BioXcel Therapeutics, Inc.
*
23.1
Consent of BDO USA, LLP
*
31.1
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*
31.2
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**
101.INS
XBRL Instance Document
*
101.SCH
XBRL Taxonomy Extension Schema Document
*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
*
103
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Exhibit
Number
Description
Form
File No.
Exhibit
Filing Date
Filed/
Furnished
Herewith
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
† Indicates a management contract or any compensatory plan, contract or arrangement.
^ Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
# Confidential treatment has been granted for portions omitted from this exhibit and those portions have been separately filed with the Securities and Exchange Commission.
* Filed herewith.
** Furnished herewith.
Item 16. Form 10-K Summary
Not applicable
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BioXcel Therapeutics, Inc.
Dated: March 12, 2021
By:
/s/ Vimal Mehta
Vimal Mehta
Chief Executive Officer
(Principal Executive Officer)
Dated: March 12, 2021
By:
/s/ Richard Steinhart
Richard Steinhart, Chief Financial Officer
(Principal Financial Officer)
11
Signature
Title
Date
/s/ VIMAL MEHTA
Vimal Mehta, Ph.D.
Chief Executive Officer, President, and Director (Principal Executive Officer)
March 12, 2021
/s/ RICHARD STEINHART
Richard Steinhart
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 12, 2021
/s/ PETER MUELLER
Peter Mueller, Ph.D.
Chairman of the Board of Directors
March 12, 2021
/s/ JUNE BRAY
June Bray
Director
March 12, 2021
/s/ SANDEEP LAUMAS
Sandeep Laumas, M.D.
Director
March 12, 2021
/s/ KRISHNAN NANDABALAN
Krishnan Nandabalan, Ph.D.
Director
March 12, 2021
/s/ MICHAL VOTRUBA
Michal Votruba
Director
March 12, 2021
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Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
BioXcel Therapeutics, Inc.
New Haven, CT
Opinion on the Financial Statements
We have audited the accompanying balance sheets of BioXcel Therapeutics, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2017 .
Stamford, Connecticut
March 12, 2021
F-1
Table of Contents
BIOXCEL THERAPEUTICS, INC.
BALANCE SHEETS
(amounts in thousands, except per share amounts)
December 31,
December 31,
2020
2019
ASSETS
Current assets
Cash and cash equivalents
$
213,119
$
32,426
Prepaid expenses and other current assets
3,946
1,681
Total current assets
217,065
34,107
Property and equipment, net
1,273
1,041
Operating lease right-of-use asset
1,511
1,193
Other assets
87
51
Total assets
$
219,936
$
36,392
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
$
3,979
$
4,953
Accrued expenses
7,469
3,120
Due to Parent
157
64
Other current liabilities
237
331
Total current liabilities
11,842
8,468
Long-term portion of operating lease liability
1,398
1,029
Total liabilities
13,240
9,497
Commitments and contingencies (Note 13)
Stockholders' equity
Common stock, $0.001 par value, 50,000 shares authorized; 24,417 and 18,087 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively
24
18
Additional paid-in-capital
345,529
83,565
Accumulated deficit
(138,857)
(56,688)
Total stockholders' equity
206,696
26,895
Total liabilities and stockholders' equity
$
219,936
$
36,392
The accompanying notes are an integral part of these financial statements.
F-2
Table of Contents
BIOXCEL THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Year Ended December 31,
2020
2019
Revenues
$
—
$
—
Operating expenses
Research and development
57,995
25,797
General and administrative
24,302
7,804
Total operating expenses
82,297
33,601
Loss from operations
(82,297)
(33,601)
Other income (expense)
Dividend and interest income
155
653
Interest expense
(27)
(20)
Net loss
$
(82,169)
$
(32,968)
Net loss per share - basic and diluted
$
(3.79)
$
(2.02)
Weighted average shares outstanding - basic and diluted
21,683
16,289
The accompanying notes are an integral part of these financial statements.
F-3
Table of Contents
BIOXCEL THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands)
Additional
Common Stock
Paid in
Accumulated
Shares
Amount
Capital
Deficit
Total
Balance as of January 1, 2019
15,663
$
16
$
62,593
$
(23,720)
$
38,889
Issuance of common shares, net of issuance costs of $1,991
2,369
2
17,808
—
17,810
Stock-based compensation
—
—
3,142
—
3,142
Exercise of stock options
55
—
22
—
22
Net loss
—
—
—
(32,968)
(32,968)
Balance as of December 31, 2019
18,087
$
18
$
83,565
$
(56,688)
$
26,895
Issuance of common shares, net of issuance costs of $17,815
6,300
6
255,779
—
255,785
Purchase and cancellation of shares from BioXcel Corporation
(300)
—
(9,024)
—
(9,024)
Stock-based compensation
—
—
14,611
—
14,611
Exercise of stock options
330
—
598
—
598
Net loss
—
—
—
(82,169)
(82,169)
Balance as of December 31, 2020
24,417
$
24
$
345,529
$
(138,857)
$
206,696
The accompanying notes are an integral part of these financial statements.
F-4
Table of Contents
BIOXCEL THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year ended December 31,
2020
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(82,169)
$
(32,968)
Reconciliation of net loss to net cash used in operating activities
Depreciation and amortization
188
156
Stock-based compensation expense
14,611
3,142
Changes in operating assets and liabilities:
Prepaid expenses, other assets and right of use assets
(2,013)
(1,190)
Accounts payable, accrued expenses, lease liabilities and other liabilities
3,033
3,759
Net cash used in operating activities
(66,350)
(27,101)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements
(316)
(870)
Net cash used in investing activities
(316)
(870)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs
255,785
17,810
Purchase and cancellation of shares from BioXcel Corporation
(9,024)
—
Exercise of options
598
22
Net cash provided by financing activities
247,359
17,832
Net increase (decrease) in cash and cash equivalents
180,693
(10,139)
Cash and cash equivalents, beginning of the period
32,426
42,565
Cash and cash equivalents, end of the period
$
213,119
$
32,426
Supplemental cash flow information:
Interest paid
$
27
$
62
Purchases of equipment and leasehold improvements in accounts payable and accrued expense
104
—
Operating right of use lease assets obtained in exchange for operating lease liabilities
606
—
Operating lease right of use asset and liability (non-cash adoption balances)
—
1,308
The accompanying notes are an integral part of these financial statements.
F-5
Table of Contents
BIOXCEL THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS
(in thousands, except per share amounts)
Note 1. Nature of the Business
BioXcel Therapeutics, Inc. is a clinical stage biopharmaceutical company focused on drug development that utilizes artificial intelligence to identify improved therapies in neuroscience and immuno-oncology. BTI'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. BTI's two most advanced clinical development programs are BXCL501, a proprietary, orally dissolving, sublingual thin film formulation of the adrenergic receptor agonist dexmedetomidine (“Dex”), for the treatment of agitation and opioid withdrawal symptoms, and BXCL701, an orally administered, systemic innate immune activator for the treatment of aggressive forms of prostate cancer and advanced solid tumors that are refractory or treatment naïve to checkpoint inhibitors.
As used in these financial statements, unless otherwise specified or the context otherwise requires, the terms the “Company” or “BTI” refer to BioXcel Therapeutics, Inc., and “BioXcel” or “Parent” refer to BioXcel LLC and, its predecessor, BioXcel Corporation.
The Company is a minority-owned subsidiary of BioXcel 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.
The Company incurred losses of $82,169 and $32,968 for the years ended December 31, 2020 and 2019, respectively. The Company had an accumulated deficit of $138,857 as of December 31, 2020. The Company has funded its operations primarily through the sale of equity securities.
Certain reclassifications have been made to the prior year financial information to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of coronavirus, a global pandemic. This outbreak has caused and is continuing to cause major disruptions to businesses and financial markets worldwide. This may affect the Company’s operations and those of third parties on which the Company relies, including causing disruptions in the supply of the Company’s product candidates and the conduct of current and planned preclinical and clinical studies. The Company may need to limit its operations and may experience limitations in employee resources. There are risks that the COVID-19 pandemic may be more difficult to contain than currently anticipated in which case the risks described herein could increase significantly. The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the coronavirus on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity, and the Company’s ability to complete its preclinical and clinical studies on a timely basis, or at all. The ultimate impact of COVID-19 is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing, preclinical and clinical trial activities or the global economy as a whole. However, these effects could have a material, adverse impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.
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Note 2. Basis of Presentation
The Company’s financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”).
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The Company’s financial statements are prepared in accordance with GAAP. The preparation of the Company’s financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses in its financial statements and the accompanying notes. 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.
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 December 31, 2020, and 2019, cash equivalents were comprised primarily of money market funds. Cash and cash equivalents held at financial institutions may at times exceed federally insured amounts. We believe we mitigate such risk by investing in or through major financial institutions.
Property and Equipment
Property and equipment are recorded at cost and depreciated and amortized over the shorter of their remaining lease term or their estimated useful life on a straight-line basis as follows:
Equipment 3-5 years
Furniture 7 years
Leasehold improvements Lesser of life of improvement or lease term
Expenditures for maintenance and repairs which do not improve or extend the useful lives of respective assets are expensed as incurred. When assets are sold or retired, the related cost and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is include income (loss) from operations.
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.
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 2017 Equity Incentive Plan became effective in August 2017. The Company’s 2020 Stock Plan became effective in May 2020. Following the effective date of the Company's 2020 Stock Plan, the Company ceased granting awards under the 2017 Plan, however the terms and conditions of the 2017 Plan continue to govern any outstanding awards granted thereunder.
F-7
Table of Contents
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.
The Company adopted FASB ASU 2018-07 as of January 1, 2019 which allowed non-employee options to be expensed using the adoption date fair value.
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 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 the Company’s 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. 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. Such estimates are subject to change as additional information becomes available. The Company expenses research and development costs as incurred.
Patent Costs
Costs related to filing and pursuing patent applications are expensed as incurred as general and administrative costs as recoverability of such expenditures is uncertain.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, “ Fair Value Measurements and Disclosures ” for financial assets and liabilities measured on a recurring basis which requires disclosure that establishes a framework for measuring fair value. 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, or observable inputs, and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances, or 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). ASC 820 requires that fair value measurements be classified and disclosed in one of three categories:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors,
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are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3: Unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
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 and accounts payable approximate fair value due to the short-term nature of these instruments.
Earnings (Loss) per Share
Basic earnings (loss) per share (“EPS”) is calculated in accordance with ASC 260, “ Earnings Per Share ,” by dividing net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and warrants. In periods in which a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive.
Segment Information
The Company operates in a single segment. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. To date, our chief operating decision maker has made such decisions and assessed performance at the company level as one segment.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic: 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU No. 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Key provisions include (i) the removal of separation models in ASC 470-20 for convertible instruments; (ii) expanded disclosures about the terms and features of convertible instruments; (iii) removed certain conditions for equity classification; and (iv) updated earnings per share calculation with respects to convertible instruments, share settlement presumption, down round features and the earnings per share denominator. ASU No. 2020-06 is effective for annual and interim reporting periods beginning after December 15, 2021, and the guidance is to be applied using the full or modified retrospective approach. Earlier adoption is permitted for annual and interim reporting periods beginning after December 15, 2020. The Company does not expect that the adoption of ASU No. 2020-06 new guidance will have a material impact on the Company’s financial statements.
In December 2019, the FASB issued ASU No. 2019-12 , Income Taxes (Topic 740) which amends the existing guidance relating to the accounting for income taxes. ASU No. 2019-12 is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. ASU No. 2019-12 is effective for fiscal years beginning after December 15, 2020. The Company does not expect that the adoption of ASU No. 2019-12 will have a material impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
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Is a Service Contract . We adopted this standard effective January 1, 2020 on a prospective basis. ASU No. 2018-15 requires that certain implementation costs for cloud computing arrangements are capitalized and amortized over the term of associated hosted cloud computing arrangement service and that capitalized implementation costs are classified in prepaid expenses and other assets. ASO No. 2018-15 also provides classification guidance on these implementation costs as well as additional quantitative and qualitative disclosures. The adoption of ASU No. 2018-15 did not have an effect on the Company’s financial statements.
Note 4. Financing Activities
In May 2019, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”) pursuant to which the Company could offer and sell shares of its common stock, par value $0.001 per share (the “Common Stock”), having an initial offering price no greater than $20.0 million (the “Shares”), from time to time, through an “at the market offering” program under which Jefferies will act as sales agent. The Company sold 66 shares under the Sale Agreement for proceeds of $387, net of issuance costs of $350. The Sale Agreement was terminated by the Company on September 22, 2019.
In September 2019, the Company entered into an underwriting agreement with several underwriters in connection with the issuance and sale by the Company in a public offering of 2,303 shares of the Company’s common stock at a public offering price of $8.25 per share, less underwriting discounts and commissions, pursuant to an effective shelf registration statement on Form S-3 (Registration No. 333-230674) and a related prospectus supplement filed with the SEC (the “September 2019 Offering”). The September 2019 Offering closed on September 30, 2019. The Company received proceeds of approximately $17,423, net of issuance costs of $1,577 from the September 2019 Offering.
In February 2020, the Company sold in a registered offering 2,300 shares of its common stock at a public offering price of $32.00 per share. The Company received proceeds of $68,811, net of issuance costs of $4,789. The Company used $9,024 of the proceeds to purchase and cancel 300 shares of common stock from BioXcel.
In July 2020, the Company sold in a registered offering 4,000 shares of its common stock at a public offering price of $50.00. The Company received proceeds of approximately $186,974, net of issuance costs of $13,026. Under the terms of the Underwriting Agreement entered into by the Company in connection with the July 2020 offering, certain stockholders of the Company granted the underwriters an option exercisable for thirty days to purchase up to an additional 600 shares of common stock at the public offering price less underwriting discounts and commissions, which was not exercised. The Company intends to use the net proceeds of the offering to fund ongoing clinical trials, commercialization preparation and for general corporate purposes.
Note 5. Transactions with BioXcel
The Company has entered into the Amended and Restated Asset 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 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 proof of concept 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. Upon the completion of the Company’s IPO in March 2018, $1,000 was charged to Research and Development costs in connection with (ii) above and was paid on April 5, 2018. The Company paid $500 to BioXcel in connection with (iii) above in April 2019. In July 2019, the Company completed the first dosing of a patient in the combination trial of BXCL701 with Keytruda, and as a result the Company paid $500 to BioXcel in connection with (iv) above in July 2019.
The Company entered into a Separation and Shared Services Agreement with BioXcel that took effect on June 30, 2017, as amended and restated, or the Services Agreement, pursuit to which services provided by BioXcel through its
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subsidiaries in India and the United States will continue indefinitely, as agreed upon by the parties. These services are primarily for drug discovery, chemical, manufacturing and controls cost, and administrative support. Service charges recorded under this agreement were $1,262 and $862 for the years ended December 31, 2020 and 2019, respectively.
Under the Services Agreement, the Company has an option, exercisable until March 12, 2023, to enter into a collaborative services agreement with BioXcel pursuant to which BioXcel shall perform product identification and related services for us utilizing EvolverAI. The parties are obligated to negotiate the collaborative services agreement in good faith and to 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 at least September 30, 2024.
The Company paid $9,024 in February 2020 for the purchase and subsequent cancellation of 300 shares owned by BioXcel.
Note 6. Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is calculated in accordance with ASC 260, “Earnings Per Share,” by dividing net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated by adjusting weighted average common shares outstanding for the dilutive effect of common stock options and warrants. In periods in which a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be antidilutive. Securities that could potentially dilute basic EPS in the future were not included in the computation of diluted EPS because to do so would have been antidilutive. The calculations of basic and diluted net loss per share are as follows (in thousands, except per share amounts):
Year Ended
December 31,
2020
2019
Net loss (numerator)
$
(82,169)
$
(32,968)
Weighted-average share, in thousands (denominator)
21,683
16,289
Basic and diluted net loss per share
$
(3.79)
$
(2.02)
Note 7. Property and Equipment, net
A summary of property and equipment is as follows:
December 31,
December 31,
2020
2019
Computers and related equipment
$
260
$
229
Furniture
369
344
Leasehold improvements
650
642
Work in Process
356
—
1,635
1,215
Accumulated depreciation
(362)
(174)
$
1,273
$
1,041
Depreciation expense was $188 and $155 for the years ended December 31, 2020 and 2019, respectively.
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Note 8. Accrued Expenses
Accrued expenses consist of the following:
December 31, 2020
December 31, 2019
Research and development expenses
$
3,264
$
1,215
Accrued compensation and benefits
2,066
1,570
Accrued professional expenses
1,288
266
Accrued taxes
697
-
Other accrued expenses
154
69
$
7,469
$
3,120
Note 9. Capital Structure
Authorized Capital
The Company is authorized to issue up to 10,000 preferred shares with a par value of $0.001 per share of which no shares were issued and outstanding as of December 31, 2020 and 2019.
The Company is authorized to issue up to 50,000 shares of common stock with a par value of $0.001 per share. The Company had 24,417 and 18,087 shares of common stock outstanding as of December 31, 2020 and December 31, 2019, respectively.
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.
Note 10. Stock-Based Compensation
2017 Equity Incentive Plan
The Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective in August 2017. Following the effective date of the Company's 2020 Plan (as defined below), the Company ceased granting awards under the 2017 Plan, however the terms and conditions of the 2017 Plan continue to govern any outstanding awards granted thereunder.
2020 Incentive Award Plan
The Company’s 2020 Incentive Award Plan (the “2020 Plan”) was approved and became effective at the Company’s 2020 annual meeting of Shareholders on May 20, 2020 and unless, earlier terminated by the Board of Directors, will remain in effect until March 26, 2030. The 2020 Plan originally authorized for issuance the sum of (i) 911 shares of the Company’s common stock authorized for issuance and (ii) 233 shares of the Company’s common stock, which represents the number of shares that remained available for issuance under the 2017 Plan as of immediately prior to the approval of the 2020 Plan by the Company’s shareholders. Any shares of Common Stock which, as of immediately prior to the approval of the 2020 Plan by the Company’s stockholders, were subject to awards granted under the 2017 Plan that are forfeited or lapse unexercised and are not issued under the 2017 Plan will increase the number of shares of common stock available for grant under the 2020 Plan. In addition, the number of shares available for issuance under the 2020 Plan will increase on the first day of each calendar year beginning January 1, 2021 and ending on and including January 1, 2030 by a number of shares equal to the lesser of (A) 4% of the aggregate number of shares of the Company’s common stock outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares of common stock as is determined by the Board of Directors. On January 1, 2021, the shares available for issuance under the 2020 Plan increased by 977 shares.
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Options granted under the 2020 Plan have a term of ten years with the vesting schedule determined by the Board of Directors, which is generally four years.
As of December 31, 2020, there were 158 shares available to be granted under the 2020 Plan.
A summary of the status of the Company’s stock option activity for the year ended December 31, 2020 is presented below (in thousands, except per share amounts):
Number
Weighted Average
of
Exercise
Shares
Price per Share
Outstanding as of January 1, 2020
3,058
$
3.26
Granted
1,149
$
46.26
Forfeited
(63)
$
12.37
Cancelled
(1)
$
9.20
Exercises
(345)
$
2.82
Outstanding as of December 31, 2020
3,798
$
16.15
Options vested and exercisable as of December 31, 2020
2,275
$
2.69
As of December 31, 2020, the intrinsic value of options outstanding was $117,298. The intrinsic value for stock options is calculated based on the difference between the exercise prices of the underlying awards and the quoted stock price of the Company’s common stock as of the reporting date.
The total intrinsic value of stock options exercised for the years ended December 31, 2020 and 2019 was $11,629 and $565, respectively.
The weighted average grant date fair value of options granted in 2020 and 2019 was $32.71 and $9.68, respectively.
The weighted average grant date fair value of options vested at December 31, 2020 was $2.61.
The weighted average remaining contractual life is 6.9 years for options exercisable.
Stock-Based Compensation
The fair value of options granted during the years ended December 31, 2020 and 2019 was estimated using the Black-Scholes option-pricing model with the following assumptions.
For the
For the
Year Ended
Year Ended
December 31, 2020
December 31, 2019
Expected Term
5.50
years
-
6.25
years
5.50
years
-
6.25
years
Expected stock price volatility
79.02
%
-
86.71
%
78.53
%
-
79.42
%
Risk-free rate of interest
0.33
%
-
2.34
%
1.54
%
-
2.50
%
Expected dividend
0.0
%
-
0.0
%
0.0
%
-
0.0
%
Prior to the Company’s IPO, it did not have a history of market prices of its common stock and, as such, volatility is 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 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.
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The Company recognized stock-based compensation expense of $14,590 and $3,070 for the years ended December 31, 2020 and 2019, respectively.
Unrecognized compensation expense related to unvested awards as of December 31, 2020 was $24,599 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 1.7 years.
BioXcel Charges
BioXcel has granted stock options to Company 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. 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.
Stock-based compensation expense, net of forfeitures, recognized by the Company in its statements of operations related to BioXcel equity awards totaled approximately $21 and $72 for the years ended December 31, 2020 and 2019, respectively.
Total stock-based compensation charges were approximately $14,611 and $3,142 for the years ended December 31, 2020 and 2019, respectively. The Company charged $6,020 and $8,591 to research and development and general and administrative expense for the year ended December 31, 2020, respectively. The Company charged $1,791 and 1,351 to research and development and general and administrative expense for the year ended December 31, 2019, respectively.
2020 Employee Stock Purchase Plan
The Company’s 2020 Employee Stock Purchase Plan (the “ESPP”) was also approved and became effective at the Company’s 2020 annual meeting of Shareholders on May 20, 2020. The ESPP is designed to assist eligible employees of the Company with the opportunity to purchase the Company’s common stock at a discount through accumulated payroll deductions during successive offering periods. The aggregate number of Shares that may be issued pursuant to rights granted under the ESPP is 100 shares of common stock. In addition, the number of shares available for issuance under the ESPP will increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030 by a number of shares of common stock equal to the lesser of (a) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by the Board. The number of shares that may be issued or transferred pursuant to rights granted under the component of the ESPP that is intended to qualify for favorable U.S. federal tax treatment under Section 423 of the Internal Revenue Code (the “Section 423 Component”) shall not exceed 500 shares. The purchase price will be determined by the administrator of the ESPP and, for purposes of the Section 423 Component, shall not be less than 85% of the fair market value of a share on the first trading day or on the last trading day of the applicable offering period, whichever is lower. On January 1, 2021, the shares available for issuance under the 2020 ESPP increased by 244 shares. To date, no shares have been sold under the ESPP.
Note 11. Leases
In August 2018, the Company entered into an agreement to lease approximately 11,040 square feet of space on the 12 th floor of the building located at 555 Long Wharf Drive, New Haven, Connecticut (the “12 th Floor Lease) which was effective February 22, 2019. The 12 th Floor Lease expires in February 2026.
In August 2020, the Company entered into an amendment to the 12 th Floor Lease wherein the Company leased an additional 7,245 square feet of space on the 12 th floor of the building located at 555 Long Wharf Drive, New Haven, Connecticut (the “12 th Floor Lease Amendment”). The 12 th Floor Lease Amendment expires in February 2026.
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The future minimum annual lease payments under these operating leases as of December 31, 2020 are as follows:
Year ending December 31,
Amount
2021
314
2022
363
2023
372
2024
381
2025
391
Thereafter
64
Total lease payments
1,885
Less imputed interest
(250)
Total lease liability
1,635
Less current portion of lease liability
(237)
Long-term portion operating lease liability
$
1,398
The current portion of the Company’s operating lease liability of $237 as of December 31, 2020 is included in other current liabilities on the balance sheet.
The Company recorded lease expense related to its operating lease right-of-use asset of $345 and $155 for the years ended December 31, 2020 and 2019, respectively.
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.
Note 12. Commitments and Contingencies
From time to time, in the ordinary course of business, the Company may be subject to litigation and regulatory examinations as well as information gathering requests, inquiries and/or investigations. The Company is not currently subject to any matters where it believes there is a reasonable possibility that a material loss may be incurred. As of December 31, 2020, there were no matters which would have a material impact on the Company’s financial results.
Note 13. Income Taxes
There is no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. The reported amount of income tax expense for the years differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses primarily because of changes in valuation allowance.
Pursuant to incorporation of the Company as a C corporation on March 29, 2017, BioXcel became the sole owner of the Company, and contributed certain assets to the Company in a tax free transaction. From the date of incorporation, the Company is a standalone C corporation subject to corporate income tax and the deferred taxes of the Company have been calculated accordingly.
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The significant components of the Company’s net deferred tax assets at December 31, 2020 and 2019 are shown below. In determining the realizability of the Company’s net deferred tax asset, the Company considered numerous factors, including historical profitability, estimated future taxable income, and the industry in which it operates. Based on this information the Company has provided a valuation allowance for the full amount of its net deferred tax asset because the Company has determined that it is more likely than not that it will not be realized.
2020
2019
Federal net operating losses
$
8,547
$
3,445
State net operating losses
2,411
972
Stock based compensation
3,998
860
Federal and state tax credits
4,895
1,254
Capitalized research and development costs
21,249
8,288
Accrued expense
599
419
Depreciation
(11)
3
Lease Accounting - ROU
(407)
(310)
Lease Accounting - Liability
440
321
41,721
15,252
Less: valuation allowance
(41,721)
(15,252)
Net deferred tax assets
$
—
$
—
A reconciliation between the Company’s effective tax rate and the federal statutory rate for the years ended December 31, 2020 and 2019 are as follows:
2020
2019
Federal statutory rate
21.0
%
21.0
%
Stock based compensation
0.9
%
(1.4)
%
Federal and state credits
3.7
%
2.7
%
State taxes
6.8
%
5.0
%
Other
(0.2)
—
Valuation allowance
(32.2)
%
(27.3)
%
—
%
0.0
%
At December 31, 2020, the Company had approximately $40,700 of gross federal and $40,700 of gross state net operating loss carry-forwards. If not utilized, the federal and state net operating loss carry-forwards will begin to expire in 2037. The federal net operating loss of 38,100 incurred after December 31, 2017 will be carried forward indefinitely. The utilization of such net operating loss carry-forwards and realization of tax benefits in future years depends predominantly upon having taxable income. The Company also has approximately $4,324 of federal research and development credits which will begin to expire in 2037 if not utilized. Our NOLs or credits may also be impaired under state law.
On March 27, 2020, the Coronavirus Aid Relief and Economic Security (“CARES”) Act was signed into law. The Act contains several new or changed income tax provisions, including but not limited to the following: increased limitation threshold for determining deductible interest expense, class life changes to qualified improvements (in general, from 39 years to 15 years) and the ability to carry back net operating losses incurred from tax years 2018 through 2020 up to the five preceding tax years. Most of these provisions are either not applicable or have no material effect on the Company.
Utilization of the net operating loss, or NOL, and research tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that has occurred or that could occur in the future, as required by Section 382 of the Code, as well as similar state and foreign provisions. These ownership changes may limit the amount of NOL and research tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an "ownership change" as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Furthermore, under the Tax Cuts and Jobs Act
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of 2017 and modified by the CARES Act signed on March 27, 2020, although the treatment of NOLs arising on or before December 31, 2017 has generally not changed, NOLs arising on or after January 1, 2018 and beyond may only be used to offset 80% of taxable income for tax years beginning after December 31, 2020. This change may require us to pay federal income taxes in future years despite generating a loss for federal income tax purposes in prior years.
Entities are also required to evaluate, measure, recognize and disclose any uncertain income tax provisions taken on their income tax returns. The Company has analyzed its tax positions and has concluded that as of December 31, 2020 there were no uncertain positions. Interest and penalties, if any, as they relate to income taxes assessed, are included in the income tax provision. There was no income tax related interest and penalties included in the income tax provision. The Company's U.S. federal and state net operating losses have occurred since its inception in 2017 and as such, tax years subject to potential tax examination could apply from that date because the utilization of net operating losses from prior years opens the relevant year to audit by the IRS and/or state taxing authorities.
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