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FDA review and recommendations by an independent FDA advisory committee, particularlyapproval of the NDA to permit commercial marketing for novel indications. The FDA is not bound by the recommendation of an advisory committee.particular indications for use.
In addition, delays or rejections may be encountered based upon changes in regulatory policy, regulations or statutes governing product approval during the period of product development and regulatory agency review.
BeforePreclinical Studies and IND Submission
The testing and approval process of product candidates requires substantial time, effort, and financial resources. Preclinical studies include laboratory evaluation of drug substance chemistry, pharmacology, toxicity, and drug product formulation, as well as animal studies to assess potential safety and efficacy. Such studies must generally be conducted in accordance with the FDA’s GLP regulations. Prior to commencing the first clinical trial with a product candidate, an IND sponsor must submit the results of the preclinical tests and preclinical literature, together with manufacturing information, analytical data, any available clinical data or literature, and proposed clinical study protocols, among other things, to the FDA as part of an IND.
An IND becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30‑day time period, notifies the applicant of safety and/or product quality concerns or questions related to one or more proposed clinical trials and places the trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Clinical holds also may be imposed by the FDA at any time before or during trials due to safety concerns or noncompliance. As a result, submission of an IND may not result in FDA authorization to commence a clinical trial.
Clinical Trials
Clinical trials involve the administration of the investigational new drug to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include the requirements that all research subjects provide their informed consent in writing for their participation in any clinical trial, as well as review and approval of the study by an IRB. Investigators must also provide certain information to the clinical trial sponsors to allow the sponsors to make certain financial disclosures to the FDA. Clinical trials are conducted under protocols detailing, among other things, the objectives of the trial, the trial procedures, the parameters to be used in monitoring safety, the effectiveness criteria to be evaluated, and a statistical analysis plan. A protocol for each clinical trial, and any subsequent protocol amendments, must be submitted to the FDA as part of the IND. In addition, an IRB at each study site participating in the clinical trial or a central IRB must review and approve the plan for any clinical trial, informed consent forms, and communications to study subjects before a study commences at that site. An IRB considers, among other things, whether the risks to individuals participating in the trials are minimized and are reasonable in relation to anticipated benefits and whether the planned human subject protections are adequate. The IRB must continue to oversee the clinical trial while it is being conducted.
Once an IND is in effect, each new clinical protocol and any amendments to the protocol must be submitted for FDA review, and to the IRB for approval. Progress reports detailing the results of the clinical trials must also be submitted at least annually to the FDA and the IRB and more frequently if serious adverse events or other significant safety information is found.
Information about certain clinical trials, including a description of the study and study results, must be submitted within specific timeframes to the NIH for public dissemination on their clinicaltrials.gov website.
Additionally, some clinical trials are overseen by an independent group of qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group regularly reviews accumulated data and advises the study sponsor regarding the continuing safety of trial subjects, enrollment of potential trial subjects, and the continuing validity and scientific merit of the clinical trial. The data safety monitoring board receives special access to unblinded data during the clinical trial and may advise the sponsor to halt the clinical trial if it determines there is an unacceptable safety risk for subjects or on other grounds, such as no demonstration of efficacy.
The manufacture of investigational drugs for the conduct of human clinical trials (and their active pharmaceutical ingredients) is subject to cGMP requirements. Investigational drugs and active pharmaceutical ingredients imported into the U.S. are also subject to regulation by the FDA relating to their labeling and distribution. Further, the export of investigational drug products outside of the United States is subject to regulatory requirements of the receiving country as well as U.S. export requirements under the FDCA.
In general, for purposes of NDA approval, human clinical trials are typically conducted in three sequential phases, which may overlap or be combined.
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Phase 1—Studies are initially conducted in healthy human volunteers or subjects with the target disease or condition and test the product candidate for safety, dosage tolerance, structure‑activity relationships, mechanism of action, absorption, metabolism, distribution, and excretion. If possible, Phase 1 trials may also be used to gain an initial indication of product effectiveness.
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Phase 2—Controlled studies are conducted in limited subject populations with a specified disease or condition to evaluate preliminary efficacy, identify optimal dosages, dosage tolerance and schedule, possible adverse effects and safety risks, and expanded evidence of safety.
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Phase 3—These adequate and well‑controlled clinical trials are undertaken in expanded subject populations, generally at geographically dispersed clinical trial sites, to generate enough data to provide statistically significant evidence of clinical efficacy and safety of the product for approval, to establish the overall risk‑benefit profile of the product, and to provide adequate information for the labeling of the product. Typically, two successful Phase 3 trials are required by the FDA for product approval.
The FDA may also require, or companies may conduct, additional clinical trials for the same indication after a product is approved. These so-called Phase 4 studies may be required by the FDA as a condition of approval of the NDA, to be satisfied after approval. The results of Phase 4 studies can confirm the effectiveness of a product candidate and can provide important safety information. In addition to the above traditional kinds of clinical trial data required for the approval of an NDA, the 21st Century Cures Act provides for potential FDA use of different types and sources of data in regulatory decision-making, such as patient experience data, real-world evidence for already approved products, and, for appropriate indications sought through supplemental marketing applications. Implementation of this law and related initiatives is still in progress and we do not know the extent to which we may in the future be able to utilize these types and sources of data. In the case of a 505(b)(2) NDA, which is a marketing application in which sponsors may rely on investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted, some of the above described studies and preclinical studies may not be required or may be abbreviated. Bridging studies may be needed, however, to demonstrate the applicability of the studies that were previously conducted by other sponsors to the drug that is the subject of the marketing application.
Clinical trials at any phase may not be completed successfully within any specified period, or at all. Regulatory authorities, an IRB, or the sponsor may suspend or discontinue a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk, the clinical trial is not being conducted in accordance with the FDA’s or the IRB’s requirements, if the drug has been associated with unexpected serious harm to the subjects, or based on evolving business objectives or competitive climate.
Concurrent with clinical trials, companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the product candidate as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality, potency, and purity of the final product. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
During the development of a new drug, a sponsor may be able to request a Special Protocol Assessment (SPA) the purpose of which is to reach agreement with the FDA on the Phase 3 clinical trial protocol design and analysis that will form the primary basis of an efficacy claim as well as preclinical carcinogenicity trials and stability studies. An SPA may only be modified with the agreement of the FDA and the trial sponsor or if the director of the FDA reviewing division determines that a substantial scientific issue essential to determining the safety or efficacy of the drug was identified after the testing began. An SPA is intended to provide assurance that, in the case of clinical trials, if the agreed‑upon clinical trial protocol is followed, the clinical trial endpoints are achieved, and there is a favorable risk‑benefit profile, the data may serve as the primary basis for an efficacy claim in support of an NDA. However, SPA agreements are not a guarantee of an approval of a product candidate or any permissible claims about the product candidate. In particular, SPAs are not binding on the FDA if, among other reasons, previously unrecognized public health concerns arise during the performance of the clinical trial, other new scientific concerns regarding the product candidate’s safety or efficacy arise, or if the sponsoring company fails to comply with the agreed upon clinical trial protocol.
NDA Submission, Review by the FDA, and Marketing Approval
Assuming successful completion of the required clinical and preclinical testing, the results of product development, including chemistry, manufacturing, and control (CMC) information, non-clinical studies, and clinical trial results, including negative or ambiguous results as well as positive findings, are all submitted to the FDA, along with the proposed labeling, as part of an NDA requesting approval to market the product for one or more indications. In most cases, the submission of an NDA is subject to a potential product, we or our collaboratorssubstantial application user fee, authorized every five years by Congress under the Prescription Drug User Fee Act (PDUFA). User fees must demonstrate through adequatebe paid at the time of the first submission of the application, even if the application is being submitted on a rolling basis, and well-controlled clinical studiesif approved, program fees must be paid on an annual basis. Product candidates that are designated as orphan drugs, which are further described below, are not subject to application user fees unless the potential product is safe and effective inapplication includes an indication other than the patient population that will be treated. orphan indication.
In addition, under the Pediatric Research Equity Act or (PREA) an NDA or supplement to an NDA for a new active ingredient, indication, dosage form, dosage regimen, or route of administration must contain data that are adequate to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective, unlesseffective. A sponsor who is planning to submit a waiver applies. If regulatory approval of a potential product is granted, this approval will be limited to those disease states and conditionsmarketing application for which the product is approved. Marketing or promoting a drug forproduct that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration must submit an unapproved indication is generally prohibited. Furthermore, FDA approvalinitial Pediatric Study Plan (PSP) within 60 days of an End-of-Phase 2 meeting or as may entail ongoing requirements for risk management, including post-marketing, or Phase 4, studies. Even if approval is obtained, a marketed product, its manufacturerbe agreed between the sponsor and its manufacturing facilities are subject to payment of significant annual fees and continuing review and periodic inspections by the FDA. DiscoveryThe initial PSP must include an outline of previously unknown problemsthe pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with a product, manufacturer or facility may result in restrictionssupporting information. The FDA and the sponsor must reach agreement on the productPSP. A sponsor can submit amendments to an agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from preclinical studies, early phase clinical studies or manufacturer, including labeling changes, warning letters, costly recallsother clinical development programs. The FDA may, on its own initiative or withdrawalat the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the market.
Any drug is likely to produce some toxicities or undesirable side effects in animals and in humans when administered at sufficiently high doses and/or for sufficiently long periods of time. Unacceptable toxicities or side effectspediatric data requirements. The FDA also may occur at any dose level at any time in the course of studies in animals designed to identify unacceptable effectsrequire submission of a product candidate, known as toxicological studies, or during clinical trials of our potential products. The appearance of any unacceptable toxicity or side effect could cause us or regulatory authorities to interrupt, limit, delay or abort the development of any of our product candidates. Further, such unacceptable toxicity or side effects could ultimately prevent a potential product’s approval by the FDA or foreign regulatory authorities for any or all targeted indications or limit any labeling claimsrisk evaluation and market acceptance, even if the product is approved.
In addition, as a condition of approval, the FDA may require an applicant to develop a Risk Evaluation and Mitigation Strategy, or mitigation strategy (REMS. A REMS uses risk minimization strategies beyond the professional labeling) to ensure that the benefits of the productdrug outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the sizerisks of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the product is a new molecular entity.drug. The REMS canplan could include medication guides, physician communication plans, for healthcare professionals, and elements to assure safe use, such as restricted distribution methods, patient registries, or other risk minimization tools. An assessment of the REMS must also be conducted at set intervals. Following product approval, a REMS may also be required by the FDA if new safety information is discovered and the FDA determines that a REMS is necessary to ensure that the benefits of the drug continue to outweigh the risks of the drug.
Once the FDA receives an application, it will determine within 60 days whether the NDA as filed is sufficiently complete to permit a substantive review (with this decision often referred to as the NDA being “accepted for filing.”). If the FDA determines that the NDA is not sufficiently complete to permit a substantive review, the application must be resubmitted with additional information requested by the FDA. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in‑depth substantive review of the NDA.
The FDA has agreed to a set of performance goals and procedures under PDUFA to review 90% of all applications within ten months from the 60-day filing date for its initial review of a standard NDA for a New Molecular Entity (ETASUNME). ETASU may include, butFor non-NME standard applications, the FDA has set the goal of completing its review of 90% of all applications within ten months from the submission receipt date. Such deadlines are referred to as the PDUFA date. The PDUFA date is only a goal, thus, the FDA does not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring,always meet its PDUFA goal dates. The review process and the use of patient registries. PDUFA goal date may also be extended if the FDA requests, or the NDA sponsor otherwise provides, substantial additional information or clarification regarding the submission.
The FDA may refer an application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved, and applications for new molecular entities are generally discussed at advisory committee meetings unless the FDA determines that this type of consultation is not needed under the circumstances.
An advisory committee is typically a panel that includes clinicians and other experts, which review, evaluate, and make a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions and typically follows such recommendations.
The FDA reviews applications to determine, among other things, whether a product is safe and effective for its intended use and whether the manufacturing methods and controls are adequate to assure and preserve the product’s identity, strength, quality, safety, potency, and purity. Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is manufactured, referred to as a Pre‑Approval Inspection. The FDA will not approve an application unless it determines that the manufacturing processes and facilities, including contract manufacturers and subcontractors, are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA the FDA will inspect one or more clinical trial sites to assure compliance with GCPs.
The approval process is lengthy and difficult, and involves numerous FDA personnel assigned to review different aspects of the NDA, and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional preclinical, CMC, or other data and information. Uncertainties can be presented by reviewers’ ability to exercise judgment and discretion during the review process. Even if such data and information are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than an applicant interprets the same data.
After evaluating the NDA and all related information, including the advisory committee recommendation, if any, and inspection reports regarding the manufacturing facilities and clinical trial sites, the FDA may issue an approval letter, or, in some cases, a REMS beforeComplete Response Letter (CRL). If a CRL is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter; withdraw the application; or request an opportunity for a hearing. A CRL indicates that the review cycle of the application is complete and the application is not ready for approval in its current form and describes all of the specific deficiencies that the FDA identified in the NDA. A CRL generally contains a statement of specific conditions that must be met in order to secure final approval of the NDA and may require additional clinical or post-approvalpreclinical testing in order for the FDA to reconsider the application. The deficiencies identified may be minor, for example, requiring labeling changes; or major, for example, requiring additional clinical trials. The FDA has the goal of reviewing 90% of application and efficacy supplement resubmissions in either two or six months (from receipt) for a Class 1 or Class 2 resubmission, respectively. For non-efficacy supplements (i.e., labeling and manufacturing supplements), FDA’s goal is to review the supplement within the same length of time (from receipt) as the initial review cycle (excluding an extension caused by a major amendment of the initial supplement).
Even with the submission of additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. If and when the issues identified in a CRL have been addressed and resolved to the FDA’s satisfaction, the FDA may issue an approval letter. An approval letter authorizes commercial marketing of the drug for specific indications and with specific prescribing information which was reviewed in connection with the NDA.
Even if the FDA approves a product, it becomes aware of a serious risk associated withmay limit the approved indications for use of the product. The requirement forproduct, require that contraindications, warnings, or precautions be included in the product labeling, including a boxed warning, require that post‑approval studies, including Phase 4 clinical trials, be conducted to further assess a drug’s safety and efficacy after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms under a REMS which can materially affect the potential market and profitability of athe product. The FDA may also not approve label statements that are necessary for successful commercialization and marketing.
Any trade nameAfter approval, some types of changes to the approved product, such as adding new indications, manufacturing changes, and additional labeling claims, are subject to further testing requirements and FDA review and approval. The FDA may also withdraw the product approval if compliance with the pre‑ and post‑marketing regulatory standards are not maintained or if problems occur after the product reaches the marketplace. Further, should new safety information arise, additional testing, product labeling, or FDA notification may be required.
505(b)(2) Approval Process
Section 505(b)(2) of the FDCA, provides an alternate regulatory pathway to FDA approval for new or improved formulations or new uses of previously approved drug products. Specifically, Section 505(b)(2) was enacted as part of the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch‑Waxman Act amendments, and permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. The applicant may rely, in part, upon the FDA’s prior findings of safety and effectiveness for an approved product that we intendacts as the reference listed drug or on published scientific literature, in support of its application. The FDA may also require 505(b)(2) applicants to useperform additional studies or measurements to support the changes from the reference listed drug as well as bridging studies to the reference listed drug. The FDA may then approve the new product candidate for all or some of the labeled indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.
Orange Book Listing
Section 505 of the FDCA describes three types of marketing applications that may be submitted to the FDA to request marketing authorization for a potentialnew drug. A section 505(b)(1) NDA is an application that contains full reports of investigations of safety and efficacy. A section 505(b)(2) NDA is an application in which the applicant, in part, relies on investigations that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted. Section 505(j) establishes an abbreviated approval process for a generic version of approved drug products through the submission of an Abbreviated New Drug Application (ANDA). An ANDA is an application for marketing of a generic drug product that has the same active ingredients, dosage form, strength, route of administration, labeling, performance characteristics, and intended use, among other things, to a previously approved product. Limited changes must be pre‑approved by the FDA irrespectivevia a suitability petition. ANDAs are termed “abbreviated” because they are generally not required to include preclinical and clinical data to establish safety and efficacy. Instead, generic applicants must scientifically demonstrate that their product is bioequivalent to, or performs in the same manner as, the innovator drug through in vitro, in vivo, or other testing. The generic version must deliver the same amount of whether weactive ingredients into a subject’s bloodstream in the same amount of time as the innovator drug and, under state substitution laws, may be substituted at the pharmacy for the reference listed drug.
In seeking approval for a drug through an NDA, including a 505(b)(2) NDA, applicants are required to identify to the FDA patents that contain claims that are directed to the applicant’s product and/or method(s) of use. Upon approval of an NDA, each of the identified patents is then listed in Approved Drug Products with Therapeutic Equivalence Evaluations, also known as the Orange Book.
An applicant who files an ANDA seeking approval of a generic version of a drug listed in the Orange Book or a 505(b)(2) NDA referencing a drug listed in the Orange Book must make patent certifications to the FDA that (1) no patent information on the drug or method of use that is the subject of the application has been submitted to the FDA; (2) the patent has expired; (3) the date on which the patent has expired and approval will not be sought until after the patent expiration; or (4) in the applicant’s opinion and to the best of its knowledge, the patent is invalid, unenforceable, or will not be infringed upon by the manufacture, use, or sale of the drug product for which the application is submitted. The last certification is known as a paragraph IV certification. Generally, the ANDA or 505(b)(2) NDA approval cannot be made effective until all listed patents have securedexpired, except where the ANDA or 505(b)(2) NDA applicant challenges a formal trademark registrationlisted patent through a paragraph IV certification or if the applicant is not seeking approval of a patented method of use. If the applicant does not challenge the listed patents or does not indicate that it is not seeking approval of a patented method of use, the ANDA or 505(b)(2) NDA application approval will not be made effective until all of the listed patents claimed by the referenced product have expired.
If the competitor has provided a paragraph IV certification to the FDA, the competitor must also send notice of the paragraph IV certification to the holder of the NDA for the reference listed drug and the patent owner within 20 days after the application has been accepted for filing by the FDA. The NDA holder or patent owner may then initiate a patent infringement lawsuit in response to the notice of the paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a paragraph IV certification notice prevents the FDA from making the approval of the ANDA or 505(b)(2) application effective until the earlier of 30 months from the U.S. Patentdate of the lawsuit, expiration of the patent, settlement of the lawsuit, a decision in the infringement case that is favorable to the applicant or such shorter or longer period as may be ordered by a court. This prohibition is generally referred to as the automatic 30‑month stay.
In practice, where an ANDA or 505(b)(2) NDA applicant files a paragraph IV certification, the NDA holder or patent owners often take action to trigger the automatic 30‑month stay, resulting in patent litigation that may take many months or years to resolve. Thus, approval of an ANDA or 505(b)(2) application could be delayed for a significant period of time depending on the patent certification the applicant makes and Trademark Office. the reference drug sponsor’s decision to initiate patent litigation.
Regulatory Exclusivity
Regulatory exclusivity provisions under the FDCA can also delay the submission or the approval effective date of certain applications. A regulatory exclusivity can provide the holder of an approved NDA protection from new competition in the marketplace for the innovation represented by its approved drug. Five years of exclusivity are available for NCEs. An NCE is a drug that contains no active moiety that has been approved by the FDA in any other NDA. An active moiety is the molecule or ion excluding those appended portions of the molecule that cause the drug to be an ester, salt, including a salt with hydrogen or coordination bonds, or other noncovalent derivatives, such as a complex, chelate, or clathrate, of the molecule, responsible for the therapeutic activity of the drug substance. During the NCE exclusivity period, the FDA may not accept for review an ANDA or a 505(b)(2) NDA application by another company that contains the previously approved active moiety. An ANDA or 505(b)(2) application, however, may be submitted one year before NCE exclusivity expires if a paragraph IV certification is filed.
Three years of exclusivity are available to the holder of an NDA, including a 505(b)(2) NDA, for a particular condition of approval, or change to a marketed product, such as a new formulation or indication for a drug product that contains an active moiety that has been previously approved, when the application contains reports of new clinical investigations, other than bioavailability studies, conducted by the sponsor that were essential to approval of the application. Changes in an approved drug product that affect its active ingredient(s), strength, dosage form, route of administration or conditions of use may be granted this exclusivity if a new clinical investigation (NCI) was essential to approval of the application containing those changes. During the NCI exclusivity period, FDA may not approve an ANDA or 505(b)(2) NDA by another company for the condition of the new drug’s approval. NCE and NCI exclusivities will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well‑controlled clinical trials necessary to demonstrate safety and efficacy.
Pediatric exclusivity is a regulatory exclusivity in the United States that provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory and statutory exclusivity, including the non‑patent exclusivity periods described above as well as applicable patent terms. This six‑month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly respond to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, the additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the required time frames, whatever statutory or regulatory periods of exclusivity or Orange Book listed patent protection cover the drug are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot make an ANDA or 505(b)(2) application approval effective as a result of regulatory exclusivity or listed patents. Moreover, pediatric exclusivity attaches to all formulations, dosage forms, and indications for products with existing marketing exclusivity or patent life that contain the same active moiety as that which was studied.
The Orphan Drug Act provides incentives for the development of drugs intended to treat rare diseases or conditions, which generally are diseases or conditions affecting less than 200,000 individuals annually in the United States, or affecting more than 200,000 in the United States and for which there is no reasonable expectation that the cost of developing and making the drug available in the United States will be recovered from United States sales. If a product receives FDA approval for the indication for which it has orphan designation, the product is generally entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan exclusivity. Orphan drug designation also entitles a party to financial incentives such as opportunities for grant funding towards clinical study costs, tax advantages, and application user‑fee waivers.
Special FDA Expedited Review and Approval Programs
The FDA conducts a rigoroushas various programs, including Fast Track designation, Priority Review and Breakthrough designation, that are intended to expedite or simplify the process for the development and FDA review of proposed product names,certain drug products that are intended for the treatment of serious or life-threatening diseases or conditions, and may rejectdemonstrate the potential to address unmet medical needs or present a significant improvement over existing therapy. The purpose of these programs is to provide important new drugs to patients earlier than under standard FDA review procedures.
To be eligible for a Fast Track designation, the FDA must determine, based on the request of a sponsor, that a product name if it believes that the name inappropriately implies medical claimsis intended to treat a serious or if it poseslife-threatening disease or condition and demonstrates the potential for confusion with other product names.to address an unmet medical need. The FDA will not approve a trade name until the NDA fordetermine that a product will fill an unmet medical need if the product will provide a therapy where none exists or provide a therapy that may be potentially superior to existing therapy based on efficacy, safety, or public health factors. If Fast Track designation is approved. Ifobtained, drug sponsors may be eligible for more frequent development meetings and correspondence with the FDA.
In addition, if an applicant obtains “rolling review,” the FDA determinesmay accept and initiate review of sections of an NDA before the application submission is complete, although it is not guaranteed that FDA will commence review before the application submission is complete, and the timing of the review depends on a number of factors including availability of review personnel at the FDA, and competing agency priorities among other things. The applicant must provide, and the FDA must agree to, a schedule for the remaining information after the initial section of the NDA.
In some cases, a Fast Track product may be eligible for Accelerated Approval or Priority Review.
The FDA may give a Priority Review designation to drugs that are intended to treat serious conditions and, if approved, would provide significant improvements in the safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions. A Priority Review designation means that the trade namesgoal for the FDA is to review an application within six months of receipt, rather than the standard review of ten months under current PDUFA guidelines, of the 60‑day filing date for NMEs and within six months of the submission receipt date for non‑NMEs. Products that are eligible for Fast Track designation may also be considered appropriate to receive a Priority Review.
Moreover, under the provisions of the Food and Drug Administration Safety and Innovation Act (FDASIA) enacted in 2012, a sponsor can request designation of a product candidate as a “breakthrough therapy.” A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious or life‑threatening disease or condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Drugs designated as breakthrough therapies are eligible for the Fast Track designation features as described above, intensive guidance on an efficient drug development program beginning as early as Phase 1 trials, and a commitment from the FDA to involve senior managers and experienced review staff in a proactive collaborative, cross‑disciplinary review.
Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
Post‑approval Requirements
Any product manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, as well as other federal and state agencies, including, among other things, requirements related to manufacturing, recordkeeping, and reporting, including adverse experience reporting, drug shortage reporting, and other periodic reporting; drug supply chain security surveillance and tracking requirements; product sampling and distribution; advertising; marketing; promotion; certain electronic records and signatures; licensure in certain states for the manufacturing and distribution of drug products; and post-approval obligations imposed as a condition of approval, such as Phase 4 clinical trials, REMS, and surveillance to assess safety and effectiveness after commercialization.
After approval, most changes to the approved product, such as adding new indications or other labeling claims are subject to prior FDA review and approval. There are also continuing annual prescription drug program user fee requirements for any approved products. In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies and list their drug products, and are subject to periodic announced and unannounced inspections by the FDA and these state agencies for compliance with cGMP and other requirements, which impose certain procedural and documentation requirements upon the company and third‑party manufacturers.
Changes to the manufacturing process are strictly regulated and often require prior FDA approval or notification before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and product specifications and impose reporting and documentation requirements upon the sponsor and any third‑party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
The FDA also strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. A company can make only those claims relating to safety and efficacy, purity, and potency that are approved prior toby the approval of our potentialFDA. Physicians, in their independent professional medical judgment, may prescribe legally available products may present a risk of confusion with our proposed trade name,for unapproved indications that are not described in the FDA may elect to not approve our proposed trade name. If our trade name is rejected, we will loseproduct’s labeling and that differ from those tested and approved by the benefit of any brand equity that may already have been developed for this trade name, as well as the benefit of our existing trademark applications for this trade name.
We and our collaborators and contract manufacturers alsoFDA. Pharmaceutical companies, however, are required to complypromote their drug products only for the approved indications and in accordance with the applicableprovisions of the approved label. The FDA cGMP regulations. cGMPand other agencies actively enforce the laws and regulations include requirements relatingprohibiting the promotion of off‑label uses, and a company that is found to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities arehave improperly promoted off‑label uses may be subject to inspection by the FDA. These facilities must be approved before we can use them in commercial manufacturing of our potential products and must maintain ongoing compliance for commercial product manufacture. The FDA may conclude that we or our collaborators or contract manufacturers are not in compliance with applicable cGMP requirements and other FDA regulatory requirements, which may result in delay or failure to approve applications, warning letters, product recalls and/or imposition of fines or penalties.
If a product is approved, we must also comply with post-marketing requirements,significant liability, including, but not limited to, criminal and civil penalties under the FDCA and False Claims Act, exclusion from participation in federal healthcare programs, mandatory compliance with advertisingprograms under corporate integrity agreements, debarment, and promotion laws enforced by variousrefusal of government agencies, includingcontracts. Recent court decisions have impacted the FDA’s Officeenforcement activity regarding off-label promotion in light of PrescriptionFirst Amendment considerations; however, there are still significant risks in this area in part due to the potential False Claims Act exposure. Further, the FDA has not materially changed its position on off-label promotion following legal setbacks on First Amendment grounds and the Department of Justice has consistently asserted in FCA briefings that “speech that serves as a conduit for violations of the law is not constitutionally protected.”
The Drug Promotion, through suchSupply Chain Security Act (DSCSA) imposes obligations on manufacturers of prescription biopharmaceutical products for commercial distribution, regulating the distribution of the products at the federal level, and sets certain standards for federal or state registration and compliance of entities in the supply chain (manufacturers and repackagers, wholesale distributors, third-party logistics providers, and dispensers). The DSCSA preempts certain previously enacted state pedigree laws asand the pedigree requirements of the Prescription Drug Marketing Act (PDMA). Trading partners within the drug supply chain must now ensure certain product tracing requirements are met that they are doing business with other authorized trading partners; and they are required to exchange transaction information, transaction history, and transaction statements. Further, the DSCSA limits the distribution of prescription pharmaceutical products and imposes requirements to ensure overall accountability and security in the drug supply chain. Product identifier information (an aspect of the product tracing scheme) is also now required. The DSCSA requirements, development of standards, and the system for product tracing have been and will continue to be phased in over a period of years through 2023, and subject companies will need to continue their implementation efforts. Many states still have in place licensure and other requirements for manufacturers and distributors of drug products. The distribution of product samples continues to be regulated under the PDMA, and some states also impose regulations on drug sample distribution.
Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in significant regulatory actions. Such actions may include refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, imposition of a clinical hold or termination of clinical trials, warning letters, untitled letters, modification of promotional materials or labeling, provision of corrective information, imposition of post‑market requirements including the need for additional testing, imposition of distribution or other restrictions under a REMS, product recalls, product seizures or detentions, refusal to allow imports or exports, total or partial suspension of production or distribution, FDA debarment, injunctions, fines, consent decrees, corporate integrity agreements, debarment from receiving government contracts and new orders under existing contracts, exclusion from participation in federal and state anti-fraudhealthcare programs, restitution, disgorgement, or civil or criminal penalties including fines and abuseimprisonment, and may result in adverse publicity, among other adverse consequences.
Fraud and Abuse, and Transparency Laws and Regulations
Following product approval, our business activities, including but not limited to research, sales, promotion, marketing, distribution, medical education, sponsorships, relationships with prescribers and other referral sources, and other activities will be subject to regulation by numerous federal and state regulatory and law enforcement authorities in the United States in addition to the FDA, including potentially the Department of Justice, the Department of Health and Human Services and its various divisions, including the Centers for Medicare & Medicaid Services (CMS), the Office of Inspector General (OIG), and the Health Resources and Services Administration (HRSA), the Department of Veterans Affairs, the Department of Defense, and certain state and local governments. Our business activities must comply with numerous healthcare laws, including anti-kickbackbut not limited to, anti‑kickback and false claims laws healthcare informationand regulations as well as data privacy and security laws post-marketing safety surveillance, and disclosureregulations, which are described below.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity, from knowingly and willfully offering, paying, soliciting, or receiving any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for purchasing, leasing, ordering, or arranging for or recommending the purchase, lease, furnishing, or order of any item or service reimbursable under Medicare, Medicaid, or other federal healthcare programs, in whole or in part. The term “remuneration” has been interpreted broadly to include anything of value. The Anti-Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers, formulary managers, and beneficiaries on the other. There are certain statutory exceptions and regulatory safe harbors protecting some common activities from prosecution. The exceptions and safe harbors are drawn narrowly, and practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases, or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor, however, does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case by case basis based on a cumulative review of all of its facts and circumstances to determine whether one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business. The Patient Protection and Affordable Care Act (ACA) of 2010, as amended, modified the intent requirement under the Anti-Kickback Statute to a stricter standard, such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. The ACA further amended the federal civil False Claims Act to provide that a claim that includes items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim under the False Claims Act. Therefore, either the federal government or private citizens under the False Claims Act’s qui tam provisions (discussed further below) can bring an action under the False Claims Act for violations of the Anti-Kickback Statute, potentially exposing an alleged violator to substantial monetary damages and penalties. Certain Anti-Kickback safe harbor provisions that protect the rebates paid by drug manufacturers to third parties may also be repealed or materially revised, as contemplated in a recent regulatory proposal.
The government has asserted False Claims Act liability against manufacturers by alleging that improper arrangements with ordering physicians caused them or another provider to file false claims in violation of the False Claims Act or that manufacturers’ support of patient assistance programs improperly induced beneficiaries to choose their products in violation of the Anti-Kickback Statute. Sales, marketing and business arrangements in the healthcare industry are also subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, patient assistance programs, and other business arrangements. Medicare Advantage and Medicaid managed care plan regulations prohibit certain forms of marketing to enrollees that are designed to discriminate against beneficiaries on the basis of their health conditions or history. These regulations may require regulatory review of marketing materials, and coordination with health plan or governmental regulators. Additionally, the federal government has pursued electronic health record (EHR) vendors and pharmaceutical manufacturers for remunerative relationships involving the EHR platform’s recommendation of particular drugs and “prompting” technology to increase prescribing of particular drugs.
The ACA further created new federal requirements for reporting under the Physician Payments Sunshine Act (the Sunshine Act) by applicable manufacturers of covered drugs, payments orand other transfers of value to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members. 2018 legislation extended the Sunshine Act to cover payments and transfers of value to physician assistants, nurse practitioners, and other mid-level practitioners (with reporting requirements going into effect in 2022 for payments and transfers of value made in 2021).
The federal civil False Claims Act (FCA) prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment to, or approval by, the federal government, knowingly making, using, or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or avoiding, decreasing, or concealing an obligation to pay money to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The civil FCA has been used to assert liability on the basis of kickbacks and other improper referrals, improperly reported government pricing metrics such as Best Price or Average Manufacturer Price, or submission of inaccurate information required by government contracts, improper use of Medicare provider or supplier numbers when detailing a provider of services, improper promotion of off-label uses not expressly approved by the FDA in a drug’s label, and allegations as to misrepresentations with respect to the products supplied or services rendered. Several pharmaceutical and other healthcare professionalscompanies have further been sued under these laws for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product. Intent to deceive is not required to establish liability under the civil FCA; however, a November 2017 Department of Justice memorandum now prohibits the use of subregulatory guidance documents to impose new or more stringent requirements on entities outside the Executive Branch of the federal government. Because the Department has experienced recent administration changes, it is unclear whether the new Attorney General will continue this policy. Civil FCA actions may be brought by the government or may be brought by private individuals on behalf of the government, called “qui tam” actions. If the government decides to intervene in a qui tam action and entities. In addition, we areprevails in the lawsuit, the individual will share in the proceeds from any fines or settlement funds. If the government declines to intervene, the individual may pursue the case alone, subject to other federalgovernmental review and state regulation including,certain approvals. Qui tam complaints are filed under seal, and the cases may progress for a number of years before a complaint is unsealed and a manufacturer becomes aware of its existence. Since 2004, these FCA lawsuits against pharmaceutical companies have increased significantly in volume and breadth, leading to several substantial civil and criminal settlements, as much as $3.0 billion, regarding certain sales practices and promoting off-label drug uses. For example, civil FCA liability may be imposed for Medicare or Medicaid overpayments arising out of claims that were filed by providers but alleged to have been caused by manufacturers’ incentives, impermissible discounts, or overpayments caused by understated rebate amounts. FCA enforcement may also arise from claims filed as the implementationresult of corporate compliance programs.manufacturing marketing materials that contained inaccurate statements or provided certain reimbursement guidance.
If we electThe government may further prosecute conduct constituting a false claim under the criminal FCA. The criminal FCA prohibits the making or presenting of a claim to distribute our products commercially, we must comply with state laws that require the registrationgovernment knowing such claim to be false, fictitious, or fraudulent and, unlike the civil FCA, requires proof of manufacturers and wholesale distributors of pharmaceutical products inintent to submit a state, including, in certain states, manufacturers and distributors who ship products into the state even if such manufacturers or distributors have no place of business within the state. Some states also impose requirements on manufacturers and distributors to establish the pedigree of product in the chain of distribution, including some states that require manufacturers and others to adopt new technology capable of tracking and tracing product as it moves through the distribution chain.false claim.
Similarly, the criminal healthcare fraud statutes impose criminal liability for, among other things, knowingly and willfully attempting or executing a scheme to defraud any healthcare benefit program, including private third-party payors, obtaining money or property of Contentsa benefit program by false or fraudulent means, or falsifying, concealing, or covering up a material fact or submitting a materially false statement in connection with the delivery of, or payment from healthcare benefits, items, or services. These statutes are not limited to items and services reimbursed by a governmental health care program and have been used to prosecute commercial insurance fraud as well.
The civil monetary penalties statute is another potential statute under which biopharmaceutical companies may be subject to enforcement. Among other things, the civil monetary penalties statue imposes fines against any person who is determined to have presented, or caused to be presented, claims to a federal healthcare program that the person knows, or should know, is for an item or service that was not provided as claimed or is false or fraudulent.
The exclusion statute requires the exclusion of entities and individuals who have been convicted of federal- program related crimes or health care felony fraud or controlled substance charges. The statute also permits the exclusion of those that have been convicted of any form of fraud, the anti-kickback statute, for obstructing an investigation or audit, misdemeanor controlled substance charges, those whose health care license has been revoked or suspended, and those who have filed claims for excessive charges or unnecessary services. If a company were to be excluded, its products would be ineligible for reimbursement from any federal programs, including Medicare and Medicaid, and no other entity participating in those programs would be permitted to enter into contracts with the company. Further, employment or contracting with an individual or entity that has been excluded from participation in federal healthcare programs could serve as a basis to invalidate claims for items or services submitted by that entity and to exclude that entity from participation in such programs as well. In order to preserve access to beneficial drugs, the government may elect to exclude officers and key employees of manufacturers, rather than excluding the organization. Such enforcement actions would prohibit the Company from engaging those individuals, which could adversely affect operations, and could result in significant reputational harm.
Payment or reimbursement of prescription drugs by Medicaid or Medicare requires manufacturers of the drugs to submit pricing information to CMS. The Medicaid Drug Rebate statute requires manufacturers to calculate and report price points, which are used to determine Medicaid rebate payments shared between the states and the federal government and Medicaid payment rates for certain drugs. For drugs paid under Medicare Part B, manufacturers must also calculate and report their Average Sales Price, which is used to determine the Medicare Part B payment rate for the drug. Drugs that are approved under a Biologic License Application (BLA) or an NDA, including 505(b)(2) drugs, are subject to an additional inflation penalty which can substantially increase rebate payments. In addition, for BLA and NDA drugs, the Veterans Health Care Act (VHCA) requires manufacturers to calculate and report to the VA a different price called the Non‑Federal Average Manufacturing Price, which is used to determine the maximum price that can be charged to certain federal agencies, referred to as the Federal Ceiling Price, or FCP. Like the Medicaid rebate amount, the FCP includes an inflation penalty. A Department of Defense regulation requires manufacturers to provide this discount through prescription rebates on drugs dispensed by retail pharmacies when paid by the TRICARE Program. All of these price reporting requirements create a risk of submitting false information to the government resulting in potential FCA liability.
The VHCA also requires manufacturers of covered drugs participating in the Medicaid program to enter into Federal Supply Schedule contracts with the VA through which their covered drugs must be sold to certain federal agencies at FCP and to report pricing information. This necessitates compliance with applicable federal procurement laws and regulations and subjects us to contractual remedies as well as administrative, civil, and criminal sanctions. In addition, the VHCA requires manufacturers participating in Medicaid to agree to provide different mandatory discounts to certain Public Health Service grantees and other safety net hospitals and clinics under the 340B Drug Pricing Program and report the ceiling price to the HRSA within Department of Health and Human Services. Manufacturers can be audited by the HRSA and be subjected to civil monetary penalties for knowingly and intentionally overcharging covered entities for drugs.
The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) also created federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud or to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, a healthcare benefit program, regardless of whether the payor is public or private, knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense, and knowingly and willfully falsifying, concealing, or covering up by any trick or device a material fact or making any materially false statements in connection with the delivery of, or payment for, healthcare benefits, items, or services relating to healthcare matters. The ACA, as amended, modified the intent requirement under the certain portions of these federal criminal statutes such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it.
Further, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business. HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH) and its respective implementing regulations, extended certain requirements relating to the privacy, security, and transmission of individually identifiable health information directly to business associates of HIPAA-covered entities. A business associate is defined as a person or organization, other than a member of a covered entity’s workforce, that performs certain functions or activities that involve the use or disclosure of protected health information on behalf of, or provides services to, a covered entity. We are not a covered entity under HIPAA but in certain limited situations, we may be considered a business associate. HITECH also strengthened the civil and criminal penalties that may be imposed against covered entities, business associates, and individuals, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, other federal and state laws may govern the privacy and security of health and other information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
Outside ofEven for entities that are not deemed “covered entities” or “business associates” under HIPAA, according to the United States Federal Trade Commission (FTC) failing to take appropriate steps to keep consumers' personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act (FTCA) 15 USC § 45(a). The FTC expects a company's data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Medical data is considered sensitive data that merits stronger safeguards. The FTC's guidance for appropriately securing consumers' personal information is similar to what is required by the HIPAA Security Rule. The FTC’s authority under Section 5 is concurrent with HIPAA’s jurisdiction and with any action taken under state law.
In addition, other federal and state laws may govern the privacy and security of health and other information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. For example, California recently enacted legislation – the California Consumer Privacy Act (CCPA) was made effective January 1, 2020. The CCPA, among other things, created new data privacy obligations for covered companies and provided new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also created a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach. The California Attorney General will issue clarifying regulations. Although the law includes limited exceptions, including for certain information collected as part of clinical trials as specified in the law, it may regulate or impact our processing of personal information depending on the context, and it remains unclear what language the final Attorney General regulations will contain or how the statute and the regulations will be interpreted.
Many states have also adopted laws similar to each of the above federal laws, which may be broader in scope and apply to items or services reimbursed by any third‑party payor, including commercial insurers, and some have transparency laws that require reporting price increases and related information. Certain state laws also regulate manufacturers’ use of prescriber‑identifiable data. Certain states also require implementation of commercial compliance programs and compliance with the pharmaceutical industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government, or otherwise restrict payments or the provision of other items of value that may be made to healthcare providers and other potential referral sources; impose restrictions on marketing practices; or require drug manufacturers to track and report information related to payments, gifts, and other items of value to physicians and other healthcare providers. These laws may affect our future sales, marketing, and other promotional activities by imposing administrative and compliance burdens.
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available under such laws, it is possible that certain business activities could be subject to challenge under one or more of such laws. The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, especially in light of the lack of applicable precedent and regulations. Federal and state enforcement bodies have recently increased their scrutiny of interactions between pharmaceutical companies and providers and patients, which has led to a number of investigations, prosecutions, convictions and settlements in the healthcare industry. Ensuring that business arrangements with third parties comply with applicable healthcare laws, as well as responding to possible investigations by government authorities, can be time- and resource-consuming and can divert management’s attention from the business, even if investigators ultimately find that no violation has occurred.
If our operations are found to be in violation of any of the laws or regulations described above or any other laws that apply to us, we may be subject penalties or other enforcement actions, including criminal and significant civil monetary penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government healthcare programs, corporate integrity agreements, debarment from receiving government contracts or refusal of new orders under existing contracts, reputational harm, diminished profits and future earnings, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to marketoperate our business and our results of operations.
To the extent that any of our products are sold in a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricingforeign country, we may be subject to similar foreign laws and reimbursement vary widely from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Community (EC), centralized registration procedures are available to companies wishing to market a product in more than one EC member state. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, marketing authorization will be granted. This foreign regulatory development and approval process involves all of the risks associated with achieving FDA marketing approval in the U.S. as discussed above. In addition, foreign regulations, which may include, for instance, applicable post-marketingpost‑marketing requirements, including safety surveillance, anti-fraudanti‑fraud and abuse laws, and implementation of corporate compliance programs and reporting of payments or other transfers of value to healthcare professionals and entities.professionals.
Potential salesCoverage and Reimbursement Generally
The commercial success of AV-101 orour product candidates and our ability to commercialize any other futureapproved product candidate, if approved,candidates successfully will depend at least in part on the extent to which governmental payor programs at the federal and state levels, including Medicare and Medicaid, private health insurers, and other third‑party payors provide coverage for and establish adequate reimbursement levels for our product candidates. Government authorities, private health insurers, and other organizations generally decide which drugs they will pay for and establish reimbursement levels and potential access restrictions. Medicare is a federally funded program managed by the Centers for Medicare and Medicaid Services (CMS) through local contractors that administer coverage and reimbursement for certain healthcare items and services furnished to the elderly and disabled. Medicaid is an insurance program for certain categories of patients whose income and assets fall below state‑defined levels and who are otherwise uninsured that is both federally and state funded and managed by each state. The federal government sets general guidelines for Medicaid and each state creates specific regulations that govern its individual program, including supplemental rebate programs that prioritize coverage for drugs on the state Preferred Drug List. Similarly, government laws and regulations establish the parameters for coverage of prescription drugs by Tricare, the health care program for military personnel, retirees, and related beneficiaries. Many states have also created pharmacy assistance programs for individuals who do not qualify for federal programs. In the United States, private health insurers and other third‑party payors often provide reimbursement for products and services based on the level at which the government provides reimbursement through the Medicare or Medicaid programs for such products and services.
In the U.S. and other potentially significant markets for our product candidates, government authorities and third‑party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which often has resulted in average selling prices lower than they would otherwise be. For example, in the U.S., federal and state governments reimburse covered prescription drugs at varying rates generally below average wholesale price. Governmental and private payors may also establish certain access restrictions, such as prior approvals or evidence of failure on existing medications or therapies.
These restrictions and limitations influence the purchase of healthcare services and products. Third‑party payors are developing increasingly sophisticated methods of controlling healthcare costs. Third‑party payors may limit coverage to specific drug products on an approved list, or formulary, which might not include all of the FDA‑approved drug products for a particular indication. Third‑party payors also control costs by requiring prior authorization or imposing other dispensing restrictions before covering certain products and by broadening therapeutic classes to increase competition. Third‑party payors are increasingly challenging the price and examining the medical necessity and cost‑effectiveness of medical products and services, in addition to their safety and efficacy. Absent clinical differentiators, third‑party payors may treat products as therapeutically equivalent and base formulary decisions on net cost. To lower the prescription cost, manufacturers frequently rebate a portion of the prescription price to the third‑party payors.
Federal programs also impose price controls through mandatory ceiling prices on purchases by federal agencies and federally funded hospitals and clinics and mandatory rebates on retail pharmacy prescriptions paid by Medicaid and Tricare. These restrictions and limitations influence the purchase of healthcare services and products. Legislative proposals to reform healthcare or reduce costs under government programs may result in lower reimbursement for our product candidates or exclusion of our product candidates from coverage. In addition, government programs like Medicaid include substantial penalties for increasing commercial prices over the rate of inflation which can affect realization and return on investment.
Private payors often rely on the lead of the governmental payors in rendering coverage and reimbursement determinations. Therefore, achieving favorable CMS coverage and reimbursement is usually a significant gating issue for successful introduction of a new product. In addition, many government programs as a condition of participation mandate fixed discounts or rebates from manufacturers regardless of formulary position or utilization, and then rely on competition in the market to attain further price reductions, which can greatly reduce realization on the sale.
Further, the increased emphasis on managed healthcare in the U.S. and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement, and utilization, which may adversely affect our future product sales and results of operations. These pressures can arise from rules and practices of managed care groups and health technology assessment bodies, competition within therapeutic classes, availability of generic equivalents, judicial decisions and governmental laws and regulations related to Medicare, Medicaid, and healthcare reform, pharmaceutical coverage and reimbursement policies, and pricing in general. Patients who are prescribed treatments for their conditions and providers performing the prescribed services generally rely on third‑party payors to reimburse all or part of the associated healthcare costs. Sales of our product candidates will therefore depend substantially, both domestically and abroad, on the extent to which the costs of our products will be coveredpaid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, such as Medicare and Medicaid, private health insurers, and other third‑party payors.
As a result of the above, we may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost‑effectiveness of our products, in addition to the costs required to obtain the FDA and other comparable foreign regulatory authority approvals. Our product candidates may not be considered medically necessary or cost‑effective, or the rebate percentages required to secure coverage may not yield an adequate margin over cost.
There is often pressure to renegotiate pricing and reimbursement levels, including, in particular, in connection with changes to Medicare. Third-party payors continue to demand discounted fee structures, and the trend toward consolidation among third-party payors such as government health care programs, commercial insurance and managed healthcare organizations. Thesetends to increase their bargaining power over price structures. If third-party payors reduce their rates for our products, then our revenue and profitability may decline and our operating margins will be reduced. Because some third-party payors rely on all or portions of Medicare payment systems to determine payment rates, changes to government healthcare programs that reduce payments under these programs may negatively impact payments from third-party payors. Our inability to maintain suitable financial arrangements with third-party payors could have a material adverse impact on our business. Additionally, the reimbursement process is complex and can involve lengthy delays. Third party payors may disallow, in whole or in part, providers’ requests for reimbursement based on determinations that certain amounts are increasingly limitingnot reimbursable under plan coverage, and/that the drugs provided were not medically necessary, or reducing reimbursements for medicalthat additional supporting documentation is necessary. Retroactive adjustments may change amounts realized from third party payors. Delays and uncertainties in the reimbursement process may adversely affect market acceptance and utilization of our products, resulting in reduced revenues. The unavailability or inadequacy of third-party coverage and reimbursement could negatively affect the market acceptance of our products and services. Athe future revenues we may expect to receive from those products. In addition, we are unable to predict what additional legislation or regulation relating to the healthcare industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on our business. Many hospitals implement a controlled and defined process for developing and approving formularies. Any marketing efforts that are determined to have violated such policies could result in the denial or removal of our products from that hospital’s formulary.
Moreover, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determinationAdequate third‑party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in drug development. Legislative proposals to reform healthcare or reduce costs under government insurance programs may result in lower reimbursement for our products and product candidates or exclusion of our products and product candidates from coverage. The cost containment measures that healthcare payors and providers are instituting and any healthcare reform could significantly reduce our revenues from the sale of any approved product candidates. We cannot provide any assurances that we will be able to obtain and maintain third‑party coverage or adequate reimbursement for our product candidates in whole or in part.
Pharmacy benefit managers (PBM) rebates and pricing transparency are key areas of legislative and regulatory focus and there may be changes in the regulatory landscape that could have a significant impact on the pharmaceutical supply chain and drug pricing more generally, which could affect our business operations and prospects in unknown and material ways.
Healthcare Reform Measures
The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals designed to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality, and expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.
For example, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a prescription drug benefit program for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that provide coverage of outpatient prescription drugs. Part D plans include both standalone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, which do not utilize formularies to restrict coverage, Part D coverage varies by plan. With some exceptions, Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug product does not assure that other payors will also provideplan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for any products for which we receive marketing approval. However, Part D plans use competition for coverage to leverage manufacturer rebates. Further, the law requires manufacturers to absorb a significant percentage of the prescription price paid for NDA drugs, including 504(b)(2) drugs, during a beneficiary’s coverage gap. The Bipartisan Budget Act of 2018 permanently increased manufacturer liability for the prescription price in the coverage gap from 50% to 70% beginning in 2019, while simultaneously accelerating closure of the gap. These cost reduction initiatives and other provisions of the legislation, as well as any negotiated price discounts for our future products covered by a Part D prescription drug product. In addition,plan, may decrease the U.S. government, state legislaturescoverage and foreign governmentsreimbursement rate that we receive, lower the net price realized on our sales to pharmacies, or both. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from Medicare Part D may result in a similar reduction in payments from non‑governmental payors.
The ACA established the Patient-Centered Outcome Research Institute to organize and coordinate federally funded research to compare the effectiveness of different treatments for the same illness. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have continued implementing cost-containment programs, including price controls, restrictions on reimbursementthe sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third‑party payors do not consider our product candidates to be cost‑effective compared to other available therapies, they may not cover our product candidates, once approved, as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
The ACA made other changes intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for substitutionhealthcare and health insurance industries, impose new taxes and fees on the health care industry, and impose additional health policy reforms. The law expanded the eligibility criteria for Medicaid programs, thereby potentially increasing both the volume of sales and manufacturers’ Medicaid rebate liability. The law also expanded the entities eligible for discounts under the 340B Drug Discount Program, which mandates discounts to certain hospitals, community centers, and other qualifying providers, although, with the exception of children’s hospitals, these newly eligible entities are not eligible to receive discounted 340B pricing on orphan drugs and the Health Resources and Services Administration has narrowed its interpretation of which beneficiaries may fill prescriptions through 340B inventories. The law additionally extended manufacturer’s Medicaid rebate liability to covered drugs dispensed to patients enrolled in Medicaid managed care organizations, increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate program, and created an alternative rebate formula for certain new formulations of certain existing products, which is intended to increase the amount of rebates due on those drugs. The revisions to the Medicaid rebate formula can have the further effect of increasing the required 340B discounts. Finally, the ACA imposes a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted through the ACA and otherwise, including the reporting of drug sample distribution, which may require us to modify our business practices with healthcare practitioners. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the success of our product candidates.
The ACA also imposed an affirmative obligation to report and repay any overpayments, including those payments that resulted from violations of the Anti-Kickback Statute, false claims act, or civil monetary penalties statute, within sixty (60) days after such overpayment has been identified. Corresponding case law imposes an obligation on entities to exercise reasonable diligence in identifying such overpayments. The failure to timely report and repay is, itself, considered to constitute a violation of the False Claims Act.
The cost of pharmaceuticals continues to generate substantial governmental and third-party payor interest, and pharmaceutical pricing and marketing currently received a great deal of Congressional and administrative attention. There have been numerous initiatives on the federal and state levels in the United States for comprehensive reforms affecting the payment for, the availability of, and reimbursement for, healthcare services. In particular, there have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States. Congressional inquiries and proposed and enacted federal and state legislation have also been released and are designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drugs. Recent federal budget proposals have included measures to permit Medicare Part D plans to negotiate the price of certain drugs under Medicare Part B, to allow some states to negotiate drug prices under Medicaid, and to eliminate cost sharing for generic products. Adoption ofdrugs for low-income patients. Current and future U.S. legislative healthcare reforms may result in price controls and cost-containment measures,other restrictions for any approved products, if covered, and adoptioncould seriously harm our business. Drug pricing is and will remain a key bipartisan issue in the coming year. Drug pricing reform policies may be pursued in the future and may be more aggressive, regardless of more restrictive policies in jurisdictions with existingwhich party controls the White House. Given that drug pricing controls is a key legislative and measures,administration priority, it is likely that additional pricing controls will be enacted and could further limitharm our future revenuesbusiness, financial condition and results of operations. DecreasesAt the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in third-party reimbursementsome cases, designed to encourage importation from other countries and bulk purchasing. Some states, such as California, have enacted transparency laws that require manufacturers to report drug price increases and related information. The boom in state laws targeting drug pricing is unprecedented and the requirements are not uniform from state to state, creating additional compliance and commercialization challenges for manufacturers. We further expect that the pharmaceutical industry will experience pricing pressures due to the trend toward managed healthcare, the increasing influence of managed care organizations, judicial interpretation of health care reform efforts, and additional legislative and regulatory proposals resulting in ongoing, relatively rapid changes to applicable laws and regulations. Our results of operations could be adversely affected by current and future healthcare reforms.
Government and private payors also increasingly require pre‑approval of coverage for new or a decisioninnovative devices or drug therapies or condition coverage on unsuccessful alternative treatment before they will reimburse healthcare providers that use such therapies. For some specialty drugs, payors are conditioning payment on successful treatment measured by a third-party payor to not cover AV-101, if approved,objective metrics. While we cannot predict whether any proposed cost‑containment measures will be adopted or anyotherwise implemented in the future, approved productsthe announcement or adoption of these proposals could reduce physician usage of our products, and have a material adverse effect on our sales,ability to obtain adequate prices for our product candidates and operate profitably.
Congress and the former Trump Administration, from 2017 – 2020, engaged in various efforts to repeal or materially modify various aspects of ACA. The results and effects of such ongoing efforts were varied after facing judicial and Congressional challenges, but could affect our business operations and financial condition.
In the United States, the Medicare Part D program provides a voluntary outpatient drug benefit to Medicare beneficiaries for certain products. We do not know whether AV-101, if approved, or anyprospects in unknown ways, and it is unclear how ACA and other future product candidatelaws ultimately will be eligible for coverage under Medicare Part D, but individual Medicare Part D plans offer coverage subject to various factors such as those described above. In addition, while Medicare Part D plans have historically included “all or substantially all” drugsimplemented. For example, in the following designated classescase of “clinical concern” on their formularies: anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals,Texas v. Azar, a federal district court in Texas struck down the ACA in its entirety, finding that the Tax Cuts and immunosuppressants,Jobs Act of 2017 rendered the Centers for Medicareindividual mandate unconstitutional. The December 15, 2019 opinion concluded that since the individual mandate is “essential” to the ACA, it could not be severed from the rest of the ACA and Medicaid Services (CMS) has intherefore, the past proposed, butentire ACA was unconstitutional. Despite its decision, however, the court did not adopted, changes to this policy. If this policy is changed inissue an injunction and therefore, immediate compliance was not required. Following appeal of the future and if CMS no longer considersFifth Circuit’s decision upholding the antidepressant class to beruling of “clinical concern”, Medicare Part D plans would have significantly more discretion to reduce the number of products covered in that class. Furthermore, private payors often follow Medicare coverage policies and payment limitations in setting their own coverage policies.
Healthcare Laws and Regulations
Sales of AV-101, if approved, or any other future product candidate will be subject to healthcare regulation and enforcement by the federal governmentdistrict court, on June 17, 2021, the Supreme Court reversed the decision of the Fifth Circuit and remanded the states and foreign governments in which we might conduct our business. The healthcare laws and regulations that may affect our ability to operate include the following:
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The federal Anti-Kickback Statute makes it illegal for any person or entity to knowingly and willfully, directly or indirectly, solicit, receive, offer, or pay any remuneration that is in exchange for or to induce the referral of business, including the purchase, order, lease of any good, facility, item or service for which payment may be made under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted to include anything of value.
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Federal false claims and false statement laws, including the federal civil False Claims Act, prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal programs, including Medicare and Medicaid, claims for items or services, including drugs, that are false or fraudulent.
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The U.S. federal Health Insurance Portability and Accountability Act of 1996 (HIPAA ) created additional federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors or making any false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services.
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH ) and their implementing regulations, impose obligations on certain types of individuals and entities regarding the electronic exchange of information in common healthcare transactions, as well as standards relatingcase back to the privacy and security of individually identifiable health information.
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The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid orlower court with instructions to dismiss the Children’s Health Insurance Program, with specific exceptions, to report annually to CMS information related to payments or other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.
Also, many statesDespite the Supreme Court’s recent ruling in California v. Texas (formerly Texas v. Azar), it remains unclear how future decisions from the Supreme Court and the various other courts across the country, if any, to repeal and replace the ACA will impact the ACA and our business. It is also unclear how regulations and sub-regulatory policy, which fluctuate continually, may affect interpretation and implementation of the ACA and its practical effects on our business.
In the future, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we will be able to charge for our product candidates, or the amounts of reimbursement available for our product candidates. If future legislation were to impose direct governmental price controls or access restrictions, it could have similar lawsa significant adverse impact on our business. Additionally, with the change in administration it is possible that President Biden may issue Executive Orders with the potential to change a number of prior executive branch actions on drug pricing. We continue to monitor the potential impact of proposals to lower prescription drug costs at the federal and regulations, suchstate level. Managed care organizations, as anti-kickback and false claims laws that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed underwell as Medicaid and other government agencies, continue to seek price discounts. Some states have implemented, and other states are considering, measures to reduce costs of the Medicaid program, and some states are considering implementing measures that would apply to broader segments of their populations that are not Medicaid-eligible. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of any unforeseen or unknown legislative, regulatory, payor or policy actions, which may include cost containment and healthcare reform measures. Such policy actions could have a material adverse impact on our profitability.
These and other healthcare reform initiatives may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our financial operations. We expect that additional state programs. Additionally,and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates or additional pricing pressures.
The Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act (FCPA) prohibits any U.S. individual or business from paying, offering, or authorizing payment or offering of anything of value, directly or indirectly, to any foreign official, political party, or candidate for the purpose of influencing any act or decision of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA has been applied to the marketing of drugs and the conduct of clinical trials outside the United States. The FCPA also obligates companies whose securities are listed in the United States to comply with accounting provisions requiring the company to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise and maintain an adequate system of internal accounting controls for international operations. Activities that violate the FCPA, even if they occur wholly outside the United States, can result in criminal and civil fines, imprisonment, disgorgement, oversight, and debarment from government contracts.
Foreign Regulation
To the extent we maychoose to develop or sell any products outside of the U.S., we will be subject to a variety of foreign regulatory requirements of other countries regarding safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales, and distribution of our products. For example, in the European Union (EU) we must obtain authorization of a clinical trial application in each member state laws that require pharmaceutical companiesin which we intend to comply withconduct a clinical trial prior to the federal government’s and/pending introduction of a EU portal for EU-wide approvals. Whether or pharmaceutical industry’s voluntary compliance guidelines, state laws that require drug manufacturersnot we obtain FDA approval for a product, we would need to report information related to payments and other transfersobtain the necessary approvals by the comparable regulatory authorities of value to physicians and other healthcare providersforeign countries before we can commence clinical trials or marketing expenditures, as well as stateof the product in those countries. The approval process varies from country to country and foreign lawscan involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from and be longer than that required to obtain FDA approval. The requirements governing the privacyconduct of clinical trials, product licensing, pricing, and security of health information, many of which differreimbursement vary greatly from each othercountry to country. Regulatory approval in significant ways and often areone country does not preempted by HIPAA.
Additionally, toensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may negatively impact the extent that our product is soldregulatory process in a foreign country, we may be subject to similar foreign laws as well to compliance with the U.S Foreign Corrupt Practices Act.
Stem Cell Technology - United States
With respect to our stem cell research and developmentothers. As in the U.S., post‑approval regulatory requirements, such as those regarding product manufacture, marketing, or distribution, would apply to any product that is approved outside the U.S. government has established requirements and procedures relating to the isolation and derivation of certain stem cell lines and the availability of federal funds for research and development programs involving those lines. All of the stem cell lines that we are using were either isolated under procedures that meet U.S. government requirements and are approved for funding from the U.S. government, or were isolated under procedures that meet U.S. government requirements.
All procedures we use to obtain clinical samples, and the procedures we use to isolate hESCs, are consistent with the informed consent and ethical guidelines promulgated by the U.S. National Academy of Science, the International Society of Stem Cell Research (ISSCR), or the NIH. These procedures and documentation have been reviewed by an external Stem Cell Research Oversight Committee, and all cell lines we use have been approved under one or more of these guidelines.
The U.S. government and its agencies on July 7, 2009 published guidelines for the ethical derivation of hESCs required for receiving federal funding for hESC research. Should we seek further NIH funding for our stem cell research and development, our request would involve the use of hESC lines that meet the NIH guidelines for NIH funding. In the U.S., the President’s Council on Bioethics monitors stem cell research, and may make recommendations from time to time that could place restrictions on the scope of research using human embryonic or fetal tissue. Although numerous states in the U.S. are considering, or have in place, legislation relating to stem cell research, it is not yet clear what affect, if any, state actions may have on our ability to commercialize stem cell technologies.
Subsidiaries and Inter-Corporate Relationships
VistaGen Therapeutics. Inc., a California corporation, dba VistaStem Therapeutics (VistaStem), is our wholly-owned subsidiary and has twoa wholly-owned subsidiaries: VistaStem Canada Inc., a corporation incorporated pursuant to the laws of the Province of Ontario, andsubsidiary, Artemis Neuroscience, Inc., a corporation incorporated pursuant to the laws of the State of Maryland. The operations of VistaStem, and each of its wholly owned subsidiariessubsidiary are managed by our senior management team based in South San Francisco, California.
Corporate History
VistaGen Therapeutics, Inc., a California corporation incorporated on May 26, 1998, dba VistaStem, is our wholly-owned subsidiary. Excaliber Enterprises, Ltd. (Excaliber), a publicly-held company (formerly OTCBB: EXCA) was incorporated under the laws of the State of Nevada on October 6, 2005. Pursuant to a strategic merger transaction on May 11, 2011, Excaliber acquired all outstanding shares of VistaStem in exchange for 341,823 shares of our common stock and assumed all of VistaStem’s pre-Merger obligations (the Merger). Shortly after the Merger, Excaliber’s name was changed to “VistaGen Therapeutics, Inc.” (a Nevada corporation).
VistaStem, as the accounting acquirer in the Merger, recorded the Merger as the issuance of common stock for the net monetary assets of Excaliber, accompanied by a recapitalization. The accounting treatment for the Merger was identical to that resulting from a reverse acquisition, except that we recorded no goodwill or other intangible assets. A total of 78,450 shares of our common stock, representing the shares held by stockholders of Excaliber immediately prior to the Merger are reflected as outstanding for all periods presented in the Consolidated Financial Statements of the Company included in Item 8 of this Annual Report. Additionally, the Consolidated Balance Sheets reflect the $0.001 par value of Excaliber’s common stock.
The Consolidated Financial Statements included in Item 8 of this Annual Report represent the activity of VistaStem from May 26, 1998, and the consolidated activity of VistaStem and Excaliber (now VistaGen Therapeutics, Inc., a Nevada corporation), from May 11, 2011 (the date of the Merger) through March 31, 2018.2021. The Consolidated Financial Statements also include the accounts of VistaStem’s two inactive wholly-owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation (Artemis), and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada (VistaStem Canada).
Research and Development
Employees
As of June 26, 2018,29, 2021, we employed nine21 full-time employees, fournine females and 12 males. Ten of whomour employees have doctorate degrees. FiveThirteen full-time employees work in research and development and laboratory support services and foureight full-time employees work in business development, commercialization and general and administrative roles. Staffing for all other functional areas is achieved through our diverse network of strategic relationships with multiple CROs, CDMOs, and other third-party service providers and consultants. These service providers and consultants each of whom providesprovide us with support services on a flexible, real-time, as-needed basis, including human resources andservices related to, among others, payroll, information technology, facilities, legal, investor and public relations, and website maintenance,manufacturing, product development, regulatory affairs and FDA program management.management to complement our internal resources in these areas.
We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective bargaining agreement. We consider our employee relations to be good.
Facilities
We lease our office and laboratory space, which consists of approximately 10,900 square feet located in South San Francisco, California, under a lease expiring on July 31, 2022.2022 which also provides a five-year option to renew.
Legal Proceedings
None.
Environmental Regulation
Our business does not require us to comply with any extraordinary environmental regulations.
Available Information
We file reports and other information with the SEC, as required by the Exchange Act. We make available free of charge through our website (http://www.vistagen.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. We make these reports available through our website as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the SEC. In addition, we regularly use our website to post information regarding our business, product development programs and governance, and we encourage investors to use our website, particularly the information in the section entitled “Investors,” as a source of information about us. The foregoing references to our website are not intended to, nor shall they be deemed to, incorporate information on our website into this Annual Report on Form 10-K by reference.
ItemItem 1A. RiskRisk Factors
InvestingRisk Factor Summary
Our business is subject to substantial risk and an investment in our securities involves a high degreevarious risks. Some of risk. the material risks include those set forth below. You should consider carefully these risks, and those discussed under “Risk Factors” below, before investing in our securities. These risks include, among others:
● | the COVID-19 pandemic has, and continues to have, an impact on our business, including delays in manufacturing of certain drug substance and drug products and potential delays in recruitment and enrollment in the PALISADE Phase 3 clinical program and other planned clinical studies of PH94B; |
● | we are a development stage biopharmaceutical company with no recurring revenues from product sales or approved products, and limited experience developing or commercializing new drug candidates, which makes it difficult to assess our future viability; |
● | we depend heavily on the success of our three CNS product candidates PH94B, PH10 and AV-101, and we cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize, any of our current or future product candidates; |
● | failures or delays in the commencement or completion of our planned clinical trials, including, among others, clinical studies in our PALISADE Phase 3 program, could delay, prevent or limit our ability to generate revenue and continue our business; |
● | we face significant competition, and if we are unable to compete effectively, we may not be able to achieve or maintain significant market penetration or improve our results of operations; |
● | if we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects; |
● | we have incurred significant net losses since inception and we will continue to incur substantial operating losses for the foreseeable future; |
● | although we are taking steps to mitigate them, we have identified material weaknesses in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address those weaknesses or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting; |
● | we require additional financing to execute our long-term business plan, including further development and commercialization of our CNS pipeline, and to continue to operate as a going concern; |
● | raising additional capital will cause substantial dilution to our existing stockholders, may restrict our operations or require us to relinquish rights, and may require us to seek stockholder approval to authorize additional shares of our common stock; and |
● | other risks and uncertainties, including those described under “Risk Factors” below. |
If we are unable to effectively manage the impact of these and other risks, our ability to operate and execute our business plan would be substantially impaired. In turn, the value of our securities would be materially reduced.
Risk Factors
You should consider carefully the risks and uncertainties described below, together with all of the other information in this Annual Report before investing in our securities. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. If any of the following risks are realized, our business, financial condition and/or operatingand results of operations could be materially and adversely affected.
The COVID-19 pandemic has adversely impacted, and may continue to adversely impact our business.
Beginning in late 2019, a new strain of coronavirus (COVID-19) spread across the world, and the outbreak has since been declared a pandemic by the World Health Organization. The U.S. Secretary of Health and Human Services has also declared a public health emergency in the United States in response to the outbreak. Considerable uncertainty still surrounds COVID-19 and its potential effects, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of COVID-19, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns resulted in significant negative economic impacts on a global basis.
Although the negative effects of the COVID-19 pandemic appear to be lessening, we cannot at this time accurately predict the effects of these conditions on our operations. Uncertainties remain as to the duration of the pandemic, the success of treatments and vaccines designed to combat the pandemic, and the length and scope of the travel restrictions and business closures imposed by the governments of impacted countries and localities. The continued COVID-19 pandemic, the spread of variants of the COVID-19 virus or another highly transmissible and pathogenic infectious disease may lead to the implementation of further responses, including additional travel restrictions, government-imposed quarantines or stay-at-home orders, and other public health safety measures, which may result in further disruptions to our business and operations. The COVID-19 pandemic has impacted our business and may continue to do so as the pandemic persists. Additionally, future outbreaks may have several adverse effects on our business, results of operations and financial condition.
| ● | Delayed product development: We have faced, and may continue to face, delays and other disruptions to our ongoing development programs for PH94B, PH10 and AV-101 due to the ongoing COVID-19 pandemic. In addition, regulatory oversight and actions regarding our products may be disrupted or delayed in regions impacted by COVID-19, including the United States and elsewhere, which may impact review and approval timelines for products in development. Although we remain invested in continuing our development programs for our current product candidates, our research and development efforts may be impacted if our employees, our contract research organizations (CROs) and our third-party contract manufacturer(s) (CMOs) are advised to continue to work remotely as part of social distancing measures. Additionally, social distancing measures, stay-at-home orders and other governmental restrictions designed to combat the COVID-19 pandemic may impair our ability to conduct studies in our PALISADE Phase 3 program for PH94B in a timely manner. |
| ● | Negative impacts on our suppliers and employees: COVID-19 has impacted, and COVID-19, variants of COVID-19 or another highly transmissible and pathogenic infectious disease, may impact or continue to impact the health of our employees, contractors or suppliers, reduce the availability of our workforce or those of companies with which we do business, divert our attention toward succession planning, or create disruptions in our supply or distribution networks. Since the beginning of the COVID-19 pandemic, we have experienced delays of the delivery of supplies of active pharmaceutical product (API) required to continue development of PH94B and PH10. Although our supply of raw materials and API remains sufficiently operational, we may experience adverse effects of such events, which may result in a significant, material disruption to clinical development programs and our operations. Additionally, having substantially shifted to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities. |
COVID-19 has also created significant disruption and volatility in national, regional and local economies and markets. Uncertainties related to, and perceived or experienced negative effects from COVID-19, may cause significant volatility or decline in the trading price of our securities, capital markets conditions and general economic conditions. Our future results of operations and liquidity could be adversely impacted by supply chain disruptions and operational challenges faced by our CROs, CMOs and other contractors. The ongoing COVID-19 pandemic, or another highly transmissible and pathogenic infectious disease, could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in a further economic downturn or a global recession. Such events may limit or restrict our ability to access capital on favorable terms, or at all, lead to consolidation that negatively impacts our business, weaken demand, increase competition, cause us to reduce our capital spend further, or otherwise disrupt our business or make it more difficult to implement our strategic plans.
Risks Related to Product Development, Regulatory Approval and Commercialization
We depend heavily on the success of AV-101. Weone or more of our current CNS drug candidates and we cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize AV-101, or any of our product candidate.candidates.
We currently have no drug products for sale and may never be able to develop and commercialize marketable drug products. Our business currently depends heavily on the successful development, manufacturing, regulatory approval and commercialization of AV-101 for depression, including for MDD, and, potentially, various other diseases and disorders involving theone or more of our current CNS drug candidates, as well as, but to a more limited extent, our ability to acquire, license or produce, develop and commercialize additional product candidates. AV-101Each of our current CNS drug candidates will require substantial additional nonclinical and clinical testingdevelopment, manufacturing and regulatory approval before itany of them may be commercialized. It is unlikely tocommercialized, and there can be no assurance that any of them will ever achieve regulatory approval, if at all, until at least 2021. Eachapproval. Any new chemical entity (NCE) we may produce through drug rescue NCEactivities will require substantial nonclinical development, all phases of clinical development, manufacturing and regulatory approval before it may be commercialized. The nonclinical and clinical development of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United StatesU.S. and in other countries where we or our collaborators intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through numerous nonclinical and clinical studies that the product candidate is safe and effective for use in each target indication. Research and development of product candidates in the pharmaceutical industry is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of nonclinical or clinical studies. This process takes many years and may also include post-marketing studies, and surveillance obligations and drug safety programs, which would require the expenditure of substantial resources beyond the proceeds we have raised to date. Of the large number of drug candidates in development in the United States,U.S., only a small percentage will successfully complete the required FDA regulatory approval process and will be commercialized. Accordingly, we cannot assure you that AV-101,any of our current drug candidates or any other future product candidatecandidates will be successfully developed or commercialized.commercialized in the U.S. or any market outside the U.S.
We are not permitted to market our product candidates in the United StatesU.S. until we receive approval of an a New Drug Application (NDA) from the FDA, or in any foreign countries until we receive the requisite approval from such countries. We expect the FDA to require us to complete our ELEVATE study, our double-blind, placebo-controlled Phase 2 clinical study to evaluate the efficacy and safety of AV-101 as an adjunctive treatment of MDD in patients with an inadequate response to current FDA-approved antidepressants, and at least two pivotal Phase 3 clinical trials in order to submit an NDA for AV-101 as an adjunctive treatment for MDD patients with an inadequate response to standard, FDA-approved antidepressants. Also, we anticipate that the FDA will require that we conduct additional toxicology studies, additional nonclinical and certain small clinical studies before submitting an NDA for AV-101. The results of all of these studies will not be known until after the studies are concluded.
Obtaining FDA approval of ana NDA is a complex, lengthy, expensive and uncertain process. The FDA may refuse to permit the filing of our NDA, delay, limit or deny approval of ana NDA for many reasons, including, among others:
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if we submit an NDA and it is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional non-clinical or clinical studies, limitations on approved labeling or distribution and use restrictions;
| ● | if we submit a NDA and it is reviewed by a FDA advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional nonclinical or clinical studies, limitations on approved labeling or distribution and use restrictions; |
the FDA may require development of a REMS as a condition of approval or post-approval;
| ● | a FDA advisory committee may recommend, or the FDA may require, a Risk Evaluation and Mitigation Strategies (REMS) safety program as a condition of approval or post-approval; |
| ● | a FDA advisory committee or the FDA or applicable regulatory agency may determine that there is insufficient evidence of overall effectiveness or safety in a NDA and require additional clinical studies; |
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the FDA or applicable regulatory agency may determine that there is insufficient evidence of overall effectiveness in an NDA and require additional clinical studies;| ● | the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or |
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the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract manufacturers with which we contract do not conform to applicable requirements, including cGMPs; or
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the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations.
| ● | the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations. |
Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully commercialize AV-101any current or any otherfuture drug product candidate we may develop. Any such setback in our pursuit of regulatory approval for any product candidate would have a material adverse effect on our business and prospects.
In addition, we anticipate that certain of our product candidates, including PH94B and PH10, will be subject to regulation as combination products, which means that they are composed of both a drug product and device product. Although we do not contemplate doing so, if marketed individually, each component would be subject to different regulatory pathways and reviewed by different centers within the FDA. Our product candidates that are considered to be drug-device combination products will require review and coordination by FDA’s drug and device centers prior to approval, which may delay approval. In the U.S.,a combination product with a drug primary mode of action generally would be reviewed and approved pursuant to the drug approval processes under the Federal Food, Drug and Cosmetic Act of 1938. In reviewing the NDA application for such a product, however, FDA reviewers in the drug center could consult with their counterparts in the device center to ensure that the device component of the combination product met applicable requirements regarding safety, effectiveness, durability and performance. Under FDA regulations, combination products are subject to cGMP requirements applicable to both drugs and devices, including the Quality System (QS) regulations applicable to medical devices. Problems associated with the device component of the combination product candidate may delay or prevent approval.
We have been granted Fast Track designation from the FDA for development of PH94B for the treatment of social anxiety disorder (SAD) and AV-101 for the adjunctive treatment of MDD.major depressive disorder (MDD) and for the treatment of neuropathic pain (NP). However, this designationthese designations may not actually lead to a faster development or regulatory review or approval processprocesses for PH94B or AV-101. Further, there is no guarantee the FDA will grant Fast Track designation for PH94B or AV-101 as a treatment option for other CNS indications or for any of our other product candidates in the future.
The Fast Track designation is a program offered by the FDA, pursuant to certain mandates under the FDA Modernization Act of 1997, designed to facilitate drug development and to expedite the review of new drugs that are intended to treat serious or life threateninglife-threatening conditions. Compounds selected must demonstrate the potential to address unmet medical needs. The FDA’s Fast Track designation allows for close and frequent interaction with the FDA. A designated Fast Track drug may also be considered for priority review with a shortened review time, rolling submission, and accelerated approval if applicable. The designation does not, however, guarantee FDA approval or expedited approval of any application for the product.product candidate.
In December 2017, the FDA granted Fast Track designation for development of AV-101 for the adjunctive (add-on) treatment of MDD in patients with an inadequate response to current antidepressants. In September 2018, the FDA granted Fast Track designation for development of AV-101 for the treatment of NP. In December 2019, the FDA granted Fast Track designation for development of PH94B for the treatment of SAD. However, this designationthese FDA Fast Track designations may not lead to a faster development or regulatory review or approval process for PH94B or AV-101 and the FDA may withdraw Fast Track designation of PH94B or AV-101 if it believes that the respective designation is no longer supported by data from our AV-101 MDD clinical development program.programs.
In addition, we may apply for Fast Track designation for PH94B, PH10 and AV-101 as a treatment option for other CNS indications, as well as for other product candidates.indications. The FDA has broad discretion whether or not to grant a Fast Track designation, and even if we believe PH94B, PH10, AV-101 andor other product candidates may be eligible for this designation, we cannot be sure that the review or approvalFDA will compare to conventional FDA procedures.grant it.
Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.
The results of preclinical studies and early clinical trials of PH94B, PH10, AV-101 and/or our other future product candidates, if any, including positive results, may not be predictive of the results of later-stage clinical trials. PH94B, PH10, AV-101 or any other future product candidates in later stages of clinical trialsdevelopment may fail to show the desired safety and efficacy results despite having progressed through preclinicalnonclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in advancedlater-stage clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, our future clinical trial results may not be successful for these or other reasons.
Moreover, preclinicalnonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinicalnonclinical studies and clinical trials nonetheless failed to obtain FDA approval. We have not yet completedapproval or approval from a similar regulatory authority in another country. With respect to our current product candidates, if our PALISADE Phase 23 program, including the PALISADE-1 Phase 3 clinical trialstudy of PH94B for AV-101, and if the NIMH Study and/or our ELEVATE Study, oracute treatment of anxiety in adults with SAD, any future nonclinical or clinical study of PH94B, PH10 or AV-101 fail(s) to produce positive results, the development timeline and regulatory approval and commercialization prospects for PH94B, PH10 or AV-101 and, correspondingly, our business and financial prospects, could be materially adversely affected.
This drug candidate development risk is heightened by any changes in planned timing or nature of clinical trials compared to completed clinical trials. As product candidates are developed through preclinical to earlyearly- and late stagelate-stage clinical trials towards regulatory approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for later stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.
For example, the results of planned clinical trials have been affected by supply chain disruptions experienced by certain of our CMOs as a result of the ongoing COVID-19 pandemic. In addition, clinical development of our products may be adverselyfurther affected if we or any of our collaboratorcollaborators seek to optimize and scale-up production of a product candidate. In such case, we will need to demonstrate comparability between the newly manufactured drug substance and/or drug product relative to the previously manufactured drug substance and/or drug product. Demonstrating comparability may cause us to incur additional costs or delay initiation or completion of our clinical trials, including the need to initiate a dose escalation study and, if unsuccessful, could require us to complete additional nonclinical or clinical studies of our product candidates. In addition, health and safety precautions at clinical sites related to the COVID-19 pandemic could cause us to incur additional costs or delay initiation or completion of planned nonclinical and clinical trials.
If serious adverse events or other undesirable side effects or safety concerns attributable to AV-101 are identified duringour product candidates occur, including PH94B in the NIMH Study, other investigator-sponsored clinical trials or in our clinical trials of AV-101, including our ELEVATE study, itPALISADE Phase 3 program, they may adversely affect or delay our clinical development and commercialization of PH94B, PH10 or AV-101.
AV-101, asUndesirable side effects or safety concerns caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a monotherapy in patients with treatment-resistant depression, is currently being tested bymore restrictive label or the NIMH in the NIMH Study and may be subjected to testing in the future for other CNS indications in additional investigator-sponsored clinical trials. Ifdelay or denial of regulatory approval. Although no treatment-related serious adverse events (SAEs) were observed in any clinical trials of any of our product candidates to date, if treatment-related SAEs or other undesirable side effects or safety concerns, or unexpected characteristics attributable to PH94B, PH10 and/or AV-101, are observed in the NIMH Study, other investigator-sponsoredany future clinical trials, of AV-101, including clinical studies in the PALISADE Phase 3 program, and/or in ourother clinical trials of AV-101, includinginvolving our ELEVATE Study, itdrug candidates, they may adversely affect or delay our clinical development and commercialization of AV-101,the effected product candidate, and the occurrence of these events could have a material adverse effect on our business and financial prospects. Results of our future clinical trials could reveal a high and unacceptable severity and prevalence of adverse side effects. In such an event, our trials could be suspended or terminated and the FDA or other regulatory agency could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.
Additionally, if any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects or safety concerns caused by these product candidates, a number of potentially significant negative consequences could result, including:
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regulatory authorities may withdraw, suspend, or limit approvals of such product and require us to take them off the market;
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regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
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regulatory authorities may require a medication guide outlining the risks of such side effects for distribution to patients, or that we implement a REMS or REMS-like plan to ensure that the benefits of the product outweigh its risks;
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we may be required to change the way a product is distributed or administered, conduct additional clinical trials or change the labeling of a product;
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we may be required to conduct additional post-marketing studies or surveillance;
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we may be subject to limitations on how we may promote the product;
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sales of the product may decrease significantly;
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we may be subject to regulatory investigations, government enforcement actions, litigation or product liability claims; and
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our products may become less competitive or our reputation may suffer.
Any of these events could prevent us or any collaborators from achieving or maintaining market acceptance of our product candidates or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our product candidates.
Failures or delays in the commencement or completion of our planned clinical trialsnonclinical and nonclinicalclinical studies of PH94B, PH10, AV-101 or other our product candidates could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.
Under our CRADA withIn addition to the NIMH, the NIMH is conducting and funding the NIMH Study. WePALISADE-1 Phase 3 clinical study, we will need to complete our ELEVATE study, at least twoone additional large Phase 3 clinical study of PH94B, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain other clinical studies prior to our submission of an NDA for regulatory approval of PH94B as an acute treatment of anxiety in adults with SAD, or for any other anxiety disorder or phobia. For PH10, at present, we believe we will need to complete at least one additional Phase 2 clinical study, two pivotal Phase 3 clinical trials, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to the submission of an NDA to the FDA for AV-101regulatory approval of PH10 as an adjunctivea stand-alone rapid-onset treatment for MDD, in patients with an inadequate response to current antidepressants, or any other depression disorder. For AV-101 in combination with probenecid, at present, for treatment of any CNS indication.indication, we believe we will need to complete at least one Phase 1B clinical study, two Phase 2 clinical studies, two pivotal Phase 3 clinical trials, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to the submission of an NDA for regulatory approval. Successful completion of our nonclinical and clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval required before commercial marketing of any product candidate we may develop. Except as disclosed herein, weWe do not know whether the NIMH Study, our ELEVATE study or any of our future-planned nonclinical and clinical trials of PH94B, PH10, AV-101 or any other product candidate will be completed on schedule, if at all, as the commencement and completion of nonclinical and clinical trials can be delayed or prevented for a number of reasons, including, among others:
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the FDA may deny permission to proceed with planned clinical trials or any other clinical trials we may initiate, or may place a planned or ongoing clinical trial on hold;
| ● | delays due to events resulting from the ongoing COVID-19 pandemic; |
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delays in filing or receiving approvals of additional INDs that may be required;
| ● | the regulatory authority may deny permission to proceed with planned clinical trials or any other clinical trials we may initiate, or may place a planned or ongoing clinical trial on hold; |
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negative results from nonclinical studies;
| ● | delays in filing or receiving approvals from regulatory authorities of additional INDs that may be required; |
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delays in reaching or failing to reach agreement on acceptable terms with prospective CROs, investigators and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, investigators and clinical trial sites;
| ● | negative or ambiguous results from nonclinical or clinical studies; |
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delays in the manufacturing of, or insufficient supply of product candidates necessary to conduct nonclinical or clinical trials, including delays in the manufacturing of sufficient supply or finished drug product;
| ● | delays in reaching or failing to reach agreement on acceptable terms with prospective CROs, investigators and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, investigators and clinical trial sites; |
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inability to manufacture or obtain clinical supplies of a product candidate meeting required quality standards;
| ● | delays in the manufacturing of, or insufficient supply of product candidates necessary to conduct nonclinical or clinical trials, including delays in the manufacturing of sufficient supply of drug substance or finished drug product; |
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difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective clinical site or sites;
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challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to clinical trial sites;
| ● | inability to manufacture or obtain clinical supplies of a product candidate meeting required quality standards; |
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eligibility criteria for a clinical trial, the nature of a clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;| ● | difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective clinical site or sites; |
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severe or unexpected adverse drug-related side effects experienced by patients in a clinical trial;
| ● | challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to clinical trial sites; |
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delays in validating any endpoints utilized in a clinical trial;
| ● | eligibility criteria for a clinical trial, the nature of a clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications; |
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the FDA may disagree with our clinical trial design and our interpretation of data from prior nonclinical studies or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;
| ● | severe or unexpected adverse drug-related side effects experienced by patients in a clinical trial; |
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reports from nonclinical or clinical testing of other CNS indications or therapies that raise safety or efficacy concerns; and
| ● | delays in validating any endpoints utilized in a clinical trial; |
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difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues or loss of interest.
| ● | the regulatory authority may disagree with our clinical trial design and our interpretation of data from prior nonclinical studies or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials; |
| ● | reports from nonclinical or clinical testing of other CNS indications or therapies that raise safety or efficacy concerns; and |
| ● | difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues or loss of interest. |
Clinical trials may also be delayed or terminated prior to completion as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA,regulatory authority, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board (DSMB), overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:
| ● | failure to conduct the clinical trial in accordance with regulatory requirements or approved clinical protocols; |
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failure to conduct the clinical trial in accordance with regulatory requirements or approved clinical protocols;
| ● | inspection of the clinical trial operations or trial sites by the regulatory authority that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold; |
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inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;
| ● | unforeseen safety issues, including any that could be identified in nonclinical carcinogenicity studies, adverse side effects or lack of effectiveness; |
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unforeseen safety issues, including any that could be identified in nonclinical carcinogenicity studies, adverse side effects or lack of effectiveness;
| ● | changes in government regulations or administrative actions; |
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changes in government regulations or administrative actions;
| ● | problems with clinical supply materials that may lead to regulatory actions; and |
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problems with clinical supply materials that may lead to regulatory actions; and
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lack of adequate funding to continue nonclinical or clinical studies.
| ● | lack of adequate funding to continue nonclinical or clinical studies. |
Changes in regulatory requirements, FDAregulatory guidance or unanticipated events during our nonclinical studies and clinical trials of PH94B, PH10, AV-101 or other CNS product candidates may occur, which may result in changes to nonclinical studies and clinical trial protocols or additional nonclinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.
Changes in regulatory requirements, FDA guidance or unanticipated events during our nonclinical studies and clinical trials of PH94B, PH10, AV-101 or other CNS product candidates may force us to amend nonclinical studies and clinical trial protocols or the FDAregulatory authority may impose additional nonclinical studies and clinical trial requirements. Amendments or changes to our clinical trial protocols would require resubmission to the FDAregulatory authority and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. Similarly, amendments to our nonclinical studies may adversely impact the cost, timing, or successful completion of those non-clinicalnonclinical studies. If we experience delays completing, or if we terminate, any of our nonclinical studies or clinical trials, or if we are required to conduct additional nonclinical studies or clinical trials, the commercial prospects for PH94B, PH10, AV-101 or other CNS product candidates may be harmed and our ability to generate product revenue will be delayed.
We rely, and expect that we will continue to rely, on third parties to conduct our nonclinical and clinical trials of AV-101our current CNS product candidates and will continue to do so for any other future CNS product candidates. If these third parties do not successfully carry out their contractual duties and/or meet expected deadlines, completion of our nonclinical or clinical trials and development of PH94B, PH10, AV-101 or other CNS future product candidates may be delayed and we may not be able to obtain regulatory approval for or commercialize PH94B, PH10, AV-101 or other future CNS product candidates and our business could be substantially harmed.
By strategic design, we do not have the extensive internal staff resources to independently conduct nonclinical and clinical trials of our product candidates completely on our own. We rely on our network of strategic relationships with various academic research centers, medical institutions, nonclinical and clinical investigators, contract laboratories, CROs and other third parties such as CROs,to assist us to conduct and complete nonclinical and clinical trials of our product candidates. We enter into agreements with third-party CROs to provide monitors for and to manage data for our clinical trials, as well as provide other services necessary to prepare for, conduct and complete clinical trials. We rely heavily on these and other third-parties for execution of nonclinical and clinical trials for our product candidates and we control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these nonclinical and clinical trials and the management of data developed through nonclinical and clinical trials than would be the case if we were relying entirely upon our own internal staff resources. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. OutsideCROs and other outside parties may:
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have staffing difficulties and/or undertake obligations beyond their anticipated capabilities and resources;
| ● | experience disruptions to their operations, such as reduced staffing and supply chain disruptions, as a result of the ongoing COVID-19 pandemic; |
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fail to comply with contractual obligations;
| ● | have staffing difficulties and/or undertake obligations beyond their anticipated capabilities and resources; |
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experience regulatory compliance issues;
| ● | fail to comply with contractual obligations; |
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undergo changes in priorities or become financially distressed; or
| ● | experience regulatory compliance issues; |
| ● | undergo changes in priorities or become financially distressed; or |
form relationships with other entities, some of which may be our competitors.
| ● | form relationships with other entities, some of which may be our competitors. |
These factors may materially adversely affect the willingness or ability of third parties to conduct our nonclinical and clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our nonclinical studies and clinical trials is conducted and completed in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs, the NIMH or other independent investigators does not relieve us of our regulatory responsibilities. We and our CROs, the NIMH and any investigator in an investigator-sponsored study are required to comply with regulations and guidelines, including current Good Clinical Practice regulations (cGCPs) for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we, any of our CROs or any of our CROsthird-party collaborators fail to comply with applicable cGCPs, the clinical data generated in our clinical trials involving our product candidates may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs and will require a large number of test patients. Our failure or the failure of our CROs or other third-party collaborators to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
Although we design our clinical trials for our product candidates, our clinical development strategy involves having CROs and other third-party investigators and medical institutions conduct clinical trials of our product candidates. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, although CROs, or independent investigators or medical institutions, as the case may be, may not perform all of their obligations under arrangements with us or in compliance with applicable regulatory requirements, under certain circumstances, we may be responsible and subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of clinical trials of our product candidates. If such third parties do not perform clinical trials of our product candidates in a satisfactory manner, breach their obligations to us or fail to comply with applicable regulatory requirements, the development and commercialization of our product candidates may be delayed or our development program materially and irreversibly harmed. In certain cases, including the NIMHBaylor Study and other investigator-sponsored clinical studies, we cannot control the amount and timing of resources these third-parties devote to clinical trials involving our product candidates. If we are unable to rely on nonclinical and clinical data collected by our third-party collaborators, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.
If our relationships with one or more of these third-partiesour third-party collaborators terminates, we may not be able to enter into arrangements with alternative third-party collaborators. If such third-party collaborators, including our CROs, and the NIMH, do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to applicable clinical protocols, regulatory requirements or for other reasons, any clinical trials that such third-parties are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully develop and commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs would increase and our ability to generate revenue would be delayed.
We rely completely on third-parties to manufacture, formulate, analyze, hold and distribute supplies of our CNS product candidates for all nonclinical and clinical studies, and we intend to continue to rely on third parties to produce all nonclinical, clinical and commercial supplies of our CNS product candidates in the future.
WeBy strategic design, we do not currently have, nor do we plan to acquire or develop, anyextensive internal infrastructure or technical capabilities to manufacture, formulate, analyze, hold or distribute supplies of our product candidates, for use in nonclinical and clinical studies or commercial scale. As a result, with respect to all of our product candidates, we rely, and will continue to rely, completely on third party contract manufacturing organizations (CMOs)CMOs to manufacture active pharmaceutical ingredient (API) and formulate, hold and distribute final drug product. The facilities used by our CMOs to manufacture PH94B, PH10 and AV-101 API and formulate PH94B, PH10 and AV-101 final drug product are subject to a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable regulatory guidelines and requirements, including cGMPs, and may be required to undergo similar inspections by the FDA or other comparable foreign regulatory agencies, after we submit INDs, NDAs or relevant foreign regulatory submission equivalent to the applicable regulatory agency.
We do not directly control the manufacturing process or the supply or quality of materials used in the manufacturing, analysis and formulation of our product candidates, and, with respect to all of our product candidates, we are completely dependent on our CMOs to comply with all applicable cGMPs for manufacturethe manufacturing of both API and finished drug product. If our CMOs cannot secure adequate supplies of suitable raw materials or successfully manufacture our product candidates, including PH94B, PH10 and AV-101 API and finished drug product, that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, production of sufficient supplies of our product candidates, including PH94B, PH10 and AV-101 API and finished drug product, may be delayed and our CMOs may not be able to secure and/or maintain regulatory approval for their manufacturing facilities, or the FDA may take other actions, including the imposition of a clinical hold. In addition, we have no direct control over our CMOs’ ability to maintain adequate quality control, quality assurance and qualified personnel. All of our CMOs are engaged with other companies to supply and/or manufacture materials or products for such other companies, which exposes our CMOs to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of our CMO’s facilities generally or affect the timing of manufacture of PH94B, PH10 and AV-101 for required or planned nonclinical and/or clinical studies of our product candidates.studies. If the FDA or an applicable foreign regulatory agency determines now or in the future that our CMOs’ facilities are noncompliant, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates. Our reliance on CMOs also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.
With respect to PH94B, PH10 and AV-101, we do not yet have long-term supply agreements in place with our CMOs and each batch of PH94B, PH10 and AV-101 is or will be individually contracted under a separate supply agreement. If we engage new CMOs, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon CMOs and, potentially, collaboration partners, to manufacture research and development scale, quantities, and, if approved, commercial scale quantities of our product candidates. Although we believe our current scale of API manufacturing for AV-101, and our contemplated scale of API manufacturing for PH94B and PH10, and the current and projected supply of PH94B, PH10 and AV-101 API and finished drug product will be adequate to support our planned nonclinical and clinical studies of PH94B, PH10 and AV-101, no assurance can be given that unanticipated AV-101 supply shortages or CMO-related delays in the manufacture and formulation of PH94B, PH10 or AV-101 API and/or finished drug product will not occur in the future.
Additionally, we anticipate that PH94B and PH10 will be considered drug-device combination products. Third-party manufacturers may not be able to comply with cGMP requirements applicable to drug/device combination products, including applicable provisions of the FDA’s or a comparable foreign regulatory authority’s drug cGMP regulations, device cGMP requirements embodied in the Quality System Regulation (QSR) or similar regulatory requirements outside the U.S. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly affect supplies of our product candidates. The facilities used by our CMOs to manufacture our product candidates must be approved by the FDA and comparable foreign regulatory authorities pursuant to inspections that will or may be conducted after we submit our NDA. We do not control the manufacturing process of, and are completely dependent on, our CMO partners for compliance with cGMPs and QSRs. If our CMOs cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or other comparable foreign regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved. CMOs may face manufacturing or quality control problems causing drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with the applicable cGMP and QSR requirements. Any failure to comply with cGMP or QSR requirements or other FDA, EMA and comparable foreign regulatory requirements could adversely affect our clinical research activities and our ability to develop our product candidates and market our products following approval.
Even if we receive marketing approval for PH94B, PH10, AV-101 or any other CNS product candidate in the United States,U.S., we may never receive regulatory approval to market PH94B, PH10, AV-101 or any other CNS product candidate outside of the United States.U.S.
We have not yet selected any markets outside of the United States where we intendIn order to seek regulatory approval to market PH94B, PH10, AV-101 or any other product candidate. In order to market AV-101 or any otherCNS product candidate outside of the United States,U.S., we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United StatesU.S. as well as other risks. In particular, in many countries outside of the United States,U.S., products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market our product candidates in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.
If any of our CNS product candidates are ultimately regulated as controlled substances, we, our CMOs, as well as future distributors, prescribers, and dispensers will be required to comply with additional regulatory requirements which could delay the marketing of our product candidates, and increase the cost and burden of manufacturing, distributing, dispensing, and prescribing our product candidates.
Before we can commercialize our product candidates in the United StatesU.S. or any market outside the U.S., the U.S. Drug Enforcement Administration (DEA) or its foreign counterpart may need to determine whether such product candidates will be considered to be a controlled substance, taking into account the recommendation of the FDA.FDA or its foreign counterpart, as the case may be. This may be a lengthy process that could delay our marketing of a product candidate and could potentially diminish any regulatory exclusivity periods for which we may be eligible, which would increase the cost associated with commercializing such products and, in turn, may have an adverse impact on our results of operations. Although we currently do not know whether the DEA or any foreign counterpart will consider any of our current or future product candidates, including AV-101,candidate to be controlled substances, we cannot yet give any assurance that certain of oursuch product candidates, including PH94B, PH10 and AV-101 will not be regulated as controlled substances.
If any of our product candidates are regulated as controlled substances, depending on the DEA controlled substance schedule in which the product candidates are placed or that of its foreign counterpart, we, our CMOs, and any future distributers, prescribers, and dispensers of the scheduled product candidates may be subject to significant regulatory requirements, such as registration, security, recordkeeping, reporting, storage, distribution, importation, exportation, inventory, quota and other requirements administered by the DEA.DEA or a foreign counterpart of the DEA as the case may be. Moreover, if any of our product candidates are regulated as controlled substances, we and our CMOs would be subject to initial and periodic DEA inspection. If we or our CMOs are not able to obtain or maintain any necessary DEA registrations or comparable foreign registrations, we may not be able to commercialize any product candidates that are deemed to be controlled substances or we may need to find alternative CMOs, which would take time and cause us to incur additional costs, delaying or limit our commercialization efforts.
Because of their restrictive nature, these laws and regulations could limit commercialization of our product candidates, should they be deemed to contain controlled substances. Failure to comply with the applicable controlled substance laws and regulations can also result in administrative, civil or criminal enforcement. The DEA or its foreign counterparts may seek civil penalties, refuse to renew necessary registrations, or initiate administrative proceedings to revoke those registrations. In some circumstances, violations could result in criminal proceedings or consent decrees. Individual states also independently regulate controlled substances.
If we are unable to establish broad sales and marketing capabilities on our own or enter into agreements with third parties to market and sell our CNS product candidates, we may not be able to generate any revenue.
We do not currently have anylimited internal resources for the sale, marketing and distribution of pharmaceutical products, nor doand we intendmay not be able to create suchbroad internal capabilities in the foreseeable future. Therefore, to market our CNS product candidates, if approved by the FDA or any other regulatory body, we must make contractual arrangements with third parties to perform servicesestablish broad internal capabilities related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates.candidates, or make contractual arrangements with third parties to perform services, prior to market approval. If we are unable to establish adequate contractual arrangements for suchinternal sales, marketing and distribution capabilities, or if we are unable to do so contractually on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.
Even if we receive marketing approval for our CNS product candidates, our product candidates may not achieve broad market acceptance, which would limit the revenue that we generate from their sales.
The commercial success of our CNS product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients and healthcare payors. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:
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the efficacy and safety of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other available therapies;
| ● | the efficacy and safety of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other available therapies; |
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limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities;
| ● | limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities; |
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the clinical indications for which our product candidates are approved;
| ● | the clinical indications for which our product candidates are approved; |
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availability of alternative treatments already approved or expected to be commercially launched in the near future;
| ● | availability of alternative treatments already approved or expected to be commercially launched in the near future; |
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the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future alternative treatments;
| ● | the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future alternative treatments; |
| ● | the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; |
| ● | the strength of marketing and distribution support and timing of market introduction of competitive products; |
| ● | publicity concerning our products or competing products and treatments; |
| ● | pricing and cost effectiveness; |
| ● | the effectiveness of our sales and marketing strategies; |
| ● | our ability to increase awareness of our product candidates through marketing efforts; |
| ● | our ability to obtain sufficient third-party coverage or reimbursement; or |
| ● | the willingness of patients to pay out-of-pocket in the absence of third-party coverage. |
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the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
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the strength of marketing and distribution support and timing of market introduction of competitive products;
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publicity concerning our products or competing products and treatments;
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pricing and cost effectiveness;
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the effectiveness of our sales and marketing strategies;
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our ability to increase awareness of our product candidates through marketing efforts;
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our ability to obtain sufficient third-party coverage or reimbursement; or
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the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
If our CNS product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from our product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant resources and may never be successful.
Our CNS product candidates may cause undesirable safety concerns and side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
Undesirable safety concerns and side effects caused byIf our product candidates couldare determined to cause usundesirable side effects and safety concerns, we or regulatory authorities tomay interrupt, delay or halt nonclinical studies and clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.
Further, clinical trials by their nature utilize a sample of potential patient populations. With a limited number of patients and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered with a significantly larger number of patients exposed to the product candidate. If our product candidates receive marketing approval and we or others identify undesirable safety concerns or side effects caused by such product candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including:
| ● | regulatory authorities may withdraw or limit their approval of such product candidates; |
regulatory authorities may withdraw or limit their approval of such product candidates;
| ● | regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication; |
| ● | we may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change the labeling of the product candidates; |
| ● | we may be subject to regulatory investigations and government enforcement actions; |
| ● | we may decide to remove such product candidates from the marketplace; |
| ● | we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and |
| ● | our reputation may suffer. |
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regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
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we may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change the labeling of the product candidates;
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we may be subject to regulatory investigations and government enforcement actions;
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we may decide to remove such product candidates from the marketplace;
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we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and
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our reputation may suffer.
We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates and would substantially increase the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidates and generate revenues.
Even if we receive marketing approval for our CNS product candidates, we may still face future development and regulatory difficulties.
Even if we receive marketing approval for our CNS product candidates, regulatory authorities may still impose significant restrictions on our product candidates, indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Our product candidates will also be subject to ongoing regulatory requirements governing the labeling, packaging, storage and promotion of the product and record keeping and submission of safety and other post-market information. The FDA hasand other regulatory authorities have significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA and other regulatory authorities also hashave the authority to require, as part of an NDA or post-approval, the submission of a REMS.REMS or comparable safety program. Any REMS or comparable safety program required by the FDA or other regulatory authority may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.
Manufacturers of drug and device products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with our product candidates, such as adverse events of unanticipated severity or frequency, or problems with the facility where our product candidates are manufactured, a regulatory agency may impose restrictions on our product candidates, the manufacturer or us, including requiring withdrawal of our product candidates from the market or suspension of manufacturing. If we, our product candidates, or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may, among other things:
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issue warning letters or untitled letters;
| ● | issue warning letters or untitled letters; |
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seek an injunction or impose civil or criminal penalties or monetary fines;
| ● | seek an injunction or impose civil or criminal penalties or monetary fines; |
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suspend or withdraw marketing approval;
| ● | suspend or withdraw marketing approval; |
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suspend any ongoing clinical trials;
| ● | suspend any ongoing clinical trials; |
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refuse to approve pending applications or supplements to applications submitted by us;
| ● | refuse to approve pending applications or supplements to applications submitted by us; |
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suspend or impose restrictions on operations, including costly new manufacturing requirements; or
| ● | suspend or impose restrictions on operations, including costly new manufacturing requirements; or |
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seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall.
| ● | seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall. |
Competing therapies could emerge adversely affecting our opportunity to generate revenue from the sale of our CNS product candidates.
The pharmaceutical industry is highly competitive. There are many public and private pharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of product candidates that may be similar to and compete with our product candidates or address similar markets. It is probable that the number of companies seeking to develop product candidates similar to and competitive with our product candidates will increase.increase in the future.
Currently, management is unaware of any FDA-approved oral adjunctive therapy for MDD patientsrapid-onset, acute treatment of anxiety in adults with an inadequate response to standard antidepressantsSAD having the same mechanism of pharmacological action and safety profile as our orally administered AV-101.PH94B. Also, management is currently unaware of any FDA-approved oral treatment for MDD having the same mechanism of pharmacological action and safety profile as our intranasally-administered PH10 or our orally-administered AV-101 in combination with probenecid. However, new antidepressant products with other mechanisms of pharmacological action or products approved for other indications, including the FDA-approved anesthetic ketamine hydrochloride administered intravenously, are being or may be used off-label for treatment of MDD, as well as other CNS indications for which PH10 or AV-101 in combination with probenecid may have therapeutic potential. Additionally, other non-pharmaceutical treatment options, such psychotherapy and electroconvulsive therapy (ECT) are used before or instead of standard antidepressant medications to treat patients with MDD.
With respect to PH94B and current treatment options for SAD in the U.S., our competition may include, but is not limited to, current generic oral antidepressants approved by the FDA for treatment of SAD, as well as certain classes of drugs prescribed on an off-label basis for treatment of SAD, including benzodiazepines such as alprazolam, and beta blockers such as propranolol. In the field of new generation, oral adjunctive treatments for adult patients with MDD, with an inadequate response to standard FDA-approved antidepressants, we believe our principal competitorcompetitors may be Alkermes’ oral opioid modulator, ALKS-5461, which adjunctive treatment product candidate is the subject ofAxsome, Alkermes, Relmada and Sage. Additional potential competitors may include, but not be limited to, academic and private commercial clinics providing intravenous ketamine therapy on an NDA recently submitted to the FDA by Alkermes.
off-label basis and Janssen’s intranasally-administered esketamine.
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery, and development of product candidates, obtaining FDA and other regulatory approvals of treatments and the commercialization of those treatments. WeWith respect to PH94B, in addition to potential competition from certain current FDA-approved antidepressants and off-label use of benzodiazepines and beta blockers, we believe thatadditional drug candidates in development for SAD may include, but potentially not be limited to, an oral fatty acid amide hydrolase inhibitor in development by Janssen. With respect to PH10 and AV-101 in combination with probenecid for treatment of depression disorders, including MDD, and AV-101 in combination with probenecid for treatment of certain neurological disorders, including levodopa-induced dyskinesia associated with therapy for Parkinson’s disease, neuropathic pain, and epilepsy, we believe a range of pharmaceutical and biotechnology companies have programs to develop small molecule drug candidates and/or medical device technologies for the treatment of depression, including MDD, Parkinson’s disease levodopa-induced dyskinesia, neuropathic pain, epilepsy, and other neurological conditions and diseases,such indications, including, but not limited to, Abbott Laboratories, Acadia, Allergan, Alkermes, Aptynix, AstraZeneca, Axsome, Eli Lilly, GlaxoSmithKline, IntraCellular, Johnson & Johnson/Janssen, Lundbeck, Merck, Neurocrine, Novartis, Ono, Otsuka, Pfizer, Relmada, Roche, Sage, Sumitomo Dainippon, and Takeda, as well as any affiliates of the foregoing companies. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market.
We may seek to establish collaborations, and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.candidates, such as the License and Collaboration Agreement we entered into with AffaMed Therapeutics (formerly EverInsight Therapeutics) in June 2020 for the development and commercialization of PH94B in Greater China, South Korea and Southeast Asia.
We may derive revenue from research and development fees, license fees, milestone payments and royalties under any collaborative arrangement into which we enter, including the AffaMed Agreement. However, our ability to generate revenue from such arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators have the right to abandon research or development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed upon terms. As a result, we can expect to relinquish some or all of the control over the future success of a product candidate that we license to a third party in the territories included in the licenses.
We face significant competition in seeking appropriate collaborators. Whether we reach aadditional definitive agreementagreements for collaborationcollaborations will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of nonclinical and clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential markets for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with us for our product candidate. The terms of any collaboration or other arrangements that we may establish may not be favorable to us.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate additional collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
In addition, any future collaboration that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.
We may not be successful in our efforts to identify or discover additional CNS product candidates, or we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
The success of our business depends primarily upon our ability to identify, develop and commercialize CNS product candidates with commercial and therapeutic potential. Although AV-101 is in Phase 2 clinical development for treatment of MDD, weWe may fail to pursue additional CNS-related Phase 2 development opportunities for PH94B, PH10 or AV-101, or identify additional CNS product candidates for clinical development and commercialization for a number of reasons. Our research methodology may be unsuccessful in identifying new product candidates or our product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.
Because we currently have limited financial and management resources, we necessarilyWe strategically focus on a limited number of research and development programs and product candidates and are currently focused primarily on development of AV-101, with additional limited focus on NCE drug rescuePH94B, PH10 and RM.AV-101. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other potential CNS-related indications for PH94B, PH10 and/or AV-101 that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research and development programs to identify and advance new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
Although we do not currently have any products on the market, once we begin commercializing our products,CNS product candidates, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product candidates, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product candidates, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
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The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
| ● | The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. |
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The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
| ● | The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. |
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The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
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The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.
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The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests.
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Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance.
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Guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.
| ● | The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. |
| ● | The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. |
| ● | The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests. |
| ● | Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance. |
| ● | Guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing. |
| ● | Foreign Corrupt Practices Act and its application to marketing and selling practices as well as to clinical trials. |
Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be out of compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.
The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as PH94B, PH10 and AV-101, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive FDA marketing approval for AV-101PH94B as an adjunctiveacute treatment of MDD,anxiety in adults with SAD, physicians may prescribe AV-101PH94B to their patients in a manner that is inconsistent with the FDA-approved label. However, if we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper off-label promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or imposed permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.
Even if approved, reimbursement policies could limit our ability to sell our CNS product candidates.
Market acceptance and sales of our product candidates will depend heavily on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S.United States healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for our product candidates and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, our product candidates. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates.
In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates with other available therapies. If reimbursement for our product candidates is unavailable in any country in which we seek reimbursement, if it is limited in scope or amount, if it is conditioned upon our completion of additional clinical trials, or if pricing is set at unsatisfactory levels, our operating results could be materially adversely affected.
We may seek FDA Orphan Drug designation for one or more of our CNS product candidates. Even if we have obtained FDA Orphan Drug designation for a product candidate, there may be limits to the regulatory exclusivity afforded by such designation.
We may, in the future, choose to seek FDA Orphan Drug designation for one or more of our current or future CNS product candidates. Even if we obtain Orphan Drug designation from the FDA for a product candidate, there are limitations to the exclusivity afforded by such designation. In the U.S., the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. To obtain Orphan Drug status for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United StatesU.S. may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to patient care.
Our future growth may depend, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.
Our future profitability may depend, in part, on our ability to commercialize our product candidates in foreign markets for which we may rely on collaboration with third parties.parties such as our collaboration with AffaMed to develop and commercialize PH94B in key Asian markets. If we commercialize our product candidates in foreign markets, we would be subject to additional risks and uncertainties, including:
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our customers’ ability to obtain reimbursement for our product candidates in foreign markets;
| ● | our customers’ ability to obtain reimbursement for our product candidates in foreign markets; |
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our inability to directly control commercial activities because we are relying on third parties;
| ● | our inability to directly control commercial activities because we are relying on third parties; |
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the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
| ● | the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements; |
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different medical practices and customs in foreign countries affecting acceptance in the marketplace;
| ● | different medical practices and customs in foreign countries affecting acceptance in the marketplace; |
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import or export licensing requirements;
| ● | import or export licensing requirements; |
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longer accounts receivable collection times;
| ● | longer accounts receivable collection times; |
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longer lead times for shipping;
| ● | longer lead times for shipping; |
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language barriers for technical training;
| ● | language barriers for technical training; |
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reduced protection of intellectual property rights in some foreign countries;
| ● | reduced protection of intellectual property rights, different standards of patentability and different availability of prior art in some foreign countries as compared with the U.S.; |
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the existence of additional potentially relevant third party intellectual property rights;
| ● | the existence of additional potentially relevant third party intellectual property rights; |
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foreign currency exchange rate fluctuations; and
| ● | foreign currency exchange rate fluctuations; and |
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the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
| ● | the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute. |
Foreign sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs.
We are a development stage biopharmaceutical company with no currentrecurring revenues from product sales or approved products, and limited experience developing new therapeutic product candidates, including conducting clinical trials and other areas required for the successful development and commercialization of therapeutic products, which makes it difficult to assess our future viability.
We are a development stage biopharmaceutical company. Although our lead drug candidate is in Phase 2 development, weWe currently have no approved products and currently generate no recurring revenues from product sales, and we have not yet fully demonstrated an ability to overcome many of the fundamental risks and uncertainties frequently encountered by development stage companies in new and rapidly evolving fields of technology, particularly biotechnology. To execute our business plan successfully, we will need to accomplish or continue to accomplish the following fundamental objectives, either on our own or with collaborators:
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develop and obtain required regulatory approvals for commercialization of AV-101 and other product candidates;
| ● | develop and obtain required regulatory approvals for commercialization of PH94B, PH10, AV-101 and/or other CNS product candidates; |
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maintain, leverage and expand our intellectual property portfolio;
| ● | maintain, leverage and expand our intellectual property portfolio; |
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establish and maintain sales, distribution and marketing capabilities, and/or enter into strategic partnering arrangements to access such capabilities;
| ● | establish and maintain sales, distribution and marketing capabilities, and/or enter into strategic partnering arrangements to access such capabilities; |
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gain market acceptance for our product candidates; and
| ● | gain market acceptance for our product candidates; and |
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obtain adequate capital resources and manage our spending as costs and expenses increase due to research, production, development, regulatory approval and commercialization of product candidates.
| ● | obtain adequate capital resources and manage our spending as costs and expenses increase due to research, production, development, regulatory approval and commercialization of product candidates. |
Our future success is highly dependent upon our ability to successfully develop and commercialize AV-101,any of our current CNS product candidates, acquire or license additional CNS product candidates, or discover, as well as produce, develop and commercialize proprietary drug rescue NCEs using our stem cell technology, and we cannot provide any assurance that we will successfully develop and commercialize PH94B, PH10, AV-101 or acquire or license additional CNS product candidates, or discover and develop drug rescue NCEs, or that, if produced, PH94B, PH10, AV-101 or any other CNS product candidate will be successfully commercialized.
Business development and research and development programs designed to identify, acquire or license additional product candidates or, as the case may be, produce drug rescue NCEs require substantial technical, financial and human resources, whether or not any additional CNS product candidate is acquired or licensed or NCEslicensed.We are ultimately identified and produced. In particular, our drug rescue programs may initially show promise in identifying potential NCEs, yet fail to yield a lead NCE suitable for preclinical, clinical development or commercialization for many reasons, including the following:
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our drug rescue research and development methodology may not be successful in identifying and developing potential drug rescue NCEs;
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competitors may develop alternatives that render our drug rescue NCEs obsolete;
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a drug rescue NCE may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or otherwise does not meet applicable regulatory criteria;
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a drug rescue NCE may not be capablebeginning stages of being produced in commercial quantities at an acceptable cost, or at all; or
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a drug rescue NCE may not be accepted as safe and effective by regulatory authorities, patients, the medical community or third-party payors.
In addition, we do not havebuilding a sales orand marketing infrastructure, and we, including ourhiring certain executive officers do notand other employees that have any significant pharmaceutical sales, marketing or distribution experience. WeIn addition, if beneficial, we may seek to collaborate with others to develop and commercialize PH94B, PH10, AV-101, drug rescue NCEs and/or other CNS product candidates if and when they are acquired and developed.developed, or we may seek to establish those commercial capabilities ourselves. If we enter into arrangements with third parties to perform sales, marketing and distribution services for our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we may not be successful entering into arrangements with third parties to sell, market and distribute PH94B, PH10, AV-101, any drug rescue NCEs or other CNS product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.
We have limited operating history with respect to drug development, including our anticipated focus on the identification and acquisition of additional product candidates or the assessment of potential drug rescue NCEs and no operating history with respect to the production of drug rescue NCEs, and we may never be able to produce a drug rescue NCE.
If we are unable to develop and commercialize AV-101, acquire or license additional product candidates, or produce suitable drug rescue NCEs, we may not be able to generate sufficient revenues to execute our business plan, which likely would result in significant harm to our financial position and results of operations, which could adversely impact our stock price.
With respect to drug rescue, there are a number of factors, in addition to the utility of CardioSafe 3D, that may impact our ability to identify and produce, develop or out-license and commercialize drug rescue NCEs, independently or with partners, including:
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our ability to identify potential drug rescue candidates in the public domain, obtain sufficient quantities of them, and assess them using our bioassay systems;
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if we seek to rescue drug rescue candidates that are not available to us in the public domain, the extent to which third parties may be willing to out-license or sell certain drug rescue candidates to us on commercially reasonable terms;
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our medicinal chemistry collaborator’s ability to design and produce proprietary drug rescue NCEs based on the novel biology and structure-function insight we provide usingCardioSafe3D; and
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financial resources available to us to develop and commercialize lead drug rescue NCEs internally, or, if we sell or out-license them to partners, the resources such partners choose to dedicate to development and commercialization of any drug rescue NCEs they acquire or license from us.
Even if we do acquire additional product candidates or produce proprietary drug rescue NCEs, we can give no assurance that we will be able to develop and commercialize them as marketable drugs, on our own or in collaboration with others. Before we generate any revenues from AV-101, additional acquired or licensed products candidates or any drug rescue NCEs, we or our potential collaborators must complete preclinical and clinical development programs, submit clinical and manufacturing data to the FDA, qualify a third party CMO, receive regulatory approval in one or more jurisdictions, satisfy the FDA that our CMO is capable of manufacturing the product in compliance with cGMP, build a commercial organization, make substantial investments and undertake significant marketing efforts ourselves or in partnership with others. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates.
If CardioSafe 3D fails to predict accurately and efficiently the cardiac effects, both toxic and nontoxic, of drug rescue candidates and drug rescue NCEs, then our drug rescue programs will be adversely affected.
Success of our subsidiary, VistaStem, is partly dependent on our ability to use CardioSafe 3D to identify and predict, accurately and efficiently, the potential toxic and nontoxic cardiac effects of drug rescue candidatesand drug rescue NCEs. If CardioSafe 3D is not capable of providing physiologically relevant and clinically predictive information regarding human cardiac biology, our drug rescue business will be adversely affected.
CardioSafe 3D may not be meaningfully more predictive of the behavior of human cells than existing methods.
The success of our drug rescue programs is highly dependent upon CardioSafe 3D being more accurate, efficient and clinically predictive than long-established surrogate safety models, including animal cells and live animals, and immortalized, primary and transformed cells, currently used by pharmaceutical companies and others. We cannot give assurance that CardioSafe 3D will be more efficient or accurate at predicting the heart safety of new drug candidates than the testing models currently used. If CardioSafe 3D fails to provide a meaningful difference compared to existing or new models in predicting the behavior of human heart, respectively, their utility for drug rescue will be limited and our drug rescue business will be adversely affected.
We may invest in producing drug rescue NCEs for which there proves to be no demand.
To generate revenue from our drug rescue activities, we must produce proprietary drug rescue NCEs for which there proves to be demand within the healthcare marketplace, and, if we intend to out-license a particular drug rescue NCE for development and commercialization prior to market approval, then also among pharmaceutical companies and other potential collaborators. However, we may produce drug rescue NCEs for which there proves to be no or limited demand in the healthcare market and/or among pharmaceutical companies and others. If we misinterpret market conditions, underestimate development costs and/or seek to rescue the wrong drug rescue candidates, we may fail to generate sufficient revenue or other value, on our own or in collaboration with others, to justify our investments, and our drug rescue business may be adversely affected.
We may experience difficulty in producing human cells and our future stem cell technology research and development efforts may not be successful within the timeline anticipated, if at all.
Our human pluripotent stem cell technology is technically complex, and the time and resources necessary to develop various human cell types and customized bioassay systems are difficult to predict in advance. We might decide to devote significant personnel and financial resources to research and development activities designed to expand, in the case of drug rescue, and explore, in the case of drug discovery and regenerative medicine, potential applications of our stem cell technology platform. In particular, we may conduct exploratory nonclinical RM programs involving blood, bone, cartilage, and/or liver cells. Although we and our collaborators have developed proprietary protocols to produce multiple differentiated cell types, we could encounter difficulties in differentiating and producing sufficient quantities of particular cell types, even when following these proprietary protocols. These difficulties could result in delays in production of certain cells, assessment of certain drug rescue candidates and drug rescue NCEs, design and development of certain human cellular assays and performance of certain exploratory non-clinical regenerative medicine studies. In the past, our stem cell research and development projects have been significantly delayed when we encountered unanticipated difficulties in differentiating human pluripotent stem cells into heart and liver cells. Although we have overcome such difficulties in the past, we may have similar delays in the future, and we may not be able to overcome them or obtain any benefits from our future stem cell technology research and development activities. Any delay or failure by us, for example, to produce functional, mature blood, bone, cartilage, and liver cells could have a substantial and material adverse effect on our potential drug discovery, drug rescue and regenerative medicine business opportunities and results of operations.
Restrictions on research and development involving human embryonic stem cells and religious and political pressure regarding such stem cell research and development could impair our ability to conduct or sponsor certain potential collaborative research and development programs and adversely affect our prospects, the market price of our common stock and our business model.
Some of our research and development programs may involve the use of human cells derived from our controlled differentiation of human embryonic stem cells (hESCs). Some believe the use of hESCs gives rise to ethical and social issues regarding the appropriate use of these cells. Our research related to differentiation of hESCs may become the subject of adverse commentary or publicity, which could significantly harm the market price of our common stock. Although now substantially less than in years past, certain political and religious groups in the United States and elsewhere voice opposition to hESC technology and practices. We may use hESCs derived from excess fertilized eggs that have been created for clinical use in in vitro fertilization (IVF) procedures and have been donated for research purposes with the informed consent of the donors after a successful IVF procedure because they are no longer desired or suitable for IVF. Certain academic research institutions have adopted policies regarding the ethical use of human embryonic tissue. These policies may have the effect of limiting the scope of future collaborative research opportunities with such institutions, thereby potentially impairing our ability to conduct certain research and development in this field that we believe is necessary to expand the drug rescue capabilities of our technology, which would have a material adverse effect on our business.
The use of embryonic or fetal tissue in research (including the derivation of hESCs) in other countries is regulated by the government, and such regulation varies widely from country to country. Government-imposed restrictions with respect to use of hESCs in research and development could have a material adverse effect on us by harming our ability to establish critical collaborations, delaying or preventing progress in our research and development, and causing a decrease in the market interest in our stock.
The foregoing potential ethical concerns do not apply to our use of induced pluripotent stem cells (iPSCs) because their derivation does not involve the use of embryonic tissues.
We have assumed that the biological capabilities of iPSCs and hESCs are likely to be comparable. If it is discovered that this assumption is incorrect, our exploratory research and development activities focused on potential regenerative medicine applications of our stem cell technology platform could be harmed.
We may use both hESCs and iPSCs to produce human cells for our customized in vitro assays for drug discovery and drug rescue purposes. However, we anticipate that our future exploratory research and development, if any, focused on potential regenerative medicine applications of our stem cell technology platform primarily will involve iPSCs. With respect to iPSCs, we believe scientists are still somewhat uncertain about the clinical utility, life span, and safety of such cells, and whether such cells differ in any clinically significant ways from hESCs. If we discover that iPSCs will not be useful for whatever reason for potential regenerative medicine programs, this would negatively affect our ability to explore expansion of our platform in that manner, including, in particular, where it would be preferable to use iPSCs to reproduce rather than approximate the effects of certain specific genetic variations.
If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.
Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.
In addition, we may incur substantial costs to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development, or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties, or other sanctions, which could have a material adverse effect on our operations.
To the extent our research and development activities involve using iPSCs, we will be subject to complex and evolving laws and regulations regarding privacy and informed consent. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our research and development programs and objectives, increased cost of operations or otherwise harm the Company.
To the extent that we pursue research and development activities involving iPSCs, we will be subject to a variety of laws and regulations in the United States and abroad that involve matters central to such research and development activities, including obligations to seek informed consent from donors for the use of their blood and other tissue to produce, or have produced for us, iPSCs, as well as state and federal laws that protect the privacy of such donors. United States federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. If we engage in iPSC-related research and development activities in countries other than the United States, we may become subject to foreign laws and regulations relating to human-subjects research and other laws and regulations that are often more restrictive than those in the United States. In addition, both the application and interpretation of these laws and regulations are often uncertain, particularly in the rapidly evolving stem cell technology sector. Compliance with these laws and regulations can be costly, can delay or impede our research and development activities, result in negative publicity, increase our operating costs, require significant management time and attention and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.
Legal, social and ethical concerns surrounding the use of iPSCs, biological materials and genetic information could impair our operations.
To the extent that our future stem cell research and development activities involve the use of iPSCs and the manipulation of human tissue and genetic information, the information we derive from such iPSC-related research and development activities could be used in a variety of applications, which may have underlying legal, social and ethical concerns, including the genetic engineering or modification of human cells, testing for genetic predisposition for certain medical conditions and stem cell banking. Governmental authorities could, for safety, social or other purposes, call for limits on or impose regulations on the use of iPSCs and genetic testing or the manufacture or use of certain biological materials involved in our iPSC-related research and development programs. Such concerns or governmental restrictions could limit our future research and development activities, which could have a material adverse effect on our business, financial condition and results of operations.
Our human cellular bioassay systems and human cells we derive from human pluripotent stem cells, although not currently subject to regulation by the FDA or other regulatory agencies as biological products or drugs, could become subject to regulation in the future.
The human cells we produce from hPSCs and our customized bioassay systems using such cells, including CardioSafe 3D, are not currently sold, for research purposes or any other purpose, to biotechnology or pharmaceutical companies, government research institutions, academic and nonprofit research institutions, medical research organizations or stem cell banks, and they are not therapeutic procedures. As a result, they are not subject to regulation as biological products or drugs by the FDA or comparable agencies in other countries. However, if, in the future, we seek to include human cells we derive from hPSCs in therapeutic applications or product candidates, such applications and/or product candidates would be subject to the FDA’s pre- and post-market regulations. For example, if we seek to develop and market human cells we produce for use in performing regenerative medicine applications, such as tissue engineering or organ replacement, we would first need to obtain FDA pre-market clearance or approval. Obtaining such clearance or approval from the FDA is expensive, time-consuming and uncertain, generally requiring many years to obtain, and requiring detailed and comprehensive scientific and clinical data. Notwithstanding the time and expense, these efforts may not result in FDA approval or clearance. Even if we were to obtain regulatory approval or clearance, it may not be for the uses that we believe are important or commercially attractive.
Risks Related to Our Financial Position
We have incurred significant net losses since inception and we will continue to incur substantial operating losses for the foreseeable future. We may never achieve or sustain profitability, which would depress the market price of our common stock and could cause you to lose all or a part of your investment.
We have incurred significant net losses in each fiscal year since our inception in 1998, including net losses of $14.3approximately $17.9 million and $10.3$20.8 million during theour fiscal years ended March 31, 20182021 and 2017,2020, respectively. As ofAt March 31, 2018,2021, we had an accumulated deficit of approximately $156.5$242.8 million. We do not know whether or when we will become profitable. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity (deficit) and working capital. We expect our research and development expenses to significantly increase in connection with nonclinical studies and clinical trials of our product candidates. In addition, if we obtain marketing approval for our product candidates, we may incur significant sales, marketing and outsourced-manufacturing expenses should we elect not to collaborate with one or more third parties for such services and capabilities. As a public company, we incur additional costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
Our ability to become profitable depends upon our ability to generate recurring revenues. To date,Through March 31, 2021, we have generated approximately $17.7$22.7 million in revenues, including receiptconsisting of receipts of non-dilutive cash payments from collaborators, sublicense revenue, including the $5.0 million cash payment received under the AffaMed Agreement during the quarter ended September 30, 2020, the majority of which has been recorded as deferred revenue at March 31, 2021, and research and development grant awards from the NIH, however not including the fair market value of the NIMH Study sponsored and conducted by the NIMH under our NIMH CRADA.NIH. We have not yet commercialized any product or generated any revenues from product sales, and we do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to experience sales of, PH94B, PH10, AV-101 or another future CNS product candidate, or we enter into one or more development and commercialization agreements with respect to PH94B, PH10, AV-101 or one or more other future CNS product candidates. Our ability to generate recurring revenue depends on a number of factors, including, but not limited to, our ability to:
| ● | initiate and successfully complete nonclinical and clinical trials that meet their prescribed endpoints; |
| ● | initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for our CNS product candidates; |
| ● | timely complete and compose successful regulatory submissions such as NDAs or comparable documents for both the U.S. and foreign jurisdictions; |
| ● | commercialize our CNS product candidates, if approved, by developing a sales force or entering into collaborations with third parties for sales and marketing capabilities; and |
| ● | achieve market acceptance of our CNS product candidates in the medical community and with third-party payors. |
●initiate and successfully complete nonclinical and clinical trials that meet their prescribed endpoints;-49-
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initiate and successfully complete all safetyIf our Phase 3 studies required to obtain U.S. and foreign marketing approvalof PH94B for our product candidates;
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timely complete and composethe acute treatment of anxiety in adults with SAD are successful, regulatory submissions such as NDAs or comparable documents for both U.S. and foreign jurisdictions;
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commercialize our product candidates, if approved, by developing a sales force or entering into collaborations with third parties for sales and marketing capabilities; and
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achieve market acceptance of our product candidates in the medical community and with third-party payors.
Unlessunless we enter into a commercialization collaboration or partnership with respect tocontractual arrangement for the commercialization of our product candidates,PH94B in the U.S., we expect to incur significant sales and marketing costs as we prepare to commercialize PH94B on our product candidates.own in the U.S. Even if we initiate and successfully complete pivotalPhase 3 clinical trials of PH94B and our other CNS product candidates, and all of our CNS product candidates are approved for commercial sale, and despite expending thesesubstantial capital for sales and marketing costs, PH94B and our other product candidates may not be commercially successful. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.
We require additional financing to execute our long-term business plan and continue to operate as a going concern.plan.
Our audited consolidated financial statements for the year ended March 31, 2018 included elsewhere in this Annual Report have been prepared assuming we will continue to operate as a going concern, although we and our auditors have indicated that our continuing losses and negative cash flows from operations raise substantial doubt about our ability to continue as such. Because we continue to experience net operating losses, our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans and grant awards from financial institutions and/or government agencies where possible. Our continued net operating losses increase the difficulty in completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all. If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required to reduce, defer, or discontinue certain or all of our research and development activities or we may not be able to continue as a going concern.
Since our inception, mosta substantial portion of our resources have been dedicated to research and development of AV-101 and the drug rescue capabilities of ourVistaStem’s stem cell technology platform. In particular, (i) for AV-101, we have expended substantial resources on research and development of methods and processes relating to the production of AV-101 API advancing AV-101 throughand drug product, IND-enabling preclinical development,studies, Phase 1 clinical safety studies, and into ongoinga Phase 2 clinical development, including preparationstudy completed in 2019 and (ii) for and recent launch of our ELEVATE study, as well as research andVistaStem, development of our stem cell technology platform, including development of CardioSafe 3D for drug rescue and our cardiac stem cell technologytechnology. In addition, beginning in 2018, we have expended a considerable portion of our resources for potential regenerative medicine applications in connection withresearch, development, manufacturing and regulatory expenses related to the Bluerock Agreement,development and weproduction of PH94B, including costs related to the PALISADE Phase 3 program, and PH10. We expect to continue to expend substantial resources for the foreseeable future developing and commercializing our CNS product candidates on our own or in collaborations. These expenditures will include costs associated with general and administrative costs, facilities costs, research and development, acquiring new technologies, manufacturing product candidates, conducting nonclinical experiments and clinical trials and obtaining regulatory approvals, as well as commercializing any products approved for sale.
At March 31, 2018,2021, we had a cash and cash equivalents balance of approximately $10.4$103.1 million. We do not believe this amount is sufficient to enable us to fund our planned operations for at least the twelve months following the issuance of the financial statements included elsewhere in this Annual Report. We expect to seek additional capital to finalize the results from our ELEVATE study, produce additional AV-101 study material, conduct Phase 3-enabling studies, conduct Phase 3 studies in MDD, conduct AV-101 Phase 2 studies in CNS indications other than MDD, acquire or license and conduct research and development of additional product candidates and to fund our internal operations in 2019 and beyond.
Further,Although we received the $5 million non-dilutive cash upfront payment under the AffaMed Agreement in August 2020 and expect to recognize that amount as revenue in future periods, we have no currentother recurring source of revenue or recurring cash flows from product sales to sustain our present activities, and we do not expect to generate revenuesustainable positive operating cash flows until, and unless, we (i) out-license or sell a product candidate to a third-party that is subsequently successfully developed and commercialized, (ii) enter into additional license arrangements involving our stem cell technology, or (iii) obtain approval from the FDA or other regulatory authorities and successfully commercialize PH94B, on our own or through a future collaboration, one or moreone of our other product candidates.
As the outcome of our ongoing research and development activities, including the outcome of ongoing and future anticipated nonclinical studies and clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our current CNS product candidates, on our own or in collaboration with others. As in prior periods, we will continue to incur substantial costs associated with other development programs for PH94B, PH10 and AV-101. In addition, other unanticipated costs may arise. As a result of these and other factors, we will need to seek additional capital in the near term to meet our future operating plans and requirements, including capital necessary to develop, obtain regulatory approval for, and to commercialize our CNS product candidates, and may seek additional capital in the event there exists favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans.plans and requirements. We have completed in the past and are considering, a range of potential financing transactions, including public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches, and we may pursue and complete additional financing arrangements in 2018 and beyond. Raising funds in the current economic environment may present additional challenges.future. Even if we believe we have sufficient funds for our current or future operating plans and requirements, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.
Our future capital requirements may depend on many factors, including:
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the number and characteristics of the product candidates we pursue;
| ● | the number and characteristics of the product candidates we pursue; |
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the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical studies;
| ● | the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical studies; |
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the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
| ● | the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; |
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the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs;
| ● | the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs; |
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the cost of manufacturing our product candidates and any products we successfully commercialize;
| ● | the cost of manufacturing and formulating our product candidates and any products we successfully commercialize; |
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our ability to establish and maintain strategic partnerships, licensing or other collaborative arrangements and the financial terms of such agreements;
| ● | our ability to establish and maintain strategic partnerships, licensing or other collaborative arrangements and the financial terms of such agreements; |
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market acceptance of our product candidates;
| ● | market acceptance of our product candidates; |
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the effect of competing technological and market developments;
| ● | the effect of competing technological and market developments; |
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our ability to obtain government funding for our research and development programs;
| ● | our ability to obtain government funding for our research and development programs; |
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the costs involved in obtaining and enforcing patents to preserve our intellectual property;
| ● | the costs involved in obtaining, maintaining and enforcing patents to preserve our intellectual property; |
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the costs involved in defending against such claims that we infringe third-party patents or violate other intellectual property rights and the outcome of such litigation;
| ● | the costs involved in defending against such claims that we infringe third-party patents or violate other intellectual property rights and the outcome of such litigation; |
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the timing, receipt and amount of potential future licensee fees, milestone payments, and sales of, or royalties on, our future products, if any; and
| ● | the timing, receipt and amount of potential future licensee fees, milestone payments, and sales of, or royalties on, our future products, if any; and |
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the extent to which we may acquire or invest in additional businesses, product candidates and technologies.
| ● | the extent to which we may acquire or invest in additional businesses, product candidates and technologies. |
Any additional fundraising efforts will divert certain members of our management team from their day-to-day activities, which may adversely affect our ability to develop and commercialize our product candidates. In addition, weWe cannot guarantee that future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. The terms of any future financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity securities and the conversion, exchange or exercise of certain of our outstanding securities will dilute all of our stockholders. The incurrence of debt could result in increased fixed payment obligations and we could be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
IfWhen necessary, if we are unable to obtain additional funding on a timely basis and on acceptable terms, we may be required to significantly curtail, delay or discontinue one or more of our research or product development programs or the commercialization of any product candidate or be unable to continue or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Current volatile and/or recessionary economic conditions in the U.S. or abroad could adversely affect our business or our access to capital markets in a material manner.
To date, our principal sources of capital used to fund our development programs and other operations have been the net proceeds we received from sales of equity securities. We have and will continue to use significant capital for the development and commercialization of our product candidates, and, as such, we expect to seek additional capital from future issuance(s) of our securities, which may consist of issuances of equity and/or debt securities, to fund our planned operations.
Accordingly, our results of operations and the implementation of both our short-term and long-term business plan could be adversely affected by general conditions in the global economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the current COVID-19 pandemic. The ongoing COVID-19 pandemic has resulted in extreme volatility and disruptions in the capital and credit markets. A prolonged economic downturn could result in a variety of risks to our business and may have a material adverse effect on us, including limiting or restricting our ability to access capital on favorable terms, or at all, which would limit our abilityto obtain adequate financing to maintain our operations.
We have identified material weaknesses in our internal control over financial reporting, and our business and stock price may be adversely affected if we do not adequately address those weaknesses or if we have other material weaknesses or significant deficiencies in our internal control over financial reporting.
We have identified and are now taking steps to correct material weaknesses in our internal control over financial reporting. In particular, we concluded that (i) the size and capabilities of the Company’sour staff doeshas not permitallowed appropriate segregation of duties to (a) permit appropriate review of accounting transactions and/or accounting treatment by multiple qualified individuals, and (b) prevent one individual from overriding the internal control system by initiating, authorizing and completing all transactions, and (ii) the Company utilizeswe have utilized accounting software that doesdid not prevent erroneous or unauthorized changes to previous reporting periods and/or cancould be adjusted so as to not provide an adequate auditing trail of entries made in the accounting software.
The existence of one or more material weaknesses or significant deficiencies could result in errors in our financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, we may be unable to obtain additional financing to operate and expand our business and our business and financial condition could be harmed.
Raising additional capital will cause substantial dilution to our existing stockholders, may restrict our operations or require us to relinquish rights, and may require us to seek stockholder approval to authorize additional shares of our common stock.
We intend tomay pursue private and public equity offerings, debt financings, strategic collaborations and licensing arrangements during 2018 and beyond.in the future. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, or to the extent, for strategic purposes, we convert or exchange certain of our outstanding securities into common stock, our current stockholders’ ownership interest in our company will be substantially diluted. In addition, the terms of any such securities may include liquidation or other preferences that materially adversely affect rights of our stockholders. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our intellectual property, future revenue streams or grant licenses on terms that are not favorable to us.
SomeWe may be required to raise additional financing by issuing new securities with terms or rights superior to those of our existing securityholders, which could adversely affect the market price of shares of our common stock and our business.
We will require additional financing to fund future operations, including our research and development activities for our CNS product candidates and our anticipated pre-launch commercialization activities, assuming our clinical development programs have been partially supported by government grant awards, whichare successful and we receive necessary approvals from the FDA. We may not be availableable to us inobtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the future.
Since inception, we have received substantial funds under grant award programs funded by state and federal governmental agencies, such as the NIH, the NIH’s National Institutepercentage ownership of Neurological Disease and Stroke (NINDS)our current stockholders will be reduced, and the NIMH,holders of the new equity securities may have rights superior to those of our existing security holders, which could adversely affect the market price of our common stock and the California Institute for Regenerative Medicine (CIRM). To fund a portionvoting power of shares of our future researchcommon stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of our existing securityholders, and development programs, we may applythe terms of these debt securities could impose restrictions on operations and create a significant interest expense for additional grant funding from such or similar governmental organizations. However, funding by these governmental organizations may be significantly reduced or eliminated in the future forus, which could have a number of reasons. For example, some programs are subject to a yearly appropriations process in Congress. In addition, we may not receive funds under future grants because of budgeting constraints of the agency administering the program. Therefore, we cannot assure you that we will receive any future grant funding from any government organization or otherwise. A restrictionmaterially adverse effect on the government funding available to us could reduce the resources that we would be able to devote to future research and development efforts. Such a reduction could delay the introduction of new products and hurt our competitive position.business.
Our ability to use net operating losses to offset future taxable income is subject to certain limitations.
As of March 31, 2018,2021, we had federal and state net operating loss carryforwards of approximately $88.5$139.2 million and $63.5$64.6 million, respectively, which beginhave begun to expire in fiscal 2019.2022 and will continue to expire in future periods. Under Section 382 of the Internal Revenue Code of 1986, as amended (the Code), changes in our ownership may limit the amount of our net operating loss carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire. Any such limitation, whether as the result of future offerings, prior private placements, sales of our common stock by our existing stockholders or additional sales of our common stock by us in the future, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.
General Company-Related Risks
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully produce, develop and commercialize our product candidates.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management and scientific and technical personnel. We are highly dependent upon our Chief Executive Officer, President and Chief Scientific Officer, Chief Medical Officer, Chief Financial Officer, Chief Commercial Officer and Senior Vice President – Corporate DevelopmentHead of CMC, as well as our other employees, advisors, consultants and scientific and clinical collaborators. As of the date of this Report, we have nine21 full-time employees, which may make us more reliant on our individual employees than companies with a greater number of employees. The loss of services of any of these individuals could delay or prevent the successful development of our product candidates or disrupt our administrative functions.
Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional personnel should we elect to expand our administrative, research and development and administrativecommercial activities. We may not be able to attract and retain quality personnel on acceptable terms.
In addition, we rely on a broad and diverse range of strategic consultants and advisors, including manufacturing, nonclinical and clinical development and regulatory advisors and CMOs and CROs, to assist us in designing and implementing our research and development and regulatory strategies and plans for our product candidates. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to us.
As we seek to advance development of our product candidates, we may need to expand our research and development capabilities and/or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to develop and commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our research and development efforts effectively and hire, train and integrate additional management, administrative, commercial and technical personnel. The hiring, training and integration of new employees may be more difficult, costly and/or time-consuming for us because we have fewer resources than a larger organization. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing the company.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
As we develop our product candidates. either on our own or in collaboration with others, we will face inherent risks of product liability as a result of the required clinical testing of such product candidates, and will face an even greater risk if we or our collaborators commercialize any such product candidates. For example, we may be sued if PH94B, PH10, AV-101, or any drug rescue NCE, other product candidate we or regenerative medicine product candidate weour collaborators develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
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decreased demand for product candidates that we may develop;
| ● | decreased demand for product candidates that we may develop; |
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injury to our reputation;
| ● | injury to our reputation; |
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withdrawal of clinical trial participants;
| ● | withdrawal of clinical trial participants; |
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costs to defend the related litigation;
| ● | costs to defend the related litigation; |
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a diversion of management's time and our resources;
| ● | a diversion of management's time and our resources; |
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substantial monetary awards to trial participants or patients; or
| ● | substantial monetary awards to trial participants or patients; or |
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product recalls, withdrawals or labeling, marketing or promotional restrictions.
| ● | product recalls, withdrawals or labeling, marketing or promotional restrictions. |
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the commercialization of products we develop. Although we maintain general and product liability insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
As a public company, we incur significant administrative workload and expenses to comply with U.S. regulations and requirements imposed by the NASDAQ Stock Market concerning corporate governance and public disclosure.
As a public company with common stock listed on the NASDAQ Capital Market, we must comply with various laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NASDAQ Stock Market. Complying with these statutes, regulations and requirements, including our public company reporting requirements, continues to occupy a significant amount of the time of management and involves significant accounting, legal and other expenses. Our efforts to comply with these regulations are likely to result in increased general and administrative expenses and management time and attention directed to compliance activities.
Unfavorable global economic or political conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by global political conditions, as well as general conditions in the global economy and in the global financial and stock markets. Global financial and political crises cause extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the recent global financial crisis,economic downturn triggered by the ongoing COVID-19 pandemic, could result in a variety of risks to our business, including, weakened demand for our product candidates and our ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters, that damaged critical infrastructure, such as the manufacturing facilities of our third-party CMOs, or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business.
Our business and operations would suffer in the event of cybersecurity or other system failures. Our business depends on complex information systems, and any failure to successfully maintain these systems or implement new systems to handle our changing needs could could result in a material disruption of our product candidates’ development programs or otherwise materially harm our operations.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our suppliers, as well as personally identifiable information of employees. Similarly, our third-party CROs, CMOs and other contractors and consultants possess certain of our sensitive data. The secure maintenance of this information is material to our operations and business strategy. Despite the implementation of security measures, our internal computer systems and those of our third-party CROs, CMOs and other contractors and consultants are vulnerable to attacks by hackers, damage from computer viruses, unauthorized access, breach due to employee error, malfeasance or other disruptions, natural disasters, terrorism and telecommunication and electrical failures. Additionally, having shifted substantially to remote working arrangements, we also face a heightened risk of cybersecurity attacks or data security incidents and are more dependent on internet and telecommunications access and capabilities. Any such attack or breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. The legislative and regulatory landscape for privacy and data protection continues to evolve, and there has been an increasing amount of focus on privacy and data protection issues with the potential to affect our business, including recently enacted laws in a majority of states requiring security breach notification. Thus, any access, disclosure or other loss of information, including our data being breached at our partners or third-party providers, could result in legal claims or proceedings and liability under laws that protect the privacy of personal information, disruption of our operations, and damage to our reputation, which could adversely affect our business.
While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for PH94B, PH10, AV-101 or other product candidates could result in substantial delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.
We may acquire businesses or product candidates, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
We may acquire additional businesses or CNS product candidates, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter numerous difficulties in developing, manufacturing and marketing any new product candidates resulting from a strategic alliance, licensing transaction or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition or licensing transaction, we will achieve the expected synergies to justify the transaction.
Current politics in the U.S. could diminish the value of the pharmaceutical industry, thereby diminishing the value of our securities.
The current political environment in the U.S. has led many incumbents and political candidates to propose various measures to reduce the prices for pharmaceuticals. As a result of the U.S. presidential 2020 elections, it is likely that these proposals will receive increasing publicity which, in turn, may cause the investing public to reduce the perceived value of pharmaceutical companies. Any decrease in the overall perception of the pharmaceutical industry may have an adverse impact on our share price and may limit our ability to raise capital needed to continue our drug development programs.
Risks Related to Our Intellectual Property Rights
If we are unable to adequately protect our proprietary technology or obtain and maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations, financial condition and prospects.
We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking patents intended to cover our productsproduct candidates, their compositions and compositions,formulations, their methods of use and methods of manufacturing and any other inventions we consider important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, to defend and enforce our patents, should they issue, to preserve the confidentiality of our trade secrets and to operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of our product candidates. We own and have licensed patents and patent applications related to product candidates PH94B, PH10, AV-101 and human pluripotentalso to certain stem cell technology.
Although we own and have licensed issued and allowed patents and patent applications relating to PH94B, PH10 and AV-101 in the U.S., selected countries in the EU and the European Union,other jurisdictions, we cannot yet provide any assurances that any of our other numerous pending U.S. and additional foreign patent applications relating to AV-101 will mature into issued patents and, if they do, that suchany of our patents will include claims with a scope sufficient to protect AV-101our product candidates or otherwise provide any competitive advantage.
Moreover, other parties may have developed technologies that may be related or competitive to our approach and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent applications,properties, for example, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-party patent positions may limit or even eliminate our ability to obtain or maintain patent protection.
The uncertainty about adequate protection includes changes to the patent laws through either legislative action to change statutory patent law or court action that may reinterpret existing law in ways affecting the scope or validity of issued patents. Moreover, relevant laws differ from country-to-country.
The patent positions of biotechnology and pharmaceutical companies, including our patent position,portfolio with respect to our product candidates, involve complex legal and factual questions, and, therefore, the issuance, scope, validity and enforceability of any additional patent claims that we may obtainbe granted cannot be predicted with certainty. Patents, if issued,
Our ability to obtain valid and enforceable patents depends, among other factors, on whether the differences between our technology and the prior art allow our inventions to be patentable over relevant prior art. Such prior art includes, for example, scientific publications, investment blogs, granted patents and published patent applications. Patent uncertainty cannot be eliminated because of the potential existence of other prior art, about which we are currently unaware, that may be challenged,relevant to our patent applications and patents and that may prevent a pending patent application from being granted or result in an issued patent being held invalid or unenforceable. Moreover, the relevant standards for granting and reviewing patents varies among countries in which we pursue patents.
In addition, some patent-related uncertainty exists because of the challenge in finding and addressing all of the relevant and material prior art in the biotechnology and pharmaceutical fields. For example, there are numerous reports in the scientific literature of compounds that target similar cellular receptors as do certain of our product candidates or that were evaluated in early (often pre-clinical) studies that did not progress to regulatory approval. In addition, even some reports in the trade press and public announcements made by us before the filing date of our AV-101 patent applications mentioned that AV-101 was in development for certain therapeutic purposes. For example, we published a web post on the NIH clinical trials website prior to the filing of our initial AV-101 patent application, which describes unit doses for a then future study, but does not mention treatment of depression and does not provide any preclinical or clinical study data relating to depression or any other medical condition, disease or disorder. This post was not submitted to the United States Patent and Trademark Office (USPTO) in our two granted U.S. patents related to (i) unit dose formulations of AV-101 effective to treat depression and (ii) methods of treating depression with AV-101, respectively. However, it was submitted in two continuation depression-related AV-101 patent applications that have similar claims and the USPTO did not make further rejection based on that post. Another source of uncertainty pertains to patent properties that were in-licensed by us for which prior art submissions were under the control of the licensor. We rely on these licensors to have satisfied the relevant disclosure obligations.
In the event any previously published prior art is deemed to be invalidating prior art, it may cause certain of our issued patents to be invalid and/or unenforceable, which would cause us to lose at least part, and perhaps all, of the patent protection on relevant product candidates. Such a loss of patent protection would have a material adverse impact on our business.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The USPTO, the European Patent Office (EPO) and various other foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
Even if patents do successfully issue, third parties may challenge the validity, enforceability or scope of such issued patents or any other issued patents we own or license, which may result in such patents being narrowed, invalidated or circumvented. U.S.held unenforceable.
United States and foreign patents and patent applications may also be subject to various types of infringement and validity proceedings, including interference proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court. Patents may be subjected to opposition, post-grant review, invalidity actions, or comparable proceedings lodged in various foreign, both national and regional, patent offices.offices or courts. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition,in such proceedings may be costly. Thus, any patentsa way that we may own or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercializethey no longer cover our product candidates.candidates or competitive products.
Furthermore, though aan issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if a patent issues and is held to be valid and enforceable, competitors may be able to design around our patents, such asfor example, by using pre-existing or newly developed technology. Other parties may develop and obtain patent protection for more effective technologies, designs or methods.
If we or one of our licensing partners initiated legal proceedings against a third-party to enforce a patent covering one of our product candidates, including patents related to PH94B, PH10 or AV-101, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the USPTO or made a misleading statement during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.
In addition, such patent-related proceedings may be costly. Thus, any patent properties that we may own or exclusively license ultimately may not provide commercially meaningful protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize our product candidates.
We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, or former employees andor current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If these developments were to occur, they could have a material adverse effect on our sales.
Our ability to enforce our patent rights also depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the components or manufacturing processes that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.
In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable, or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any patents covering our product candidates are invalidated or found unenforceable, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that valid, enforceable patents held by third parties covered our product candidates, our financial position and results of operations would also be materially and adversely impacted.
TheOverall, the degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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any of our issued patents related to AV-101 or pending patent applications, if issued, will include claims having a scope sufficient to protect AV-101 or any other products or product candidates, particularly considering that the compound patent to AV-101 has| ● | any issued patents related to PH94B, PH10, AV-101 or any pending patent applications, if issued and challenged by others, will include or maintain claims having a scope sufficient to protect PH94B, PH10, AV-101 or any other products or product candidates against generic or other competition, particularly considering that any patent rights to these compoundsper sehave expired; |
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any of our pending patent applications will issue as patents at all;
| ● | any of our pending patent applications will issue as patents at all; |
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we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire;
| ● | we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire; |
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we were the first to make the inventions covered by each of our patents and pending patent applications;
| ● | we were the first to make the inventions covered by each of our patents and pending patent applications; |
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we were the first to file patent applications for these inventions;
| ● | we were the first to file patent applications for these inventions; |
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others will not develop similar or alternative technologies that do not infringe our patents;
| ● | others will not develop similar or alternative technologies that do not infringe our patents; |
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others will not use pre-existing technology to effectively compete against us;
| ● | others will not use pre-existing technology to effectively compete against us; |
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any of our patents, if issued, will be found to ultimately be valid and enforceable;
| ● | any of our patents, if issued, will ultimately be found to be valid and enforceable, including on the basis of prior art relating to our patent applications and patents; |
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any patents currently held or issued to us in the future will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;
| ● | any patents currently held or issued to us in the future will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties; |
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we will develop additional proprietary technologies or product candidates that are separately patentable; or
| ● | we will develop additional proprietary technologies or product candidates that are separately patentable; or |
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that our commercial activities or products will not infringe upon the patents or proprietary rights of others.
| ● | our commercial activities or products will not infringe upon the patents or proprietary rights of others. |
We also rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees, collaborators and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not discover or have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.
WeThird parties may initiate legal proceedings against us alleging that we infringe thetheir intellectual property rights, of others, which may prevent or delay our product development efforts and stop us from commercializing candidate products or increase the costs of commercializing them, if approved. Also, we may file counterclaims or initiate other legal proceedings against third parties to challenge the validity or scope of their intellectual property rights, the outcomes of which also would be uncertain and could have a material adverse effect on the success of our business.
We cannot assure that our business, product candidates if approved.and methods do not or will not infringe the patents or other intellectual property rights of third parties. Third parties may initiate legal proceedings against us or our licensors or collaborators alleging that we or our licensors or collaborators infringe their intellectual property rights. In addition, we or our licensors or collaborators may file counterclaims in such proceedings or initiate separate legal proceedings against third parties to challenge the validity or scope of their intellectual property rights, including in oppositions, interferences, reexaminations,inter partesreviews or derivation proceedings before the United States or other jurisdictions.
Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot assure you thatSuccess also will depend on our business, productsability to prevail in litigation if we are sued for infringement or to resolve litigation matters with rights and methods do not or will not infringe the patents or other intellectual property rights of third parties.
at costs favorable to us.
The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our product candidates or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize our current product candidates and future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of their business strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent applications can take many years to issue, third parties may have currently pending patent applications that may later result in issued patents that our product candidates may infringe, or whichthat such third parties claimassert are infringed by our technologies.
The foregoing types of proceedings can be expensive and time-consuming and many of our own or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can. Our defense of litigation or other proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States or European Union.
The outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates, products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient financial resources to bring these actions to a successful conclusion.
An unfavorable outcome in the foregoing kinds of proceedings could require us or our licensors or collaborators to cease using the related technology or developing or commercializing our product candidates, or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators.
In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome isoutcomes are uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to behave willfully infringing anotherinfringed a third party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim wasis successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our product candidates.
Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion.
In addition, intellectual property litigation or claims could force us to do one or more of the following:
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cease developing, selling or otherwise commercializing our product candidates;
| ● | cease developing, selling or otherwise commercializing our product candidates; |
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pay substantial damages for past use of the asserted intellectual property;
| ● | pay substantial damages for past use of the asserted intellectual property; |
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obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
| ● | obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and |
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in the case of trademark claims, redesign, or rename, some or all of our product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming.
| ● | in the case of trademark claims, redesign, or rename, some or all of our product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming. |
Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all suchtheir intellectual property to his or her employing institution.
Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office (USPTO), European Patent Office (EPO) and various other foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.
Third parties may initiate legal proceedings against us alleging that we infringe their intellectual property rights or we may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, the outcome of which would be uncertain and could have a material adverse effect on the success of our business. Any lawsuit we are engaged in to protect or enforce our patents or the patents of our licensors could be expensive, time-consuming and unsuccessful.
Even if the patent applications we own or license are issued, competitors may infringe these patents. To counter infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the technology at issue on the grounds that our patentsWe do not cover the technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Further, third parties may initiate legal proceedings against us or our licensors or collaborators alleging that we or our licensors or collaborators infringe their intellectual property rights or we or our licensors or collaborators may initiate legal proceedings against third parties to challenge the validity or scope of intellectual property rights controlled by third parties, including in oppositions, interferences, reexaminations, inter partes reviews or derivation proceedings before the United States or other jurisdictions. These proceedings can be expensive and time-consuming and many of our or our licensors’ or collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our licensors or collaborators can. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States or European Union.
An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology or developing or commercializing our product candidates, or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
Issued patents covering our product candidates could be found invalid or unenforceable if challenged in court.
If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent covering one of our product candidates, including patents related to AV-101, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the USPTO or EPO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world is prohibitively expensive, and our intellectual property rights in some countries outside the United StatesU.S. could be less extensive than those in the United States, assuming that rights are obtained in the United States.U.S. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States,U.S., or from selling or importing products made using our inventions in and into the United States or other jurisdictions. The statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our patent applications. For the pending patent applications relating to AV-101, as well as for manyother of the patent families that we own or license, the relevant statutory deadlines have not yet expired. Thus, for each of the patent families that we believe provide coverage for our lead product candidates or technologies, we will need to decide whether and where to pursue protection outside the United States.U.S.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States.U.S. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States.U.S. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to biotechnology.biotechnology and pharmaceuticals. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties.parties under certain circumstances. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
An unfavorable outcome could require us or our licensors or collaborators to cease using the related technology or developing or commercializing our product candidates, or to attempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our licensors or collaborators a license on commercially reasonable terms or at all. Even if we or our licensors or collaborators obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our licensors or collaborators. In addition, we could be found liable for monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed a patent. A finding of infringement could prevent us from commercializing our product candidates or force us to cease some of our business operations, which could materially harm our business.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of our common stock.
Furthermore, proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We are dependent, in part, on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing our product candidates, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technology from third parties or, in certain cases, we fail to meet certain development or payment deadlines, we could lose license rights that are important to our business.
WeFor PH94B, PH10 and certain stem cell technologies, we are a party to a number of license agreements under which we are granted rights to intellectual propertyproperties that are or could become important to our business, and we expect that we may need to enter into additional license agreements in the future.business. Our existing license agreements impose, and we expect that any future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of fees, milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to develop or market products, which could be covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms.
As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.
Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:
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the scope of rights granted under the license agreement and other interpretation-related issues;
| ● | the scope of rights granted under the license agreement and other interpretation-related issues; |
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whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;
| ● | whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; |
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our right to sublicense patent and other rights to third parties under collaborative development relationships;
| ● | our right to sublicense patent and other rights to third parties under collaborative development relationships; |
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our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and
| ● | our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and |
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the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners.
| ● | the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners. |
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
We have entered into several licenses, both in-license agreements and out-license agreements, to support and leverage our various stem cell technology-related programs. We may enter into additional license(s) to third-party intellectual property that are necessary or useful to our business. Our current licenses, and any future licenses that we may enter into, impose various royalty payments, milestone, and other obligations on us. For example, the licensor may retain control over patent prosecution and maintenance under a license agreement, in which case, we may not be able to adequately influence patent prosecution or prevent inadvertent lapses of coverage due to failure to pay maintenance fees. If we fail to comply with any of our obligations under a current or future license agreement, our licensor(s) may allege that we have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensor(s) may decide to terminate our license at will. Termination of any of our current or future licenses could result in our loss of the right to use the licensed intellectual property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, if approved, as well as harm our competitive business position and our business prospects.
In addition, if our licensors fail to abide by the terms of the license, if the licensors fail to prevent infringement by third parties, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms our business could suffer.
Some intellectual property which we have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.
Some of the intellectual property rights we have licensed or will license in the future may have been generated through the use of U.S. government funding and may therefore be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose.
In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. In addition,Also, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits.
Intellectual property generated under a government funded program is alsofurther subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property.
In the event we apply for additional U.S. government funding, and we discover compounds or drug candidates as a result of such funding, intellectual property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act.
If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.
DependingIn the U.S., depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of the U.S. patents we own or license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. For example, we may not be granted an extension if the active ingredient of PH94B, PH10 or AV-101 is used in another drug company’s product candidate and that product candidate is the first to obtain FDA approval.
Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.
Similar kinds of patent term and regulatory and data protection periods are available outside of the U.S. We will pursue such opportunities to extend the exclusivity of our products, but we cannot predict the availability of such exclusivity pathways or that we will be successful in pursuing them.
Changes in U.S. U.S.patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other pharmaceutical and biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recentlyU.S. in recent years enacted and is currently implementing wide-ranging patent reform legislation: the Leahy-Smith America Invents Act, referred to as the America Invents Act. The America Invents Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. It is not yet clear what, if any, impact the America Invents Act will have on the operation of our business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that may issue from our patent applications, all of which could have a material adverse effect on our business and financial condition.
In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. The full impact of these decisions is not yet known. For example, on March 20, 2012 inMayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to obtain patent protection for certain inventions. Additionally, on June 13, 2013 inAssociation for Molecular Pathology v. Myriad Genetics, Inc., the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA molecules are patent eligible because they are not a natural product. The effect of the decision on patents for other isolated natural products is uncertain.
Additionally, on March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or natural products under the Myriad and Prometheus decisions. This guidance did not limit the application of Myriad to DNA but, rather, applied the decision to other natural products. Further, in 2015, inAriosa Diagnostics, Inc. v. Sequenom, Inc., the Court of Appeals for the Federal Circuit held that methods for detecting fetal genetic defects were not patent eligible subject matter. Other more recent court decisions and related USPTO examination guidelines must be taken into account, particularly as they relate to changes in what types of inventions are eligible for patent protection. Foreign patent and intellectual property laws also are evolving and are not predictable as to their impact on the Company and other biopharmaceutical companies.
In addition to increasing uncertainty regarding our ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on these and other decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce any patents that may issue in the future.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Certain of our current employees have been, and certain of our future employees may have been, previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.
Although we are not aware of any claims currently pending or threatened against us, we may be subject to claims that we or our employees, advisors or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We have and may in the future also be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our product candidates, which would materially adversely affect our commercial development efforts.
Numerous factors may limit any potential competitive advantage provided by our intellectual property rights.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:
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others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered by the claims of patents, should such patents issue from our patent applications;-62-
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we might not have been the first to make the inventions covered by a pending patent application that we own;
| ● | others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered by the claims of patents, should such patents issue from our patent applications; |
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we might not have been the first to file patent applications covering an invention;
| ● | we might not have been the first to make the inventions covered by a pending patent application that we own; |
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others may independently develop similar or alternative technologies without infringing our intellectual property rights;
| ● | we might not have been the first to file patent applications covering an invention; |
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pending patent applications that we own or license may not lead to issued patents;
| ● | others may independently develop similar or alternative technologies without infringing our intellectual property rights; |
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patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;
| ● | pending patent applications that we own or license may not lead to issued patents; |
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third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection;
| ● | patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable or be narrowed, as a result of legal challenges by our competitors; |
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we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; and
| ● | third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection; |
| ● | we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all; and |
the patents of others may have an adverse effect on our business.
| ● | the patents of others may have an adverse effect on our business. |
Should any of these events occur, they could significantly harm our business and results of operations.
If,With regard to our stem cell technology, if, instead of identifying drug rescue candidatesa potential NCE candidate based on information available to us in the public domain, we seek to in-license drug rescue candidatesa NCE candidate from biotechnology, medicinal chemistry and pharmaceutical companies, academic, governmental and nonprofit research institutions, including the NIH, or other third parties, there can be no assurances that we will obtain material ownership or economic participation rights over intellectual property we may derive from such licenses or similar rights to the drug rescue NCEs that we may produce and develop. If we are unable to obtain ownership or substantial economic participation rights over intellectual property related to drug rescue NCEs we produce and develop, our business may be adversely affected.
Risks Related to our Securities
Market volatility may affect our stock price and the value of your investment.
The market price for our common stock, similar to that of other biopharmaceutical companies, is likely to beremain highly volatile. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:
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plans for, progress of or results from nonclinical and clinical development activities related to our product candidates;
| ● | volatility resulting from uncertainty and general economic conditions caused by the ongoing COVID-19 pandemic; |
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the failure of the FDA to approve our product candidates;
| ● | plans for, progress of or results from nonclinical and clinical development activities related to our product candidates; |
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announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;
| ● | the failure of the FDA or other regulatory authority to approve our product candidates; |
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the success or failure of other CNS therapies;
| ● | announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors; |
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regulatory or legal developments in the United States and other countries;
| ● | the success or failure of other CNS therapies; |
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announcements regarding our intellectual property portfolio;
| ● | regulatory or legal developments in the U.S. and other countries; |
| ● | announcements regarding our intellectual property portfolio; |
| ● | failure of our product candidates, if approved, to achieve commercial success; |
| ● | fluctuations in stock market prices and trading volumes of similar companies; |
| ● | general market conditions and overall fluctuations in U.S. equity markets; |
| ● | variations in our quarterly operating results; |
| ● | changes in our financial guidance or securities analysts’ estimates of our financial performance; |
| ● | changes in accounting principles; |
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failure of our product candidates, if approved, to achieve commercial success;
| ● | our ability to raise additional capital and the terms on which we can raise it; |
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fluctuations in stock market prices and trading volumes of similar companies;
| ● | sales or purchases of large blocks of our common stock, including sales or purchases by our executive officers, directors and significant stockholders; |
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general market conditions and overall fluctuations in U.S. equity markets;
| ● | establishment of short positions by holders or non-holders of our stock or warrants; |
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variations in our quarterly operating results;
| ● | additions or departures of key personnel; |
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changes in our financial guidance or securities analysts’ estimates of our financial performance;
| ● | discussion of us or our stock price by the press and by online investor communities; and |
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changes in accounting principles;
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our ability to raise additional capital and the terms on which we can raise it;
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sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
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additions or departures of key personnel;
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discussion of us or our stock price by the press and by online investor communities; and
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other risks and uncertainties described in these risk factors.
| ● | other risks and uncertainties described in these risk factors. |
Future sales and issuances of our common stock may cause our stock price to decline.
Sales or issuances of a substantial number of shares of our common stock in the public market, or the perception that such sales or issuances are occurring or might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.
The stock market in general, and small biopharmaceutical companies like ours in particular, have frequently experienced significant volatility in the market prices for securities that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In certain situations in which the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. Additionally, if the trading volume of our common stock remains low and limited there will be an increased level of volatility and you may not be able to generate a return on your investment.
A portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. Future sales of shares by existing stockholders could cause our stock price to decline, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Historically, there has been a limited public market for shares of our common stock. Future sales and issuances of a substantial number of shares of our common stock in the public market, including shares issued upon the conversion of our Series A Preferred, Series B Preferred or Series C Preferred, and the exercise of outstanding options and warrants for common stock which are issuable upon exercise, in the public market, or the perception that these sales and issuances are occurring or might occur, could significantly reduce the market price for our common stock and impair our ability to raise adequate capital through the sale of equity securities.
A limited number of institutional stockholders could limit your ability to influence the outcome of key transactions, including changes in control.
A limited number of institutional stockholders own a substantial portion of our outstanding preferred stock, consisting of shares of our Series A Preferred, Series B Preferred, and Series C Preferred, all of which is convertible, at the option of the holders (but subject to certain beneficial ownership restrictions), into a substantial number of shares of our common stock. Accordingly, should a few of these institutional holders convert their shares of preferred stock into common stock, such stockholders may exert influence over us and over the outcome of any corporate actions requiring approval of holders of our common stock, including the election of directors and amendments to our organizational documents, such as increases in our authorized shares of common stock, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of the Company, even if such a change of control is approved by our Board and would benefit our other stockholders. Furthermore, the interests of such institutional stockholders may not always coincide with your interests or the interests of other common stockholders and an institutional holder may act in a manner that advances its best interests and not necessarily those of other stockholders.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common stock or if such analysts issue other unfavorable commentary or cease publishing reports about us or our business.
There may be additional issuances of shares of preferred stock in the future.
Our Restated Articles of Incorporation, as amended (the Articles), permit us to issue up to 10.0 million shares of preferred stock. Our Board has authorized the issuance of (i) 500,000 shares of Series A Preferred, all of which shares are issued and outstanding at March 31, 2018;as of the date of this Report; (ii) 4.0 million shares of Series B 10% Convertible Preferred stock, of which approximately 1.21.1 million shares remain issued and outstanding at March 31, 2018; andas of the date of this Report; (iii) 3.0 million shares of Series C Convertible Preferred Stock, of which approximately 2.3 million shares are issued and outstanding at March 31, 2018.as of the date of this Report; and (iv) 2.0 million shares of Series D Convertible Preferred stock, of which no shares were issued or outstanding as of the date of this Report. Our Board could authorize the issuance of additional series of preferred stock in the future and such preferred stock could grant holders preferred rights to our assets upon liquidation, the right to receive dividends before dividends would be declared to holders of our common stock, and the right to the redemption of such shares, possibly together with a premium, prior to the redemption of the common stock. In the event and to the extent that we do issue additional preferred stock in the future, the rights of holders of our common stock could be impaired thereby, including without limitation, with respect to liquidation.
We do not intend to pay dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased them.
We incur significant costs to ensure compliance with corporate governance, federal securities law and accounting requirements.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), which requires that we file annual, quarterly and current reports with respect to our business and financial condition, and the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, and the Public Company Accounting Oversight Board, each of which imposes additional reporting and other obligations on public companies. We have incurred and will continue to incur significant costs to comply with these public company reporting requirements, including accounting and related audit costs, legal costs to comply with corporate governance requirements and other costs of operating as a public company. These legal and financial compliance costs will continue to require us to divert a significant amount of resources that we could otherwise use to achieve our research and development and other strategic objectives.
The filing and internal control reporting requirements imposed by federal securities laws, rules and regulations on companies that are not “smaller reporting companies” under federal securities laws are rigorous and, once we are no longer a smaller reporting company, we may not be able to meet them, resulting in a possible decline in the price of our common stock and our inability to obtain future financing. Certain of these requirements may require us to carry out activities we have not done previously and complying with such requirements may divert management’s attention from other business concerns, which could have a material adverse effect on our business, results of operations, financial condition and cash flows. Any failure to adequately comply with applicable federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and financial condition.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resources to comply with evolving laws, regulations and standards, however this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
ItemItem 1B. UnresolvedUnresolved Staff Comments
The disclosures in this section are not required since we qualify as a smaller reporting company.
Our corporate headquarters and laboratories are located at 343 Allerton Avenue, South San Francisco, California 94080, where we occupy approximately 10,900 square feet of office and lab space under a lease expiring on July 31, 2022.2022, which contains a 5-year option to renew. We believe that our facilities are suitable and adequate for our current and foreseeable needs.
ItemItem 3. LegalLegal Proceedings
None.
ItemItem 4. MineMine Safety Disclosures
Not applicable.
ItemItem 5. MarketMarket for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock was approved for listing and has traded since May 11, 2016 on The NASDAQNasdaq Capital Market under the symbol “VTGN”. From June 21, 2011 through May 10, 2016, our common stock traded on the OTC Marketplace (OTCQB), under the symbol “VSTA”. There was no established trading market for our common stock prior to June 21, 2011.
Shown belowBelow is the range of high and low sales prices for our common stock for the periods indicated as reported by the NASDAQNasdaq Capital Market or the OTCQB.Market. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
| | | |
| Year Ending March 31, 2018 | | |
| First quarter ending June 30, 2017 | $2.40 | $1.72 |
| Second quarter ended September 30, 2017 | $2.05 | $1.53 |
| Third quarter ended December 31, 2017 | $2.65 | $0.69 |
| Fourth quarter ended March 31, 2018 | $1.79 | $0.86 |
| | | |
| Year Ending March 31, 2017 | | |
| First quarter ending June 30, 2016 | $9.00 | $3.40 |
| Second quarter ended September 30, 2016 | $4.69 | $2.81 |
| Third quarter ended December 31, 2016 | $4.50 | $3.11 |
| Fourth quarter ended March 31, 2017 | $3.90 | $1.74 |
| | | |
| Year Ended March 31, 2021 | | |
| First quarter ended June 30, 2020 | $0.68 | $0.35 |
| Second quarter ended September 30, 2020 | $1.06 | $0.46 |
| Third quarter ended December 31, 2020 | $1.96 | $0.6088 |
| Fourth quarter ended March 31, 2021 | $3.18 | $1.83 |
| | | |
| Year Ended March 31, 2020 | | |
| First quarter ended June 30, 2019 | $1.35 | $0.52 |
| Second quarter ended September 30, 2019 | $1.32 | $0.38 |
| Third quarter ended December 31, 2019 | $1.49 | $0.29 |
| Fourth quarter ended March 31, 2020 | $0.90 | $0.30 |
On June 26, 201828, 2021 the closing price of our common stock on the NASDAQNasdaq Capital Market was $1.345 $2.84 per share.
As of June 26, 2018,28, 2021, we had 23,037,615191,382,350 shares of common stock outstanding and approximately 4,50020,000 stockholders of record. On the same date, two stockholders held all 500,000 outstanding restricted shares of our Series A Preferred Stock (Series A Preferred), which shares are convertible into 750,000 shares of common stock; two stockholdersone stockholder held 1,160,2401,131,669 outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred), which shares are convertible into 1,160,2401,131,669 shares of common stock;stock, excluding shares of our common stock which may be issued in payment of accrued dividends upon conversion of the Series B Preferred; and one stockholder held all 2,318,012 outstanding shares of our Series C Convertible Preferred stock,Stock (Series C Preferred), which shares are convertible into 2,318,012 shares of common stock.
Dividend Policy
We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Covenants in certain of our debt agreements prohibit us from paying dividends while the debt remains outstanding. Our Series B Preferred accrues dividends at a rate of 10% per annum, which dividends are payable solely in unregistered shares of our common stock at the time the Series B Preferred is converted into common stock.
Recent Sales of Unregistered Securities
We have issued the following securities in private placement transactions which were not registered under the Securities Act of 1933, as amended (Securities Act) and that have not been previously reported in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Securities Issued for Professional Services
Between March 2018 and May 2018, we granted an aggregate of 130,000 unregistered shares of our common stock to two accredited investors and an investment banking firm as full or partial compensation for financial advisory and investor relations services. The shares of common stock were issued in private placement transactions exempt from registration under the Securities Act, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder.None.
ItemItem 6. SelectedSelected Financial Data
The disclosures in this section are not required because we qualify as a smaller reporting company under federal securities laws.
ItemItem 7. ManagManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (Annual Report or Report) includes forward-looking statements. All statements contained in this Annual Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward- looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward- looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Our business is subject to significant risks including, but not limited to, our ability to obtain additional financing, the results of our research and development efforts, the results of non-clinicalnonclinical and clinical testing, the effect of regulation by the United States Food and Drug Administration (FDA) and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk Factors” in this Annual Report. Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board of Directors (our Board) and stockholders.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management or Board to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Annual Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Business Overview
We are a clinical-stage biopharmaceutical company focused oncommitted to developing and commercializing differentiated new generation medicinesmedications that go beyond the current standard of care for widespread anxiety, depression and other diseases and disorders of the central nervous system (CNS) disorders. Our CNS pipeline includes three CNS product candidates, PH94B Nasal Spray, PH10 Nasal Spray and AV-101, each with high unmet need.a differentiated profile, favorable safety results observed in all clinical studies to date and therapeutic potential in multiple CNS indications. PH94B Nasal Spray (PH94B) is being developed for multiple anxiety disorders. We recently initiated our PH94B Phase 3 development program, which we refer to as the PALISADE program, with PALISADE-1, a U.S., multi-center, randomized, double-blind, placebo-controlled Phase 3 clinical study to evaluate the efficacy and safety of PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD), as well as preparations for the additional studies required to support our potential U.S. New Drug Application (NDA) for that indication should the PALISADE Phase 3 program be successful. We are also preparing for exploratory Phase 2A clinical studies of PH94B in adults experiencing several other anxiety disorders. PH10 Nasal Spray (PH10) is being developed as a stand-alone treatment for multiple depression disorders. Exploratory Phase 2A clinical development of PH10 for major depressive disorder (MDD) has been completed. We are now preparing for planned Phase 2B clinical development of PH10 for this indication. We are preparing for a Phase 1B clinical study of AV-101 in combination with probenecid to assess potential future Phase 2A clinical development of the combination for MDD or certain neurological indications. Our goal is to become a biopharmaceutical company that develops and commercializes innovative CNS therapies for highly prevalent neuropsychiatry and neurology indications where current treatments options are inadequate to meet the needs of millions of patients in markets worldwide.
Our lead CNS product candidate, AV-101, is an oral, non-opioid and non-sedating therapy that we believe offers the potential to be a new at-home treatment for multiple CNS indications with high unmet medical need. These indications include potential use as a new generation treatment alternative for Major Depressive Disorder (MDD), as a non-addictive, non-sedating option for management of chronic neuropathic pain (CNP), to reduce dyskinesia induced by levodopa therapy for Parkinson’s disease (PD LID), and additional CNS indications where modulation of NMDA (N-methyl-D-aspartate) receptor and AMPA (alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid) receptor pathways may achieve therapeutic benefit.Product Candidates
For MDD, we believe AV-101 has potential asPH94B is a first line oral monotherapy and assynthetic investigational neurosteroid developed from proprietary compounds called pherines. With its novel mechanism of action, PH94B is an adjunctive oral therapy. As an adjunctive therapy, we believe AV-101 has potential bothodorless nasal spray administered at microgram-level doses to displace atypical antipsychotics such as aripiprazole in the current MDD drug treatment paradigm both for patients with an inadequate response to currentachieve rapid-onset anti-anxiety, or anxiolytic, effects. The pharmacological activity of PH94B is fundamentally differentiated from that of all FDA-approved anti-anxiety drugs, including all antidepressants approved by the U.S. Food and Drug Administration (FDA) for treatment of SAD, as well as all benzodiazepines and beta blockers prescribed on an off-label basis. PH94B engages peripheral chemosensory receptors in nasal passages that trigger a subset of neurons in the main olfactory bulbs (OB) at the base of the brain. The OB neurons then stimulate inhibitory GABAergic neurons in the limbic amygdala, decreasing the activity of the sympathetic nervous system, and facilitating fear extinction activity of the limbic-hypothalamic system, the main fear and anxiety center in the brain, as well as in other parts of the brain. Importantly, PH94B does not require systemic uptake and distribution to prevent relapseproduce its rapid-onset anti-anxiety effects. Our ongoing PALISADE Phase 3 program for PH94B is designed to further demonstrate its potential as a fast-acting, non-sedating, non-addictive acute treatment of MDD following successful treatmentanxiety in adults with the FDA-approved anesthetic, ketamine hydrochloride, an ion-channel blocking NDMA receptor antagonist (ketamine), whether administered by intravenous (IV) injection or as an intranasal spray formulation.SAD. We believe AV-101 may havePH94B also has potential to deliver ketamine-like antidepressant effects on an at-home basis, withoutbe developed as a novel treatment for adjustment disorder with anxiety, postpartum anxiety, post-traumatic stress disorder, procedural anxiety, panic and other anxiety disorders. PH94B has been granted Fast Track designation status by the requirementFDA for inconvenient administration in a medical setting, and without causing psychological or other side effects and safety concerns associated with ketamine therapy.development for the acute treatment of SAD.
action (AV-101MOA) is in Phase 2 developmentfundamentally differentiated from the MOA of all current treatments for MDD and other depression disorders. PH10 is self-administered at microgram-level doses as an odorless nasal spray. PH10 activates nasal chemosensory cells in the United States. In the fourth quarter of 2017, we received authorization from the FDAnasal passages, connected to initiate ELEVATE, our Phase 2 multi-center, multi-dose, double blind, placebo-controlled clinical study to evaluate the efficacy and safety of AV-101 as an adjunctive treatment of MDD in adult patients with an inadequate therapeutic response to current FDA-approved antidepressants (the ELEVATE Study). As planned, we initiated the ELEVATE Studyneural circuits in the first quarterbrain that produce antidepressant effects. Specifically, PH10 engages peripheral chemosensory receptors in the nasal passages that trigger a subset of 2018. Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute,neurons in the main OB that stimulate neurons in the limbic amygdala. This is the Principal Investigatorturn increases activity of the ELEVATE Study assisting our internal team, which is led by Mark Smith, MD, PhD, our Chief Medical Officer. Dr. Fava waslimbic-hypothalamic sympathetic nervous system and increases the co-Principal Investigator with Dr. A. John Rushrelease of the STAR*D study, the largestcatecholamines. Importantly, unlike all currently approved oral antidepressants (ADs), PH10 does not require systemic uptake and distribution to produce rapid-onset of antidepressant effects. In all clinical trial conducted in depressionstudies to date, whose findings were published in journals suchPH10 has not caused psychological side effects (such as theNew England Journal of Medicine(NEJM)dissociation and thehallucinations) or safety concerns that may be associated with rapid-onset ketamine-based therapy (KBTJournal of the American Medical Association(JAMA), including intravenous ketamine or intranasal ketamine (esketamine). We currently anticipate top line results from the ELEVATE Study in the first half of 2019.believe PH10 has potential to be a new stand-alone treatment for MDD and several other depression disorders.
AV-101 is also(4-Cl-KYN) targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the subjectbrain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. AV-101 is an oral prodrug of 7-chloro-kynurenic acid (7-Cl-KYNA), which is a smallpotent and selective full antagonist of the glycine co-agonist site of the NMDAR that inhibits the function of the NMDAR. However, unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. At doses administered in all studies to date, AV-101 has been observed to be well tolerated and has not exhibited dissociative or hallucinogenic psychological side effects or safety concerns. In light of these observations and findings from preclinical studies, we believe that AV-101, in combination with FDA-approved probenecid, has potential to become a new oral treatment alternative for certain CNS indications involving the NMDAR. We are currently preparing to evaluate AV-101 in combination with probenecid in a Phase 21B clinical study being conductedstudy. The FDA has granted Fast Track designation for development of AV-101 as a potential adjunctive treatment for MDD and funded by the U.S. National Institute of Mental Health (theNIMH), pursuant to our Cooperative Research and Development Agreementas a non-opioid treatment for neuropathic pain (CRADA) with the NIMH (theNIMH StudyNP). Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders, is acting as the Principal Investigator for the NIMH Study, which is focused on AV-101 monotherapy for subjects with treatment-resistant MDD and certain biomarkers. Dr. Zarate and the NIMH were among the first in the U.S. to conduct clinical studies demonstrating the robust, fast-acting antidepressant effects of ketamine in MDD patients with inadequate responses to multiple current FDA-approved antidepressants.
In addition to our CNS business, we have two additional programs through our wholly-owned subsidiary VistaStem Therapeutics (VistaStem). VistaStem is focused on applying human pluripotent stem cell (hPSC) technology to rescue, develop and commercialize (i) proprietary new chemical entities (NCEs) for CNS and other diseases and (ii) regenerative medicine (RM) involving hPSC-derived blood, cartilage, heart and liver cells. Our internal drug rescue programs are designed to utilize CardioSafe 3D, our customized cardiac bioassay system, to develop small molecule NCEs for our pipeline or out-licensing. To advance potential RM applications of VistaStem’s cardiac stem cell technology, we have exclusively sublicensed to BlueRock Therapeutics LP, a next generation cell therapy and RM company established in 2016 with $225 million of committed capital from Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to the BlueRock Agreement, we may pursue additional VistaStem collaborations or licensing transactions involving blood, cartilage, and/or liver cells derived from hPSCs for cell-based therapy, cell repair therapy, RM and/or tissue engineering.Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, determination of right of use assets under lease transactions and related lease obligations, impairment of long-lived assets, research and development, stock-based compensation, warrant liability and income taxes to be critical accounting policies that require the use of significant judgments and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions. The preparation of financial statements in conformity with United States generally accepted accounting principles (GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the consolidated financial statements. These estimates include, but are not limited to, those relating to stock-based compensation, revenue recognition, research and development expenses, determination of right of use assets under lease transactions and related lease obligations, and the assumptions used to value warrants, warrant modifications, and useful lives for property and equipment and related depreciation calculations, and assumptions for valuing options, warrants and other stock-based compensation.calculations. Our actual results could differ from these estimates.
Revenue Recognition
We have historically generated revenue principally from collaborative research and development arrangements, licensing and technology access fees and government grants. Through March 31, 2018, we have recognized revenue under the provisions of the SEC issued Staff Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated(SAB 104) andWe adopted Accounting Standards CodificationUpdate (ASUASC) 605-25,No. 2014-09, Revenue Arrangements-Multiple Element Arrangementsfrom Contracts with Customers (Topic 606) (and its related amendments, collectively referred to as ASC 605-25(Accounting Standards Codification). Revenue for arrangements not having multiple deliverables, Topic 606, as outlined in ASC 605-25, is recognized once costs are incurred and collectability is reasonably assured.of April 1, 2018, using the modified retrospective transition method.
RevenueUnder ASC Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract with multiple componentsa customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are divided into separate unitsentitled in exchange for the goods or services we transfer to a customer.
Once a contract is determined to be within the scope of accounting if certain criteriaTopic 606, we assess the goods or services promised within each contract and determine those that are met, includingperformance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess whether the delivered component has stand-alone valuethese options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or counterparty. Consideration receivedas a continuation of the contract for accounting purposes.
We assess whether each promised good or service is allocated amongdistinct for the separate unitspurpose of accounting basedidentifying the performance obligations in the contract. This assessment involves subjective determinations and requires judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on their respective selling prices. The selling price for each unitits own or together with other resources that are readily available to the customer (that is, based on vendor-specific objective evidence,the good orVSOE, if available, third party evidence if VSOE service is capable of being distinct) and (ii) our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not available,distinct, we are required to combine that good or estimated selling price if neither VSOE nor third party evidenceservice with other promised goods or services until we identify a bundle of goods or services that is available. The applicable revenue recognition criteria are then applied to each of the units.
distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and satisfaction of the performance obligations. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant Company-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. In certain circumstances, we may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. We recognizevalidate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue whenrecognized will not occur. At the four basic criteriaend of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue recognitionreversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are met: (i)not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.
In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a contractual agreement exists; (ii)significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensee and the transfer of technologythe promised goods or services to the licensee will be one year or less. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been completed or services haveallocated has been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. For each source of revenue, we comply with the above revenue recognition criteria in the following manner:satisfied.
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Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements for specific research and development spending, and various future product development milestone and royalty payments. If the delivered technology does not have stand-alone value,We then recognize as revenue the amount of revenue allocablethe transaction price that is allocated to the delivered technologyrespective performance obligation when (or as) each performance obligation is deferred. Non-refundable upfront fees with stand-alone valuesatisfied at a point in time or over time, and if over time, based on the use of an output or input method.
Right of use assets and lease obligations
We adopted Accounting Standards Update No. 2016-02, “Leases (Topic 842)”(ASU 2016-02) effective April 1, 2019. ASU 2016-02 requires that are not dependentwe determine, at the inception of an arrangement, whether the arrangement is or contains a lease, based on future performance under these agreementsthe unique facts and circumstances present. Operating lease assets represent our right to use an underlying asset for the lease term (Right of use assets) and operating lease liabilities represent our obligation to make lease payments arising from the lease. Right of use assets and operating lease liabilities are recognized as revenueat the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when received,it is reasonably certain, at inception, that we will exercise that option. The interest rate implicit in lease contracts is typically not readily determinable; accordingly, we use our incremental borrowing rate, which is the rate that would be incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment, based upon the information available at the commencement date. The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation, when determinable, and are deferred if we have continuing performance obligationsrecognized in determining our Right of use assets. Our operating lease is reflected in the right-of-use asset – operating lease; operating lease obligation - current portion; and have no objective and reliable evidence of the fair value of those obligations. We recognize non-refundable upfront technology access fees under agreementsoperating lease obligation - non-current portion in which we have a continuing performance obligation ratably,our consolidated balance sheets.
Lease expense for minimum lease payments is recognized on a straight-line basis over the period in whichlease term. As a result of our adoption of ASU 2016-02, we no longer recognize deferred rent on the consolidated balance sheet. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are obligated to provide services. Cost reimbursements for researchexcluded from this treatment and development spending are recognized whenon a straight-line basis over the related costs are incurred and when collectability is reasonably assured. Payments received related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievementterm of the milestone event specifiedlease. Variable lease payments are amounts owed by us to a lessor that are not fixed, such as reimbursement for common area maintenance costs for our facility lease; and are expensed when incurred.
Financing leases, formerly referred to as capitalized leases, are treated similarly to operating leases except that the asset subject to the lease is included in the underlying contracts, which represent the culmination of the earnings process. Amounts received in advance areappropriate fixed asset category, rather than recorded as deferred revenue until the technology is transferred, costs are incurred,a Right of use asset, and depreciated over its estimated useful life, or a milestone is reached.
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Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees and/or royalty payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are recognized when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of the continuing research and development efforts. Otherwise, revenue is recognized over the period of our continuing involvement.-69-
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Government grant awards, which support our research efforts on specific projects, generally provide for reimbursement of approved costs as defined in the terms of grant awards. We recognize grant revenue when associated project costs are incurred.
As described more completely in Note 3, Summary of Significant Accounting Policies, to the accompanying Consolidated Financial Statements contained in Item 8 of this Annual Report, the Financial Accounting Standards Board (the FASB) has issued new guidance regarding revenue recognition. This new guidance becomes effective for our fiscal year beginning April 1, 2018, and we will adopt it using the modified retrospective transition method, applying the new guidance to the most current period presented. We currently have only the BlueRock Agreement as a potential revenue generating arrangement. Upon adoption of the new guidance, we anticipate no change to the units of accounting previously identified with respect to the BlueRock Agreement under legacy GAAP, which are now considered performance obligations under the new guidance, and there was no change to the revenue recognition pattern for the performance obligation. Accordingly, we do not expect the adoption of the new standard to have a material impact on our consolidated financial statements or result in a cumulative effect change to our opening accumulated deficit balance.
Impairment of Long-Lived Assets
In accordance with ASC 360-10, Property, Plant & Equipment—Overall, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, we write down the assets to their estimated fair values and recognize the loss in the Consolidated Statements of Operations and Comprehensive Loss.
Research and Development Expenses
Research and development expenses are composed of both internal and external costs. Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with clinical and non-clinicalnonclinical development of AV-101, our oral NMDAR GlyB antagonist product candidate in clinical development for MDD PH94B, PH10,and potentially for other CNS indications,AV-101, stem cell research and development costs, and costs related to the application and prosecution of patents related to AV-101, PH94B, PH10 and our stem cell technology platform. All such costs are charged to expense as incurred.
We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by contract research organizations (CROs) and clinical trial sites. Progress payments are generally made to CROs, clinical sites, investigators and other professional service providers. We analyze the progress of the clinical trial, including levels of subject enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to research and development expense in the period in which the facts that give rise to the revision become known.
1,630,435 unregistered shares of our common stock having a fair market value of $2,250,000. In October 2018, we exercised our option to acquire an exclusive license to develop and commercialize PH10 by issuing 925,926 shares of our unregistered common stock having a fair market value of $2,000,000. Since, at the date of each acquisition, neither product candidate had achieved regulatory approval and each requires significant additional development and expense, we recorded the costs related to acquiring the licenses and the option as research and development expense.
Stock-Based Compensation
We recognize non-cash compensation expensecost for all stock-based awards to employees and non-employee consultants based on the grant date fair value of the award. We record thisstock-based compensation expense over the period during which the employee or other grantee is required to perform services in exchange for the award, which generally represents the scheduled vesting period. We have not granted no restricted stock awards to employees or consultants nor do we have any awards with market or performance conditions. For equity awardsPrior to non-employees, our April 1, 2019 adoption of ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), we re-measurehistorically re-measured the fair value of the awardsoption grants to non-employees as they vest,vested and theany resulting increase in value iswas recognized as an expense during the period over which the services arewere performed. Under ASU 2018-17, expense recognition for grants to non-employees follows the same methodology as for employees. Noncash expense attributable to compensatory grants of our common stock to non-employees is determined by the quoted market price of the stock on the date of grant and is either recognized as fully-earned at the time of the grant or expensed ratably over the term of the related service agreement, depending on the terms of the specific agreement.
We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards as of the grant date. The Black-Scholes model is complex and dependent upon key data input estimates. The primary data inputs with the greatest degree of judgment are the expected term of the stock options and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two inputs. The expected term of the options represents the period of time that options granted are expected to be outstanding. We use the simplified method in accordance with guidance provided by the Securities and Exchange Commission (SEC) to estimate the expected term as an input into the Black-Scholes option pricing model. We determine expected volatility using the historical method, which, because of the relatively limited period during which our stock has been publicly traded on a major exchange and its historically limited trading volume, is based on the historical daily trading data of the common stock of a peer group of public companies over the expected term of the option.
Warrants Issued in Connection with Equity Financing
We generally account for warrants issued in connection with equity financings as a component of equity, unless there is a deemed possibility that we may have to settle the warrants in cash or the warrants contain other features requiring them to be treated as liabilities. For warrants issued with the possibility of cash settlement or otherwise requiring liability treatment, we record the fair value of the issued warrants as a liability at each reporting period and record changes in the estimated fair value as noncash gain or loss in the Consolidated Statements of Operations and Comprehensive Loss.
Income Taxes
We account for income taxes using the asset and liability approach for financial reporting purposes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce the deferred tax assets to an amount expected to be realized.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K for information on recent accounting pronouncements.
Financial Operations Overview and Results of Operations
Net Loss
WeAlthough we entered into the AffaMed Agreement in June 2020 and the Bayer Agreement in December 2016, we have not yet achieved recurring revenue-generating status in amounts sufficient to sustain our operations and enable our strategic business plans from any of our product candidates or technologies. Since inception, we have devoted substantially all of oursubstantial time and effortseffort to developing AV-101 for multiple CNS indications, including manufacturing research, process development and production of AV-101 drug substance and finished drug product, preclinical efficacy and safety studies, and clinical efficacy and safety studies in CNS indications. Since acquiring our lead CNSexclusive worldwide licenses to PH94B and PH10 in 2018, we have devoted substantial resources focused on research, development and commercialization of PH94B and PH10, including initiatives to advance manufacturing research, process development and production programs for drug substance and finished drug product, candidate, AV-101, from early nonclinicaladditional preclinical safety studies, and clinical efficacy and safety studies in multiple neuropsychiatry indications. Also, from-time-to-time, we have devoted resources to our ongoing Phase 2 clinical development program in MDD, as well asVistaStem’s stem cell technology research and development, bioassay development and small molecule drug development, andrescue initiatives, as well as creating, protecting and patenting intellectual property (IP) related to our product candidates and stem cell technologies, with the corollary initiatives of recruiting and retaining personnel and raising working capital. As of March 31, 2018,2021, we had an accumulated deficit of approximately $156.5$242.8 million. Our net loss for the fiscal years ended March 31, 20182021 and 20172020 was approximately $14.3$17.9 million and $10.3$20.8 million, respectively. We expect losses to continue for the foreseeable future, primarily as a result of our ELEVATE Studywe engage in further research, development and further clinicalcommercialization activities related to PH94B, PH10 and AV-101, and pursue VistaStem’s potential drug rescue, drug development of AV-101 for the adjunctive treatment of MDD, as well as a range of other CNS indications.and CT and RM opportunities.
Summary of Ourthe Fiscal Year Ended March 31, 20182021
DuringOn December 22, 2020, we completed a transformative $100 million underwritten public offering (theDecember 2020Public Offering) of our securities, consisting of shares of our common stock and shares of our newly created Series D Convertible Preferred Stock (Series D Preferred).After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $93.6 million from the sale of our securities in the December 2020 Public Offering.Combined with financing and development and commercialization partnering transactions completed earlier in our fiscal year, aggregating approximately an additional $25 million, the proceeds from the December 2020 Public Offering have provided us with working capital to advance an important stream of potential catalysts across our CNS pipeline, including, among others, our Phase 3 development program for PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD) and, upon successful Phase 3 development, submission of our New Drug Application to the U.S. Food and Drug Administration and potential U.S. market approval of PH94B.
From an operational perspective, during our fiscal year ended March 31, 20182021 (Fiscal 20182021), we have continued to (i) advance nonclinical, includingour manufacturing, preclinical and clinical development, and regulatory initiatives necessary for our Phase 3 clinical development of AV-101PH94B as a potential new generation antidepressant andacute treatment of anxiety in adults with SAD, PH10 as a potential new therapeutic alternativestand-alone treatment of MDD and AV-101 in combination with probenecid as a potential treatment for several other CNS indicationsNMDAR-focused indications. During the quarter ended March 31, 2021, and thereafter, following the completion of the December 2020 Public Offering, we increased our headcount with the addition of twelve additional employees with significant unmet medical need, (ii)expertise in various disciplines including manufacturing, regulatory affairs, clinical development, commercial affairs and administrative functions. Further, we accelerated our planning for clinical trials for both PH94B and PH10, culminating in the start of the PALISADE-1 Phase 3 clinical study in late-May 2021. The PALISADE-1 Phase 3 clinical study is part of our PH94B PALISADE Phase 3 program for the acute treatment of anxiety in adult patients with SAD. Throughout Fiscal 2021, we continued to expand our regulatory and IPintellectual property foundation to support broad clinical development and, ultimately, commercialization of AV-101our CNS product candidates in the U.S. and major foreign markets, and (iii) on a limited basis, advance the predictive toxicology capabilities ofCardioSafe3D for small molecule NCE drug rescue and development applications and collaborative cell therapy and/or RM opportunities related to our stem cell technology platform.markets.
PursuantThroughout Fiscal 2021 and through the date of this Report, a strain of SARS-CoV-2, commonly referred to as COVID-19, has spread to many countries in the world and the outbreak was declared a pandemic by the World Health Organization. The U.S. Secretary of Health and Human Services also declared a public health emergency in the U.S. in response to the outbreak. From time to time during the COVID-19 pandemic, our operations and those of our CROs and CMOs have been and still may be impacted by shelter-in-place orders, social distancing measures, travel bans and restrictions, and certain business and government closures or reductions in service. Our headquarters operations have been significantly curtailed and our employees have worked remotely since the beginning of the COVID-19 pandemic. From time to time since the beginning of the COVID-19 pandemic, we have experienced delays in the delivery of supplies of active pharmaceutical product (API) or other key materials required to continue development of PH94B and PH10. Future unexpected delays may result in a significant, material delay or disruption to our CRADA with the NIMH, the NIMH continues to fund,current clinical development plans, programs, and Dr. Carlos Zarate Jr. of the NIMH continues to conduct, the NIMH Study at no cost to us other than supplying clinical trial material.
In the fourth quarter of Fiscal 2018, we launched our ELEVATE Study. During our preparations for the launch of the ELEVATE Study, we pursued initiatives that significantly improved the efficiency of our AV-101 manufacturing processes and supplied sufficient quantities of AV-101 to enable comprehensive initiation of the ELEVATE Study.
Additionally, during Fiscal 2018, we continued to pursue initiatives to secure a broad portfolio of patent protection for AV-101, covering multiple CNS indications, unit dose formulations and chemical synthesis methods. During Fiscal 2018 and subsequently, we filed and have pursued several patent applications in the U.S., Europe, Japan and other selected countries and regions. Several of these patent applications were allowed or have been granted, including for (i) certain novel therapeutic methods for the use of AV-101, including treatment of depression (U. S. and Europe), (ii) certain unit dose formulations of AV-101 (U.S. and Europe) and (iii) treatment of levodopa-induced dyskinesia (Europe). Other patent applications have been allowed or granted for the chemical synthesis of AV-101 (U.S., Europe and Japan). We have also recently filed a new U.S. provisional patent application for the AV-101 patent portfolio. Based on our patent issuances or allowances to-date, we believe that counterpart patent applications related to AV-101 currently under review in other countries are likely to be granted, although there can be no assurance that all pending applications will ultimately be granted.
We have obtained and are pursuing patent rights to the production of several types of stem cells, including cardiomyocytes, hematopoietic cells, chondrocytes, cartilage cells and hepatocytes, as well as the use of certain cell types that have been differentiated from pluripotent stem cells for therapeutic purposes, including cell-based therapy and regenerative medicine. For example, the U.S. Patent and Trademark Office (USPTO) granted a patent during Fiscal 2018 related to methods for producing, from human pluripotent stem cells (hPSCs), hematopoietic precursor stem cells, which are stem cells that give rise to all of the blood cells and most of the bone marrow cells in the body. A related patent application was allowed in Japan and we expect this patent to be granted by the Japanese Patent Office later this year. VistaGen holds an exclusive license to this patent from the University Health Network (UHN). The technology covered by the patent has the potential to impact both direct and supportive therapy for autoimmune disorders and cancer, with CAR-T cell applications, and foundational technology which may provide approaches for producing bone marrow stem cells for bone marrow transfusions.
We were granted a U.S. patent in 2018 related to methods of producing pluripotent stem cell-derived chondrocytes, chondrocyte lineage cells, cartilage-like tissue and cartilage. Additionally, the USPTO allowed claims to the therapeutic administration of these cells and tissues to treat osteoarthritis and joint injuries affecting cartilage. VistaGen also holds an exclusive license to this patent from UHN.operations.
During our fiscal quarter ended June 30, 2020, we completeda successful and positive meeting with the FDA regarding Phase 3 clinical development of PH94B for the acute treatment of anxiety in adult patients with SAD, reaching consensus with the FDA on key aspects of the design of our Phase 3 clinical trials of PH94B, which studies will be randomized, double-blind, placebo-controlled, studies involving a single-event, laboratory-simulated public speaking challenge in adult subjects with SAD. As noted earlier, the initial Phase 3 clinical trial of PH94B, PALISADE-1, commenced in late-May 2021. Dr. Michael Liebowitz, Professor of Clinical Psychiatry at Columbia University, director of the Medical Research Network in New York City, and creator of the Liebowitz Social Anxiety Scale (LSAS), is the Principal Investigator of PALISADE-1. Target enrollment for PALISADE-1 (completed patients) is approximately 208 adult patients with SAD. As in the statistically significant (p=0.002) public speaking component of the Phase 2 study, the patient-reported Subjective Units of Distress Scale (SUDS) will be used to assess the primary efficacy endpoint in PALISADE-1. Throughout Fiscal 2021, we have been actively engaged in formalizing processes and procedures for the manufacture of PH94B for the PALISADE Phase 3 program and Phase 2 programs in other anxiety indications, and of PH10 for our planned Phase 2B clinical study of PH10 in MDD and other Phase 2 and nonclinical studies of PH10.
In June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B (theEverInsight Agreement) with EverInsight Therapeutics Inc. (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, Inc., which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed is responsible for clinical development, regulatory submissions and commercialization of PH94B for the treatment of SAD, and potentially other anxiety-related indications, in key markets in Asia, including markets in Greater China, South Korea and Southeast Asia (collectively, theTerritory). Under the terms of the AffaMed Agreement, in August 2020, we received a non-dilutive upfront license fee payment of $5.0 million from AffaMed. Upon successful development and commercialization of PH94B in the Territory, we are eligible to receive up to $172 million in additional development and commercial milestone payments, plus royalties on commercial sales of PH94B in the Territory. After payment of sublicense fees to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment of consulting fees related to consummation of the AffaMed Agreement, we received net cash proceeds of approximately $4.655 million.
In December 2017,2020, we completed an underwritten public offering ofsold 63,000,000 shares of our common stock in at a public offering price of $0.92 per share and warrants2,000,000 shares of our Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to purchaseus of $100 million (the December 2020 Public Offering). Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Earlier in Fiscal 2021, in August 2020, we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock atfor a combined public offering price of $1.50$0.80 per share, and related warrant, resulting in gross proceeds to us of $15.0 million$12,500,000. We also granted to the underwriter an over-allotment option to purchase up to an additional 2,343,750 shares at a public offering price of $0.80 per share, which option was exercised with respect to 2,243,250 shares (the December 2017 Public OfferingExercised Option Shares). We issued an aggregateThe sale of 10,000,000the Exercised Option Shares resulted in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
To satisfy our obligations under the common stock purchase and registration rights agreements that we entered into with Lincoln Park Capital Fund (Lincoln Park) in March 2020, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the SEC on March 31, 2020 (Registration No. 333-237514), which the SEC declared effective on April 14, 2020 (theCommencement Date). Subsequent to the Commencement Date and through July 2020, we sold 6,301,995 registered shares of our common stock and warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $1.50 per share (theDecember 2017 Offering Warrants). The December 2017 Offering Warrants are exercisable at any time through December 13, 2022,Lincoln Park and do not contain any cashless exercise features as long as our Registration Statement on Form S-1 (Registration No. 333-221009) (theS-1) is effective. We received net proceeds of approximately $13.6 million from the December 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering. The common stock and the shares of common stock underlying the December 2017 Offering Warrants issued in the December 2017 Public Offering were offered, issued and sold pursuant to the S-1.
In September 2017, we completed an underwritten public offering, pursuant to which we sold 1,371,430 shares of our common stock and Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 shares of common stock (collectively, theWarrants), each initially exercisable for $1.82 per share to two of our existing institutional investors, resulting in net proceeds of approximately $2.0 million (theSeptember 2017 Public Offering). The Series A1 Warrants became exercisable for a five-year period commencing on March 7, 2018, and the Series A2 Warrants were exercisable at any time through September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were sold pursuant to our effective Registration Statement on Form S-3 (Registration No. 333-215671) to cover this and potential future sales of our equity securities in one or more public offerings from time to time. Consistent with the anti-dilution protection provisions of the Series A2 Warrants, the exercise price of such warrants was reduced upon the closing of the December 2017 Public Offering. In December 2017 and January 2018, all of the Series A2 Warrants were exercised at the reset exercise price resulting from the December 2017 Public Offering and we received nominal cash proceeds. Following these exercises, none of our outstanding warrants have down round anti-dilution protection features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend.
During Fiscal 2018, we also entered into self-placed private placement transactions with individual accredited investors, pursuant to which we sold units consisting of an aggregate of 616,323 shares of our unregistered common stock and, after adjustments, warrants which are not exercisable until six months and one day following issuance and expire between April 30, 2021 and November 30, 2022, to purchase an aggregate of 616,323 unregistered shares of our common stock at a weighted average fixed exercise price of approximately $2.00 per share. We received aggregate cash proceeds of approximately $1.1 million in$2,891,200. We have not sold any additional shares to Lincoln Park under these self-placed private placement transactions.
Inagreements since July 2017, we appointed Mark Wallace, M.D., Distinguished Professor of Clinical Anesthesiology at2020. We terminated the University of California, San Diego, to our Clinical and Regulatory Advisory Board to assist us in advancing development of AV-101 as a potential non-opioid, non-addictive, non-sedating oral treatment alternative for neuropathic pain. Dr. Wallace is an internationally recognized leader in the field of multi-modal pain management,stock purchase agreement with over 30 years of professional experience, board certifications, licensures, honors/awards, grants, articles and abstracts.Lincoln Park effective on June 25, 2021.
As a matter of course, we continue to minimize, to the greatest extent possible, cash commitments and expenditures for both internal and external research and development and general and administrative services. To further advance the nonclinical and clinical development of AV-101PH94B, PH10 and our stem cell technology platform,AV-101, as well as support our operating activities, we continue to carefully manage our routine operating costs, including our internal employee related expenses, as well as external costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and internal costs.
Comparison of Fiscal Years Ended March 31, 20182021 and 20172020
The following table summarizes the results of our operations for the fiscal years ended March 31, 20182021 and 20172020 (amounts in thousands).
| | Fiscal Year Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| | | |
| Sublicense revenue | $- | $1,250 | $1,089 | $- |
| Operating expenses: | | |
| Research and development | 7,763 | 5,204 | 12,476 | 13,374 |
| General and administrative | 6,437 | 6,295 | 6,547 | 7,427 |
| Total operating expenses | 14,200 | 11,499 | 19,023 | 20,801 |
| | | |
| Loss from operations | (14,200) | (10,249) | (17,934) | (20,801) |
| | | |
| Interest expense (net) | (9) | (5) | |
| Loss on extinguishment of accounts payable | (135) | - | |
| Interest income, net | | 2 | 30 |
| Other income | | 1 | - |
| | | |
| Loss before income taxes | (14,344) | (10,254) | (17,931) | (20,771) |
| Income taxes | (2) | (3) |
| | | |
| Net loss | (14,346) | (10,256) | (17,934) | (20,774) |
| Accrued dividend on Series B Preferred Stock | (1,030) | (1,257) | (1,386) | (1,264) |
| Deemed dividend from trigger of down round | | |
| provision feature | (199) | - | |
| Deemed dividend on Series B Preferred Stock | - | (111) | |
Beneficial conversion feature on Series D Preferred Stock | | (23,000) | - |
| Net loss attributable to common stockholders | $(15,575) | $(11,624) | $(42,320) | $(22,038) |
Revenue
We recognized $1.25 million$1,089,500 in sublicense revenue pursuant to the BlueRockAffaMed Agreement in Fiscal 2021 compared to none in the fiscal year ended March 31, 20172020 (Fiscal 20172020). As noted earlier, in June 2020, we entered into the AffaMed Agreement, pursuant to which we received a non-dilutive upfront license fee payment of $5.0 million in August 2020. We initially recorded this payment as deferred revenue and we are recognizing it as revenue on a straight-line basis over the period in which we expect to perform the services required under the AffaMed Agreement. We currently estimate that we will complete our performance obligations at the end of calendar 2023. While we may potentially receive additional cash payments and royalties under the BlueRock Agreement in the future under the AffaMed Agreement in the event certain performance-based milestones and commercial sales are achieved, we reported no revenue under the agreement in Fiscal 2018 and we presently have no recurring revenue generating arrangements with respect to AV-101 or other potential product candidates. Therethere can be no assurance that the BlueRockAffaMed Agreement will provide additional revenue beyond that noted or cash payments to us in the near term, or at all.
Research and Development Expense
Research and development (R&D) expense including both cashdecreased from $13.4 million in Fiscal 2020 to $12.5 million in Fiscal 2021, primarily due to the completion of the Elevate Study of AV-101 in Fiscal 2020, noticeably offset by increased developmental expenses in Fiscal 2021 for PH94B and noncash components, totaledPH10. Expenses related to the Elevate Study and other AV-101 related nonclinical activities decreased by approximately $7.8$5.9 million forin Fiscal 2018, an increase of approximately 49%2021 compared to theFiscal 2020, while expenses for PH94B and PH10 preclinical and clinical readiness initiatives increased by $5.2 million reported forin Fiscal 2017.2021 compared to Fiscal 2020. Salaries and benefits expense increased in Fiscal 2021 as a result of the addition of six new senior-level employees during the third and fourth quarters of Fiscal 2021 and bonus payments made in the third quarter of Fiscal 2021. Noncash research and development expenses, totaled approximately $1,595,000primarily stock-based compensation and $534,000 for Fiscal 2018 and Fiscal 2017, respectively, including stock compensation,equipment depreciation and a portion of rent expense in both periods, accounted for approximately $841,000 and a portion of AV-101 project expenses$1,380,000 in Fiscal 2018. The increase in research2021 and development expense in Fiscal 2018 reflects our continued focus on nonclinical and clinical development of AV-101, particularly our preparations for and fourth quarter Fiscal 2018 initiation of the ELEVATE Study. 2020, respectively.
The following table indicates the primary components of research and developmentR&D expense for each of the periods (amounts in thousands):
The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| | | |
| Salaries and benefits | $1,563 | $1,331 | $1,986 | $1,381 |
| Stock-based compensation | 969 | 375 | 747 | 1,287 |
| Consulting and other professional services | 32 | (75) | 327 | 533 |
| Technology licenses and royalties | 433 | 746 | 551 | 546 |
| Project-related research and supplies: | | |
| AV-101 | 4,154 | 2,292 | |
| Project-related research, licenses and supplies: | | |
| Elevate study and other AV-101 expenses | | 611 | 6,483 |
| PH94B and PH10 development expenses | | 7,620 | 2,448 |
| Stem cell and all other | 130 | 185 | 24 | 110 |
| | 4,284 | 2,477 | 8,255 | 9,041 |
| Rent | 412 | 310 | 545 | 535 |
| Depreciation | 66 | 37 | 64 | 49 |
| All other | 3 | 1 | 2 |
| | | |
| Total Research and Development Expense | $7,762 | $5,204 | $12,476 | $13,374 |
The increase in salaries and benefits expense in Fiscal 2021 reflects (i) the hiringimpact of bonus payments made to our Chief Medical Officer (CMO) in June 2016, and a salary increase granted to our CMO in July 2017, as well as salary increases granted to our, Chief Scientific Officer (CSO), and to the non-officer members of our scientific staff in June 2016December 2020, (ii) modest salary increases to those officers and June 2017, offset byemployees effective in the impactfourth quarter of a staff position terminatedFiscal 2021; and (iii) the addition of six officer-level employees between December 2020 and March 2021. There were no changes in April 2017. Additionally, our then-newly-hired CMO did not receive a bonus in July 2016; however, bothbase compensation levels for our CMO, CSO, or other members of our scientific staff between April 2019 and CSO were granted aDecember 2020 and no bonus in September 2017.expense or payments during that same period.
Stock basedCurrent year stock-based compensation expense increased inreflects the current period primarily as a result of the routine amortization of option grants made to our CMO, CSO, CMOmembers of our scientific staff, our new senior-level employees and certain clinical and scientific staff in Novemberconsultants since June 2016, April 2017, September 2017all earlier outstanding grants having become fully vested and February 2018, plus the new-hire grant made to our CMO in June 2016.amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020, including those granted during Fiscal 20182021, account for approximately $521,000$348,700 of expense in Fiscal 2018 expense. The2021, offset by an expense reduction of approximately $814,400 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $79,500 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to theserecent option grants is generally being amortized over a two-year to four-yearthree-year vesting period, based onperiods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Substantially all option grants made priorGrants to September 2015 were fully-vestednew employees generally vest 25% on the first anniversary of the grant date and fully-expensed prior to June 30, 2017.ratably monthly over the next three years.
Consulting and other professional services reflects fees paid or accruedincurred, generally on an as-needed basis, for project-based scientific, nonclinical and clinical development and regulatory advisory and analytical services rendered to us by third-parties, primarilythird parties, including by members of our scientificScientific Advisory Board and CNS clinicalClinical and regulatory advisory boards.Regulatory Advisory Board, especially in support of our PH94B and PH10 development initiatives. Fiscal 20182021 expense primarily reflects paymenta reduction of $110,000 in development support payments to Pherin which terminated in April 2020 under consultingthe terms of our PH94B and PH10 license agreements with our stem cell-related scientific advisory board members. Consulting expenseand a $95,000 reduction in analytical and other services in support of PH94B and PH10 development compared to Fiscal 2020, a portion of which is attributable to the conversion of a consultant to an employee in Fiscal 2017 reflected the impact of the rationalization of the agreements and accruals related to previous advisory board members.
Technology license and royalties expense in both periodsprimarily reflects both recurring annual license fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements, our AV-101 patents, or patents that we have elected to pursue for commercial purposes. We recognize thesepurposes, as well as recurring annual license fees. These costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, this expense also includes legal counsel and other costs we have incurred to advance numerous pending or now-grantedvarious patent applications in the U.S. and variousnumerous foreign countries, primarily with respect to AV-101 and our stem cell technology platform. Technology license-related expense for Fiscal 2017platform, but also includes net expense of $158,000 relatednominally with respect to the sublicense consideration paid to UHN pursuant to the BlueRock Agreement plus additional feesour PH94B and expenses related to two additional stem cell technology related licenses acquired from UHN, net of amounts previously accrued in connection with our prior sponsored research agreement with UHN, as well as noncash expense of $55,000 representing the fair value of a warrant granted toPH10 intellectual property counsel as partial compensation for services.portfolios during Fiscal 2021.
AV-101 project expense for both periods includesFiscal 2020 reflects the costs of actively conducting the Elevate Study in MDD, including various CROs, investigator and clinical site costs, and determination of topline study results, as well as CRO support services for AV-101 projects for indications other than MDD, and, to lesser extent, expense incurred to develop more efficient and cost-effective proprietary manufacturing methodsmanufacture additional quantities of AV-101 for AV-101, and to produce clinical trial material for the ELEVATE Study, and, primarilyuse in Fiscal 2018, costs incurred for certain other nonclinical studies to facilitate furtherpotential future clinical development of AV-101 in MDDa number of potential CNS indications. AV-101 project expense for Fiscal 2021 primarily reflects the cost of certain preclinical studies related to the use of AV-101 with probenecid and potentially for other indicationscertain AV-101 manufacturing stability studies, and costs incurred to comply with applicable FDA regulations. We expect these expenses to increase significantly during fiscal 2019, as we continue to conduct and move towards completionfinalize the results of the ELEVATE Study. Elevate Study for regulatory submission.
PH94B and PH10 project expenses for both Fiscal 2021 and Fiscal 2020 reflect research and development and manufacturing and regulatory initiatives necessary to facilitate Phase 3 clinical development and readiness of PH94B for acute treatment of anxiety in adults with SAD and Phase 2B development of PH10 for MDD. Manufacturing, formulation and analysis of sufficient quantities of drug substance and drug product have been the key initiatives during Fiscal 2021 for advancing the further clinical development of both PH94B and PH10, with costs for PH94B significantly exceeding those for PH10 in Fiscal 2021 and in comparison to those of Fiscal 2020. From time to time during Fiscal 2021, production, logistics and analytical processes for both of these product candidates were delayed due to the ongoing COVID-19 pandemic.
Stem cell and other project related expenses reflects costs associated with drug rescue applications of our stem cell technology in both years. These expenses are typically incurred by our in-house stem cell technology-related initiatives,scientific personnel. As a result of shelter-in-place and remote working requirements related to a greater extent inthe ongoing COVID-19 pandemic, such expenses were reduced to an insignificant level during Fiscal 2017, our participation in the FDA’s CiPA project.2021.
Rent expense for both Fiscal 2020 and Fiscal 2021 reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The increase in rent expense in Fiscal 2018underlying lease reflects higher commercial property rents prevalent in the South San Francisco real estate market as recognized inat the time of our November 2016 lease amendment which extendedextending the lease of our headquarters and laboratory facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022,2022. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Following our implementation of ASC 842, the modest increase in rent expense between periods is primarily related accounting for the extension amendment.to Fiscal 2021 increases in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
General and Administrative Expense
General and administrative (G&A) expense including both cash and noncash components, increaseddecreased to approximately 2% to $6.4$6.5 million in Fiscal 20182021 from $6.3approximately $7.4 million in Fiscal 2017. Noncash expense accounted for2020. Cash compensation in Fiscal 2021 increased by approximately $2.9$0.7 million and $3.1while noncash stock-based compensation decreased by approximately $1.0 million in Fiscal 20182021. Further, during Fiscal 2020 we modified certain outstanding warrants and Fiscal 2017, respectively, including, in both periods, stock compensation expense, a portion of investor relations and professional services expenses,recognized non-cash warrant modification expense of $826,900. Noncash G&A expense, approximately $1,731,000 for Fiscal 2021, decreased from approximately $3,543,000 for Fiscal 2020, primarily due to the decreases in stock-based compensation and a portionwarrant modifications noted above and the noncash components of rent expense. The overall increaseinvestor and public relations expense in general and administrative expenses was primarilyFiscal 2020 attributable to increased salary and benefits expense and noncashthe amortization of the fair value of common stock compensation and investor relations expenses, offset by reductions in professional services and noncash warrant modification expenses. or warrants granted to service providers.
The following table indicates the primary components of general and administrative expenses, including noncash components,G&A expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $1,575 | $1,206 |
| Stock-based compensation | 1,375 | 476 |
| Board fees | 155 | 140 |
| Legal, accounting and other professional fees | 785 | 2,093 |
| Investor relations | 1,454 | 1,219 |
| Insurance | 242 | 165 |
| Travel expenses | 131 | 179 |
| Rent and utilities | 279 | 220 |
| Warrant modification expense | 293 | 427 |
| All other expenses | 148 | 170 |
| | | |
| | $6,437 | $6,295 |
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $2,052 | $1,382 |
| Stock-based compensation | 1,559 | 2,533 |
| Board fees and other consulting services | 428 | 185 |
| Legal, accounting and other professional fees | 564 | 575 |
| Investor and public relations | 695 | 933 |
| Insurance | 449 | 348 |
| Travel expenses | 4 | 81 |
| Rent and utilities | 354 | 354 |
| Sublicense contract amortized acquisition expense | 102 | - |
| Warrant modification expense | - | 827 |
| All other expenses | 340 | 209 |
| | $6,547 | $7,427 |
The increase in salaries and benefits expense for Fiscal 2021 primarily reflects the impact of the hiring of our VP-Corporate Development in September 2016 and salary increases granted in June 2016 and July 2017(i) bonus payments made to our Chief Executive Officer (CEO) and, Chief Financial Officer (CFO), Vice President-Corporate Development (VP-Corporate Development) and in June 2016 and June 2017 to a non-officer member of our administrative staff. Additionally, eachstaff in December 2020; (ii) modest salary increases to those officers and employee effective in the fourth quarter of Fiscal 2021; and (iii) the addition of three senior-level employees during February 2021 and March 2021. There were no changes in base compensation levels for our administrative officers was granted a bonus in September 2017, but ourCEO, CFO, or VP-Corporate Development had not yet joined the Company in July 2016, when our CEObetween April 2019 and CFO received aDecember 2020 and no bonus payment.expense or payments to them during that same period.
Stock basedCurrent year stock-based compensation expense increased in 2017 primarily as a result ofreflects the routine amortization of option grants made to our CEO, CFO, VP Corporate Development, administrative staff, independent members of our Board and certain consultants since June 2016, all earlier outstanding grants having become fully vested and amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020 account for approximately $677,000 of expense in Fiscal 2021, offset by an expense reduction of approximately $1,515,000 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $141,700 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.
Board fees and other consulting services represent, in both periods, fees paid as consideration for Board and Board Committee services to the independent members of our Board of Directors and, our CEO, CFO, VP-Corporate Developmentadditionally in the current year, other consulting service fees related to commercial analyses of both PH94B and administrative staff in November 2016, April 2017, September 2017 and February 2018, plus the new-hire grant made to our VP-Corporate Development in September 2016. Grants awarded during Fiscal 2018 account for approximately $884,000 of Fiscal 2018 expense. The expense attributable to these grants is generally being amortized over a two-year to four-year vesting period based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.PH10.
Board fees includes fees recognized for the services of independent members of our Board. The Board modified its committee assignments effective in April 2017, resulting in the modest increase in expense.
Legal, accounting and other professional fees for both Fiscal 2082021 and Fiscal 20172020 includes expense related to routine corporate legal services,fees as well as the accounting expense related to the annual audit of theour prior year’syear financial statements tax return preparation and the reviewthree quarterly reviews of theour current year financial statementsstatements. In Fiscal 2021, we incurred additional consulting fees related to revenue recognition accounting for the first three quarters of each fiscal year,AffaMed Agreement and, various financial advisory and corporate development services. In additionin Fiscal 2020, we incurred fees attributable to cash fees incurred, during the second quarter of Fiscal 2018, we grantedservices provided by an aggregate of 20,000 unregistered shares of our common stock having an aggregate grant date fair value of $30,800 to legal services providers as partial compensation for services and an aggregate of 150,000 unregistered shares of our common stock having an aggregate grant date fair value of $234,000 to two investment banking firms pursuant to financial advisory agreements. Noncash expense recognized during Fiscal 2017 includes (i) $337,500 recognized in the first quarter pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B 10% convertible preferred stock having an aggregate grant date fair value of $1,350,000 as compensation for financial advisory and corporate development service contracts with two independent providers for services to be performed through June 30, 2016; (ii) $108,500 recognized in the second quarter representing the grant date fair value of 25,000 unregistered shares of our common stock granted to a legal services provider as compensation for services; and (iii) an aggregate of $1,058,800 recognized in the third and fourth quarters of Fiscal 2017 representing the grant date fair value of 320,000 unregistered shares of our common stock granted as compensation for financial advisory, investment banking andinternational business development services.consultant.
Investor and public relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, public relations and social media services, and well as market awareness and strategic advisory and support functions as well asand initiatives that, in Fiscal 2020, included numerous in-person meetings in multiple U.S. and certain foreign markets and other communication activities focused on expanding global market awareness of the Company, our CNS product candidate pipeline and technologies and our research and development programs, including among registered investment professionals and investment advisors, and individual and institutional investors.investors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide. During Fiscal 2018,2021, we curtailed the number and scope of external service providers engaged in these activities compared to the prior year. Further, in Fiscal 2020, in addition to cash fees and expenses we incurred for such activities, we recognized approximately $105,900 of noncash expense attributable to the amortization of the fair value of stock and warrants granted an aggregate of 582,000 shares of our unregistered common stockin previous periods to various corporate development, investor relations, market awareness and business advisory service providers as full or partial compensation for their services and recognized noncash expense totaling $886,300, representing the grant date fair value of the stock issued. During Fiscal 2017, in addition to cash fees and expenses we incurred, we granted an aggregate of 160,000 unregistered shares of our common stock to six investor relations and market awareness service providers as full or partial compensationproviders. No such noncash expense was incurred in Fiscal 2021.
The increase in insurance expense for their servicesFiscal 2021 is primarily attributable to the market-rate increase in the premium for our directors and recognized non-cash expense of $472,800, representing the grant date fair value of the stock. We also granted three-year, immediately exercisable warrants to purchase an aggregate of 75,000 sharesofficers liability insurance upon renewal of our unregistered common stock at exercise prices ranging from $4.50 per share to $6.00 per share to three investor relations service providers and recognized non-cash expense of $172,300 representing the grant date fair value of the warrants.policy in May 2020.
In both fiscal years,Fiscal 2020, travel expense reflects costs associated with in-person management presentations to and meetings held in multiple U.S. markets and certain international markets with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development initiatives.and partnering initiatives and in monitoring the progress of our Elevate Study. As a result of periodic shelter-in-place restrictions and travel and workplace precautions and restrictions associated with the ongoing COVID-19 pandemic, during Fiscal 2021, such meetings have occurred remotely without requiring in-person business travel by our executives.
Rent expense for both periods presented reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The increase in rent expense in Fiscal 2018underlying lease reflects higher commercial property rents prevalent in the South San Francisco real estate market as recognized inat the time of our November 2016 lease amendment which extendedextending the lease of our headquarters and laboratory facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022,2022. We allocate total rent expense for our South San Francisco facility between research and thedevelopment expense and general and administrative expense based generally on square footage dedicated to each function. Following our implementation of ASC 842, increases or decreases in rent expense between periods are primarily related accounting for the extension amendment.to changes in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
In the second quarter of Fiscal 2018, we reduced the exercise price of 247,500 warrants issued in the Spring 2017 Private Placement from a weighted average exercise price of $3.99 per share to $2.00 per share. We also issued to each of the Spring 2017 Private Placement investors additional warrants to purchase an aggregate total of 247,501 shares of common stock, each additional warrant having an exercise price of $2.00 per share. We recognized noncash expense of $279,700Beginning in the second quarter of Fiscal 2018, representing2021, we began to amortize the increase indeferred contract acquisition costs related to our acquisition of the AffaMed Agreement, composed of the cash payments of $220,000 for sublicense fees which we were obligated to make pursuant to our PH94B license from Pherin, and $125,000 of cash fees and $125,000 fair value of the initially-granted warrants before and after the modification plus the fair valuecommon stock issued for consulting services, in each case exclusively related to our acquisition of the additional warrants granted. InAffaMed Agreement. The contract acquisition costs are amortized over the third quarterexpected term of the services to be provided under the AffaMed Agreement. During Fiscal 2018,2021, we amortized $102,400 of contract acquisition costs.
During Fiscal 2020, we completed three warrant modifications resulting in an aggregate of $826,900 of noncash warrant modification expense as described below.
●
On December 4, 2019, we modified outstanding warrants previously issued inas a part of completed private placement transactions between August 2017 and November 2017placements to purchase an aggregate of 178,572approximately 6.6 million unregistered shares of our common stock to temporarily reduce, for a period of two years or until the expiration of the warrant, if sooner, the exercise prices from a weighted averageprice of $2.32such warrants to $0.50 per share, in order to a weighted averagemore closely align the exercise price of $1.58 per share.the warrants with the then-current trading price of our common stock. Following the two-year period during which the exercise price is reduced, the exercise price will revert to its pre-modification price. We recognized the increase indetermined that this modification increased the fair value of the modified warrants $13,000,by $702,500, which we recorded as noncash warrant modification expense in the third quarter of Fiscal 2018. Between April 2016 andexpense.
●
Also, on December 2016,4, 2019, we entered into warrant exchange agreements with certain warrant holders pursuant to which the warrant holders exchanged outstandingissued additional warrants (theAdditional Warrants) to purchase an aggregate of 224,513325,000 additional shares of our common stock forto the participants in our fall 2019 private placement of shares of common stock and warrants to increase the number of unregistered shares of common stock issuable upon exercise of the warrants from 50% to 100% of the number of shares issued in the private placement. The Additional Warrants are exercisable through March 31, 2024 at an aggregateexercise price of 156,246$0.50 per share. We determined that the fair value of the Additional Warrants was $88,800, which we also recognized as noncash warrant modification expense.
●
Further, on December 19, 2019, we modified additional outstanding warrants previously issued as a part of a completed private placement to purchase a total of 80,431 shares of our unregistered common stock. We accounted for these transactions as warrant modifications, resulting in our recognition of an aggregate of $350,700 in noncash expense attributablestock to the increase in fair value related to the warrant exchanges during the first through third quarters of Fiscal 2017. Additionally, in the third quarter of Fiscal 2017, we modified an outstanding warrant topermanently reduce the exercise price from $8.00 per shareof such warrants to $3.51$0.805 per share and increaseto extend the numberterm of shares exercisable undersuch warrants through December 31, 2022, in order to more closely align the warrant from 25,000 sharesexercise price of the warrants with the then-current trading price of our common stock and to 50,000 shares, recognizing $76,900 in expense inprovide additional time for the third quarter asholders to exercise the incrementalwarrants. We determined that these modifications increased the fair value attributable toof the modification.subject warrants by $35,600, which we also recognized as noncash warrant modification expense.
The shares underlying the modified warrants and the Additional Warrants were included in a Registration Statement on Form S-3 (File No. 333-237968) that was declared effective by the Commission on May 13, 2020.
Interest and Other Expenses,Income, Net
Interest expenseincome, net totaled $8,900$1,600 for Fiscal 20182021 compared to $4,600interest income, net of $30,100 for Fiscal 2017. 2020. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Interest income | $15 | $45 |
| Interest expense on financing lease, insurance premium financing notes | | |
| and Payroll Protection Program loan (2021) | (13) | (15) |
| | | |
| Interest income, net | $2 | $30 |
| | | |
In both periods, interest income relates to cash deposits in interest-bearing cash equivalent accounts. Although cash balances were generally higher during Fiscal 2021, the decline in market interest rates during Fiscal 2021 compared to Fiscal 2020 resulted in reduced interest income. Interest expense in both periods relates to interest paid on insurance premium financing notes and on a capitalour financing lease of office equipment.
During the third quarter ofequipment subject to ASC 842, and in Fiscal 2018, we issued 500,000 unregistered shares of2021, to interest accrued on our common stock having a grant date fair value of $585,000 and a cash payment of $76,500Payroll Protection Program loan prior to a contract manufacturing organizationits voluntary repayment, including interest, in settlement of $526,500 of open accounts payable. We recognized a corresponding loss on settlement of accounts payable in the amount of $135,000 for the quarter.December 2020.
We recognized $1,030,400,$1,385,600 and $1,257,0001,263,600 in Fiscal 20182021 and Fiscal 2017,2020, respectively, representing the 10% cumulative noncash dividend payableaccrued on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred) as an additional deduction in arriving at net loss attributable to common stockholders in the Consolidated Statement of Operations and Comprehensive Loss included in Item 8, Part II of this Annual Report. The reduction in the dividend accrual results from the automatic conversionIn December 2020, one holder of an aggregate of 2,403,051Series B Preferred converted 28,571 shares of Series B Preferred into an equal number of unregistered shares of our common stock upon our completion of our May 2016 public offering of units consisting of common stock and warrants, and a subsequent voluntary conversion of 87,500 shares of our Series B Preferred in August 2016. There have been no conversions of outstanding shares of Series B Preferred into common shares since August 2016.
Our sale of units consisting of common stock and warrants in the December 2017 Public Offering atwe issued an offering price of $1.50 per unit triggered the anti-dilution protection provisions of the Series A2 Warrants to purchase an aggregate of 503,641additional 160,062 unregistered shares of our common stock in payment of $124,600 of accrued dividends.
The Series D Preferred that we issued in the September 2017December 2020 Public Offering.Offering contained a beneficial conversion feature (aBCF), which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date (with respect to the Series D Preferred, the date the security was actually issued rather than the date the agreement to do so was entered into, referred to as theCommitment Date). In accordance with Accounting Standards Codification 470-20,Debt- Debt with Conversion and Other Options(ASC 470-20), an embedded BCF is required to be recognized separately by allocating a portion of the anti-dilution terms and formula contained inproceeds equal to the intrinsic value of the feature to additional paid-in capital. ASC 470-20 also provides that the intrinsic value is to be calculated as of the Commitment Date. The Series D Certificate of Designation provides that the Series A2 warrants,D Preferred has a conversion price of $0.92 per share on an as-converted basis the exercise(Conversion Price). The Conversion Price compared to the closing price of $1.42 per share of our common stock on the Commitment Date results in a difference of $0.50 per share. That difference multiplied by the 46 million shares of our common stock issuable upon conversion of the Series A2 WarrantsD Preferred resulted in an aggregate BCF of $23.0 million. We did not recognize the impact of the BCF at December 31, 2020 because the Series D Preferred was reduced fromnot convertible into common stock prior to the initial exercise priceApproval Date (the date of $1.82 per share to $0.001 per share. Weour Special Meeting of Stockholders held on March 5, 2021). Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021, the contingency of the BCF was eliminated and we recognized the effect of triggering the down round feature, $199,200,BCF as a further addition tononcash charge in arriving at net loss attributable to common stockholders and in our calculation of basic and fully diluted earnings per share in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2021 and as a dividendcorresponding increase in additional paid-in capital in our Consolidated Statement of Stockholders’ Equity included in Item 8 of this Annual Report.(Deficit). The holdersrecognition of the Series A2 Warrants subsequently exercised them in the third and fourth quarters of Fiscal 2018 and we received minimal cash proceeds from the exercises. Following the exercise ofBCF on the Series A2 Warrants, none ofD Preferred had no impact in aggregate on our outstanding warrants contain antidilution protection provisions other than is customary in the event of a change instockholders’ equity or on our capital structure as a result of a stock split or dividend.cash position.
During the first quarter of Fiscal 2017, we allocated the proceeds from our self-placed private placement sales of Series B Preferred Units to the Series B Preferred stock and the Series B Warrants based on their relative fair values on the dates of the sales. The difference between the relative fair value per share of the Series B Preferred, approximately $4.20 per share, and its Conversion Price (or stated value) of $7.00 per share represented a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we recognized a deemed dividend in the aggregate amount of $111,100 in arriving at net loss attributable to common stockholders for Fiscal 2017 in the Consolidated Statement of Operations and Comprehensive Loss included in Item 8 of this Annual Report.
Liquidity and Capital Resources
Since our inception in May 1998 through March 31, 2018,2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $61.4$197.8 million, as well as from an aggregate of approximately $17.6$22.7 million of government research grant awards (excluding the fair market value of the NIMH Study)government sponsored and funded clinical trials), strategic collaboration payments, intellectual property sublicensinglicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $33.6 $38.2million in non-cashnoncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
In December 2017,Recent Developments
Jefferies ATM. On May 14, 2021, we completed the December 2017 Public Offering pursuantentered into an Open Market Sale AgreementSM (theSales Agreement) with Jefferies LLC, as sales agent (Jefferies), with respect to an at-the-market offering program under which soldwe may offer and sell, from time to time, shares of our common stock with an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. As of the date of this Report, we have not completed any sales under the Sale Agreement.
December 2020 Public Offering. In December 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold 63,000,000 shares of our common stock in the December 2020 Public Offering at a public offering price of $0.92 per share and warrants2,000,000 shares of Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to purchaseus of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021 and through the date of this Annual Report, we issued 46 million shares of our common stock upon conversion of all outstanding shares of Series D Preferred issued in the December 2020 Public Offering.
August 2020 Public Offering. In August 2020, we entered into an underwriting agreement pursuant to which we sold, in the August 2020 Public Offering an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a combined public offering price of $1.50$0.80 per share, and related warrant under our Registration Statement on Form S-1 (Registration No. 333-221009), resulting in gross proceeds to us of $15.0 million. In September 2017,$12,500,000. Under the terms of the August 2020 Underwriting Agreement, we completedgranted to the September 2017underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
AffaMed Agreement. In June 2020, we entered into the AffaMed Agreement, a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders, with EverInsight, now operating as AffaMed Therapeutics. Under the terms of the AffaMed Agreement, AffaMed agreed to make a non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin pursuant to our PH94B license from Pherin, and payment for consulting services related to the AffaMed Agreement.
LPC Agreement. Additionally, on March 24, 2020, we entered into the LPC Agreement with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months. To satisfy our obligations under the registration rights agreement, we filed the LPC Registration Statement, which the SEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the LPC Registration Statement and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200. We have not sold any shares of our common stock pursuant to the Lincoln Park Agreement since July 2020.
Warrant Exercises. Further, between December 2020 and March 31, 2021, certain holders of outstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our common stock and we received cash proceeds of $4,924,800 from such exercises. Since March 31, 2021 and through the date of this Annual Report, holders of outstanding warrants resulting in grosshave exercised warrants to purchase an additional 1,508,768 shares of our common stock and we have received cash proceeds of approximately $2.4$1,105,700, resulting in aggregate cash proceeds of $6,030,500 received from warrant exercises between December 2020 and the date of this Annual Report.
Liquidity and Capital Resources
During Fiscal 2021, we received approximately $119 million underin net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of the financial statements included in Part II, Item 8 of this Annual Report, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
During the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE Phase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, and (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for well beyond the next twelve months, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-215671). Subject to certain restrictions, the 333-254299) (theS-3 Registration Statement), which became effective on March 26, 2021 remains available for future sales of our equity securities under the Sales Agreement with Jefferies, or in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so. As we have been in the past, we expect that, when and as necessary, we will be successful in raising additional capital from the sale of our equity securities either in one or more public offerings or in one or more private placement transactions with individual accredited investors or institutions.
At March 31, 2018, we had a cash and cash equivalents balance of $10.4 million. This amount was not sufficient to enable us to fund our planned operations, including expected cash expenditures of approximately $13 million for the twelve months following the date of this Annual Report, including expenditures required to satisfy a significant portion of the projected expenses associated with our ELEVATE Study.
Our cash position at March 31, 2018 considered with our recurring and anticipated losses, negative cash flows from operations and limited stockholders’ equity make it probable, in the absence of additional financing, that we will not be able to meet our obligations as they come due within one year from the date of this Report, raising substantial doubt that we can continue as a going concern. However, to alleviate that doubt, we plan, as we have numerous times in the past, to raise additional financing when and as needed, primarily through the sale of our equity securities in one or more private placements to accredited investors or public offerings.
In addition to the potential sale of our equity securities, we may also seek to enter research, and development collaborations that could generate revenue and/or commercialization collaborations similar to the AffaMed Agreement and the Bayer Agreement to provide funding, including non-dilutive funding, for development of AV-101 and additionalone or more of our CNS product candidates.candidate programs. We may also seek additional government grant awards or agreements similar to our current CRADAprior agreement with the NIMH, which provides forU.S. National Institutes of Health (NIH), Baylor University and the NIMH to fully fund the NIMH Study.U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. In a mannerWe may also pursue intellectual property arrangements similar to the BlueRockAffaMed Agreement we may also pursue similar arrangementsand the Bayer Agreement with third-parties covering other of our intellectual property.parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of AV-101 and otherour product candidates, as well as new government grant awards and/or agreements, similar to our CRADA with NIMH, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the continuing COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of AV-101 as an adjunctive treatment for MDD and other potential CNS conditions,our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract manufacturing, research and development, investor and public relations, and corporatebusiness development, legal, intellectual property acquisition and protection, of intellectual property, public company compliance and other professional services and operating costs.
Notwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future financingpotential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain substantial additional financing on a timely basis when needed, in 2018 or 2019 and beyond, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern. As noted above, thesethe Consolidated Financial Statements included in part II, Item 8 of this Annual Report do not include any adjustments that might result from the negative outcome of this uncertainty.
Cash and Cash Equivalents
The following table summarizes changes in cash and cash equivalents for the periodsfiscal years stated (in thousands):
| | Fiscal Years Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| | | |
| Net cash used in operating activities | $(9,058) | $(7,262) | $(12,074) | $(15,757) |
| Net cash used in investing activities | (2) | (239) | (275) | - |
| Net cash provided by financing activities | 16,517 | 9,994 | 114,102 | 4,012 |
| | | |
| Net increase in cash and cash equivalents | 7,457 | 2,493 | |
| Net increase (decrease) in cash and cash equivalents | | 101,753 | (11,745) |
| Cash and cash equivalents at beginning of period | 2,921 | 428 | 1,355 | 13,100 |
| | | |
| Cash and cash equivalents at end of period | $10,378 | $2,921 | $103,108 | $1,355 |
our preparations for the PALISADE Phase 3 program, combined with expansion of our infrastructure by the addition of experienced senior-level executives in manufacturing, clinical and regulatory disciplines in the fourth quarter of Fiscal 2021, offset by the impact of the completion of the Elevate Study, which commenced at the end of the first calendar quarter of 2018 and was operationally completed during the third fiscal quarter of Fiscal 2020. Additionally, cash used in operations during Fiscal 2021 was reduced by the August 2020 receipt of the $5.0 million nondilutive upfront payment from EverInsight under the AffaMed Agreement. Cash used in investing activities in Fiscal 2021 primarily reflects the purchase of certain manufacturing equipment acquired for use by our contract development and manufacturing organization in connection with the production of PH94B drug product. Cash provided by financing activities in Fiscal 2021 primarily reflects net cash proceeds to us from sales of our common stock and Series D Preferred stock pursuant to the December 2020 Public Offering and from sales of our common stock pursuant to the August 2020 Public Offering, the LPC Agreement and the Spring 2020 Private Placement, as well as from the exercise of outstanding warrants, net of routine insurance premium financing note and financing lease payments. We received a Payroll Protection Program loan in April 2020 and voluntarily repaid all principal and accrued interest on the loan in December 2020, following the completion of the December 2020 Public Offering. Cash provided by financing activities in Fiscal 2020 reflects the cash proceeds from our Fall 2019 Private Placement, our Fall 2019 Warrant Offering, the exercise of certain warrants following the modification of their exercise prices, proceeds from our January 2020 Registered Direct Offering and initial transactions under the LPC Agreement, net of routine payments on our insurance premium financing notes and lease.
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. VistaStem has two inactive, wholly owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., an Ontario corporation.
ItemItem 7A. QuanQuantitative and Qualitative Disclosures About Market Risk
The disclosures in this section are not required because we qualify as a smaller reporting company under federal securities laws.
ItemItem 8. Financial StatementsFinancial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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REPORTREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
VistaGen Therapeutics, Inc.
South San Francisco, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of VistaGen Therapeutics, Inc. (the “Company”) as of March 31, 20182021 and 2017,2020, the related consolidated statements of operations and comprehensive loss, cash flows, and stockholders’ equity (deficit) for each of the two fiscal years in the period ended March 31, 2018,2021, 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 March 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 20182021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has not yet generated sustainable revenues, has suffered recurring losses and negative cash flows from operations and has minimal stockholders’ equity, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenues from Contracts with Customers
Description of the Matter‒License Agreement with AffaMed
As discussed in Note 12 to the consolidated financial statements, the Company recognized approximately $1.1 million in revenue under the license agreement with AffaMed Therapeutics. Inc. (“AffaMed”) during the fiscal year ended March 31, 2021. The Company evaluated each of the deliverables identified in the license agreement and determined the license is not distinct within the context of the contract and is combined with development and regulatory approval services; as such, the Company combined the license and promised services into one combined performance obligation.
Auditing management’s identification of performance obligations was challenging as the license agreement includes implicit and explicit obligations. Significant judgment was required in the evaluation of the identification of performance obligations and in the determination of whether the identified license and promised services meet the criteria of being distinct and capable of being distinct within the context of the contract. The Company’s revenue from its licensing agreement is recognized over time, as the combined performance obligation is satisfied.
We identified license revenue recognition as a critical audit matter because of the judgments necessary for management to: identify performance obligations, determine variable consideration, and determine the timing of recognition for such revenue. Because of the complexity associated with applying the recognition criteria of ASC 606, notably related to identification of performance obligations, determination of variable consideration, and determination of timing of revenue recognition, this required extensive audit effort and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the recognition of license revenue, included the following, among others:
●
We evaluated the Company’s revenue recognition for the license agreement through an inspection of the agreement and an evaluation of management’s revenue recognition analysis corresponding to the license agreement. Our objective was to validate that revenue from the license agreement was recognized in a manner commensurate with the terms of the established agreement and the relevant accounting guidance. Evaluating the reasonableness of management’s accounting conclusions involved:
●
Evaluating the accuracy and completeness of the performance obligations identified by management in the license agreement. Management identified one combined performance obligation. We analyzed the license agreement to determine if the arrangement terms that may have an impact on revenue recognition were identified and properly considered in the evaluation of the accounting for the contract. We also inquired of management, and reviewed source documentation, to assess whether the one combined performance obligation identified by management was complete and whether the license and promised services within it were both capable of being distinct and distinct within the context of the contract.
●
Determining the reasonableness of the amounts of variable consideration included within the total transaction price. We analyzed the nature of the combined performance obligation and the contingencies related to the variable consideration in assessing management’s methods in estimating the amount of variable consideration to be included in the total transaction price.
●
Testing the measurement of efforts toward satisfaction of the combined performance obligation which included, among other procedures:
●
Reviewing management’s revenue schedules for accuracy and completeness by agreeing data to the underlying agreement.
●
Evaluating the manner in which the combined performance obligation was satisfied, and corroborating management estimates and judgments through a review of press releases and third-party data as a potential source of corroborating or contradictory evidence.
●
Discussing management’s judgments with the Company’s research and development personnel that oversee aspects of the license agreement.
/s/ OUM & CO. LLP
San Francisco, California
June 26, 201829, 2021
We have served as the Company's auditor since 2006.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED BALANCEBALANCE SHEETS (Amounts in dollars, except share amounts)
| | | | |
| | | | |
| | | | |
| | | | |
| | |
| Current assets: | | |
| Cash and cash equivalents | $10,378,300 | $2,921,300 | $103,108,300 | $1,355,100 |
| Receivable from collaboration partner | | 40,600 | - |
| Prepaid expenses and other current assets | 644,800 | 456,600 | 835,100 | 225,100 |
| Deferred contract acquisition costs - current portion | | 133,500 | - |
| Total current assets | 11,023,100 | 3,377,900 | 104,117,500 | 1,580,200 |
| Property and equipment, net | 207,400 | 286,500 | 367,400 | 209,600 |
| Right of use asset - operating lease | | 3,219,600 | 3,579,600 |
| Deferred offering costs | | 294,900 | 355,100 |
| Deferred contract acquisition costs - non-current portion | | 234,100 | - |
| Security deposits and other assets | 47,800 | 47,800 |
| Total assets | $11,278,300 | $3,712,200 | $108,281,300 | $5,772,300 |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: | | |
| Accounts payable | $1,195,700 | $867,300 | $838,300 | $1,836,600 |
| Accrued expenses | 206,300 | 443,000 | 1,562,700 | 561,500 |
| Current notes payable | 53,900 | 54,800 | - | 56,500 |
| Capital lease obligations | 2,600 | 2,400 | |
| Deferred revenue - current portion | | 1,420,200 | - |
| Operating lease obligation - current portion | | 364,800 | 313,400 |
| Financing lease obligation - current portion | | 3,000 | 3,300 |
| Total current liabilities | 1,458,500 | 1,367,500 | 4,189,000 | 2,771,300 |
| | | |
| Non-current liabilities: | | |
| Accrued dividends on Series B Preferred Stock | 2,608,300 | 1,577,800 | 6,272,700 | 5,011,800 |
| Deferred rent liability | 285,600 | 139,200 | |
| Capital lease obligations | 9,300 | 11,900 | |
| Deferred revenue - non-current portion | | 2,490,300 | - |
| Operating lease obligation - non-current portion | | 3,350,800 | 3,715,600 |
| Financing lease obligation - non-current portion | | - | 3,000 |
| Total non-current liabilities | 2,903,200 | 1,728,900 | 12,113,800 | 8,730,400 |
| Total liabilities | 4,361,700 | 3,096,400 | 16,302,800 | 11,501,700 |
| | | |
| Commitments and contingencies | | |
| Commitments and contingencies (Note 15) | | |
| | | |
| | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2018 and 2017: | | |
| Series A Preferred, 500,000 shares authorized, issued and outstanding at March 31, 2018 and 2017 | 500 | |
| Series B Preferred; 4,000,000 shares authorized at March 31, 2018 and 2017; 1,160,240 shares | | |
| issued and outstanding at March 31, 2018 and 2017 | 1,200 | |
| Series C Preferred; 3,000,000 shares authorized at March 31, 2018 and 2017; 2,318,012 shares | | |
| issued and outstanding at March 31, 2018 and 2017 | 2,300 | |
| Common stock, $0.001 par value; 100,000,000 and 30,000,000 shares authorized at March 31, 2018 and | | |
| March 31, 2017, respectively; 23,068,280 and 8,974,386 shares issued and outstanding at March 31, 2018 | | |
| and March 31, 2017, respectively | 23,100 | 9,000 | |
| Stockholders’ equity (deficit): | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2021 and 2020: | | |
| Series A Preferred, 500,000 shares authorized, issued and outstanding at March 31, 2021 and 2020 | | 500 |
| Series B Preferred; 4,000,000 shares authorized at March 31, 2021 and 2020; 1,131,669 shares | | |
| and 1,160,240 shares issued and outstanding at March 31, 2021 and 2020, respectively | | 1,100 | 1,200 |
| Series C Preferred; 3,000,000 shares authorized at March 31, 2021 and 2020; 2,318,012 shares | | |
| issued and outstanding at March 31, 2021 and 2020 | | 2,300 |
| Series D Preferred; 2,000,000 shares and no shares authorized at March 31, 2021 and 2020, respectively; | | |
| 402,149 shares and no shares issued and outstanding at March 31, 2021 and March 31, 2020, respectively | | 400 | - |
Common stock, $0.001 par value; 325,000,000 shares and 175,000,000 shares authorized at March 31, 2021 and 2020, respectively; 180,751,234 and 49,348,707 shares issued at March 31, 2021 and 2020, respectively | | 180,800 | 49,300 |
| Additional paid-in capital | 167,401,400 | 146,569,600 | 315,603,100 | 200,092,800 |
| Treasury stock, at cost, 135,665 shares of common stock held at March 31, 2018 and 2017 | (3,968,100) | |
| Treasury stock, at cost, 135,665 shares of common stock held at March 31, 2021 and 2020 | | (3,968,100) |
| Accumulated deficit | (156,543,800) | (141,998,700) | (219,841,600) | (201,907,400) |
| Total stockholders’ equity | 6,916,600 | 615,800 | |
| Total liabilities and stockholders’ equity | $11,278,300 | $3,712,200 | |
| Total stockholders’ equity (deficit) | | 91,978,500 | (5,729,400) |
| Total liabilities and stockholders’ equity (deficit) | | $108,281,300 | $5,772,300 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATEDCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSLOSS(Amounts in dollars, except share amounts)
| | Fiscal Years Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| Revenues: | | |
| Sublicense revenue | $- | $1,250,000 | $1,089,500 | $- |
| Total revenues | - | 1,250,000 | 1,089,500 | - |
| Operating expenses: | | |
| Research and development | 7,762,500 | 5,203,700 | 12,476,400 | 13,374,200 |
| General and administrative | 6,437,100 | 6,294,800 | 6,546,900 | 7,427,300 |
| Total operating expenses | 14,199,600 | 11,498,500 | 19,023,300 | 20,801,500 |
| Loss from operations | (14,199,600) | (10,248,500) | (17,933,800) | (20,801,500) |
| Other expenses, net: | | |
| Interest expense, net | (8,900) | (4,600) | |
| Loss on extinguishment of accounts payable | (135,000) | - | |
| | | |
| Other income and expenses, net: | | |
| Interest income, net | | 1,600 | 30,100 |
| Other income | | 600 | - |
| Loss before income taxes | (14,343,500) | (10,253,100) | (17,931,600) | (20,771,400) |
| Income taxes | (2,400) | (2,600) |
Net loss and comprehensive loss | (14,345,900) | (10,255,500) | $(17,934,200) | $(20,774,000) |
| | | |
| Accrued dividend on Series B Preferred stock | (1,030,400) | (1,257,000) | |
| Deemed dividend from trigger of down round | | |
| provision feature | (199,200) | - | |
| Deemed dividend on Series B Preferred Units | - | (111,100) | |
| | | |
| Accrued dividends on Series B Preferred stock | | (1,385,600) | (1,263,600) |
| Beneficial conversion feature on Series D | | |
| Preferred stock | | (23,000,000) | - |
| Net loss attributable to common stockholders | $(15,575,500) | $(11,623,600) | $(42,319,800) | $(22,037,600) |
| | | |
| Basic and diluted net loss attributable to common | | |
| stockholders per common share | $(1.12) | $(1.54) | $(0.49) | $(0.50) |
| | | |
| Weighted average shares used in computing basic | | |
and diluted net loss attributable to common | | |
| Weighted average shares used in computing | | |
| basic and diluted net loss attributable to common | | |
| stockholders per common share | 13,890,041 | 7,531,642 | 86,133,644 | 43,869,523 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASHCASH FLOWS (Amounts in dollars)
| | Fiscal Years Ended March 31, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(14,345,900) | $(10,255,500) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 80,700 | 54,900 |
| Stock-based compensation | 2,344,200 | 851,300 |
| Expense related to modification of warrants, including exchange of warrants for common stock | 292,700 | 427,500 |
| Amortization of deferred rent | 146,300 | 83,700 |
| Fair value of common stock granted for services | 1,615,800 | 1,640,100 |
| Fair value of Series B Preferred stock granted for services | - | 375,000 |
| Fair value of warrants granted for services | - | 240,300 |
| Loss on extinguishment of accounts payable | 135,000 | - |
| Changes in operating assets and liabilities: | | |
| Prepaid expenses and other current assets | 131,200 | (227,700) |
| Accounts payable and accrued expenses, including accrued interest | 541,700 | (451,700) |
| Net cash used in operating activities | (9,058,300) | (7,262,100) |
| | | |
| Cash flows from property and investing activities: | | |
| Purchases of equipment | (1,600) | (239,100) |
| Net cash used in investing activities | (1,600) | (239,100) |
| | | |
| Cash flows from financing activities: | | |
| Net proceeds from issuance of common stock and warrants, including Units | 16,722,300 | 9,899,500 |
| Net proceeds from issuance of Series B Preferred Units | - | 278,000 |
| Repayment of capital lease obligations | (2,400) | (1,300) |
| Repayment of notes payable | (203,000) | (182,200) |
| Net cash provided by financing activities | 16,516,900 | 9,994,000 |
| Net increase in cash and cash equivalents | 7,457,000 | 2,492,800 |
| Cash and cash equivalents at beginning of period | 2,921,300 | 428,500 |
| Cash and cash equivalents at end of period | $10,378,300 | $2,921,300 |
| | | |
Supplemental disclosure of cash flow activities: | | |
| $8,900 | $16,600 |
Cash paid for income taxes | $2,400 | $2,400 |
| | | |
Supplemental disclosure of noncash activities: | | |
Insurance premiums settled by issuing note payable | $202,100 | $178,200 |
Accrued dividends on Series B Preferred | $1,030,400 | $1,257,000 |
Accrued dividends on Series B Preferred settled upon conversion by issuance of common stock | $- | $1,768,800 |
Deemed dividend from trigger of down round provision feature | $199,200 | $- |
Acquisition of equipment under capital lease | $- | $14,700 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Fiscal Years Ended March 31, 2017 and 2018
(Amounts in dollars, except share amounts)
| | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | |
| Balances at March 31, 2016 | 500,000 | $500 | 3,663,077 | $3,700 | 2,318,012 | $2,300 | 2,623,145 | $2,600 | $132,725,000 | $(3,968,100) | $(131,743,200) | $(2,977,200) |
| | | | | | | | | | | | | |
Proceeds from sale of Series B Preferred Units for cash under Series B Preferred Unit Private Placement | - | - | 39,714 | - | - | - | - | - | 278,000 | - | - | 278,000 |
Proceeds from sale of common stock and warrants for cash in May 2016 Public Offering | - | - | - | - | - | - | 2,570,040 | 2,600 | 9,534,500 | - | - | 9,537,100 |
Proceeds from sale of common stock and warrants for cash in private placement offerings | - | - | - | - | - | - | 124,250 | 100 | 362,300 | - | - | 362,400 |
Series B Preferred converted to common stock automatically upon consummation of May 2016 Public Offering and voluntarily | - | - | (2,542,551) | (2,500) | - | - | 2,542,551 | 2,500 | - | - | - | - |
Common stock issued for dividends upon conversion of Series B Preferred | - | - | - | - | - | - | 453,154 | 500 | 1,768,300 | - | - | 1,768,800 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | (1,257,000) | - | - | (1,257,000) |
| Share-based compensation expense | - | - | - | - | - | - | | | 851,300 | - | - | 851,300 |
Exchange of outstanding warrants for common stock and other warrant modifications | - | - | - | - | - | - | 156,246 | 200 | 427,300 | - | - | 427,500 |
| Fair value of common stock and warrants granted for services | - | - | - | - | - | - | 505,000 | 500 | 1,879,900 | - | - | 1,880,400 |
| Net loss for fiscal year ended March 31, 2017 | - | - | - | - | - | - | - | - | - | - | (10,255,500) | (10,255,500) |
| Balances at March 31, 2017 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 8,974,386 | $9,000 | $146,569,600 | $(3,968,100) | $(141,998,700) | $615,800 |
| | | | | | | | | | | | | |
Proceeds from sale of common stock and warrants for cash in September 2017 Public Offering, net of underwriting discount and expenses | - | - | - | - | - | - | 1,371,430 | 1,400 | 2,023,000 | - | - | 2,024,400 |
Proceeds from sale of common stock and warrants for cash in December 2017 Public Offering, net of underwriting discount and expenses | - | - | - | - | - | - | 10,000,000 | 10,000 | 13,614,000 | - | - | 13,624,000 |
Proceeds from sale of common stock and warrants for cash in private placement offerings | - | - | - | - | - | - | 616,323 | 600 | 1,072,600 | - | - | 1,073,200 |
| Proceeds from exercise of warrants | - | - | - | - | - | - | 503,641 | 500 | - | - | - | 500 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | (1,030,400) | - | - | (1,030,400) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | 2,344,100 | - | - | 2,344,100 |
| Fair value of common stock granted for services | - | - | - | - | - | - | 1,102,500 | 1,100 | 1,732,100 | - | - | 1,733,200 |
| Fair value of common stock granted in settlement of accounts payable | - | - | - | - | - | - | 500,000 | 500 | 584,500 | - | - | 585,000 |
| Increase in fair value attributable to warrant modifications | - | - | - | - | - | - | - | - | 292,700 | - | - | 292,700 |
| Deemed dividend from trigger of down round provision feature | - | - | - | - | - | - | - | - | 199,200 | - | (199,200) | - |
| Net loss for the fiscal year ended March 31, 2018 | - | - | - | - | - | - | - | - | - | - | (14,345,900) | (14,345,900) |
| | | | | | | | | | | | | |
| Balances at March 31, 2018 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 23,068,280 | $23,100 | $167,401,400 | $(3,968,100) | $(156,543,800) | $6,916,600 |
| | Fiscal Years Ended March 31, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(17,934,200) | $(20,774,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 117,600 | 103,100 |
| Stock-based compensation | 2,306,100 | 3,820,800 |
| Expense related to modification of warrants | - | 826,900 |
| Amortization of fair value of common stock issued for services | - | 92,100 |
| Amortization of fair value of warrants issued for services | - | 13,800 |
| Changes in operating assets and liabilities: | | |
| Receivable from collaboration partner or supplier | (40,600) | 300,000 |
| Prepaid expenses and other current assets | (287,800) | 182,600 |
| Right of use asset - operating lease | 360,000 | 335,400 |
| Operating lease liability | (313,500) | (267,000) |
| Deferred sublicense revenue, net of deferred contract acquisition costs | 3,667,900 | - |
| Accounts payable and accrued expenses | 51,000 | (390,700) |
| Net cash used in operating activities | (12,073,500) | (15,757,000) |
| | | |
| Cash flows from property and investing activities: | | |
| Purchases of manufacturing and other equipment | (275,400) | - |
| Net cash used in investing activities | (275,400) | - |
| | | |
| Cash flows from financing activities: | | |
| Net proceeds from issuance of common stock and Series D Preferred stock | 93,675,200 | - |
| Net proceeds from issuance of common stock and warrants, including Units | 12,957,800 | 3,349,000 |
| Net proceeds from exercise of warrants | 5,009,500 | 410,000 |
| Proceeds from sale of warrants | - | 300,000 |
| Net proceeds from sale of common stock under equity line | 2,841,600 | 249,400 |
| Proceeds from issuance of note under Payroll Protection Plan | 224,400 | - |
| Repayment of capital lease obligations | (3,300) | (3,000) |
| Repayment of notes payable, including Payroll Protection Plan note | (603,100) | (293,600) |
| Net cash provided by financing activities | 114,102,100 | 4,011,800 |
| Net increase (decrease) in cash and cash equivalents | 101,753,200 | (11,745,200) |
| Cash and cash equivalents at beginning of period | 1,355,100 | 13,100,300 |
| Cash and cash equivalents at end of period | $103,108,300 | $1,355,100 |
| | | |
| Supplemental disclosure of cash flow activities: | | |
| Cash paid for interest | $13,300 | $14,800 |
| Cash paid for income taxes | $2,600 | $2,600 |
| | | |
| Supplemental disclosure of noncash activities: | | |
| Insurance premiums settled by issuing note payable | $322,200 | $292,800 |
| Accrued dividends on Series B Preferred | $1,385,600 | $1,263,600 |
| Accrued dividends on Series B Preferred settled upon conversion by issuance | | |
| of common stock | $124,600 | $- |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
Fiscal Years Ended March 31, 2020 and 2021
(Amounts in dollars, except share amounts)
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2019 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 42,758,630 | $42,800 | $192,129,900 | $(3,968,100) | $(181,133,400) | $7,075,200 |
| | | | | | | | | | | | | | | |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in private placements | - | - | - | - | - | - | - | - | 650,000 | 600 | 649,400 | - | - | 650,000 |
| Proceeds from sale of warrants in private placement | - | - | - | - | - | - | - | - | | | 300,000 | - | - | 300,000 |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in public offering and concurrent private placement | - | - | - | - | - | - | - | - | 3,870,077 | 3,900 | 2,695,100 | - | - | 2,699,000 |
| Issuance of commitment shares and net proceeds of initial | | | | | | | | | | | | | | |
| sale of common stock under equity line | - | - | - | - | - | - | - | - | 1,250,000 | 1,200 | 525,100 | - | - | 526,300 |
| Proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 820,000 | 800 | 409,200 | - | - | 410,000 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,263,600) | - | - | (1,263,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 3,820,800 | - | - | 3,820,800 |
| Increase in fair value attributed to warrant modifications | | | | | | | | | | | | | | - |
| and additional warrants issued | - | - | - | - | - | - | - | - | - | - | 826,900 | - | - | 826,900 |
| | | | | | | | | | | | | | | - |
| Net loss for the fiscal year ended March 31, 2020 | - | - | - | - | - | - | - | - | - | - | - | - | (20,774,000) | (20,774,000) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2020 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 49,348,707 | $49,300 | $200,092,800 | $(3,968,100) | $(201,907,400) | $(5,729,400) |
| | | | | | | | | | | | | | | |
| Net proceeds from sale of common stock under equity line | - | - | - | - | - | - | - | - | 6,301,995 | 6,300 | 2,790,500 | - | - | 2,796,800 |
| Net proceeds from sale of common stock in public offering | - | - | - | - | - | - | - | - | 17,868,250 | 17,900 | 12,887,200 | - | - | 12,905,100 |
| Net proceeds from sale of common stock and Series D Preferred | | | | | | | | | | | | | | |
| stock in public offering | - | - | - | - | - | - | 2,000,000 | 2,000 | 63,000,000 | 63,000 | 93,582,900 | - | - | 93,647,900 |
| Net proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 6,624,302 | 6,600 | 5,002,900 | - | - | 5,009,500 |
| Comversion of Series D Preferred stock to common stock | - | - | - | - | - | - | (1,597,851) | (1,600) | 36,750,573 | 36,800 | (35,200) | - | - | - |
| Comversion of Series B Preferred stock to common stock and payment | | | | | | | | | | | | | | |
| of accrued dividends in common stock | - | - | (28,571) | (100) | - | - | - | - | 188,633 | 200 | 124,500 | - | - | 124,600 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,385,600) | - | - | (1,385,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 2,306,100 | - | - | 2,306,100 |
| Sale of common stock pursuant to 2019 Employee Stock Purchase Plan | - | - | - | - | - | - | - | - | 58,125 | 100 | 26,100 | - | - | 26,200 |
| Issuance of common stock upon cashless exercise of stock options | - | - | - | - | - | - | - | - | 222,004 | 200 | (200) | - | - | - |
| Net proceeds from exercise of stock options for cash | - | - | - | - | - | - | - | - | 30,000 | - | 36,500 | | | 36,500 |
| Issuance of common stock at fair value for professional services | - | - | - | - | - | - | - | - | 233,645 | 200 | 124,800 | - | - | 125,000 |
| Beneficial conversion feature on Series D Preferred stock | - | - | - | - | - | - | - | - | - | - | 23,000,000 | - | - | 23,000,000 |
| Deemed dividend from beneficial conversion feature of Series D Preferred Stock | - | - | - | - | - | - | - | - | - | - | (23,000,000) | - | - | (23,000,000) |
| Net loss for the fiscal year ended March 31, 2021 | - | - | - | - | - | - | - | - | - | - | | - | (17,934,200) | (17,934,200) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2021 | 500,000 | $500 | 1,131,669 | $1,100 | 2,318,012 | $2,300 | 402,149 | $400 | 180,751,234 | $180,800 | $315,603,100 | $(3,968,100) | $(219,841,600) | $91,978,500 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DescriptionDescription of Business
Overview
VistaGen Therapeutics.Therapeutics, Inc., a Nevada corporation(which may be referred to asVistaGen, theCompany,we,our, orus),isa clinical-stage biopharmaceutical company focused oncommitted to developing and commercializing differentiated new generation medicinesmedications that go beyond the current standard of care for widespread anxiety, depression and other diseases and disorders of the central nervous system (CNS) disorders. Our CNS pipeline includes three CNS product candidates, PH94B Nasal Spray, PH10 Nasal Spray and AV-101, each with high unmet need.a differentiated profile, favorable safety results observed in all clinical studies to date and therapeutic potential in multiple CNS indications. PH94B Nasal Spray (PH94B) is being developed for multiple anxiety disorders. We recently initiated our PH94B Phase 3 development program, which we refer to as the PALISADE program, with PALISADE-1, a U.S., multi-center, randomized, double-blind, placebo-controlled Phase 3 clinical study to evaluate the efficacy and safety of PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD), as well as preparations for the additional studies required to support our potential U.S. New Drug Application (NDA) for that indication should the PALISADE Phase 3 program be successful. We are also preparing for exploratory Phase 2A clinical studies of PH94B in adults experiencing several other anxiety disorders. PH10 Nasal Spray (PH10) is being developed as a stand-alone treatment for multiple depression disorders. Exploratory Phase 2A clinical development of PH10 for major depressive disorder (MDD) has been completed. We are now preparing for planned Phase 2B clinical development of PH10 for this indication. We are preparing for a Phase 1B clinical study of AV-101 in combination with probenecid to assess potential future Phase 2A clinical development of the combination for MDD or certain neurological indications. Our goal is to become a biopharmaceutical company that develops and commercializes innovative CNS therapies for highly prevalent neuropsychiatry and neurology indications where current treatments options are inadequate to meet the needs of millions of patients in markets worldwide.
Our lead CNS product candidate, AV-101, is an oral, non-opioid and non-sedating therapy that we believe offers the potential to be a new at-home treatment for multiple CNS indications with high unmet medical need. These indications include potential use as a new generation treatment alternative for Major Depressive Disorder (MDD), as a non-addictive, non-sedating option for management of chronic neuropathic pain (CNP), to reduce dyskinesia induced by levodopa therapy for Parkinson’s disease (PD LID), and additional CNS indicationswhere modulation of NMDA (N-methyl-D-aspartate) receptor and AMPA (alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid) receptor pathways may achieve therapeutic benefit.Product Candidates
For MDD, we believe AV-101 has potential asPH94B is a first line oral monotherapy and assynthetic investigational neurosteroid developed from proprietary compounds called pherines. With its novel mechanism of action, PH94B is an adjunctive oral therapy. As an adjunctive therapy, we believe AV-101 has potential bothodorless nasal spray administered at microgram-level doses to displace atypical antipsychotics such as aripiprazole in the current MDD drug treatment paradigm both for patients with an inadequate response to currentachieve rapid-onset anti-anxiety, or anxiolytic, effects. The pharmacological activity of PH94B is fundamentally differentiated from that of all FDA-approved anti-anxiety drugs, including all antidepressants approved by the U.S. Food and Drug Administration (FDA) for treatment of SAD, as well as all benzodiazepines and beta blockers prescribed on an off-label basis. PH94B engages peripheral chemosensory receptors in nasal passages that trigger a subset of neurons in the main olfactory bulbs (OB) at the base of the brain. The OB neurons then stimulate inhibitory GABAergic neurons in the limbic amygdala, decreasing the activity of the sympathetic nervous system, and facilitating fear extinction activity of the limbic-hypothalamic system, the main fear and anxiety center in the brain, as well as in other parts of the brain. Importantly, PH94B does not require systemic uptake and distribution to prevent relapseproduce its rapid-onset anti-anxiety effects. Our ongoing PALISADE Phase 3 program for PH94B is designed to further demonstrate its potential as a fast-acting, non-sedating, non-addictive acute treatment of anxiety in adults with SAD. We believe PH94B also has potential to be developed as a novel treatment for adjustment disorder with anxiety, postpartum anxiety, post-traumatic stress disorder, procedural anxiety, panic and other anxiety disorders. PH94B has been granted Fast Track designation status by the FDA for development for the acute treatment of SAD.
PH10 is a synthetic investigational neurosteroid, which also was developed from proprietary compounds called pherines. Its novel, rapid-onset mechanism of action (MOA) is fundamentally differentiated from the MOA of all current treatments for MDD following successful treatment with the FDA-approved anesthetic, ketamine hydrochloride, an ion-channel blocking NDMA receptor antagonist (ketamine), whether administered by intravenous (IV) injection orand other depression disorders. PH10 is self-administered at microgram-level doses as an odorless nasal spray. PH10 activates nasal chemosensory cells in the nasal passages, connected to neural circuits in the brain that produce antidepressant effects. Specifically, PH10 engages peripheral chemosensory receptors in the nasal passages that trigger a subset of neurons in the main OB that stimulate neurons in the limbic amygdala. This is turn increases activity of the limbic-hypothalamic sympathetic nervous system and increases the release of catecholamines. Importantly, unlike all currently approved oral antidepressants (ADs), PH10 does not require systemic uptake and distribution to produce rapid-onset of antidepressant effects. In all clinical studies to date, PH10 has not caused psychological side effects (such as dissociation and hallucinations) or safety concerns that may be associated with rapid-onset ketamine-based therapy (KBT), including intravenous ketamine or intranasal spray formulation. ketamine (esketamine). We believe AV-101 may havePH10 has potential to deliver ketamine-like antidepressant effects on an at-home basis, without the requirementbe a new stand-alone treatment for inconvenient administration in a medical setting,MDD and without causing psychological orseveral other side effects and safety concerns associated with ketamine therapy.depression disorders.
AV-101 is in Phase 2 development(4-Cl-KYN) targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the United States.brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. AV-101 is an oral prodrug of 7-chloro-kynurenic acid (7-Cl-KYNA), which is a potent and selective full antagonist of the glycine co-agonist site of the NMDAR that inhibits the function of the NMDAR. However, unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. At doses administered in all studies to date, AV-101 has been observed to be well tolerated and has not exhibited dissociative or hallucinogenic psychological side effects or safety concerns. In light of these observations and findings from preclinical studies, we believe that AV-101, in combination with FDA-approved probenecid, has potential to become a new oral treatment alternative for certain CNS indications involving the fourth quarter of 2017, we received authorization from the FDA to initiate ELEVATE, our Phase 2 multi-center, multi-dose, double blind, placebo-controlled clinical studyNMDAR. We are currently preparing to evaluate the efficacy and safetyAV-101 in combination with probenecid in a Phase 1B clinical study. The FDA has granted Fast Track designation for development of AV-101 as ana potential adjunctive treatment offor MDD in adult patients with an inadequate therapeutic response to current FDA-approved antidepressants (the and as a non-opioid treatment for neuropathic pain (ELEVATE StudyNP). As planned, we initiated the ELEVATE Study in the first quarter of 2018. Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, is the Principal Investigator of the ELEVATE Study assisting our internal team, which is led by Mark Smith, MD, PhD, our Chief Medical Officer. Dr. Fava was the co-Principal Investigator with Dr. A. John Rush of the STAR*D study, the largest clinical trial conducted in depression to date, whose findings were published in journals such as theNew England Journal of Medicine(NEJM) and theJournal of the American Medical Association(JAMA). We currently anticipate top line results from the ELEVATE Study in the first half of 2019.
AV-101 is also in the subject of a small Phase 2 clinical study being conducted and funded by the U.S. National Institute of Mental Health (theNIMH), pursuant to our Cooperative Research and Development Agreement (CRADA) with the NIMH (theNIMH Study). Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders, is acting as the Principal Investigator for the NIMH Study, which is focused on AV-101 monotherapy for subjects with treatment-resistant MDD and certain biomarkers. Dr. Zarate and the NIMH were among the first in the U.S. to conduct clinical studies demonstrating the robust, fast-acting antidepressant effects of ketamine in MDD patients with inadequate responses to multiple current FDA-approved antidepressants.
In addition to our CNS business, we have two additional programs through our wholly-owned subsidiary VistaGen Therapeutics, Inc., a California corporation, dba VistaStem Therapeutics (VistaStem). VistaStem is focused on applying human pluripotent stem cell (hPSC) technology to rescue, develop and commercialize (i) proprietary new chemical entities (NCEs) for CNS and other diseases and (ii) regenerative medicine (RM) involving hPSC-derived blood, cartilage, heart and liver cells. Our internal drug rescue programs are designed to utilize CardioSafe 3D, our customized cardiac bioassay system, to develop small molecule NCEs for our pipeline or out-licensing. To advance potential RM applications of VistaStem’s cardiac stem cell technology, we have exclusively sublicensed to BlueRock Therapeutics LP, a next generation cell therapy and RM company established in 2016 with $225 million of committed capital from Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to the BlueRock Agreement, we may pursue additional VistaStem collaborations or licensing transactions involving blood, cartilage, and/or liver cells derived from hPSCs for cell-based therapy, cell repair therapy, RM and/or tissue engineering.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries
As noted above,VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem (VistaStem),is our wholly-owned subsidiary. Our Consolidated Financial Statements in this Annual Report on Form 10-K (Annual Report) also include the accounts of VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.
2. Basis of Presentation and Going Concern
The accompanying Consolidated Financial Statements have been prepared assuming that we will continue as a going concern. As a clinical-stage biopharmaceutical company having not yet developed commercial products or achieved sustainable revenues, we have experienced recurring losses and negative cash flows from operations and recurring losses resulting in a deficit of $156.5$242.8 million accumulated from inception (May 1998) through March 31, 2018.2021. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further potential development of AV-101, initially as an adjunctive treatment for MDD,PH94B, PH10 and subsequently as a new treatment alternative for other CNS conditions, execute our drug rescue programs, and pursue potential drug development and regenerative medicine opportunities.AV-101.
Since our inception in May 1998 through March 31, 2018,2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $61.4$197.8 million, as well as from an aggregate of approximately $17.6$22.7 million of government research grant awards (excluding the fair market value of the NIMH Study)government sponsored and funded clinical trials), strategic collaboration payments, intellectual property sublicensinglicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $33.6 $38.2million in non-cashnoncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Recent Developments
InAs described more completely in Note 9,Capital Stock, in December 2017,2020, we completedentered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold, in an underwritten public offering of shares of our common stock and warrants to purchase(the December 2020 Public Offering), 63,000,000 shares of our common stock at a combined public offering price of $1.50$0.92 per share and 2,000,000 shares of a newly issued series of convertible preferred stock (Series D Preferred) and, together with the common stock, the Securities) at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million.
As also described more completely in Note 9,Capital Stock, in August 2020, we entered into an underwriting agreement (the August 2020Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. Under the terms of the August 2020 Underwriting Agreement, we granted to the underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, were approximately $12.9 million.
As more completely described in Note 12,Licensing, Sublicensing and Collaboration Agreements, in June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders (theEverInsight Agreement), with EverInsight Therapeutics Inc., (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia, and funded by CBC Group, a global healthcare-focused venture capital firm. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, also funded by CBC Group, which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed agreed to make a non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment for consulting services related warrantto the AffaMed Agreement.
Additionally, as described in Note 9,Capital Stock, on March 24, 2020, we entered into a purchase agreement and a registration rights agreement with Lincoln Park Capital Fund (Lincoln Park) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (theLPC Agreement). To satisfy our obligations under ourthe registration rights agreement, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the Securities and Exchange Commission (theSEC) on March 31, 2020, which the SEC declared effective on April 14, 2020 (Registration No. 333-221009), resulting in333-237514). Subsequent to the effectiveness of the LPC Registration Statement and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $15.0 million (theDecember 2017 Public Offering). In September 2017, we completed an underwritten public offering$2,891,200. We have not sold any shares of our common stock pursuant to which we offeredthe Lincoln Park Agreement since July 2020.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As also described in Note 9,Capital Stock, between December 2020 and soldMarch 31, 2021, certain holders of outstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our common stock and we received cash proceeds of $4,924,800 from such exercises. As disclosed in Note 16,Subsequent Events, since March 31, 2021, holders of outstanding warrants resulting in grosshave exercised warrants to purchase an additional 1,508,768 shares of our common stock and we have received cash proceeds of approximately $2.4$1,105,700.
Liquidity and Capital Resources
During the fiscal year ended March 31, 2021, we received approximately $119 million (thein net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of these financial statements, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
During the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE September 2017 Public OfferingPhase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, ) underand (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for more than the next twelve months following the issuance of this Annual Report, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-215671)333-254299) (the S-3 Registration Statement). (See Note 8,Capital Stock,for additional information regarding the December 2017 Public Offering and the September 2017 Public Offering.) Subject to certain restrictions, the S-3 Registration Statement, which became effective on March 26, 2021, remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so. As we have been in the past, we expect that, when and as necessary, we will be successful in raising additional capital from the sale of our equity securities either in one or more public offerings or in one or more private placement transactions with individual accredited investors or institutions.
At March 31, 2018, we had a cash and cash equivalents balance of $10.4 million. This amount was not sufficient to enable us to fund our planned operations, including expected cash expenditures of approximately $13 million for the twelve months following the issuance of these financial statements, including expenditures required to satisfy a significant portion of the projected expenses associated with our ELEVATE Study.
Our cash position at March 31, 2018 considered with our recurring and anticipated losses, negative cash flows from operations and limited stockholders’ equity make it probable, in the absence of additional financing, that we will not be able to meet our obligations as they come due within one year from the date of this Report, raising substantial doubt that we can continue as a going concern. However, to alleviate that doubt, we plan, as we have numerous times in the past, to raise additional financing when and as needed, primarily through the sale of our equity securities in one or more private placements to accredited investors or public offerings.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement and development collaborations that could generate revenue orthe Bayer Agreement (defined in Note 12, below) to provide funding, including non-dilutive funding, for development of AV-101 and additionalone or more of our CNS product candidates.candidate programs. We may also seek additional government grant awards or agreements similar to our current CRADAprior agreement with the NIMH, which provides forU.S. National Institutes of Health (NIH), Baylor University and the NIMH to fully fund the NIMH Study.U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. In a mannerWe may also pursue intellectual property arrangements similar to the BlueRockAffaMed Agreement we may also pursue similar arrangementsand the Bayer Agreement with third-parties covering other of our intellectual property.parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of AV-101 and otherour product candidates, as well as new government grant awards and/or agreements, similar to our CRADA with NIMH, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the current COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of AV-101 as an adjunctive treatment for MDD and other potential CNS conditions,our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract manufacturing, research and development, investor and public relations, and corporatebusiness development, legal, intellectual property acquisition and protection, of intellectual property, public company compliance and other professional services and operating costs.
Notwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future financingpotential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain substantial additional financing on a timely basis when needed, in 2018 or 2019 and beyond, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern. As noted above, these Consolidated Financial Statements do not include any adjustments that might result from the negative outcome of this uncertainty.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
UseIncome Taxes
We account for income taxes using the asset and liability approach for financial reporting purposes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of Estimatesexisting assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce the deferred tax assets to an amount expected to be realized.
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K for information on recent accounting pronouncements.
Financial Operations Overview and Results of Operations
Net Loss
Although we entered into the AffaMed Agreement in June 2020 and the Bayer Agreement in December 2016, we have not yet achieved recurring revenue-generating status in amounts sufficient to sustain our operations and enable our strategic business plans from any of our product candidates or technologies. Since inception, we have devoted substantial time and effort to developing AV-101 for multiple CNS indications, including manufacturing research, process development and production of AV-101 drug substance and finished drug product, preclinical efficacy and safety studies, and clinical efficacy and safety studies in CNS indications. Since acquiring our exclusive worldwide licenses to PH94B and PH10 in 2018, we have devoted substantial resources focused on research, development and commercialization of PH94B and PH10, including initiatives to advance manufacturing research, process development and production programs for drug substance and finished drug product, additional preclinical safety studies, and clinical efficacy and safety studies in multiple neuropsychiatry indications. Also, from-time-to-time, we have devoted resources to VistaStem’s stem cell technology research and development, bioassay development and small molecule drug rescue initiatives, as well as creating, protecting and patenting intellectual property (IP) related to our product candidates and stem cell technologies, with the corollary initiatives of recruiting and retaining personnel and raising working capital. As of March 31, 2021, we had an accumulated deficit of approximately $242.8 million. Our net loss for the fiscal years ended March 31, 2021 and 2020 was approximately $17.9 million and $20.8 million, respectively. We expect losses to continue for the foreseeable future, primarily as we engage in further research, development and commercialization activities related to PH94B, PH10 and AV-101, and pursue VistaStem’s potential drug rescue, drug development and CT and RM opportunities.
Summary of the Fiscal Year Ended March 31, 2021
On December 22, 2020, we completed a transformative $100 million underwritten public offering (theDecember 2020Public Offering) of our securities, consisting of shares of our common stock and shares of our newly created Series D Convertible Preferred Stock (Series D Preferred).After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $93.6 million from the sale of our securities in the December 2020 Public Offering.Combined with financing and development and commercialization partnering transactions completed earlier in our fiscal year, aggregating approximately an additional $25 million, the proceeds from the December 2020 Public Offering have provided us with working capital to advance an important stream of potential catalysts across our CNS pipeline, including, among others, our Phase 3 development program for PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD) and, upon successful Phase 3 development, submission of our New Drug Application to the U.S. Food and Drug Administration and potential U.S. market approval of PH94B.
From an operational perspective, during our fiscal year ended March 31, 2021 (Fiscal 2021), we continued to advance our manufacturing, preclinical and clinical development, and regulatory initiatives necessary for our Phase 3 clinical development of PH94B as a potential acute treatment of anxiety in adults with SAD, PH10 as a potential stand-alone treatment of MDD and AV-101 in combination with probenecid as a potential treatment for NMDAR-focused indications. During the quarter ended March 31, 2021, and thereafter, following the completion of the December 2020 Public Offering, we increased our headcount with the addition of twelve additional employees with significant expertise in various disciplines including manufacturing, regulatory affairs, clinical development, commercial affairs and administrative functions. Further, we accelerated our planning for clinical trials for both PH94B and PH10, culminating in the start of the PALISADE-1 Phase 3 clinical study in late-May 2021. The PALISADE-1 Phase 3 clinical study is part of our PH94B PALISADE Phase 3 program for the acute treatment of anxiety in adult patients with SAD. Throughout Fiscal 2021, we continued to expand our regulatory and intellectual property foundation to support broad clinical development and, ultimately, commercialization of our CNS product candidates in the U.S. and foreign markets.
Throughout Fiscal 2021 and through the date of this Report, a strain of SARS-CoV-2, commonly referred to as COVID-19, has spread to many countries in the world and the outbreak was declared a pandemic by the World Health Organization. The U.S. Secretary of Health and Human Services also declared a public health emergency in the U.S. in response to the outbreak. From time to time during the COVID-19 pandemic, our operations and those of our CROs and CMOs have been and still may be impacted by shelter-in-place orders, social distancing measures, travel bans and restrictions, and certain business and government closures or reductions in service. Our headquarters operations have been significantly curtailed and our employees have worked remotely since the beginning of the COVID-19 pandemic. From time to time since the beginning of the COVID-19 pandemic, we have experienced delays in the delivery of supplies of active pharmaceutical product (API) or other key materials required to continue development of PH94B and PH10. Future unexpected delays may result in a significant, material delay or disruption to our current clinical development plans, programs, and operations.
During our fiscal quarter ended June 30, 2020, we completeda successful and positive meeting with the FDA regarding Phase 3 clinical development of PH94B for the acute treatment of anxiety in adult patients with SAD, reaching consensus with the FDA on key aspects of the design of our Phase 3 clinical trials of PH94B, which studies will be randomized, double-blind, placebo-controlled, studies involving a single-event, laboratory-simulated public speaking challenge in adult subjects with SAD. As noted earlier, the initial Phase 3 clinical trial of PH94B, PALISADE-1, commenced in late-May 2021. Dr. Michael Liebowitz, Professor of Clinical Psychiatry at Columbia University, director of the Medical Research Network in New York City, and creator of the Liebowitz Social Anxiety Scale (LSAS), is the Principal Investigator of PALISADE-1. Target enrollment for PALISADE-1 (completed patients) is approximately 208 adult patients with SAD. As in the statistically significant (p=0.002) public speaking component of the Phase 2 study, the patient-reported Subjective Units of Distress Scale (SUDS) will be used to assess the primary efficacy endpoint in PALISADE-1. Throughout Fiscal 2021, we have been actively engaged in formalizing processes and procedures for the manufacture of PH94B for the PALISADE Phase 3 program and Phase 2 programs in other anxiety indications, and of PH10 for our planned Phase 2B clinical study of PH10 in MDD and other Phase 2 and nonclinical studies of PH10.
In June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B (theEverInsight Agreement) with EverInsight Therapeutics Inc. (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, Inc., which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed is responsible for clinical development, regulatory submissions and commercialization of PH94B for the treatment of SAD, and potentially other anxiety-related indications, in key markets in Asia, including markets in Greater China, South Korea and Southeast Asia (collectively, theTerritory). Under the terms of the AffaMed Agreement, in August 2020, we received a non-dilutive upfront license fee payment of $5.0 million from AffaMed. Upon successful development and commercialization of PH94B in the Territory, we are eligible to receive up to $172 million in additional development and commercial milestone payments, plus royalties on commercial sales of PH94B in the Territory. After payment of sublicense fees to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment of consulting fees related to consummation of the AffaMed Agreement, we received net cash proceeds of approximately $4.655 million.
In December 2020, we sold 63,000,000 shares of our common stock in at a public offering price of $0.92 per share and 2,000,000 shares of our Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million (the December 2020 Public Offering). Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Earlier in Fiscal 2021, in August 2020, we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock for a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. We also granted to the underwriter an over-allotment option to purchase up to an additional 2,343,750 shares at a public offering price of $0.80 per share, which option was exercised with respect to 2,243,250 shares (theExercised Option Shares). The sale of the Exercised Option Shares resulted in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
To satisfy our obligations under the common stock purchase and registration rights agreements that we entered into with Lincoln Park Capital Fund (Lincoln Park) in March 2020, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the SEC on March 31, 2020 (Registration No. 333-237514), which the SEC declared effective on April 14, 2020 (theCommencement Date). Subsequent to the Commencement Date and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received aggregate cash proceeds of $2,891,200. We have not sold any additional shares to Lincoln Park under these agreements since July 2020. We terminated the stock purchase agreement with Lincoln Park effective on June 25, 2021.
As a matter of course, we continue to minimize, to the greatest extent possible, cash commitments and expenditures for both internal and external research and development and general and administrative services. To further advance the nonclinical and clinical development of PH94B, PH10 and AV-101, as well as support our operating activities, we continue to carefully manage our routine operating costs, including our internal employee related expenses, as well as external costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and internal costs.
Comparison of Fiscal Years Ended March 31, 2021 and 2020
The following table summarizes the results of our operations for the fiscal years ended March 31, 2021 and 2020 (amounts in thousands).
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Sublicense revenue | $1,089 | $- |
| Operating expenses: | | |
| Research and development | 12,476 | 13,374 |
| General and administrative | 6,547 | 7,427 |
| Total operating expenses | 19,023 | 20,801 |
| | | |
| Loss from operations | (17,934) | (20,801) |
| | | |
| Interest income, net | 2 | 30 |
| Other income | 1 | - |
| | | |
| Loss before income taxes | (17,931) | (20,771) |
| Income taxes | (3) | (3) |
| | | |
| Net loss | (17,934) | (20,774) |
| Accrued dividend on Series B Preferred Stock | (1,386) | (1,264) |
Beneficial conversion feature on Series D Preferred Stock | (23,000) | - |
| Net loss attributable to common stockholders | $(42,320) | $(22,038) |
Revenue
We recognized $1,089,500 in sublicense revenue pursuant to the AffaMed Agreement in Fiscal 2021 compared to none in the fiscal year ended March 31, 2020 (Fiscal 2020). As noted earlier, in June 2020, we entered into the AffaMed Agreement, pursuant to which we received a non-dilutive upfront license fee payment of $5.0 million in August 2020. We initially recorded this payment as deferred revenue and we are recognizing it as revenue on a straight-line basis over the period in which we expect to perform the services required under the AffaMed Agreement. We currently estimate that we will complete our performance obligations at the end of calendar 2023. While we may potentially receive additional cash payments and royalties in the future under the AffaMed Agreement in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the AffaMed Agreement will provide additional revenue beyond that noted or cash payments to us in the near term, or at all.
Research and Development Expense
Research and development (R&D) expense decreased from $13.4 million in Fiscal 2020 to $12.5 million in Fiscal 2021, primarily due to the completion of the Elevate Study of AV-101 in Fiscal 2020, noticeably offset by increased developmental expenses in Fiscal 2021 for PH94B and PH10. Expenses related to the Elevate Study and other AV-101 related nonclinical activities decreased by approximately $5.9 million in Fiscal 2021 compared to Fiscal 2020, while expenses for PH94B and PH10 preclinical and clinical readiness initiatives increased by $5.2 million in Fiscal 2021 compared to Fiscal 2020. Salaries and benefits expense increased in Fiscal 2021 as a result of the addition of six new senior-level employees during the third and fourth quarters of Fiscal 2021 and bonus payments made in the third quarter of Fiscal 2021. Noncash research and development expenses, primarily stock-based compensation and equipment depreciation in both periods, accounted for approximately $841,000 and $1,380,000 in Fiscal 2021 and Fiscal 2020, respectively.
The following table indicates the primary components of R&D expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $1,986 | $1,381 |
| Stock-based compensation | 747 | 1,287 |
| Consulting and other professional services | 327 | 533 |
| Technology licenses and royalties | 551 | 546 |
| Project-related research, licenses and supplies: | | |
| Elevate study and other AV-101 expenses | 611 | 6,483 |
| PH94B and PH10 development expenses | 7,620 | 2,448 |
| Stem cell and all other | 24 | 110 |
| | 8,255 | 9,041 |
| Rent | 545 | 535 |
| Depreciation | 64 | 49 |
| All other | 1 | 2 |
| | | |
| Total Research and Development Expense | $12,476 | $13,374 |
The preparationincrease in salaries and benefits expense in Fiscal 2021 reflects (i) the impact of bonus payments made to our Chief Medical Officer (CMO), Chief Scientific Officer (CSO), and members of our scientific staff in December 2020, (ii) modest salary increases to those officers and employees effective in the fourth quarter of Fiscal 2021; and (iii) the addition of six officer-level employees between December 2020 and March 2021. There were no changes in base compensation levels for our CMO, CSO, or other members of our scientific staff between April 2019 and December 2020 and no bonus expense or payments during that same period.
Current year stock-based compensation expense reflects the amortization of option grants made to our CMO, CSO, members of our scientific staff, our new senior-level employees and certain clinical and scientific consultants since June 2016, all earlier outstanding grants having become fully vested and amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020, including those granted during Fiscal 2021, account for approximately $348,700 of expense in Fiscal 2021, offset by an expense reduction of approximately $814,400 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $79,500 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.
Consulting and other professional services reflects fees incurred, generally on an as-needed basis, for project-based scientific, nonclinical and clinical development and regulatory advisory and analytical services rendered to us by third parties, including by members of our Scientific Advisory Board and CNS Clinical and Regulatory Advisory Board, especially in support of our PH94B and PH10 development initiatives. Fiscal 2021 expense reflects a reduction of $110,000 in development support payments to Pherin which terminated in April 2020 under the terms of our PH94B and PH10 license agreements and a $95,000 reduction in analytical and other services in support of PH94B and PH10 development compared to Fiscal 2020, a portion of which is attributable to the conversion of a consultant to an employee in Fiscal 2021.
Technology license and royalties expense primarily reflects legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements, our AV-101 patents, or patents that we have elected to pursue for commercial purposes, as well as recurring annual license fees. These costs do not occur ratably throughout the year or between years. In both periods, this expense includes legal counsel and other costs we have incurred to advance various patent applications in the U.S. and numerous foreign countries, primarily with respect to AV-101 and our stem cell technology platform, but also nominally with respect to our PH94B and PH10 intellectual property portfolios during Fiscal 2021.
AV-101 project expense for Fiscal 2020 reflects the costs of actively conducting the Elevate Study in MDD, including various CROs, investigator and clinical site costs, and determination of topline study results, as well as CRO support services for AV-101 projects for indications other than MDD, and, to lesser extent, expense incurred to manufacture additional quantities of AV-101 for use in potential future clinical development of AV-101 in a number of potential CNS indications. AV-101 project expense for Fiscal 2021 primarily reflects the cost of certain preclinical studies related to the use of AV-101 with probenecid and certain AV-101 manufacturing stability studies, and costs incurred to finalize the results of the Elevate Study for regulatory submission.
PH94B and PH10 project expenses for both Fiscal 2021 and Fiscal 2020 reflect research and development and manufacturing and regulatory initiatives necessary to facilitate Phase 3 clinical development and readiness of PH94B for acute treatment of anxiety in adults with SAD and Phase 2B development of PH10 for MDD. Manufacturing, formulation and analysis of sufficient quantities of drug substance and drug product have been the key initiatives during Fiscal 2021 for advancing the further clinical development of both PH94B and PH10, with costs for PH94B significantly exceeding those for PH10 in Fiscal 2021 and in comparison to those of Fiscal 2020. From time to time during Fiscal 2021, production, logistics and analytical processes for both of these product candidates were delayed due to the ongoing COVID-19 pandemic.
Stem cell and other project related expenses reflects costs associated with drug rescue applications of our stem cell technology in both years. These expenses are typically incurred by our in-house scientific personnel. As a result of shelter-in-place and remote working requirements related to the ongoing COVID-19 pandemic, such expenses were reduced to an insignificant level during Fiscal 2021.
Rent expense for both Fiscal 2020 and Fiscal 2021 reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Following our implementation of ASC 842, the modest increase in rent expense between periods is primarily related to Fiscal 2021 increases in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
General and Administrative Expense
General and administrative (G&A) expense decreased to approximately $6.5 million in Fiscal 2021 from approximately $7.4 million in Fiscal 2020. Cash compensation in Fiscal 2021 increased by approximately $0.7 million while noncash stock-based compensation decreased by approximately $1.0 million in Fiscal 2021. Further, during Fiscal 2020 we modified certain outstanding warrants and recognized non-cash warrant modification expense of $826,900. Noncash G&A expense, approximately $1,731,000 for Fiscal 2021, decreased from approximately $3,543,000 for Fiscal 2020, primarily due to the decreases in stock-based compensation and warrant modifications noted above and the noncash components of investor and public relations expense in Fiscal 2020 attributable to the amortization of the fair value of common stock or warrants granted to service providers.
The following table indicates the primary components of G&A expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $2,052 | $1,382 |
| Stock-based compensation | 1,559 | 2,533 |
| Board fees and other consulting services | 428 | 185 |
| Legal, accounting and other professional fees | 564 | 575 |
| Investor and public relations | 695 | 933 |
| Insurance | 449 | 348 |
| Travel expenses | 4 | 81 |
| Rent and utilities | 354 | 354 |
| Sublicense contract amortized acquisition expense | 102 | - |
| Warrant modification expense | - | 827 |
| All other expenses | 340 | 209 |
| | $6,547 | $7,427 |
The increase in salaries and benefits expense for Fiscal 2021 primarily reflects the impact of (i) bonus payments made to our Chief Executive Officer (CEO), Chief Financial Officer (CFO), Vice President-Corporate Development (VP-Corporate Development) and a non-officer member of our administrative staff in December 2020; (ii) modest salary increases to those officers and employee effective in the fourth quarter of Fiscal 2021; and (iii) the addition of three senior-level employees during February 2021 and March 2021. There were no changes in base compensation levels for our CEO, CFO, or VP-Corporate Development between April 2019 and December 2020 and no bonus expense or payments to them during that same period.
Current year stock-based compensation expense reflects the amortization of option grants made to our CEO, CFO, VP Corporate Development, administrative staff, independent members of our Board and certain consultants since June 2016, all earlier outstanding grants having become fully vested and amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020 account for approximately $677,000 of expense in Fiscal 2021, offset by an expense reduction of approximately $1,515,000 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $141,700 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.
Board fees and other consulting services represent, in both periods, fees paid as consideration for Board and Board Committee services to the independent members of our Board of Directors and, additionally in the current year, other consulting service fees related to commercial analyses of both PH94B and PH10.
Legal, accounting and other professional fees for Fiscal 2021 and Fiscal 2020 includes expense related to routine corporate legal fees as well as the accounting expense related to the annual audit of our prior year financial statements and the three quarterly reviews of our current year financial statements. In Fiscal 2021, we incurred additional consulting fees related to revenue recognition accounting for the AffaMed Agreement and, in conformityFiscal 2020, we incurred fees attributable to services provided by an international business development consultant.
Investor and public relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, public relations and social media services, and well as market awareness and strategic advisory and support functions and initiatives that, in Fiscal 2020, included numerous in-person meetings in multiple U.S. and certain foreign markets and other communication activities focused on expanding global market awareness of the Company, our CNS product candidate pipeline and technologies and our research and development programs, including among registered investment professionals and investment advisors, individual and institutional investors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide. During Fiscal 2021, we curtailed the number and scope of external service providers engaged in these activities compared to the prior year. Further, in Fiscal 2020, in addition to cash fees and expenses we incurred for such activities, we recognized approximately $105,900 of noncash expense attributable to the amortization of the fair value of stock and warrants granted in previous periods to various corporate development, investor relations, and market awareness service providers. No such noncash expense was incurred in Fiscal 2021.
The increase in insurance expense for Fiscal 2021 is primarily attributable to the market-rate increase in the premium for our directors and officers liability insurance upon renewal of our policy in May 2020.
In Fiscal 2020, travel expense reflects costs associated with in-person management presentations and meetings held in multiple U.S. markets and certain international markets with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development and partnering initiatives and in monitoring the progress of our Elevate Study. As a result of periodic shelter-in-place restrictions and travel and workplace precautions and restrictions associated with the ongoing COVID-19 pandemic, during Fiscal 2021, such meetings have occurred remotely without requiring in-person business travel by our executives.
Rent expense for both periods presented reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally accepted accounting principleson square footage dedicated to each function. Following our implementation of ASC 842, increases or decreases in rent expense between periods are primarily related to changes in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
Beginning in the second quarter of Fiscal 2021, we began to amortize the deferred contract acquisition costs related to our acquisition of the AffaMed Agreement, composed of the cash payments of $220,000 for sublicense fees which we were obligated to make pursuant to our PH94B license from Pherin, and $125,000 of cash fees and $125,000 fair value of common stock issued for consulting services, in each case exclusively related to our acquisition of the AffaMed Agreement. The contract acquisition costs are amortized over the expected term of the services to be provided under the AffaMed Agreement. During Fiscal 2021, we amortized $102,400 of contract acquisition costs.
During Fiscal 2020, we completed three warrant modifications resulting in an aggregate of $826,900 of noncash warrant modification expense as described below.
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On December 4, 2019, we modified outstanding warrants previously issued as a part of completed private placements to purchase an aggregate of approximately 6.6 million unregistered shares of our common stock to temporarily reduce, for a period of two years or until the expiration of the warrant, if sooner, the exercise price of such warrants to $0.50 per share, in order to more closely align the exercise price of the warrants with the then-current trading price of our common stock. Following the two-year period during which the exercise price is reduced, the exercise price will revert to its pre-modification price. We determined that this modification increased the fair value of the modified warrants by $702,500, which we recorded as warrant modification expense.
●
Also, on December 4, 2019, we issued additional warrants (theAdditional Warrants) to purchase an aggregate of 325,000 additional shares of our common stock to the participants in our fall 2019 private placement of shares of common stock and warrants to increase the number of unregistered shares of common stock issuable upon exercise of the warrants from 50% to 100% of the number of shares issued in the private placement. The Additional Warrants are exercisable through March 31, 2024 at an exercise price of $0.50 per share. We determined that the fair value of the Additional Warrants was $88,800, which we also recognized as noncash warrant modification expense.
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Further, on December 19, 2019, we modified additional outstanding warrants previously issued as a part of a completed private placement to purchase a total of 80,431 shares of our unregistered common stock to permanently reduce the exercise price of such warrants to $0.805 per share and to extend the term of such warrants through December 31, 2022, in order to more closely align the exercise price of the warrants with the then-current trading price of our common stock and to provide additional time for the holders to exercise the warrants. We determined that these modifications increased the fair value of the subject warrants by $35,600, which we also recognized as noncash warrant modification expense.
The shares underlying the modified warrants and the Additional Warrants were included in a Registration Statement on Form S-3 (File No. 333-237968) that was declared effective by the Commission on May 13, 2020.
Interest and Other Income, Net
Interest income, net totaled $1,600 for Fiscal 2021 compared to interest income, net of $30,100 for Fiscal 2020. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Interest income | $15 | $45 |
| Interest expense on financing lease, insurance premium financing notes | | |
| and Payroll Protection Program loan (2021) | (13) | (15) |
| | | |
| Interest income, net | $2 | $30 |
| | | |
In both periods, interest income relates to cash deposits in interest-bearing cash equivalent accounts. Although cash balances were generally higher during Fiscal 2021, the decline in market interest rates during Fiscal 2021 compared to Fiscal 2020 resulted in reduced interest income. Interest expense in both periods relates to interest paid on insurance premium financing notes and on our financing lease of office equipment subject to ASC 842, and in Fiscal 2021, to interest accrued on our Payroll Protection Program loan prior to its voluntary repayment, including interest, in December 2020.
We recognized $1,385,600 and $1,263,600 in Fiscal 2021 and Fiscal 2020, respectively, representing the 10% cumulative dividend accrued on outstanding shares of our Series B 10% Convertible Preferred Stock (U.S. GAAPSeries B Preferred) requires managementas an additional deduction in arriving at net loss attributable to common stockholders in the Consolidated Statement of Operations and Comprehensive Loss included in Item 8, Part II of this Annual Report. In December 2020, one holder of Series B Preferred converted 28,571 shares of Series B Preferred into an equal number of unregistered shares of our common stock and we issued an additional 160,062 unregistered shares of our common stock in payment of $124,600 of accrued dividends.
The Series D Preferred that we issued in the December 2020 Public Offering contained a beneficial conversion feature (aBCF), which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date (with respect to the Series D Preferred, the date the security was actually issued rather than the date the agreement to do so was entered into, referred to as theCommitment Date). In accordance with Accounting Standards Codification 470-20,Debt- Debt with Conversion and Other Options(ASC 470-20), an embedded BCF is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital. ASC 470-20 also provides that the intrinsic value is to be calculated as of the Commitment Date. The Series D Certificate of Designation provides that the Series D Preferred has a conversion price of $0.92 per share on an as-converted basis the (Conversion Price). The Conversion Price compared to the closing price of $1.42 per share of our common stock on the Commitment Date results in a difference of $0.50 per share. That difference multiplied by the 46 million shares of our common stock issuable upon conversion of the Series D Preferred resulted in an aggregate BCF of $23.0 million. We did not recognize the impact of the BCF at December 31, 2020 because the Series D Preferred was not convertible into common stock prior to the Approval Date (the date of our Special Meeting of Stockholders held on March 5, 2021). Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021, the contingency of the BCF was eliminated and we recognized the BCF as a noncash charge in arriving at net loss attributable to common stockholders in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2021 and as a corresponding increase in additional paid-in capital in our Consolidated Statement of Stockholders’ Equity (Deficit). The recognition of the BCF on the Series D Preferred had no impact in aggregate on our stockholders’ equity or on our cash position.
Liquidity and Capital Resources
Since our inception in May 1998 through March 31, 2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $197.8 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments, intellectual property licensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.2million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Recent Developments
Jefferies ATM. On May 14, 2021, we entered into an Open Market Sale AgreementSM (theSales Agreement) with Jefferies LLC, as sales agent (Jefferies), with respect to an at-the-market offering program under which we may offer and sell, from time to time, shares of our common stock with an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. As of the date of this Report, we have not completed any sales under the Sale Agreement.
December 2020 Public Offering. In December 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold 63,000,000 shares of our common stock in the December 2020 Public Offering at a public offering price of $0.92 per share and 2,000,000 shares of Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021 and through the date of this Annual Report, we issued 46 million shares of our common stock upon conversion of all outstanding shares of Series D Preferred issued in the December 2020 Public Offering.
August 2020 Public Offering. In August 2020, we entered into an underwriting agreement pursuant to which we sold, in the August 2020 Public Offering an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. Under the terms of the August 2020 Underwriting Agreement, we granted to the underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
AffaMed Agreement. In June 2020, we entered into the AffaMed Agreement, a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders, with EverInsight, now operating as AffaMed Therapeutics. Under the terms of the AffaMed Agreement, AffaMed agreed to make estimatesa non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin pursuant to our PH94B license from Pherin, and assumptions that affectpayment for consulting services related to the reported amountsAffaMed Agreement.
LPC Agreement. Additionally, on March 24, 2020, we entered into the LPC Agreement with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10,250,000 of assetsour common stock at market-based prices over a period of 24 months. To satisfy our obligations under the registration rights agreement, we filed the LPC Registration Statement, which the SEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the LPC Registration Statement and liabilities,through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200. We have not sold any shares of our common stock pursuant to the disclosureLincoln Park Agreement since July 2020.
Warrant Exercises. Further, between December 2020 and March 31, 2021, certain holders of contingent assetsoutstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our common stock and liabilities atwe received cash proceeds of $4,924,800 from such exercises. Since March 31, 2021 and through the date of this Annual Report, holders of outstanding warrants have exercised warrants to purchase an additional 1,508,768 shares of our common stock and we have received cash proceeds of approximately $1,105,700, resulting in aggregate cash proceeds of $6,030,500 received from warrant exercises between December 2020 and the date of this Annual Report.
Liquidity and Capital Resources
During Fiscal 2021, we received approximately $119 million in net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of the financial statements included in Part II, Item 8 of this Annual Report, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
During the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE Phase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, and (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for well beyond the next twelve months, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-254299) (theS-3 Registration Statement), which became effective on March 26, 2021 remains available for future sales of our equity securities under the Sales Agreement with Jefferies, or in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement and the reported amountsBayer Agreement to provide funding, including non-dilutive funding, for development of revenuesone or more of our CNS product candidate programs. We may also seek additional government grant awards or agreements similar to our prior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the AffaMed Agreement and the Bayer Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of our product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the continuing COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, during the reporting period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, thoseas well as costs relating to stock-based compensation, revenue recognition,regulatory consulting, contract manufacturing, research and development, expensesinvestor and the assumptions used to value warrants, warrant modificationspublic relations, business development, legal, intellectual property acquisition and warrant liabilities.protection, public company compliance and other professional services and operating costs.
PrinciplesNotwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future potential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain additional financing on a timely basis when needed, our business, financial condition, and results of Consolidationoperations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern. As noted above, the Consolidated Financial Statements included in part II, Item 8 of this Annual Report do not include any adjustments that might result from the negative outcome of this uncertainty.
The accompanying consolidated financial statements include the Company’s accounts, VistaStem’s accounts and the accounts of VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neurosciences and VistaStem Canada. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
CashThe following table summarizes changes in cash and cash equivalents are considered to be highly liquid investmentsfor the fiscal years stated (in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Net cash used in operating activities | $(12,074) | $(15,757) |
| Net cash used in investing activities | (275) | - |
| Net cash provided by financing activities | 114,102 | 4,012 |
| | | |
| Net increase (decrease) in cash and cash equivalents | 101,753 | (11,745) |
| Cash and cash equivalents at beginning of period | 1,355 | 13,100 |
| Cash and cash equivalents at end of period | $103,108 | $1,355 |
The decrease in cash used in operations results primarily from increased spending on PH94B and PH10 nonclinical development, manufacturing advancements, and, for PH94B in particular, Phase 3-enabling initiatives as a part of our preparations for the PALISADE Phase 3 program, combined with maturitiesexpansion of three months or lessour infrastructure by the addition of experienced senior-level executives in manufacturing, clinical and regulatory disciplines in the fourth quarter of Fiscal 2021, offset by the impact of the completion of the Elevate Study, which commenced at the dateend of purchase.the first calendar quarter of 2018 and was operationally completed during the third fiscal quarter of Fiscal 2020. Additionally, cash used in operations during Fiscal 2021 was reduced by the August 2020 receipt of the $5.0 million nondilutive upfront payment from EverInsight under the AffaMed Agreement. Cash used in investing activities in Fiscal 2021 primarily reflects the purchase of certain manufacturing equipment acquired for use by our contract development and manufacturing organization in connection with the production of PH94B drug product. Cash provided by financing activities in Fiscal 2021 primarily reflects net cash proceeds to us from sales of our common stock and Series D Preferred stock pursuant to the December 2020 Public Offering and from sales of our common stock pursuant to the August 2020 Public Offering, the LPC Agreement and the Spring 2020 Private Placement, as well as from the exercise of outstanding warrants, net of routine insurance premium financing note and financing lease payments. We received a Payroll Protection Program loan in April 2020 and voluntarily repaid all principal and accrued interest on the loan in December 2020, following the completion of the December 2020 Public Offering. Cash provided by financing activities in Fiscal 2020 reflects the cash proceeds from our Fall 2019 Private Placement, our Fall 2019 Warrant Offering, the exercise of certain warrants following the modification of their exercise prices, proceeds from our January 2020 Registered Direct Offering and initial transactions under the LPC Agreement, net of routine payments on our insurance premium financing notes and lease.
Property and EquipmentOff-Balance Sheet Arrangements
Property and equipment is stated at cost. Repairs and maintenance costs are expensedOther than contractual obligations incurred in the period incurred. Depreciation is calculated using the straight-line method over the estimated useful livesnormal course of the assets. The estimated useful livesbusiness, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of propertya material variable interest in an unconsolidated entity. VistaStem has two inactive, wholly owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and equipment range from three to seven years.VistaStem Canada, Inc., an Ontario corporation.
Impairment of Long-Lived AssetsItem 7A. Quantitative and Qualitative Disclosures About Market Risk
Our long-lived assets consist of property and equipment. Long-lived assets to be held and usedThe disclosures in this section are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors thatrequired because we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, we have not recorded any impairment losses on long-lived assets.
Revenue Recognition
We have historically generated revenue principally from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants. Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer or counterparty. Consideration received is allocated among the separate units of accounting based on their respective selling prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. The applicable revenue recognition criteria are then applied to each of the units.qualify as a smaller reporting company under federal securities laws.
Item 8. TableFinancial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of ContentsDirectors
VistaGen Therapeutics, Inc.
South San Francisco, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of VistaGen Therapeutics, Inc. (the “Company”) as of March 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, cash flows, and stockholders’ equity (deficit) for each of the two fiscal years in the period ended March 31, 2021, 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 March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenues from Contracts with Customers
Description of the Matter‒License Agreement with AffaMed
As discussed in Note 12 to the consolidated financial statements, the Company recognized approximately $1.1 million in revenue under the license agreement with AffaMed Therapeutics. Inc. (“AffaMed”) during the fiscal year ended March 31, 2021. The Company evaluated each of the deliverables identified in the license agreement and determined the license is not distinct within the context of the contract and is combined with development and regulatory approval services; as such, the Company combined the license and promised services into one combined performance obligation.
Auditing management’s identification of performance obligations was challenging as the license agreement includes implicit and explicit obligations. Significant judgment was required in the evaluation of the identification of performance obligations and in the determination of whether the identified license and promised services meet the criteria of being distinct and capable of being distinct within the context of the contract. The Company’s revenue from its licensing agreement is recognized over time, as the combined performance obligation is satisfied.
We identified license revenue recognition as a critical audit matter because of the judgments necessary for management to: identify performance obligations, determine variable consideration, and determine the timing of recognition for such revenue. Because of the complexity associated with applying the recognition criteria of ASC 606, notably related to identification of performance obligations, determination of variable consideration, and determination of timing of revenue recognition, this required extensive audit effort and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the recognition of license revenue, included the following, among others:
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We evaluated the Company’s revenue recognition for the license agreement through an inspection of the agreement and an evaluation of management’s revenue recognition analysis corresponding to the license agreement. Our objective was to validate that revenue from the license agreement was recognized in a manner commensurate with the terms of the established agreement and the relevant accounting guidance. Evaluating the reasonableness of management’s accounting conclusions involved:
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Evaluating the accuracy and completeness of the performance obligations identified by management in the license agreement. Management identified one combined performance obligation. We analyzed the license agreement to determine if the arrangement terms that may have an impact on revenue recognition were identified and properly considered in the evaluation of the accounting for the contract. We also inquired of management, and reviewed source documentation, to assess whether the one combined performance obligation identified by management was complete and whether the license and promised services within it were both capable of being distinct and distinct within the context of the contract.
●
Determining the reasonableness of the amounts of variable consideration included within the total transaction price. We analyzed the nature of the combined performance obligation and the contingencies related to the variable consideration in assessing management’s methods in estimating the amount of variable consideration to be included in the total transaction price.
●
Testing the measurement of efforts toward satisfaction of the combined performance obligation which included, among other procedures:
●
Reviewing management’s revenue schedules for accuracy and completeness by agreeing data to the underlying agreement.
●
Evaluating the manner in which the combined performance obligation was satisfied, and corroborating management estimates and judgments through a review of press releases and third-party data as a potential source of corroborating or contradictory evidence.
●
Discussing management’s judgments with the Company’s research and development personnel that oversee aspects of the license agreement.
/s/ OUM & CO. LLP
San Francisco, California
June 29, 2021
We have served as the Company's auditor since 2006.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS (Amounts in dollars, except share amounts)
| | | |
| | | |
| | | |
| | | |
|
| Current assets: | | |
| Cash and cash equivalents | $103,108,300 | $1,355,100 |
| Receivable from collaboration partner | 40,600 | - |
| Prepaid expenses and other current assets | 835,100 | 225,100 |
| Deferred contract acquisition costs - current portion | 133,500 | - |
| Total current assets | 104,117,500 | 1,580,200 |
| Property and equipment, net | 367,400 | 209,600 |
| Right of use asset - operating lease | 3,219,600 | 3,579,600 |
| Deferred offering costs | 294,900 | 355,100 |
| Deferred contract acquisition costs - non-current portion | 234,100 | - |
| Security deposits and other assets | 47,800 | 47,800 |
| Total assets | $108,281,300 | $5,772,300 |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: | | |
| Accounts payable | $838,300 | $1,836,600 |
| Accrued expenses | 1,562,700 | 561,500 |
| Current notes payable | - | 56,500 |
| Deferred revenue - current portion | 1,420,200 | - |
| Operating lease obligation - current portion | 364,800 | 313,400 |
| Financing lease obligation - current portion | 3,000 | 3,300 |
| Total current liabilities | 4,189,000 | 2,771,300 |
| | |
| Non-current liabilities: | | |
| Accrued dividends on Series B Preferred Stock | 6,272,700 | 5,011,800 |
| Deferred revenue - non-current portion | 2,490,300 | - |
| Operating lease obligation - non-current portion | 3,350,800 | 3,715,600 |
| Financing lease obligation - non-current portion | - | 3,000 |
| Total non-current liabilities | 12,113,800 | 8,730,400 |
| Total liabilities | 16,302,800 | 11,501,700 |
| | | |
| Commitments and contingencies (Note 15) | | |
| | | |
| Stockholders’ equity (deficit): | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2021 and 2020: | | |
| Series A Preferred, 500,000 shares authorized, issued and outstanding at March 31, 2021 and 2020 | 500 | 500 |
| Series B Preferred; 4,000,000 shares authorized at March 31, 2021 and 2020; 1,131,669 shares | | |
| and 1,160,240 shares issued and outstanding at March 31, 2021 and 2020, respectively | 1,100 | 1,200 |
| Series C Preferred; 3,000,000 shares authorized at March 31, 2021 and 2020; 2,318,012 shares | | |
| issued and outstanding at March 31, 2021 and 2020 | 2,300 | 2,300 |
| Series D Preferred; 2,000,000 shares and no shares authorized at March 31, 2021 and 2020, respectively; | | |
| 402,149 shares and no shares issued and outstanding at March 31, 2021 and March 31, 2020, respectively | 400 | - |
Common stock, $0.001 par value; 325,000,000 shares and 175,000,000 shares authorized at March 31, 2021 and 2020, respectively; 180,751,234 and 49,348,707 shares issued at March 31, 2021 and 2020, respectively | 180,800 | 49,300 |
| Additional paid-in capital | 315,603,100 | 200,092,800 |
| Treasury stock, at cost, 135,665 shares of common stock held at March 31, 2021 and 2020 | (3,968,100) | (3,968,100) |
| Accumulated deficit | (219,841,600) | (201,907,400) |
| Total stockholders’ equity (deficit) | 91,978,500 | (5,729,400) |
| Total liabilities and stockholders’ equity (deficit) | $108,281,300 | $5,772,300 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Amounts in dollars, except share amounts)
| | Fiscal Years Ended March 31, |
| | | |
| Sublicense revenue | $1,089,500 | $- |
| Total revenues | 1,089,500 | - |
| Operating expenses: | | |
| Research and development | 12,476,400 | 13,374,200 |
| General and administrative | 6,546,900 | 7,427,300 |
| Total operating expenses | 19,023,300 | 20,801,500 |
| Loss from operations | (17,933,800) | (20,801,500) |
| Other income and expenses, net: | | |
| Interest income, net | 1,600 | 30,100 |
| Other income | 600 | - |
| Loss before income taxes | (17,931,600) | (20,771,400) |
| Income taxes | (2,600) | (2,600) |
| Net loss and comprehensive loss | $(17,934,200) | $(20,774,000) |
| | | |
| Accrued dividends on Series B Preferred stock | (1,385,600) | (1,263,600) |
| Beneficial conversion feature on Series D | | |
| Preferred stock | (23,000,000) | - |
| Net loss attributable to common stockholders | $(42,319,800) | $(22,037,600) |
| | | |
| Basic and diluted net loss attributable to common | | |
| stockholders per common share | $(0.49) | $(0.50) |
| | | |
| Weighted average shares used in computing | | |
| basic and diluted net loss attributable to common | | |
| stockholders per common share | 86,133,644 | 43,869,523 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in dollars)
| | Fiscal Years Ended March 31, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(17,934,200) | $(20,774,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 117,600 | 103,100 |
| Stock-based compensation | 2,306,100 | 3,820,800 |
| Expense related to modification of warrants | - | 826,900 |
| Amortization of fair value of common stock issued for services | - | 92,100 |
| Amortization of fair value of warrants issued for services | - | 13,800 |
| Changes in operating assets and liabilities: | | |
| Receivable from collaboration partner or supplier | (40,600) | 300,000 |
| Prepaid expenses and other current assets | (287,800) | 182,600 |
| Right of use asset - operating lease | 360,000 | 335,400 |
| Operating lease liability | (313,500) | (267,000) |
| Deferred sublicense revenue, net of deferred contract acquisition costs | 3,667,900 | - |
| Accounts payable and accrued expenses | 51,000 | (390,700) |
| Net cash used in operating activities | (12,073,500) | (15,757,000) |
| | | |
| Cash flows from property and investing activities: | | |
| Purchases of manufacturing and other equipment | (275,400) | - |
| Net cash used in investing activities | (275,400) | - |
| | | |
| Cash flows from financing activities: | | |
| Net proceeds from issuance of common stock and Series D Preferred stock | 93,675,200 | - |
| Net proceeds from issuance of common stock and warrants, including Units | 12,957,800 | 3,349,000 |
| Net proceeds from exercise of warrants | 5,009,500 | 410,000 |
| Proceeds from sale of warrants | - | 300,000 |
| Net proceeds from sale of common stock under equity line | 2,841,600 | 249,400 |
| Proceeds from issuance of note under Payroll Protection Plan | 224,400 | - |
| Repayment of capital lease obligations | (3,300) | (3,000) |
| Repayment of notes payable, including Payroll Protection Plan note | (603,100) | (293,600) |
| Net cash provided by financing activities | 114,102,100 | 4,011,800 |
| Net increase (decrease) in cash and cash equivalents | 101,753,200 | (11,745,200) |
| Cash and cash equivalents at beginning of period | 1,355,100 | 13,100,300 |
| Cash and cash equivalents at end of period | $103,108,300 | $1,355,100 |
| | | |
| Supplemental disclosure of cash flow activities: | | |
| Cash paid for interest | $13,300 | $14,800 |
| Cash paid for income taxes | $2,600 | $2,600 |
| | | |
| Supplemental disclosure of noncash activities: | | |
| Insurance premiums settled by issuing note payable | $322,200 | $292,800 |
| Accrued dividends on Series B Preferred | $1,385,600 | $1,263,600 |
| Accrued dividends on Series B Preferred settled upon conversion by issuance | | |
| of common stock | $124,600 | $- |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Fiscal Years Ended March 31, 2020 and 2021
(Amounts in dollars, except share amounts)
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2019 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 42,758,630 | $42,800 | $192,129,900 | $(3,968,100) | $(181,133,400) | $7,075,200 |
| | | | | | | | | | | | | | | |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in private placements | - | - | - | - | - | - | - | - | 650,000 | 600 | 649,400 | - | - | 650,000 |
| Proceeds from sale of warrants in private placement | - | - | - | - | - | - | - | - | | | 300,000 | - | - | 300,000 |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in public offering and concurrent private placement | - | - | - | - | - | - | - | - | 3,870,077 | 3,900 | 2,695,100 | - | - | 2,699,000 |
| Issuance of commitment shares and net proceeds of initial | | | | | | | | | | | | | | |
| sale of common stock under equity line | - | - | - | - | - | - | - | - | 1,250,000 | 1,200 | 525,100 | - | - | 526,300 |
| Proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 820,000 | 800 | 409,200 | - | - | 410,000 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,263,600) | - | - | (1,263,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 3,820,800 | - | - | 3,820,800 |
| Increase in fair value attributed to warrant modifications | | | | | | | | | | | | | | - |
| and additional warrants issued | - | - | - | - | - | - | - | - | - | - | 826,900 | - | - | 826,900 |
| | | | | | | | | | | | | | | - |
| Net loss for the fiscal year ended March 31, 2020 | - | - | - | - | - | - | - | - | - | - | - | - | (20,774,000) | (20,774,000) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2020 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 49,348,707 | $49,300 | $200,092,800 | $(3,968,100) | $(201,907,400) | $(5,729,400) |
| | | | | | | | | | | | | | | |
| Net proceeds from sale of common stock under equity line | - | - | - | - | - | - | - | - | 6,301,995 | 6,300 | 2,790,500 | - | - | 2,796,800 |
| Net proceeds from sale of common stock in public offering | - | - | - | - | - | - | - | - | 17,868,250 | 17,900 | 12,887,200 | - | - | 12,905,100 |
| Net proceeds from sale of common stock and Series D Preferred | | | | | | | | | | | | | | |
| stock in public offering | - | - | - | - | - | - | 2,000,000 | 2,000 | 63,000,000 | 63,000 | 93,582,900 | - | - | 93,647,900 |
| Net proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 6,624,302 | 6,600 | 5,002,900 | - | - | 5,009,500 |
| Comversion of Series D Preferred stock to common stock | - | - | - | - | - | - | (1,597,851) | (1,600) | 36,750,573 | 36,800 | (35,200) | - | - | - |
| Comversion of Series B Preferred stock to common stock and payment | | | | | | | | | | | | | | |
| of accrued dividends in common stock | - | - | (28,571) | (100) | - | - | - | - | 188,633 | 200 | 124,500 | - | - | 124,600 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,385,600) | - | - | (1,385,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 2,306,100 | - | - | 2,306,100 |
| Sale of common stock pursuant to 2019 Employee Stock Purchase Plan | - | - | - | - | - | - | - | - | 58,125 | 100 | 26,100 | - | - | 26,200 |
| Issuance of common stock upon cashless exercise of stock options | - | - | - | - | - | - | - | - | 222,004 | 200 | (200) | - | - | - |
| Net proceeds from exercise of stock options for cash | - | - | - | - | - | - | - | - | 30,000 | - | 36,500 | | | 36,500 |
| Issuance of common stock at fair value for professional services | - | - | - | - | - | - | - | - | 233,645 | 200 | 124,800 | - | - | 125,000 |
| Beneficial conversion feature on Series D Preferred stock | - | - | - | - | - | - | - | - | - | - | 23,000,000 | - | - | 23,000,000 |
| Deemed dividend from beneficial conversion feature of Series D Preferred Stock | - | - | - | - | - | - | - | - | - | - | (23,000,000) | - | - | (23,000,000) |
| Net loss for the fiscal year ended March 31, 2021 | - | - | - | - | - | - | - | - | - | - | | - | (17,934,200) | (17,934,200) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2021 | 500,000 | $500 | 1,131,669 | $1,100 | 2,318,012 | $2,300 | 402,149 | $400 | 180,751,234 | $180,800 | $315,603,100 | $(3,968,100) | $(219,841,600) | $91,978,500 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Overview
VistaGen Therapeutics, Inc., a Nevada corporation(which may be referred to asVistaGen, theCompany,we,our, orus),isa biopharmaceutical company committed to developing and commercializing differentiated new generation medications that go beyond the current standard of care for widespread anxiety, depression and other central nervous system (CNS) disorders. Our CNS pipeline includes three CNS product candidates, PH94B Nasal Spray, PH10 Nasal Spray and AV-101, each with a differentiated profile, favorable safety results observed in all clinical studies to date and therapeutic potential in multiple CNS indications. PH94B Nasal Spray (PH94B) is being developed for multiple anxiety disorders. We recognize revenue when four basic criteriarecently initiated our PH94B Phase 3 development program, which we refer to as the PALISADE program, with PALISADE-1, a U.S., multi-center, randomized, double-blind, placebo-controlled Phase 3 clinical study to evaluate the efficacy and safety of revenue recognitionPH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD), as well as preparations for the additional studies required to support our potential U.S. New Drug Application (NDA) for that indication should the PALISADE Phase 3 program be successful. We are met: (i)also preparing for exploratory Phase 2A clinical studies of PH94B in adults experiencing several other anxiety disorders. PH10 Nasal Spray (PH10) is being developed as a contractual agreement exists; (ii) the transferstand-alone treatment for multiple depression disorders. Exploratory Phase 2A clinical development of technologyPH10 for major depressive disorder (MDD) has been completedcompleted. We are now preparing for planned Phase 2B clinical development of PH10 for this indication. We are preparing for a Phase 1B clinical study of AV-101 in combination with probenecid to assess potential future Phase 2A clinical development of the combination for MDD or services have been rendered; (iii)certain neurological indications. Our goal is to become a biopharmaceutical company that develops and commercializes innovative CNS therapies for highly prevalent neuropsychiatry and neurology indications where current treatments options are inadequate to meet the feeneeds of millions of patients in markets worldwide.
Our Product Candidates
PH94B is fixeda synthetic investigational neurosteroid developed from proprietary compounds called pherines. With its novel mechanism of action, PH94B is an odorless nasal spray administered at microgram-level doses to achieve rapid-onset anti-anxiety, or determinable;anxiolytic, effects. The pharmacological activity of PH94B is fundamentally differentiated from that of all FDA-approved anti-anxiety drugs, including all antidepressants approved by the U.S. Food and (iv) collectability is reasonably assured. For each sourceDrug Administration (FDA) for treatment of revenue, we comply with the above revenue recognition criteriaSAD, as well as all benzodiazepines and beta blockers prescribed on an off-label basis. PH94B engages peripheral chemosensory receptors in nasal passages that trigger a subset of neurons in the following manner:main olfactory bulbs (OB) at the base of the brain. The OB neurons then stimulate inhibitory GABAergic neurons in the limbic amygdala, decreasing the activity of the sympathetic nervous system, and facilitating fear extinction activity of the limbic-hypothalamic system, the main fear and anxiety center in the brain, as well as in other parts of the brain. Importantly, PH94B does not require systemic uptake and distribution to produce its rapid-onset anti-anxiety effects. Our ongoing PALISADE Phase 3 program for PH94B is designed to further demonstrate its potential as a fast-acting, non-sedating, non-addictive acute treatment of anxiety in adults with SAD. We believe PH94B also has potential to be developed as a novel treatment for adjustment disorder with anxiety, postpartum anxiety, post-traumatic stress disorder, procedural anxiety, panic and other anxiety disorders. PH94B has been granted Fast Track designation status by the FDA for development for the acute treatment of SAD.
PH10 is a synthetic investigational neurosteroid, which also was developed from proprietary compounds called pherines. Its novel, rapid-onset mechanism of action (MOA) is fundamentally differentiated from the MOA of all current treatments for MDD and other depression disorders. PH10 is self-administered at microgram-level doses as an odorless nasal spray. PH10 activates nasal chemosensory cells in the nasal passages, connected to neural circuits in the brain that produce antidepressant effects. Specifically, PH10 engages peripheral chemosensory receptors in the nasal passages that trigger a subset of neurons in the main OB that stimulate neurons in the limbic amygdala. This is turn increases activity of the limbic-hypothalamic sympathetic nervous system and increases the release of catecholamines. Importantly, unlike all currently approved oral antidepressants (ADs), PH10 does not require systemic uptake and distribution to produce rapid-onset of antidepressant effects. In all clinical studies to date, PH10 has not caused psychological side effects (such as dissociation and hallucinations) or safety concerns that may be associated with rapid-onset ketamine-based therapy (KBT), including intravenous ketamine or intranasal ketamine (esketamine). We believe PH10 has potential to be a new stand-alone treatment for MDD and several other depression disorders.
AV-101 (4-Cl-KYN) targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. AV-101 is an oral prodrug of 7-chloro-kynurenic acid (7-Cl-KYNA), which is a potent and selective full antagonist of the glycine co-agonist site of the NMDAR that inhibits the function of the NMDAR. However, unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. At doses administered in all studies to date, AV-101 has been observed to be well tolerated and has not exhibited dissociative or hallucinogenic psychological side effects or safety concerns. In light of these observations and findings from preclinical studies, we believe that AV-101, in combination with FDA-approved probenecid, has potential to become a new oral treatment alternative for certain CNS indications involving the NMDAR. We are currently preparing to evaluate AV-101 in combination with probenecid in a Phase 1B clinical study. The FDA has granted Fast Track designation for development of AV-101 as a potential adjunctive treatment for MDD and as a non-opioid treatment for neuropathic pain (NP).
●
Collaborative arrangements typically consist of non-refundable and/or exclusive up front technology access fees, cost reimbursements for specific research and development spending, and future product development milestone and royalty payments. If the delivered technology does not have stand-alone value, the amount of revenue allocable to the delivered technology is deferred. Non-refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are recognized as revenue when received, and are deferred if we have continuing performance obligations and have no objective and reliable evidence of the fair value of those obligations. We recognize non-refundable upfront technology access fees under agreements in which we have a continuing performance obligation ratably, on a straight-line basis, over the period during which we are obligated to provide services. Cost reimbursements for research and development spending are recognized when the related costs are incurred and when collectability is reasonably assured. Payments received related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the milestone event specified in the underlying contracts, which represent the culmination of the earnings process. Amounts received in advance are recorded as deferred revenue until the technology is transferred, costs are incurred, or a milestone is reached.-88-
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●Subsidiaries
Technology license agreements typically consist
VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem (VistaStem),is our wholly-owned subsidiary. Our Consolidated Financial Statements in this Annual Report on Form 10-K (Annual Report) also include the accounts of non-refundableVistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.
2. Basis of Presentation and Going Concern
The accompanying Consolidated Financial Statements have been prepared assuming that we will continue as a going concern. As a clinical-stage biopharmaceutical company having not yet developed commercial products or achieved sustainable revenues, we have experienced negative cash flows from operations and recurring losses resulting in a deficit of $242.8 million accumulated from inception (May 1998) through March 31, 2021. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of PH94B, PH10 and AV-101.
Since our inception in May 1998 through March 31, 2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $197.8 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments, intellectual property licensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.2million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Recent Developments
As described more completely in Note 9,Capital Stock, in December 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (the December 2020 Public Offering), 63,000,000 shares of our common stock at a public offering price of $0.92 per share and 2,000,000 shares of a newly issued series of convertible preferred stock (Series D Preferred) and, together with the common stock, the Securities) at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million.
As also described more completely in Note 9,Capital Stock, in August 2020, we entered into an underwriting agreement (the August 2020Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. Under the terms of the August 2020 Underwriting Agreement, we granted to the underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, were approximately $12.9 million.
As more completely described in Note 12,Licensing, Sublicensing and Collaboration Agreements, in June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders (theEverInsight Agreement), with EverInsight Therapeutics Inc., (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia, and funded by CBC Group, a global healthcare-focused venture capital firm. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, also funded by CBC Group, which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed agreed to make a non-dilutive upfront license fees, annual minimum access fees, development and/or regulatory milestone payments and/or royalty payments. Non-refundablepayment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license feespayment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and annual minimum payments receivedpayment for consulting services related to the AffaMed Agreement.
Additionally, as described in Note 9,Capital Stock, on March 24, 2020, we entered into a purchase agreement and a registration rights agreement with separable stand-alone values are recognized whenLincoln Park Capital Fund (Lincoln Park) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (theLPC Agreement). To satisfy our obligations under the technology is transferred or accessed, provided thatregistration rights agreement, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the technology transferred or accessed is not dependentSecurities and Exchange Commission (theSEC) on March 31, 2020, which the outcomeSEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the continuing researchLPC Registration Statement and development efforts. Otherwise, revenue is recognized over the periodthrough July 2020, we sold 6,301,995 registered shares of our continuing involvement,common stock to Lincoln Park and inreceived gross cash proceeds of $2,891,200. We have not sold any shares of our common stock pursuant to the case of development and/or regulatory milestone payments, when the applicable event triggering such a payment has occurred.Lincoln Park Agreement since July 2020.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●
Government grants, which supportAs also described in Note 9,Capital Stock, between December 2020 and March 31, 2021, certain holders of outstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our research efforts on specific projects, generally provide for reimbursementcommon stock and we received cash proceeds of approved costs as defined$4,924,800 from such exercises. As disclosed in the termsNote 16,Subsequent Events, since March 31, 2021, holders of grant awards. Grant revenue is recognized when associated project costs are incurred.
ResearchLiquidity and Development ExpensesCapital Resources
During the fiscal year ended March 31, 2021, we received approximately $119 million in net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of these financial statements, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
ResearchDuring the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE Phase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, and (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for more than the next twelve months following the issuance of this Annual Report, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development expenses are composedcollaborations involving one or more of both internalour drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-254299) (theS-3 Registration Statement), which became effective on March 26, 2021, remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement and external costs. Internal costs include salaries and employment-related expenses,the Bayer Agreement (defined in Note 12, below) to provide funding, including stock-based compensation expense, of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with clinical and non-clinicalnon-dilutive funding, for development of AV-101,one or more of our oral NMDAR GlyB antagonistCNS product candidate programs. We may also seek additional government grant awards or agreements similar to our prior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the U.S. Department of Veterans Affairs in clinicalconnection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the AffaMed Agreement and the Bayer Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development for MDD and potentially for other CNS indications, stem cell research and development costs, and costsof our product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the applicationcurrent COVID-19 pandemic, the scope and prosecutionnature of patentsopportunities related to AV-101our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform. All suchplatform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, are chargedincluding our employee headcount and related expenses, as well as costs relating to expense as incurred. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred byregulatory consulting, contract manufacturing, research organizations (CROs) and clinical trial sites. Progress payments are generally made to CROs, clinical sites, investigatorsdevelopment, investor and public relations, business development, legal, intellectual property acquisition and protection, public company compliance and other professional service providers. We analyzeservices and operating costs.
Notwithstanding the progressforegoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future potential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain additional financing on a timely basis when needed, our business, financial condition, and results of operations may be harmed, the clinical trial, including levelsprice of subject enrollment, invoices received and contracted costs when evaluating the adequacyour stock may decline, we may be required to reduce, defer, or discontinue certain of accrued liabilities. Significant judgments and estimates must be made and used in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged toour research and development expense in the period in which the facts that give riseactivities and we may not be able to the revision become known.continue as a going concern.
Stock-Based CompensationVISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize compensation cost for all stock-based awards to employees and non-employee consultants based on the grant date fair value3. Summary of the award. We record non-cash, stock-based compensation expense over the period during which the employee is required to perform services in exchange for the award, which generally represents the scheduled vesting period. We have granted no restricted stock awards to employees nor do we have any awards with market or performance conditions. For option grants to non-employees, we re-measure the fair value of the awards as they vest and the resulting value is recognized as an expense during the period over which the services are performed. Compensatory grants of stock to non-employees are generally treated as fully-earned at the time of the grant and the non-cash expense recognized is based on the quoted market price of the stock on the date of grant.Significant Accounting Policies
Income Taxes
We account for income taxes using the asset and liability approach for financial reporting purposes. DeferredWe recognize deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce the deferred tax assets to an amount expected to be realized.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents. Our investment policies limit any such investments to short-term, low-risk investments. We deposit cash and cash equivalents with quality financial institutions and are insured to the maximum of federal limitations. Balances in these accounts may exceed federally insured limits at times.
Fair Value Measurements
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. We follow the principles of fair value accounting as they relate to our financial assets and financial liabilities. Fair value is defined as the estimated exit price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, rather than an entry price that represents the purchase price of an asset or liability. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on several factors, including the instrument’s complexity. The required fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described as follows:
●
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 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
●
Level 3 — Unobservable inputs (i.e.,inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific financial instrument, then we estimate fair value by using pricing models, quoted prices of financial instruments with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to valuation, financial assets or liabilities are classified as Level 3 within the valuation hierarchy.
We carried no assets or liabilities at fair value at March 31, 2018 or 2017.
Warrants Issued in Connection with Equity Financing
We generally account for warrants issued in connection with equity financings as a component of equity, unless there is a deemed possibility that we may have to settle the warrants in cash or the warrants contain other features requiring them to be treated as liabilities. For warrants issued with the possibility of cash settlement, or otherwise requiring liability treatment, we record the fair value of the issued warrants as a liability at each reporting period and record changes in the estimated fair value as noncash gain or loss in the Consolidated Statements of Operations and Comprehensive Loss.
Comprehensive Loss
We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.
Loss per Common Share Attributable to Common Stockholders
Basic net loss attributable to common stockholders per share of common stock excludes the effect of dilution and is computed by dividing net loss increased by the accrual for dividends on our Series B Preferred and, for the fiscal year ended March 31, 2018, the deemed dividend attributable to the trigger of a down-round provision feature, and, for the fiscal year ended March 31, 2017 (refer to Note 7, Capital Stock, for a description of these adjustments), the deemed dividend attributable to the issuance of our Series B Preferred Units by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net loss attributable to common stockholders per share, we have generally not increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method because the result is antidilutive.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of our net loss for both years presented, potentially dilutive securities were excluded from the computation of diluted loss per share, as their effect would be antidilutive.
Basic and diluted net loss attributable to common stockholders per share was computed as follows:
| | Fiscal Years Ended March 31, |
| | | |
| Numerator: | | |
| Net loss attributable to common stockholders for basic and diluted earnings | | |
| per share | $(15,575,500) | $(11,623,600) |
| | | |
| Denominator: | | |
| Weighted average basic and diluted common shares outstanding | 13,890,041 | 7,531,642 |
| | | |
| Basic and diluted net loss attributable to common stockholders per common share | $(1.12) | $(1.54) |
Potentially dilutive securities excluded in determining diluted net loss per common share for the fiscal years ended March 31, 2018 and 2017 are as follows:
| | |
| | | |
| | | |
Series A Preferred stock issued and outstanding (1) | 750,000 | 750,000 |
| | | |
Series B Preferred stock issued and outstanding (2) | 1,160,240 | 1,160,240 |
| | | |
Series C Preferred stock issued and outstanding (3) | 2,318,012 | 2,318,012 |
| | | |
| Outstanding options under the Amended and Restated 2016 (formerly 2008) and 1999 Stock Incentive Plans (1999 Plan in 2017 only) | 5,300,338 | 1,659,324 |
| | | |
Outstanding warrants to purchase common stock | 16,603,516 | 4,577,631 |
| | | |
| Total | 26,132,106 | 10,465,207 |
(1)Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement, as amended
(2)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015
(3)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016
Recent Accounting Pronouncements
See Note 3 to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K for information on recent accounting pronouncements.
Financial Operations Overview and Results of Operations
Net Loss
Although we entered into the AffaMed Agreement in June 2020 and the Bayer Agreement in December 2016, we have not yet achieved recurring revenue-generating status in amounts sufficient to sustain our operations and enable our strategic business plans from any of our product candidates or technologies. Since inception, we have devoted substantial time and effort to developing AV-101 for multiple CNS indications, including manufacturing research, process development and production of AV-101 drug substance and finished drug product, preclinical efficacy and safety studies, and clinical efficacy and safety studies in CNS indications. Since acquiring our exclusive worldwide licenses to PH94B and PH10 in 2018, we have devoted substantial resources focused on research, development and commercialization of PH94B and PH10, including initiatives to advance manufacturing research, process development and production programs for drug substance and finished drug product, additional preclinical safety studies, and clinical efficacy and safety studies in multiple neuropsychiatry indications. Also, from-time-to-time, we have devoted resources to VistaStem’s stem cell technology research and development, bioassay development and small molecule drug rescue initiatives, as well as creating, protecting and patenting intellectual property (IP) related to our product candidates and stem cell technologies, with the corollary initiatives of recruiting and retaining personnel and raising working capital. As of March 31, 2021, we had an accumulated deficit of approximately $242.8 million. Our net loss for the fiscal years ended March 31, 2021 and 2020 was approximately $17.9 million and $20.8 million, respectively. We expect losses to continue for the foreseeable future, primarily as we engage in further research, development and commercialization activities related to PH94B, PH10 and AV-101, and pursue VistaStem’s potential drug rescue, drug development and CT and RM opportunities.
Summary of the Fiscal Year Ended March 31, 2021
On December 22, 2020, we completed a transformative $100 million underwritten public offering (theDecember 2020Public Offering) of our securities, consisting of shares of our common stock and shares of our newly created Series D Convertible Preferred Stock (Series D Preferred).After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $93.6 million from the sale of our securities in the December 2020 Public Offering.Combined with financing and development and commercialization partnering transactions completed earlier in our fiscal year, aggregating approximately an additional $25 million, the proceeds from the December 2020 Public Offering have provided us with working capital to advance an important stream of potential catalysts across our CNS pipeline, including, among others, our Phase 3 development program for PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD) and, upon successful Phase 3 development, submission of our New Drug Application to the U.S. Food and Drug Administration and potential U.S. market approval of PH94B.
From an operational perspective, during our fiscal year ended March 31, 2021 (Fiscal 2021), we continued to advance our manufacturing, preclinical and clinical development, and regulatory initiatives necessary for our Phase 3 clinical development of PH94B as a potential acute treatment of anxiety in adults with SAD, PH10 as a potential stand-alone treatment of MDD and AV-101 in combination with probenecid as a potential treatment for NMDAR-focused indications. During the quarter ended March 31, 2021, and thereafter, following the completion of the December 2020 Public Offering, we increased our headcount with the addition of twelve additional employees with significant expertise in various disciplines including manufacturing, regulatory affairs, clinical development, commercial affairs and administrative functions. Further, we accelerated our planning for clinical trials for both PH94B and PH10, culminating in the start of the PALISADE-1 Phase 3 clinical study in late-May 2021. The PALISADE-1 Phase 3 clinical study is part of our PH94B PALISADE Phase 3 program for the acute treatment of anxiety in adult patients with SAD. Throughout Fiscal 2021, we continued to expand our regulatory and intellectual property foundation to support broad clinical development and, ultimately, commercialization of our CNS product candidates in the U.S. and foreign markets.
Throughout Fiscal 2021 and through the date of this Report, a strain of SARS-CoV-2, commonly referred to as COVID-19, has spread to many countries in the world and the outbreak was declared a pandemic by the World Health Organization. The U.S. Secretary of Health and Human Services also declared a public health emergency in the U.S. in response to the outbreak. From time to time during the COVID-19 pandemic, our operations and those of our CROs and CMOs have been and still may be impacted by shelter-in-place orders, social distancing measures, travel bans and restrictions, and certain business and government closures or reductions in service. Our headquarters operations have been significantly curtailed and our employees have worked remotely since the beginning of the COVID-19 pandemic. From time to time since the beginning of the COVID-19 pandemic, we have experienced delays in the delivery of supplies of active pharmaceutical product (API) or other key materials required to continue development of PH94B and PH10. Future unexpected delays may result in a significant, material delay or disruption to our current clinical development plans, programs, and operations.
During our fiscal quarter ended June 30, 2020, we completeda successful and positive meeting with the FDA regarding Phase 3 clinical development of PH94B for the acute treatment of anxiety in adult patients with SAD, reaching consensus with the FDA on key aspects of the design of our Phase 3 clinical trials of PH94B, which studies will be randomized, double-blind, placebo-controlled, studies involving a single-event, laboratory-simulated public speaking challenge in adult subjects with SAD. As noted earlier, the initial Phase 3 clinical trial of PH94B, PALISADE-1, commenced in late-May 2021. Dr. Michael Liebowitz, Professor of Clinical Psychiatry at Columbia University, director of the Medical Research Network in New York City, and creator of the Liebowitz Social Anxiety Scale (LSAS), is the Principal Investigator of PALISADE-1. Target enrollment for PALISADE-1 (completed patients) is approximately 208 adult patients with SAD. As in the statistically significant (p=0.002) public speaking component of the Phase 2 study, the patient-reported Subjective Units of Distress Scale (SUDS) will be used to assess the primary efficacy endpoint in PALISADE-1. Throughout Fiscal 2021, we have been actively engaged in formalizing processes and procedures for the manufacture of PH94B for the PALISADE Phase 3 program and Phase 2 programs in other anxiety indications, and of PH10 for our planned Phase 2B clinical study of PH10 in MDD and other Phase 2 and nonclinical studies of PH10.
In June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B (theEverInsight Agreement) with EverInsight Therapeutics Inc. (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, Inc., which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed is responsible for clinical development, regulatory submissions and commercialization of PH94B for the treatment of SAD, and potentially other anxiety-related indications, in key markets in Asia, including markets in Greater China, South Korea and Southeast Asia (collectively, theTerritory). Under the terms of the AffaMed Agreement, in August 2020, we received a non-dilutive upfront license fee payment of $5.0 million from AffaMed. Upon successful development and commercialization of PH94B in the Territory, we are eligible to receive up to $172 million in additional development and commercial milestone payments, plus royalties on commercial sales of PH94B in the Territory. After payment of sublicense fees to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment of consulting fees related to consummation of the AffaMed Agreement, we received net cash proceeds of approximately $4.655 million.
In December 2020, we sold 63,000,000 shares of our common stock in at a public offering price of $0.92 per share and 2,000,000 shares of our Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million (the December 2020 Public Offering). Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Earlier in Fiscal 2021, in August 2020, we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock for a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. We also granted to the underwriter an over-allotment option to purchase up to an additional 2,343,750 shares at a public offering price of $0.80 per share, which option was exercised with respect to 2,243,250 shares (theExercised Option Shares). The sale of the Exercised Option Shares resulted in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
To satisfy our obligations under the common stock purchase and registration rights agreements that we entered into with Lincoln Park Capital Fund (Lincoln Park) in March 2020, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the SEC on March 31, 2020 (Registration No. 333-237514), which the SEC declared effective on April 14, 2020 (theCommencement Date). Subsequent to the Commencement Date and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received aggregate cash proceeds of $2,891,200. We have not sold any additional shares to Lincoln Park under these agreements since July 2020. We terminated the stock purchase agreement with Lincoln Park effective on June 25, 2021.
As a matter of course, we continue to minimize, to the greatest extent possible, cash commitments and expenditures for both internal and external research and development and general and administrative services. To further advance the nonclinical and clinical development of PH94B, PH10 and AV-101, as well as support our operating activities, we continue to carefully manage our routine operating costs, including our internal employee related expenses, as well as external costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and internal costs.
Comparison of Fiscal Years Ended March 31, 2021 and 2020
The following table summarizes the results of our operations for the fiscal years ended March 31, 2021 and 2020 (amounts in thousands).
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Sublicense revenue | $1,089 | $- |
| Operating expenses: | | |
| Research and development | 12,476 | 13,374 |
| General and administrative | 6,547 | 7,427 |
| Total operating expenses | 19,023 | 20,801 |
| | | |
| Loss from operations | (17,934) | (20,801) |
| | | |
| Interest income, net | 2 | 30 |
| Other income | 1 | - |
| | | |
| Loss before income taxes | (17,931) | (20,771) |
| Income taxes | (3) | (3) |
| | | |
| Net loss | (17,934) | (20,774) |
| Accrued dividend on Series B Preferred Stock | (1,386) | (1,264) |
Beneficial conversion feature on Series D Preferred Stock | (23,000) | - |
| Net loss attributable to common stockholders | $(42,320) | $(22,038) |
Revenue
We recognized $1,089,500 in sublicense revenue pursuant to the AffaMed Agreement in Fiscal 2021 compared to none in the fiscal year ended March 31, 2020 (Fiscal 2020). As noted earlier, in June 2020, we entered into the AffaMed Agreement, pursuant to which we received a non-dilutive upfront license fee payment of $5.0 million in August 2020. We initially recorded this payment as deferred revenue and we are recognizing it as revenue on a straight-line basis over the period in which we expect to perform the services required under the AffaMed Agreement. We currently estimate that we will complete our performance obligations at the end of calendar 2023. While we may potentially receive additional cash payments and royalties in the future under the AffaMed Agreement in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the AffaMed Agreement will provide additional revenue beyond that noted or cash payments to us in the near term, or at all.
Research and Development Expense
Research and development (R&D) expense decreased from $13.4 million in Fiscal 2020 to $12.5 million in Fiscal 2021, primarily due to the completion of the Elevate Study of AV-101 in Fiscal 2020, noticeably offset by increased developmental expenses in Fiscal 2021 for PH94B and PH10. Expenses related to the Elevate Study and other AV-101 related nonclinical activities decreased by approximately $5.9 million in Fiscal 2021 compared to Fiscal 2020, while expenses for PH94B and PH10 preclinical and clinical readiness initiatives increased by $5.2 million in Fiscal 2021 compared to Fiscal 2020. Salaries and benefits expense increased in Fiscal 2021 as a result of the addition of six new senior-level employees during the third and fourth quarters of Fiscal 2021 and bonus payments made in the third quarter of Fiscal 2021. Noncash research and development expenses, primarily stock-based compensation and equipment depreciation in both periods, accounted for approximately $841,000 and $1,380,000 in Fiscal 2021 and Fiscal 2020, respectively.
The following table indicates the primary components of R&D expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $1,986 | $1,381 |
| Stock-based compensation | 747 | 1,287 |
| Consulting and other professional services | 327 | 533 |
| Technology licenses and royalties | 551 | 546 |
| Project-related research, licenses and supplies: | | |
| Elevate study and other AV-101 expenses | 611 | 6,483 |
| PH94B and PH10 development expenses | 7,620 | 2,448 |
| Stem cell and all other | 24 | 110 |
| | 8,255 | 9,041 |
| Rent | 545 | 535 |
| Depreciation | 64 | 49 |
| All other | 1 | 2 |
| | | |
| Total Research and Development Expense | $12,476 | $13,374 |
The increase in salaries and benefits expense in Fiscal 2021 reflects (i) the impact of bonus payments made to our Chief Medical Officer (CMO), Chief Scientific Officer (CSO), and members of our scientific staff in December 2020, (ii) modest salary increases to those officers and employees effective in the fourth quarter of Fiscal 2021; and (iii) the addition of six officer-level employees between December 2020 and March 2021. There were no changes in base compensation levels for our CMO, CSO, or other members of our scientific staff between April 2019 and December 2020 and no bonus expense or payments during that same period.
Current year stock-based compensation expense reflects the amortization of option grants made to our CMO, CSO, members of our scientific staff, our new senior-level employees and certain clinical and scientific consultants since June 2016, all earlier outstanding grants having become fully vested and amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020, including those granted during Fiscal 2021, account for approximately $348,700 of expense in Fiscal 2021, offset by an expense reduction of approximately $814,400 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $79,500 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.
Consulting and other professional services reflects fees incurred, generally on an as-needed basis, for project-based scientific, nonclinical and clinical development and regulatory advisory and analytical services rendered to us by third parties, including by members of our Scientific Advisory Board and CNS Clinical and Regulatory Advisory Board, especially in support of our PH94B and PH10 development initiatives. Fiscal 2021 expense reflects a reduction of $110,000 in development support payments to Pherin which terminated in April 2020 under the terms of our PH94B and PH10 license agreements and a $95,000 reduction in analytical and other services in support of PH94B and PH10 development compared to Fiscal 2020, a portion of which is attributable to the conversion of a consultant to an employee in Fiscal 2021.
Technology license and royalties expense primarily reflects legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements, our AV-101 patents, or patents that we have elected to pursue for commercial purposes, as well as recurring annual license fees. These costs do not occur ratably throughout the year or between years. In both periods, this expense includes legal counsel and other costs we have incurred to advance various patent applications in the U.S. and numerous foreign countries, primarily with respect to AV-101 and our stem cell technology platform, but also nominally with respect to our PH94B and PH10 intellectual property portfolios during Fiscal 2021.
AV-101 project expense for Fiscal 2020 reflects the costs of actively conducting the Elevate Study in MDD, including various CROs, investigator and clinical site costs, and determination of topline study results, as well as CRO support services for AV-101 projects for indications other than MDD, and, to lesser extent, expense incurred to manufacture additional quantities of AV-101 for use in potential future clinical development of AV-101 in a number of potential CNS indications. AV-101 project expense for Fiscal 2021 primarily reflects the cost of certain preclinical studies related to the use of AV-101 with probenecid and certain AV-101 manufacturing stability studies, and costs incurred to finalize the results of the Elevate Study for regulatory submission.
PH94B and PH10 project expenses for both Fiscal 2021 and Fiscal 2020 reflect research and development and manufacturing and regulatory initiatives necessary to facilitate Phase 3 clinical development and readiness of PH94B for acute treatment of anxiety in adults with SAD and Phase 2B development of PH10 for MDD. Manufacturing, formulation and analysis of sufficient quantities of drug substance and drug product have been the key initiatives during Fiscal 2021 for advancing the further clinical development of both PH94B and PH10, with costs for PH94B significantly exceeding those for PH10 in Fiscal 2021 and in comparison to those of Fiscal 2020. From time to time during Fiscal 2021, production, logistics and analytical processes for both of these product candidates were delayed due to the ongoing COVID-19 pandemic.
Stem cell and other project related expenses reflects costs associated with drug rescue applications of our stem cell technology in both years. These expenses are typically incurred by our in-house scientific personnel. As a result of shelter-in-place and remote working requirements related to the ongoing COVID-19 pandemic, such expenses were reduced to an insignificant level during Fiscal 2021.
Rent expense for both Fiscal 2020 and Fiscal 2021 reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Following our implementation of ASC 842, the modest increase in rent expense between periods is primarily related to Fiscal 2021 increases in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
General and Administrative Expense
General and administrative (G&A) expense decreased to approximately $6.5 million in Fiscal 2021 from approximately $7.4 million in Fiscal 2020. Cash compensation in Fiscal 2021 increased by approximately $0.7 million while noncash stock-based compensation decreased by approximately $1.0 million in Fiscal 2021. Further, during Fiscal 2020 we modified certain outstanding warrants and recognized non-cash warrant modification expense of $826,900. Noncash G&A expense, approximately $1,731,000 for Fiscal 2021, decreased from approximately $3,543,000 for Fiscal 2020, primarily due to the decreases in stock-based compensation and warrant modifications noted above and the noncash components of investor and public relations expense in Fiscal 2020 attributable to the amortization of the fair value of common stock or warrants granted to service providers.
The following table indicates the primary components of G&A expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Salaries and benefits | $2,052 | $1,382 |
| Stock-based compensation | 1,559 | 2,533 |
| Board fees and other consulting services | 428 | 185 |
| Legal, accounting and other professional fees | 564 | 575 |
| Investor and public relations | 695 | 933 |
| Insurance | 449 | 348 |
| Travel expenses | 4 | 81 |
| Rent and utilities | 354 | 354 |
| Sublicense contract amortized acquisition expense | 102 | - |
| Warrant modification expense | - | 827 |
| All other expenses | 340 | 209 |
| | $6,547 | $7,427 |
The increase in salaries and benefits expense for Fiscal 2021 primarily reflects the impact of (i) bonus payments made to our Chief Executive Officer (CEO), Chief Financial Officer (CFO), Vice President-Corporate Development (VP-Corporate Development) and a non-officer member of our administrative staff in December 2020; (ii) modest salary increases to those officers and employee effective in the fourth quarter of Fiscal 2021; and (iii) the addition of three senior-level employees during February 2021 and March 2021. There were no changes in base compensation levels for our CEO, CFO, or VP-Corporate Development between April 2019 and December 2020 and no bonus expense or payments to them during that same period.
Current year stock-based compensation expense reflects the amortization of option grants made to our CEO, CFO, VP Corporate Development, administrative staff, independent members of our Board and certain consultants since June 2016, all earlier outstanding grants having become fully vested and amortized during Fiscal 2021 or earlier. Grants awarded after March 31, 2020 account for approximately $677,000 of expense in Fiscal 2021, offset by an expense reduction of approximately $1,515,000 attributable to certain options granted between June 2016 and January 2019 that became fully vested and amortized during Fiscal 2021 or earlier. Fiscal 2021 stock compensation expense is further reduced by approximately $141,700 due to the absence of the impact of immediate vesting attributable to certain options granted in May 2019 or fully vesting prior to March 31, 2020. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2021, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.
Board fees and other consulting services represent, in both periods, fees paid as consideration for Board and Board Committee services to the independent members of our Board of Directors and, additionally in the current year, other consulting service fees related to commercial analyses of both PH94B and PH10.
Legal, accounting and other professional fees for Fiscal 2021 and Fiscal 2020 includes expense related to routine corporate legal fees as well as the accounting expense related to the annual audit of our prior year financial statements and the three quarterly reviews of our current year financial statements. In Fiscal 2021, we incurred additional consulting fees related to revenue recognition accounting for the AffaMed Agreement and, in Fiscal 2020, we incurred fees attributable to services provided by an international business development consultant.
Investor and public relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, public relations and social media services, and well as market awareness and strategic advisory and support functions and initiatives that, in Fiscal 2020, included numerous in-person meetings in multiple U.S. and certain foreign markets and other communication activities focused on expanding global market awareness of the Company, our CNS product candidate pipeline and technologies and our research and development programs, including among registered investment professionals and investment advisors, individual and institutional investors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide. During Fiscal 2021, we curtailed the number and scope of external service providers engaged in these activities compared to the prior year. Further, in Fiscal 2020, in addition to cash fees and expenses we incurred for such activities, we recognized approximately $105,900 of noncash expense attributable to the amortization of the fair value of stock and warrants granted in previous periods to various corporate development, investor relations, and market awareness service providers. No such noncash expense was incurred in Fiscal 2021.
The increase in insurance expense for Fiscal 2021 is primarily attributable to the market-rate increase in the premium for our directors and officers liability insurance upon renewal of our policy in May 2020.
In Fiscal 2020, travel expense reflects costs associated with in-person management presentations and meetings held in multiple U.S. markets and certain international markets with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development and partnering initiatives and in monitoring the progress of our Elevate Study. As a result of periodic shelter-in-place restrictions and travel and workplace precautions and restrictions associated with the ongoing COVID-19 pandemic, during Fiscal 2021, such meetings have occurred remotely without requiring in-person business travel by our executives.
Rent expense for both periods presented reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Following our implementation of ASC 842, increases or decreases in rent expense between periods are primarily related to changes in such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.
Beginning in the second quarter of Fiscal 2021, we began to amortize the deferred contract acquisition costs related to our acquisition of the AffaMed Agreement, composed of the cash payments of $220,000 for sublicense fees which we were obligated to make pursuant to our PH94B license from Pherin, and $125,000 of cash fees and $125,000 fair value of common stock issued for consulting services, in each case exclusively related to our acquisition of the AffaMed Agreement. The contract acquisition costs are amortized over the expected term of the services to be provided under the AffaMed Agreement. During Fiscal 2021, we amortized $102,400 of contract acquisition costs.
During Fiscal 2020, we completed three warrant modifications resulting in an aggregate of $826,900 of noncash warrant modification expense as described below.
●
On December 4, 2019, we modified outstanding warrants previously issued as a part of completed private placements to purchase an aggregate of approximately 6.6 million unregistered shares of our common stock to temporarily reduce, for a period of two years or until the expiration of the warrant, if sooner, the exercise price of such warrants to $0.50 per share, in order to more closely align the exercise price of the warrants with the then-current trading price of our common stock. Following the two-year period during which the exercise price is reduced, the exercise price will revert to its pre-modification price. We determined that this modification increased the fair value of the modified warrants by $702,500, which we recorded as warrant modification expense.
●
Also, on December 4, 2019, we issued additional warrants (theAdditional Warrants) to purchase an aggregate of 325,000 additional shares of our common stock to the participants in our fall 2019 private placement of shares of common stock and warrants to increase the number of unregistered shares of common stock issuable upon exercise of the warrants from 50% to 100% of the number of shares issued in the private placement. The Additional Warrants are exercisable through March 31, 2024 at an exercise price of $0.50 per share. We determined that the fair value of the Additional Warrants was $88,800, which we also recognized as noncash warrant modification expense.
●
Further, on December 19, 2019, we modified additional outstanding warrants previously issued as a part of a completed private placement to purchase a total of 80,431 shares of our unregistered common stock to permanently reduce the exercise price of such warrants to $0.805 per share and to extend the term of such warrants through December 31, 2022, in order to more closely align the exercise price of the warrants with the then-current trading price of our common stock and to provide additional time for the holders to exercise the warrants. We determined that these modifications increased the fair value of the subject warrants by $35,600, which we also recognized as noncash warrant modification expense.
The shares underlying the modified warrants and the Additional Warrants were included in a Registration Statement on Form S-3 (File No. 333-237968) that was declared effective by the Commission on May 13, 2020.
Interest and Other Income, Net
Interest income, net totaled $1,600 for Fiscal 2021 compared to interest income, net of $30,100 for Fiscal 2020. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Interest income | $15 | $45 |
| Interest expense on financing lease, insurance premium financing notes | | |
| and Payroll Protection Program loan (2021) | (13) | (15) |
| | | |
| Interest income, net | $2 | $30 |
| | | |
In both periods, interest income relates to cash deposits in interest-bearing cash equivalent accounts. Although cash balances were generally higher during Fiscal 2021, the decline in market interest rates during Fiscal 2021 compared to Fiscal 2020 resulted in reduced interest income. Interest expense in both periods relates to interest paid on insurance premium financing notes and on our financing lease of office equipment subject to ASC 842, and in Fiscal 2021, to interest accrued on our Payroll Protection Program loan prior to its voluntary repayment, including interest, in December 2020.
We recognized $1,385,600 and $1,263,600 in Fiscal 2021 and Fiscal 2020, respectively, representing the 10% cumulative dividend accrued on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred) as an additional deduction in arriving at net loss attributable to common stockholders in the Consolidated Statement of Operations and Comprehensive Loss included in Item 8, Part II of this Annual Report. In December 2020, one holder of Series B Preferred converted 28,571 shares of Series B Preferred into an equal number of unregistered shares of our common stock and we issued an additional 160,062 unregistered shares of our common stock in payment of $124,600 of accrued dividends.
The Series D Preferred that we issued in the December 2020 Public Offering contained a beneficial conversion feature (aBCF), which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date (with respect to the Series D Preferred, the date the security was actually issued rather than the date the agreement to do so was entered into, referred to as theCommitment Date). In accordance with Accounting Standards Codification 470-20,Debt- Debt with Conversion and Other Options(ASC 470-20), an embedded BCF is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital. ASC 470-20 also provides that the intrinsic value is to be calculated as of the Commitment Date. The Series D Certificate of Designation provides that the Series D Preferred has a conversion price of $0.92 per share on an as-converted basis the (Conversion Price). The Conversion Price compared to the closing price of $1.42 per share of our common stock on the Commitment Date results in a difference of $0.50 per share. That difference multiplied by the 46 million shares of our common stock issuable upon conversion of the Series D Preferred resulted in an aggregate BCF of $23.0 million. We did not recognize the impact of the BCF at December 31, 2020 because the Series D Preferred was not convertible into common stock prior to the Approval Date (the date of our Special Meeting of Stockholders held on March 5, 2021). Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021, the contingency of the BCF was eliminated and we recognized the BCF as a noncash charge in arriving at net loss attributable to common stockholders in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2021 and as a corresponding increase in additional paid-in capital in our Consolidated Statement of Stockholders’ Equity (Deficit). The recognition of the BCF on the Series D Preferred had no impact in aggregate on our stockholders’ equity or on our cash position.
Liquidity and Capital Resources
Since our inception in May 1998 through March 31, 2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $197.8 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments, intellectual property licensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.2million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Recent Developments
Jefferies ATM. On May 14, 2021, we entered into an Open Market Sale AgreementSM (theSales Agreement) with Jefferies LLC, as sales agent (Jefferies), with respect to an at-the-market offering program under which we may offer and sell, from time to time, shares of our common stock with an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. As of the date of this Report, we have not completed any sales under the Sale Agreement.
December 2020 Public Offering. In December 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold 63,000,000 shares of our common stock in the December 2020 Public Offering at a public offering price of $0.92 per share and 2,000,000 shares of Series D Preferred at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million. Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021 and through the date of this Annual Report, we issued 46 million shares of our common stock upon conversion of all outstanding shares of Series D Preferred issued in the December 2020 Public Offering.
August 2020 Public Offering. In August 2020, we entered into an underwriting agreement pursuant to which we sold, in the August 2020 Public Offering an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. Under the terms of the August 2020 Underwriting Agreement, we granted to the underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $12.9 million.
AffaMed Agreement. In June 2020, we entered into the AffaMed Agreement, a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders, with EverInsight, now operating as AffaMed Therapeutics. Under the terms of the AffaMed Agreement, AffaMed agreed to make a non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin pursuant to our PH94B license from Pherin, and payment for consulting services related to the AffaMed Agreement.
LPC Agreement. Additionally, on March 24, 2020, we entered into the LPC Agreement with Lincoln Park, pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months. To satisfy our obligations under the registration rights agreement, we filed the LPC Registration Statement, which the SEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the LPC Registration Statement and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200. We have not sold any shares of our common stock pursuant to the Lincoln Park Agreement since July 2020.
Warrant Exercises. Further, between December 2020 and March 31, 2021, certain holders of outstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our common stock and we received cash proceeds of $4,924,800 from such exercises. Since March 31, 2021 and through the date of this Annual Report, holders of outstanding warrants have exercised warrants to purchase an additional 1,508,768 shares of our common stock and we have received cash proceeds of approximately $1,105,700, resulting in aggregate cash proceeds of $6,030,500 received from warrant exercises between December 2020 and the date of this Annual Report.
Liquidity and Capital Resources
During Fiscal 2021, we received approximately $119 million in net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of the financial statements included in Part II, Item 8 of this Annual Report, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
During the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE Phase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, and (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for well beyond the next twelve months, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-254299) (theS-3 Registration Statement), which became effective on March 26, 2021 remains available for future sales of our equity securities under the Sales Agreement with Jefferies, or in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement and the Bayer Agreement to provide funding, including non-dilutive funding, for development of one or more of our CNS product candidate programs. We may also seek additional government grant awards or agreements similar to our prior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the AffaMed Agreement and the Bayer Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of our product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the continuing COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract manufacturing, research and development, investor and public relations, business development, legal, intellectual property acquisition and protection, public company compliance and other professional services and operating costs.
Notwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future potential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain additional financing on a timely basis when needed, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern. As noted above, the Consolidated Financial Statements included in part II, Item 8 of this Annual Report do not include any adjustments that might result from the negative outcome of this uncertainty.
Cash and Cash Equivalents
The following table summarizes changes in cash and cash equivalents for the fiscal years stated (in thousands):
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Net cash used in operating activities | $(12,074) | $(15,757) |
| Net cash used in investing activities | (275) | - |
| Net cash provided by financing activities | 114,102 | 4,012 |
| | | |
| Net increase (decrease) in cash and cash equivalents | 101,753 | (11,745) |
| Cash and cash equivalents at beginning of period | 1,355 | 13,100 |
| Cash and cash equivalents at end of period | $103,108 | $1,355 |
The decrease in cash used in operations results primarily from increased spending on PH94B and PH10 nonclinical development, manufacturing advancements, and, for PH94B in particular, Phase 3-enabling initiatives as a part of our preparations for the PALISADE Phase 3 program, combined with expansion of our infrastructure by the addition of experienced senior-level executives in manufacturing, clinical and regulatory disciplines in the fourth quarter of Fiscal 2021, offset by the impact of the completion of the Elevate Study, which commenced at the end of the first calendar quarter of 2018 and was operationally completed during the third fiscal quarter of Fiscal 2020. Additionally, cash used in operations during Fiscal 2021 was reduced by the August 2020 receipt of the $5.0 million nondilutive upfront payment from EverInsight under the AffaMed Agreement. Cash used in investing activities in Fiscal 2021 primarily reflects the purchase of certain manufacturing equipment acquired for use by our contract development and manufacturing organization in connection with the production of PH94B drug product. Cash provided by financing activities in Fiscal 2021 primarily reflects net cash proceeds to us from sales of our common stock and Series D Preferred stock pursuant to the December 2020 Public Offering and from sales of our common stock pursuant to the August 2020 Public Offering, the LPC Agreement and the Spring 2020 Private Placement, as well as from the exercise of outstanding warrants, net of routine insurance premium financing note and financing lease payments. We received a Payroll Protection Program loan in April 2020 and voluntarily repaid all principal and accrued interest on the loan in December 2020, following the completion of the December 2020 Public Offering. Cash provided by financing activities in Fiscal 2020 reflects the cash proceeds from our Fall 2019 Private Placement, our Fall 2019 Warrant Offering, the exercise of certain warrants following the modification of their exercise prices, proceeds from our January 2020 Registered Direct Offering and initial transactions under the LPC Agreement, net of routine payments on our insurance premium financing notes and lease.
Off-Balance Sheet Arrangements
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. VistaStem has two inactive, wholly owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., an Ontario corporation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk The disclosures in this section are not required because we qualify as a smaller reporting company under federal securities laws.
Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors
VistaGen Therapeutics, Inc.
South San Francisco, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of VistaGen Therapeutics, Inc. (the “Company”) as of March 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, cash flows, and stockholders’ equity (deficit) for each of the two fiscal years in the period ended March 31, 2021, 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 March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenues from Contracts with Customers
Description of the Matter‒License Agreement with AffaMed
As discussed in Note 12 to the consolidated financial statements, the Company recognized approximately $1.1 million in revenue under the license agreement with AffaMed Therapeutics. Inc. (“AffaMed”) during the fiscal year ended March 31, 2021. The Company evaluated each of the deliverables identified in the license agreement and determined the license is not distinct within the context of the contract and is combined with development and regulatory approval services; as such, the Company combined the license and promised services into one combined performance obligation.
Auditing management’s identification of performance obligations was challenging as the license agreement includes implicit and explicit obligations. Significant judgment was required in the evaluation of the identification of performance obligations and in the determination of whether the identified license and promised services meet the criteria of being distinct and capable of being distinct within the context of the contract. The Company’s revenue from its licensing agreement is recognized over time, as the combined performance obligation is satisfied.
We identified license revenue recognition as a critical audit matter because of the judgments necessary for management to: identify performance obligations, determine variable consideration, and determine the timing of recognition for such revenue. Because of the complexity associated with applying the recognition criteria of ASC 606, notably related to identification of performance obligations, determination of variable consideration, and determination of timing of revenue recognition, this required extensive audit effort and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the recognition of license revenue, included the following, among others:
●
We evaluated the Company’s revenue recognition for the license agreement through an inspection of the agreement and an evaluation of management’s revenue recognition analysis corresponding to the license agreement. Our objective was to validate that revenue from the license agreement was recognized in a manner commensurate with the terms of the established agreement and the relevant accounting guidance. Evaluating the reasonableness of management’s accounting conclusions involved:
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Evaluating the accuracy and completeness of the performance obligations identified by management in the license agreement. Management identified one combined performance obligation. We analyzed the license agreement to determine if the arrangement terms that may have an impact on revenue recognition were identified and properly considered in the evaluation of the accounting for the contract. We also inquired of management, and reviewed source documentation, to assess whether the one combined performance obligation identified by management was complete and whether the license and promised services within it were both capable of being distinct and distinct within the context of the contract.
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Determining the reasonableness of the amounts of variable consideration included within the total transaction price. We analyzed the nature of the combined performance obligation and the contingencies related to the variable consideration in assessing management’s methods in estimating the amount of variable consideration to be included in the total transaction price.
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Testing the measurement of efforts toward satisfaction of the combined performance obligation which included, among other procedures:
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Reviewing management’s revenue schedules for accuracy and completeness by agreeing data to the underlying agreement.
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Evaluating the manner in which the combined performance obligation was satisfied, and corroborating management estimates and judgments through a review of press releases and third-party data as a potential source of corroborating or contradictory evidence.
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Discussing management’s judgments with the Company’s research and development personnel that oversee aspects of the license agreement.
/s/ OUM & CO. LLP
San Francisco, California
June 29, 2021
We have served as the Company's auditor since 2006.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS (Amounts in dollars, except share amounts)
| | | |
| | | |
| | | |
| | | |
|
| Current assets: | | |
| Cash and cash equivalents | $103,108,300 | $1,355,100 |
| Receivable from collaboration partner | 40,600 | - |
| Prepaid expenses and other current assets | 835,100 | 225,100 |
| Deferred contract acquisition costs - current portion | 133,500 | - |
| Total current assets | 104,117,500 | 1,580,200 |
| Property and equipment, net | 367,400 | 209,600 |
| Right of use asset - operating lease | 3,219,600 | 3,579,600 |
| Deferred offering costs | 294,900 | 355,100 |
| Deferred contract acquisition costs - non-current portion | 234,100 | - |
| Security deposits and other assets | 47,800 | 47,800 |
| Total assets | $108,281,300 | $5,772,300 |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| Current liabilities: | | |
| Accounts payable | $838,300 | $1,836,600 |
| Accrued expenses | 1,562,700 | 561,500 |
| Current notes payable | - | 56,500 |
| Deferred revenue - current portion | 1,420,200 | - |
| Operating lease obligation - current portion | 364,800 | 313,400 |
| Financing lease obligation - current portion | 3,000 | 3,300 |
| Total current liabilities | 4,189,000 | 2,771,300 |
| | |
| Non-current liabilities: | | |
| Accrued dividends on Series B Preferred Stock | 6,272,700 | 5,011,800 |
| Deferred revenue - non-current portion | 2,490,300 | - |
| Operating lease obligation - non-current portion | 3,350,800 | 3,715,600 |
| Financing lease obligation - non-current portion | - | 3,000 |
| Total non-current liabilities | 12,113,800 | 8,730,400 |
| Total liabilities | 16,302,800 | 11,501,700 |
| | | |
| Commitments and contingencies (Note 15) | | |
| | | |
| Stockholders’ equity (deficit): | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2021 and 2020: | | |
| Series A Preferred, 500,000 shares authorized, issued and outstanding at March 31, 2021 and 2020 | 500 | 500 |
| Series B Preferred; 4,000,000 shares authorized at March 31, 2021 and 2020; 1,131,669 shares | | |
| and 1,160,240 shares issued and outstanding at March 31, 2021 and 2020, respectively | 1,100 | 1,200 |
| Series C Preferred; 3,000,000 shares authorized at March 31, 2021 and 2020; 2,318,012 shares | | |
| issued and outstanding at March 31, 2021 and 2020 | 2,300 | 2,300 |
| Series D Preferred; 2,000,000 shares and no shares authorized at March 31, 2021 and 2020, respectively; | | |
| 402,149 shares and no shares issued and outstanding at March 31, 2021 and March 31, 2020, respectively | 400 | - |
Common stock, $0.001 par value; 325,000,000 shares and 175,000,000 shares authorized at March 31, 2021 and 2020, respectively; 180,751,234 and 49,348,707 shares issued at March 31, 2021 and 2020, respectively | 180,800 | 49,300 |
| Additional paid-in capital | 315,603,100 | 200,092,800 |
| Treasury stock, at cost, 135,665 shares of common stock held at March 31, 2021 and 2020 | (3,968,100) | (3,968,100) |
| Accumulated deficit | (219,841,600) | (201,907,400) |
| Total stockholders’ equity (deficit) | 91,978,500 | (5,729,400) |
| Total liabilities and stockholders’ equity (deficit) | $108,281,300 | $5,772,300 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Amounts in dollars, except share amounts)
| | Fiscal Years Ended March 31, |
| | | |
| Sublicense revenue | $1,089,500 | $- |
| Total revenues | 1,089,500 | - |
| Operating expenses: | | |
| Research and development | 12,476,400 | 13,374,200 |
| General and administrative | 6,546,900 | 7,427,300 |
| Total operating expenses | 19,023,300 | 20,801,500 |
| Loss from operations | (17,933,800) | (20,801,500) |
| Other income and expenses, net: | | |
| Interest income, net | 1,600 | 30,100 |
| Other income | 600 | - |
| Loss before income taxes | (17,931,600) | (20,771,400) |
| Income taxes | (2,600) | (2,600) |
| Net loss and comprehensive loss | $(17,934,200) | $(20,774,000) |
| | | |
| Accrued dividends on Series B Preferred stock | (1,385,600) | (1,263,600) |
| Beneficial conversion feature on Series D | | |
| Preferred stock | (23,000,000) | - |
| Net loss attributable to common stockholders | $(42,319,800) | $(22,037,600) |
| | | |
| Basic and diluted net loss attributable to common | | |
| stockholders per common share | $(0.49) | $(0.50) |
| | | |
| Weighted average shares used in computing | | |
| basic and diluted net loss attributable to common | | |
| stockholders per common share | 86,133,644 | 43,869,523 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in dollars)
| | Fiscal Years Ended March 31, |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(17,934,200) | $(20,774,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | |
| Depreciation and amortization | 117,600 | 103,100 |
| Stock-based compensation | 2,306,100 | 3,820,800 |
| Expense related to modification of warrants | - | 826,900 |
| Amortization of fair value of common stock issued for services | - | 92,100 |
| Amortization of fair value of warrants issued for services | - | 13,800 |
| Changes in operating assets and liabilities: | | |
| Receivable from collaboration partner or supplier | (40,600) | 300,000 |
| Prepaid expenses and other current assets | (287,800) | 182,600 |
| Right of use asset - operating lease | 360,000 | 335,400 |
| Operating lease liability | (313,500) | (267,000) |
| Deferred sublicense revenue, net of deferred contract acquisition costs | 3,667,900 | - |
| Accounts payable and accrued expenses | 51,000 | (390,700) |
| Net cash used in operating activities | (12,073,500) | (15,757,000) |
| | | |
| Cash flows from property and investing activities: | | |
| Purchases of manufacturing and other equipment | (275,400) | - |
| Net cash used in investing activities | (275,400) | - |
| | | |
| Cash flows from financing activities: | | |
| Net proceeds from issuance of common stock and Series D Preferred stock | 93,675,200 | - |
| Net proceeds from issuance of common stock and warrants, including Units | 12,957,800 | 3,349,000 |
| Net proceeds from exercise of warrants | 5,009,500 | 410,000 |
| Proceeds from sale of warrants | - | 300,000 |
| Net proceeds from sale of common stock under equity line | 2,841,600 | 249,400 |
| Proceeds from issuance of note under Payroll Protection Plan | 224,400 | - |
| Repayment of capital lease obligations | (3,300) | (3,000) |
| Repayment of notes payable, including Payroll Protection Plan note | (603,100) | (293,600) |
| Net cash provided by financing activities | 114,102,100 | 4,011,800 |
| Net increase (decrease) in cash and cash equivalents | 101,753,200 | (11,745,200) |
| Cash and cash equivalents at beginning of period | 1,355,100 | 13,100,300 |
| Cash and cash equivalents at end of period | $103,108,300 | $1,355,100 |
| | | |
| Supplemental disclosure of cash flow activities: | | |
| Cash paid for interest | $13,300 | $14,800 |
| Cash paid for income taxes | $2,600 | $2,600 |
| | | |
| Supplemental disclosure of noncash activities: | | |
| Insurance premiums settled by issuing note payable | $322,200 | $292,800 |
| Accrued dividends on Series B Preferred | $1,385,600 | $1,263,600 |
| Accrued dividends on Series B Preferred settled upon conversion by issuance | | |
| of common stock | $124,600 | $- |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Fiscal Years Ended March 31, 2020 and 2021
(Amounts in dollars, except share amounts)
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2019 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 42,758,630 | $42,800 | $192,129,900 | $(3,968,100) | $(181,133,400) | $7,075,200 |
| | | | | | | | | | | | | | | |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in private placements | - | - | - | - | - | - | - | - | 650,000 | 600 | 649,400 | - | - | 650,000 |
| Proceeds from sale of warrants in private placement | - | - | - | - | - | - | - | - | | | 300,000 | - | - | 300,000 |
| Proceeds from sale of units of common stock and warrants | | | | | | | | | | | | | | |
| for cash in public offering and concurrent private placement | - | - | - | - | - | - | - | - | 3,870,077 | 3,900 | 2,695,100 | - | - | 2,699,000 |
| Issuance of commitment shares and net proceeds of initial | | | | | | | | | | | | | | |
| sale of common stock under equity line | - | - | - | - | - | - | - | - | 1,250,000 | 1,200 | 525,100 | - | - | 526,300 |
| Proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 820,000 | 800 | 409,200 | - | - | 410,000 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,263,600) | - | - | (1,263,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 3,820,800 | - | - | 3,820,800 |
| Increase in fair value attributed to warrant modifications | | | | | | | | | | | | | | - |
| and additional warrants issued | - | - | - | - | - | - | - | - | - | - | 826,900 | - | - | 826,900 |
| | | | | | | | | | | | | | | - |
| Net loss for the fiscal year ended March 31, 2020 | - | - | - | - | - | - | - | - | - | - | - | - | (20,774,000) | (20,774,000) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2020 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | - | $- | 49,348,707 | $49,300 | $200,092,800 | $(3,968,100) | $(201,907,400) | $(5,729,400) |
| | | | | | | | | | | | | | | |
| Net proceeds from sale of common stock under equity line | - | - | - | - | - | - | - | - | 6,301,995 | 6,300 | 2,790,500 | - | - | 2,796,800 |
| Net proceeds from sale of common stock in public offering | - | - | - | - | - | - | - | - | 17,868,250 | 17,900 | 12,887,200 | - | - | 12,905,100 |
| Net proceeds from sale of common stock and Series D Preferred | | | | | | | | | | | | | | |
| stock in public offering | - | - | - | - | - | - | 2,000,000 | 2,000 | 63,000,000 | 63,000 | 93,582,900 | - | - | 93,647,900 |
| Net proceeds from exercise of warrants | - | - | - | - | - | - | - | - | 6,624,302 | 6,600 | 5,002,900 | - | - | 5,009,500 |
| Comversion of Series D Preferred stock to common stock | - | - | - | - | - | - | (1,597,851) | (1,600) | 36,750,573 | 36,800 | (35,200) | - | - | - |
| Comversion of Series B Preferred stock to common stock and payment | | | | | | | | | | | | | | |
| of accrued dividends in common stock | - | - | (28,571) | (100) | - | - | - | - | 188,633 | 200 | 124,500 | - | - | 124,600 |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | - | - | - | (1,385,600) | - | - | (1,385,600) |
| Stock-based compensation expense | - | - | - | - | - | - | - | - | - | - | 2,306,100 | - | - | 2,306,100 |
| Sale of common stock pursuant to 2019 Employee Stock Purchase Plan | - | - | - | - | - | - | - | - | 58,125 | 100 | 26,100 | - | - | 26,200 |
| Issuance of common stock upon cashless exercise of stock options | - | - | - | - | - | - | - | - | 222,004 | 200 | (200) | - | - | - |
| Net proceeds from exercise of stock options for cash | - | - | - | - | - | - | - | - | 30,000 | - | 36,500 | | | 36,500 |
| Issuance of common stock at fair value for professional services | - | - | - | - | - | - | - | - | 233,645 | 200 | 124,800 | - | - | 125,000 |
| Beneficial conversion feature on Series D Preferred stock | - | - | - | - | - | - | - | - | - | - | 23,000,000 | - | - | 23,000,000 |
| Deemed dividend from beneficial conversion feature of Series D Preferred Stock | - | - | - | - | - | - | - | - | - | - | (23,000,000) | - | - | (23,000,000) |
| Net loss for the fiscal year ended March 31, 2021 | - | - | - | - | - | - | - | - | - | - | | - | (17,934,200) | (17,934,200) |
| | | | | | | | | | | | | | | |
| Balances at March 31, 2021 | 500,000 | $500 | 1,131,669 | $1,100 | 2,318,012 | $2,300 | 402,149 | $400 | 180,751,234 | $180,800 | $315,603,100 | $(3,968,100) | $(219,841,600) | $91,978,500 |
See accompanying notes to consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business Overview
VistaGen Therapeutics, Inc., a Nevada corporation(which may be referred to asVistaGen, theCompany,we,our, orus),isa biopharmaceutical company committed to developing and commercializing differentiated new generation medications that go beyond the current standard of care for widespread anxiety, depression and other central nervous system (CNS) disorders. Our CNS pipeline includes three CNS product candidates, PH94B Nasal Spray, PH10 Nasal Spray and AV-101, each with a differentiated profile, favorable safety results observed in all clinical studies to date and therapeutic potential in multiple CNS indications. PH94B Nasal Spray (PH94B) is being developed for multiple anxiety disorders. We recently initiated our PH94B Phase 3 development program, which we refer to as the PALISADE program, with PALISADE-1, a U.S., multi-center, randomized, double-blind, placebo-controlled Phase 3 clinical study to evaluate the efficacy and safety of PH94B for the acute treatment of anxiety in adults with social anxiety disorder (SAD), as well as preparations for the additional studies required to support our potential U.S. New Drug Application (NDA) for that indication should the PALISADE Phase 3 program be successful. We are also preparing for exploratory Phase 2A clinical studies of PH94B in adults experiencing several other anxiety disorders. PH10 Nasal Spray (PH10) is being developed as a stand-alone treatment for multiple depression disorders. Exploratory Phase 2A clinical development of PH10 for major depressive disorder (MDD) has been completed. We are now preparing for planned Phase 2B clinical development of PH10 for this indication. We are preparing for a Phase 1B clinical study of AV-101 in combination with probenecid to assess potential future Phase 2A clinical development of the combination for MDD or certain neurological indications. Our goal is to become a biopharmaceutical company that develops and commercializes innovative CNS therapies for highly prevalent neuropsychiatry and neurology indications where current treatments options are inadequate to meet the needs of millions of patients in markets worldwide.
Our Product Candidates
PH94B is a synthetic investigational neurosteroid developed from proprietary compounds called pherines. With its novel mechanism of action, PH94B is an odorless nasal spray administered at microgram-level doses to achieve rapid-onset anti-anxiety, or anxiolytic, effects. The pharmacological activity of PH94B is fundamentally differentiated from that of all FDA-approved anti-anxiety drugs, including all antidepressants approved by the U.S. Food and Drug Administration (FDA) for treatment of SAD, as well as all benzodiazepines and beta blockers prescribed on an off-label basis. PH94B engages peripheral chemosensory receptors in nasal passages that trigger a subset of neurons in the main olfactory bulbs (OB) at the base of the brain. The OB neurons then stimulate inhibitory GABAergic neurons in the limbic amygdala, decreasing the activity of the sympathetic nervous system, and facilitating fear extinction activity of the limbic-hypothalamic system, the main fear and anxiety center in the brain, as well as in other parts of the brain. Importantly, PH94B does not require systemic uptake and distribution to produce its rapid-onset anti-anxiety effects. Our ongoing PALISADE Phase 3 program for PH94B is designed to further demonstrate its potential as a fast-acting, non-sedating, non-addictive acute treatment of anxiety in adults with SAD. We believe PH94B also has potential to be developed as a novel treatment for adjustment disorder with anxiety, postpartum anxiety, post-traumatic stress disorder, procedural anxiety, panic and other anxiety disorders. PH94B has been granted Fast Track designation status by the FDA for development for the acute treatment of SAD.
PH10 is a synthetic investigational neurosteroid, which also was developed from proprietary compounds called pherines. Its novel, rapid-onset mechanism of action (MOA) is fundamentally differentiated from the MOA of all current treatments for MDD and other depression disorders. PH10 is self-administered at microgram-level doses as an odorless nasal spray. PH10 activates nasal chemosensory cells in the nasal passages, connected to neural circuits in the brain that produce antidepressant effects. Specifically, PH10 engages peripheral chemosensory receptors in the nasal passages that trigger a subset of neurons in the main OB that stimulate neurons in the limbic amygdala. This is turn increases activity of the limbic-hypothalamic sympathetic nervous system and increases the release of catecholamines. Importantly, unlike all currently approved oral antidepressants (ADs), PH10 does not require systemic uptake and distribution to produce rapid-onset of antidepressant effects. In all clinical studies to date, PH10 has not caused psychological side effects (such as dissociation and hallucinations) or safety concerns that may be associated with rapid-onset ketamine-based therapy (KBT), including intravenous ketamine or intranasal ketamine (esketamine). We believe PH10 has potential to be a new stand-alone treatment for MDD and several other depression disorders.
AV-101 (4-Cl-KYN) targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. AV-101 is an oral prodrug of 7-chloro-kynurenic acid (7-Cl-KYNA), which is a potent and selective full antagonist of the glycine co-agonist site of the NMDAR that inhibits the function of the NMDAR. However, unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. At doses administered in all studies to date, AV-101 has been observed to be well tolerated and has not exhibited dissociative or hallucinogenic psychological side effects or safety concerns. In light of these observations and findings from preclinical studies, we believe that AV-101, in combination with FDA-approved probenecid, has potential to become a new oral treatment alternative for certain CNS indications involving the NMDAR. We are currently preparing to evaluate AV-101 in combination with probenecid in a Phase 1B clinical study. The FDA has granted Fast Track designation for development of AV-101 as a potential adjunctive treatment for MDD and as a non-opioid treatment for neuropathic pain (NP).
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subsidiaries
VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem (VistaStem),is our wholly-owned subsidiary. Our Consolidated Financial Statements in this Annual Report on Form 10-K (Annual Report) also include the accounts of VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.
2. Basis of Presentation and Going Concern
The accompanying Consolidated Financial Statements have been prepared assuming that we will continue as a going concern. As a clinical-stage biopharmaceutical company having not yet developed commercial products or achieved sustainable revenues, we have experienced negative cash flows from operations and recurring losses resulting in a deficit of $242.8 million accumulated from inception (May 1998) through March 31, 2021. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of PH94B, PH10 and AV-101.
Since our inception in May 1998 through March 31, 2021, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $197.8 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments, intellectual property licensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.2million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Recent Developments
As described more completely in Note 9,Capital Stock, in December 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (the December 2020 Public Offering), 63,000,000 shares of our common stock at a public offering price of $0.92 per share and 2,000,000 shares of a newly issued series of convertible preferred stock (Series D Preferred) and, together with the common stock, the Securities) at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100 million. Net proceeds to us from the securities sold in the December 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, was approximately $93.6 million.
As also described more completely in Note 9,Capital Stock, in August 2020, we entered into an underwriting agreement (the August 2020Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares of our common stock at a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. Under the terms of the August 2020 Underwriting Agreement, we granted to the underwriter an over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 shares of common stock at a public offering price of $0.80 per share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 shares (theExercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Aggregate net proceeds to us from the August 2020 Public Offering, after deducting underwriting discounts and commissions and offering expenses payable by us, were approximately $12.9 million.
As more completely described in Note 12,Licensing, Sublicensing and Collaboration Agreements, in June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders (theEverInsight Agreement), with EverInsight Therapeutics Inc., (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia, and funded by CBC Group, a global healthcare-focused venture capital firm. Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, also funded by CBC Group, which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the terms of the AffaMed Agreement, AffaMed agreed to make a non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment for consulting services related to the AffaMed Agreement.
Additionally, as described in Note 9,Capital Stock, on March 24, 2020, we entered into a purchase agreement and a registration rights agreement with Lincoln Park Capital Fund (Lincoln Park) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (theLPC Agreement). To satisfy our obligations under the registration rights agreement, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the Securities and Exchange Commission (theSEC) on March 31, 2020, which the SEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the LPC Registration Statement and through July 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200. We have not sold any shares of our common stock pursuant to the Lincoln Park Agreement since July 2020.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As also described in Note 9,Capital Stock, between December 2020 and March 31, 2021, certain holders of outstanding warrants exercised such warrants to purchase an aggregate of 6,396,302 shares of our common stock and we received cash proceeds of $4,924,800 from such exercises. As disclosed in Note 16,Subsequent Events, since March 31, 2021, holders of outstanding warrants have exercised warrants to purchase an additional 1,508,768 shares of our common stock and we have received cash proceeds of approximately $1,105,700.
Liquidity and Capital Resources
During the fiscal year ended March 31, 2021, we received approximately $119 million in net cash proceeds from the transactions described above. At March 31, 2021, we had cash and cash equivalents of approximately $103.1 million, which we believe is sufficient to fund our planned operations for well beyond the twelve months following the issuance of these financial statements, and indicating our ability to continue as a going concern. Nevertheless, we have not yet developed products that generate recurring revenue and, assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.
During the next twelve months, we plan to (i) continue PALISADE-1 and prepare for and initiate multiple studies in our PALISADE Phase 3 program for development and commercialization of PH94B as an acute treatment of anxiety in adult patients with SAD, (ii) prepare for and initiate multiple small exploratory Phase 2A studies of PH94B in additional anxiety disorders, (iii) prepare for and initiate a Phase 2B clinical study of PH10 as a potential stand-alone treatment for MDD, (iv) prepare for and initiate a Phase 1B clinical study of AV-101 in combination with probenecid to enable assessment of potential exploratory Phase 2A development of the combination in MDD and certain neurological disorders, and (v) conduct nonclinical studies involving PH94B, PH10 and AV-101.
Although we believe our current cash position is sufficient to fund our planned operations for more than the next twelve months following the issuance of this Annual Report, when necessary and advantageous, we may raise additional capital through the sale of our equity securities in one or more (i) public offerings (ii) private placements to accredited investors, and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the AffaMed Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-254299) (theS-3 Registration Statement), which became effective on March 26, 2021, remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement and the Bayer Agreement (defined in Note 12, below) to provide funding, including non-dilutive funding, for development of one or more of our CNS product candidate programs. We may also seek additional government grant awards or agreements similar to our prior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the AffaMed Agreement and the Bayer Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of our product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.
Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the current COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract manufacturing, research and development, investor and public relations, business development, legal, intellectual property acquisition and protection, public company compliance and other professional services and operating costs.
Notwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the AffaMed Agreement and/or the Bayer Agreement will generate revenue from future potential milestone payments, or that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain additional financing on a timely basis when needed, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, those relating to stock-based compensation, revenue recognition, research and development expenses, determination of right of use assets under lease transactions and related lease obligations, and the assumptions used to value warrants, warrant modifications and useful lives for property and equipment and related depreciation calculations.
Principles of Consolidation
The accompanying consolidated financial statements include the Company’s accounts, VistaStem’s accounts and the accounts of VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neurosciences and VistaStem Canada. All material intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are considered to be highly liquid investments with maturities of three months or less at the date of purchase.
Property and Equipment
Property and equipment is stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of laboratory, information technology and office equipment range from three to seven years; the estimated useful lives of manufacturing equipment ranges from five to ten years. Leasehold improvements are amortized over the shorter of the lease term or the useful life of the improvements.
Impairment of Long-Lived Assets
Our long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, we have not recorded any impairment losses on long-lived assets.
Deferred Offering Costs
Deferred offering costs are expenses directly related to our current S-3 Registration Statement (theShelf Registration), which became effective on March 26, 2021, and expenses transferred from our predecessor registration statement on Form S-3, and the LPC Registration Statement which became effective on April 14, 2020. These costs consist of legal, accounting, printing, SEC filing fees, and, as appropriate, Nasdaq filing fees, and, in the case of the LPC Registration Statement, the issuance-date fair value of certain shares of our common stock issued to Lincoln Park under the terms of the LPC Agreement. Deferred costs associated with the Shelf Registration are reclassified to additional paid-in capital on a pro-rata basis as we complete offerings under the S-3 Registration Statement, with any remaining deferred costs to be charged to results of operations at the end of the three-year life of the S-3 Registration Statement. During the fiscal years ended March 31, 2021 and 2020, we charged deferred offering costs of $15,800 and $300, respectively, to additional paid-in capital as a result of offerings under the Shelf Registration. Deferred costs associated with the LPC Registration Statement are reclassified to additional paid-in capital on a pro-rata basis as we complete sales of our common stock pursuant to the LPC Agreement, with any remaining deferred costs to be charged to results of operations at the end of the two-year life of the LPC Agreement. We charged deferred offering costs of $94,400 and $8,100 to additional paid-in capital during the fiscal years ended March 31, 2021 and 2020, respectively, as a result of sales of our common stock under the LPC Agreement.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
Our primary source of revenue for the fiscal year ended March 31, 2021 is from the AffaMed Agreement involving clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD, and potentially other anxiety-related disorders, in Greater China, South Korea, and Southeast Asia. The terms of the AffaMed Agreement include a $5.0 million non-refundable upfront license fee which we received in August 2020, potential payments based upon achievement of certain development and commercial milestones, and royalties on product sales. We have historically generated revenue principally from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants. We adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments, collectively referred to as ASC (Accounting Standards Codification) Topic 606, as of April 1, 2018, using the modified retrospective transition method. We did not recognize any revenue under the Bayer Agreement (defined in Note 12) which we entered in our fiscal year ended March 31, 2017, in the fiscal years ended March 31, 2021 or 2020. Upon adoption of ASC Topic 606, there was no change to the units of accounting previously identified with respect to the Bayer Agreement under legacy GAAP, which are now considered performance obligations under ASC Topic 606, and there was no change to the revenue recognition pattern for the performance obligation. Accordingly, there was no cumulative effect change to our opening accumulated deficit upon the adoption of ASC Topic 606.
Under ASC Topic 606, we recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to a customer.
Once a contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess whether these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or as a continuation of the contract for accounting purposes.
We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires judgments about the individual promised goods or services and whether such are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, we are required to combine that good or service with other promised goods or services until we identify a bundle of goods or services that is distinct.
The transaction price is then determined and allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and satisfaction of the performance obligations. Determining the SSP for performance obligations requires significant judgment. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant Company-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. In certain circumstances, we may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations.
If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.
In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensee and the transfer of the promised goods or services to the licensee will be one year or less. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.
We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time, based on the use of an output or input method.
Research and Development Expenses
Research and development expenses are composed of both internal and external costs. Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with clinical and nonclinical development of PH94B, PH10 and AV-101, stem cell research and development costs, and costs related to the application and prosecution of patents related to AV-101 and our stem cell technology platform. All such costs are charged to expense as incurred.
We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by contract research organizations (CROs) and clinical trial sites. Progress payments are generally made to CROs, clinical sites, investigators and other professional service providers. We analyze the progress of the clinical trial, including levels of subject enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to research and development expense in the period in which the facts that give rise to the revision become known.
Costs incurred in obtaining product or technology licenses are charged immediately to research and development expense if the product or technology licensed has not achieved regulatory approval or reached technical feasibility and has no alternative future uses. In September 2018, we acquired an exclusive license to develop and commercialize PH94B and an option to acquire a license to develop and commercialize PH10 by issuing an aggregate of 1,630,435 unregistered shares of our common stock having a fair market value of $2,250,000. In October 2018, we exercised our option to acquire an exclusive license to develop and commercialize PH10 by issuing 925,926 shares of our unregistered common stock having a fair market value of $2,000,000. Since, at the date of each acquisition, neither product candidate had achieved regulatory approval and each required significant additional development and expense, we recorded the costs related to acquiring the licenses and the option as research and development expense.
Stock-Based Compensation
We recognize compensation cost for all stock-based awards to employees and non-employee consultants based on the grant date fair value of the award. We record stock-based compensation expense over the period during which the employee or other grantee is required to perform services in exchange for the award, which generally represents the scheduled vesting period. We have not granted restricted stock awards to employees or consultants nor do we have any awards with market or performance conditions. Prior to our April 1, 2019 adoption of ASU 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07), we historically re-measured the fair value of option grants to non-employees as they vested and any resulting increase in value was recognized as an expense during the period over which the services were performed. Under ASU 2018-17, expense recognition for grants to non-employees now follows the same methodology as for employees. Noncash expense attributable to compensatory grants of our common stock to non-employees is determined by the quoted market price of the stock on the date of grant and is either recognized as fully-earned at the time of the grant or expensed ratably over the term of the related service agreement, depending on the terms of the specific agreement.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
We account for income taxes using the asset and liability approach for financial reporting purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce the deferred tax assets to an amount expected to be realized.
Right of Use Assets and Operating Lease Obligations
We adopted Accounting Standards Update No. 2016-02, “Leases (Topic 842)”(ASU 2016-02) effective April 1, 2019. ASU 2016-02 requires that we determine, at the inception of an arrangement, whether the arrangement is or contains a lease, based on the unique facts and circumstances present. Operating lease assets represent our right to use an underlying asset for the lease term (Right of use assets) and operating lease liabilities represent our obligation to make lease payments arising from the lease. Right of use assets and operating lease liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain, at inception, that we will exercise that option. The interest rate implicit in lease contracts is typically not readily determinable; accordingly, we use our incremental borrowing rate, which is the rate that would be incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment, based upon the information available at the commencement date. The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation, when determinable, and are recognized in determining our Right of use assets. Our operating lease is reflected in the Right-of-use asset – operating lease; Operating lease obligation - current portion; and Operating lease obligation - non-current portion in our consolidated balance sheets.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. As a result of our adoption of ASU 2016-02, we no longer recognize deferred rent on the consolidated balance sheet. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease. Variable lease payments are amounts owed by us to a lessor that are not fixed, such as reimbursement for common area maintenance costs for our facility lease; and are expensed when incurred.
Financing leases, formerly referred to as capitalized leases, are treated similarly to operating leases except that the asset subject to the lease is included in the appropriate fixed asset category, rather than recorded as a Right of use asset, and depreciated over its estimated useful life, or lease term, if shorter.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents. Our investment policies limit any such investments to short-term, low-risk instruments. We deposit cash and cash equivalents with quality financial institutions which are insured to the maximum of federal limitations. Balances in these accounts may exceed federally insured limits at times.
Fair Value Measurements
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. When applicable, we follow the principles of fair value accounting as they relate to our financial assets and financial liabilities. Fair value is defined as the estimated exit price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, rather than an entry price that represents the purchase price of an asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on several factors, including the instrument’s complexity. The required fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described as follows:
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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.
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Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 — Unobservable inputs (i.e.,inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific financial instrument, then we estimate fair value by using pricing models, quoted prices of financial instruments with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to valuation, financial assets or liabilities are classified as Level 3 within the valuation hierarchy.
We carried no assets or liabilities that are measured on a recurring basis at fair value at March 31, 2021 or 2020.
Warrants Issued in Connection with Equity Financing
We generally account for warrants issued in connection with equity financings as a component of equity, unless there is a deemed possibility that we may have to settle the warrants in cash or the warrants contain other features requiring them to be treated as liabilities. For warrants issued with the possibility of cash settlement, or otherwise requiring liability treatment, we record the fair value of the issued warrants as a liability at each reporting period and record changes in the estimated fair value as noncash gain or loss in the Consolidated Statements of Operations and Comprehensive Loss.
Comprehensive Loss
We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.
Loss per Common Share Attributable to Common Stockholders
Basic net loss attributable to common stockholders per share of common stock excludes the effect of dilution and is computed by dividing net loss increased by the accrual of dividends on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred) for the fiscal years ended March 30, 2021 and 2020, respectively, and, in the fiscal year ended March 31, 2021, by the beneficial conversion feature related to our Series D Convertible Stock (Series D Preferred), as described in Note 9, Capital Stock, by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net loss attributable to common stockholders per share, we have generally not increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method because the result is antidilutive.
As a result of our net loss for both years presented, potentially dilutive securities were excluded from the computation of diluted loss per share, as their effect would be antidilutive.
Basic and diluted net loss attributable to common stockholders per share was computed as follows:
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Numerator: | | |
| Net loss attributable to common stockholders for basic and diluted earnings | | |
| pershare | $(42,319,800) | $(22,037,600) |
| | | |
| Denominator: | | |
| Weighted average basic and diluted common shares outstanding | 86,133,644 | 43,869,523 |
| | | |
| | | |
| Basic and diluted net loss attributable to common stockholders per common share | $(0.49) | $(0.50) |
| | | |
Potentially dilutive securities excluded in determining diluted net loss per common share for the fiscal years ended March 31, 2021 and 2020 are as follows:
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | |
| | | |
| | | |
Series A Preferred stock issued and outstanding (1) | 750,000 | 750,000 |
| | | |
Series B Preferred stock issued and outstanding (2) | 1,131,669 | 1,160,240 |
| | | |
Series C Preferred stock issued and outstanding (3) | 2,318,012 | 2,318,012 |
| | | |
Series D Preferred stock issued and outstanding (4) | 402,149 | - |
| | | |
| Outstanding options under the Company's Amended and Restated 2016 (formerly 2008) Stock Incentive Plan and 2019 Omnibus Equity Incentive Plan | 14,638,088 | 10,003,088 |
| | | |
| Outstanding warrants to purchase common stock | 19,362,532 | 26,555,281 |
| | | |
| Total | 38,602,450 | 40,786,621 |
| ____________ | | |
(1)Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement, as amended. |
(2)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015; excludes shares of unregistered common stock issuable in payment of dividends on Series B Preferred upon conversion. |
(3)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016. |
(4)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series D Convertible Preferred Stock, effective December 21, 2020. |
| | |
Recent Accounting Pronouncements
We believe the following recent accounting pronouncements or changes in accounting pronouncements are of significance or potential significance to the Company.
In August 2020, the Financial Accounting Standards Board (FASB) issued ASU 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), to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.
The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives.
In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract.
The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.
The amendments in ASU 2020-06 are effective for our fiscal year beginning April 1, 2024. We are evaluating the impact of this new guidance, but do not believe that our adoption of ASU 2020-06 will have a material impact on our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities4. Receivable from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (ASU 2017-11). Part I of this ASU provides that an entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked financial instrument, such as a free-standing warrant, or an embedded feature, such as a conversion option in a convertible instrument, that reduces the exercise price of such instrument if the entity subsequently sells stock for a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments or embedded features are indexed to its own stock. The definition of a down round feature in ASU 2017-11 excludes standard antidilution provisions related to changes in an entity’s capital structure. Accounting Standards Codification Topic 815-40, “Derivatives and Hedging–Contracts in Entity’s Own Equity” (ASC 815-40) requires that a freestanding equity-linked financial instrument be indexed to the issuer’s own stock to be classified as equity. An equity-linked embedded feature that meets the definition of a derivative may avoid bifurcation and derivative accounting if it is indexed to the issuer’s own stock. Under the terms of prior guidance, a freestanding financial instrument or embedded feature was not considered indexed to the issuer’s own stock if it had a down round provision. Consequently, the freestanding financial instrument was classified as a liability (or asset), and if it met the definition of a derivative, was measured at fair value with changes in fair value recorded through earnings. Similarly, an embedded feature was bifurcated and separately accounted for as a derivative if it met all other criteria for bifurcation under ASC 815-40. The bifurcated embedded feature was also measured at fair value through earnings. Under the provisions of ASU 2017-11, an entity that presents earnings per share (EPS) under Accounting Standards Codification Topic 260, “Earnings Per Share” will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The new guidance requires new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. Part I of ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods therein, however early adoption is permitted. We early-adopted ASU 2017-11 effective for the quarter ended September 30, 2017 and applied its guidance to certain of the warrants issued in the September 2017 Public Offering, as described more completely in Note 7, Capital Stock. No retrospective adjustments to our financial statements were required as a result of our adoption of ASU 2017-11.Collaboration Partner
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), to provide guidance on revenue recognition. In August 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue onThis amount reflects a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic 606, which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASC Topic 606 defines a five-step process to achieve this core principal which may require entities to use more judgment and make more estimates than under legacy guidance. These estimates and judgments include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinct performance obligation. ASC Topic 606 is effective for our fiscal year beginning April 1, 2018. We will adopt ASC Topic 606 as of April 1, 2018, using the modified retrospective transition method, applying the new guidance to the most current period presented. We currently have only the BlueRock Agreement as a potential revenue generating arrangement. Upon adoption of ASC Topic 606,payment we anticipate no change to the units of accounting previously identified with respect to that contract under legacy GAAP, which are now considered performance obligations under ASC Topic 606, and there was no change to the revenue recognition pattern for the performance obligation. Accordingly, we do not expect the adoption of the new standard to result in a cumulative effect change to our opening accumulated deficit balance.
In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which will replace the existing guidance in ASC 840, Leases, and which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both partiesmade to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases basedmanufacturing organization for certain drug substance manufacturing services on behalf of our collaboration partner. Our collaboration partner reimbursed us for the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the current guidance for operating leases. This standard will become effective for our fiscal year beginning April 1, 2019, with early adoption permitted. We expect to adopt the standard as of April 1, 2019, and are evaluating the expected impact of this new guidance on our consolidated financial statements.payment in May 2021.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting which includes multiple provisions intended to simplify several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. We adopted the standard effective for our fiscal year beginning April 1, 2017. Our adoption of this ASU did not have a material impact on our consolidated financial statements.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued ASU 2017-09,Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting, to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and after the change of terms and conditions:
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The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used),
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The award’s vesting conditions, and
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The award’s classification as an equity or liability instrument.
ASU 2017-09 is effective for our fiscal year beginning April 1, 2018 and is to be applied prospectively to awards modified on or after the adoption date. We do not believe that our adoption of ASU 2017-09 will have a material effect on our results of operations, financial condition or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The standardreduces the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance addresses the following eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transitions and (8) separately identifiable cash flows and application of predominance principle. The guidance is effective for our fiscal year beginning April 1, 2018 and requires retrospective adoption. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash that changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents must be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for our fiscal year beginning April 1, 2018. As we do not currently have restricted cash or restricted cash equivalents, we do not believe that the adoption of this ASU will have a material impact on our consolidated financial statements.
4.5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consistconsists of the following:
| | | |
| | | | | |
| | | |
| AV-101 materials and services | $505,900 | $352,800 | |
| Clinical and nonclinical materials and contract services | | $686,900 | $115,200 |
| Insurance | 88,300 | 85,800 | 121,800 | 107,200 |
| Public offering filing fees and expenses | 25,900 | 11,600 | |
| All other | 24,700 | 6,400 | 26,400 | 2,700 |
| | | $835,100 | $225,100 |
| | $644,800 | $456,600 | |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5.6. Property and Equipment
Property and equipment consists of the following:
| | | |
| | | | | |
| | | |
| Laboratory equipment | $888,300 | $937,400 | $892,500 |
| Tenant improvements | 26,900 | 214,400 |
| Computers and network equipment | 54,600 | 53,000 | |
| Information technology equipment | | 73,900 | 54,600 |
| Office furniture and equipment | 79,700 | 84,600 |
| Manufacturing equipment | | 211,200 | - |
| | 1,049,500 | 1,047,900 | 1,521,500 | 1,246,100 |
| | | |
| Accumulated depreciation and amortization | (842,100) | (761,400) | (1,154,100) | (1,036,500) |
| | | |
| Property and equipment, net | $207,400 | $286,500 | $367,400 | $209,600 |
The following table summarizes depreciation and amortization expense attributable to owned and leased property and equipment for the fiscal years ended March 31, 20182021 and 2017:2020:
| | | Fiscal Years Ended March 31, |
| | Fiscal Years Ended March 31, | | |
| | | | |
| Owned assets | $77,800 | $53,100 | $114,600 | $100,200 |
| 2,900 | 1,800 | 3,000 | 2,900 |
Total depreciation and amortization | $80,700 | $54,900 | $117,600 | $103,100 |
The amount reported above for manufacturing equipment at March 31, 2021 reflects the cost of certain process equipment acquired in connection with the manufacture of PH94B drug product and placed in service in the fourth quarter of the fiscal year ended March 31, 2021. Included in amounts reported above for office furniture and equipment is the right-of-use asset related to a financing lease of certain office equipment. Amounts associated with assets subject to the financing lease at March 31, 2021 and 2020 are as follows:
| | | |
| | | |
| | | |
| Office equipment subject to financing lease | $14,700 | $14,700 |
| Accumulated depreciation | (12,400) | (9,400) |
| | | |
| Net book value of office equipment subject to | | |
| financing lease | $2,300 | $5,300 |
Other than certain leased office equipment, none of our assets were subject to third party security interests at March 31, 20182021 or 2017.
6. Accrued Expenses
Accrued expenses consist of:
| | |
| | | |
| | | |
| Accrued AV-101 development and related expenses | $176,600 | $402,400 |
| Accrued professional services | 27,000 | 37,000 |
| All other | 2,700 | 3,600 |
| | | |
| | $206,300 | $443,000 |
| | | |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accrued Expenses
Accrued expenses consist of:
| | | |
| | | |
| | | |
| Accrued expenses for clinical and nonclinical | | |
| materials, development and contract services | $1,449,400 | $462,300 |
| Accrued professional services | 85,500 | 76,500 |
| All other | 27,800 | 22,700 |
| | $1,562,700 | $561,500 |
8. Notes Payable
The following table summarizes our notes payable:
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| 7.15% (2018) and 8.25% (2017) Notes payable | | | | | | |
| to insurance premium financing company (current) | $53,900 | $- | $53,900 | $54,800 | $- | $54,800 |
| | | | | | | |
| Total notes payable to unrelated parties | $53,900 | $- | $53,900 | $54,800 | $- | $54,800 |
| less: current portion | (53,900) | - | (53,900) | (54,800) | - | (54,800) |
| Net non-current portion | $- | $- | $- | $- | $- | $- |
| | | |
| | | | | | | |
| | | | | | | |
| 7.30% Note payable to insurance premium financing company (current) | $- | $- | $- | $56,500 | $- | $56,500 |
In May 2017,February 2020, we executed a 7.30% promissory note in the faceprincipal amount of $142,400$62,600 in connection with certain insurance policy premiums. That note was payable in monthly installments of $6,500, including principal and interest, through December 2020 and was fully paid at March 31, 2021. In May 2020, we executed a 6.30% promissory note in the principal amount of $322,200 in connection with other insurance policy premiums. The note was payable in monthly installments of $14,800,$33,200, including principal and interest, through March 2018, when it2021, and was fully paid in full. In February 2018, we executed a promissory note in the face amount of $59,700 in connection with other insurance policy premiums. The note is payable in monthly installments of $6,200, including principal and interest, through December 2018, and has an outstanding balance of $53,900 at March 31, 2018.2021.
8.In April 2020, we entered into a note payable agreement (thePPP Loan Agreement) with Silicon Valley Bank as lender (theLender), pursuant to which we received net proceeds of $224,400 from a potentially forgivable loan from the U.S. Small Business Administration (SBA) pursuant to the Paycheck Protection Program (PPP) enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act (theCARES Act) administered by the SBA (thePPP Loan). In accordance with its terms, the PPP Loan was to mature on April 22, 2022. The PPP Loan accrued interest at a rate of 1.00% per annum throughout the period it was outstanding. The CARES Act provided that all or a portion of the PPP Loan might be forgiven upon our request to the Lender, subject to requirements in the PPP Loan Agreement and the CARES Act. While we believe our use of the PPP Loan proceeds met all of the conditions for forgiveness under the PPP, following the completion of the December 2020 Public Offering, on December 23, 2020, we voluntarily repaid in full the outstanding principal balance of the PPP Loan, $224,400, plus accrued interest of approximately $1,500.
9. Capital Stock
Common Stock
At our AnnualSpecial Meeting of Stockholders on September 15, 2017,March 5, 2021, as approved by and recommended to our stockholders by our Board, of Directors (Board), our stockholders approved an amendment to our Restated and Amended Articles of Incorporation to increase the authorized number of shares of common stock that we may issue from 30.0175.0 million shares to 100.0325.0 million shares. The amendment became effective on September 15, 2017,March 5, 2021, upon our filing of a certificate of amendment with the Nevada Secretary of State. Previously, at our Annual Meeting of Stockholders on September 5, 2019, as approved by and recommended to our stockholders by our Board, our stockholders approved an amendment to our Restated Articles of Incorporation to increase the authorized number of shares of common stock that we may issue from 100.0 million shares to 175.0 million shares. The amendment became effective on September 6, 2019, upon our filing of a certificate of amendment with the Nevada Secretary of State. In connection with an underwritten public offering of our common stock and warrants in May 2016, our common stock was approved for listing on the Nasdaq Capital Market. Our common stock has traded on the Nasdaq Capital Market under the symbol “VTGN” since May 11, 2016.
Series A Preferred Stock
In December 2011, our Board authorized the creation of a series of up to 500,000 shares of Series A Preferred, par value $0.001 (Series A Preferred). ��Each restricted share of Series A Preferred is currently convertible at the option of the holder into one and one-half restricted shares of our common stock. The Series A Preferred ranks prior to the common stock for purposes of liquidation preference.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series A Preferred has no separate dividend rights, however, whenever the Board declares a dividend on the common stock, each holder of record of a share of Series A Preferred shall be entitled to receive an amount equal to such dividend declared on one share of common stock multiplied by the number of shares of common stock into which such share of Series A Preferred could be converted on the Record Date.applicable record date.
Except with respect to transactions upon which the Series A Preferred shall be entitled to vote separately as a class, the Series A Preferred has no voting rights. The restricted common stock into which the Series A Preferred is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding shares of our common stock.
In the event of the liquidation, dissolution or winding up of our affairs, after payment or provision for payment of our debts and other liabilities, the holders of Series A Preferred then outstanding shall be entitled to receive distributions out of our assets, if any, an amount per share of Series A Preferred calculated by taking the total amount available for distribution to holders of all of our outstanding common stock before deduction of any preference payments for the Series A Preferred, divided by the total of (x), all of the then outstanding shares of our common stock, plus (y) all of the shares of our common stock into which all of the outstanding shares of the Series A Preferred can be converted before any payment shall be made or any assets distributed to the holders of the common stock or any other junior stock.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 20182021 and 2017,2020, there were 500,000 restricted shares of Series A Preferred outstanding, convertible into 750,000 shares of our common stock at the option of the two respective holders.
Series B Preferred Stock
In July 2014, our Board authorized the creation of a class of Series B Preferred Stock.Stock, par value $0.001 (Series B Preferred). In May 2015, we filed a Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Preferred Stock of VistaGen Therapeutics, Inc. (Series B Certificate of Designation) with the Nevada Secretary of State to designate 4.0 million shares of our authorized preferred stock as Series B Preferred.
Except with respect to transactions upon which the Series B Preferred shall be entitled to vote separately as a class, the Series B Preferred has no voting rights. The common stock into which the Series B Preferred is convertible shall, upon issuance, have all of the same voting rights as other issued and outstanding shares of our common stock.
Each share of Series B Preferred is convertible, at the option of the holder (Voluntary Conversion), into one (1) share of our Common Stock,common stock, subject to adjustment only for customary stock dividends, reclassifications, splits and similar transactions set forth in the Certificate of Designation. OutstandingAs permitted by the Series B Certificate of Designation, approximately 2.4 million shares of Series B Preferred are also convertiblewere converted automatically on a one-to-one basis into approximately 2.4 million shares of our Common Stockcommon stock following the completion of our underwritten public offering in May 2016, which occurred concurrently with and facilitated the listing of our common stock on the Nasdaq Capital Market (Automatic Conversion) upon the closing or effective date of any of the following transactions or events: (i) a strategic transaction involving AV-101 with an initial up-front cash payment to us of at least $10.0 million; (ii) a registered public offering of our common stock with aggregate gross proceeds to us of at least $10.0 million; or (iii) for 20 consecutive trading days, our common stock trades at least 20,000 shares per day with a daily closing price of at least $12.00 per share; provided, however, that. Both Automatic Conversion and Voluntary Conversion (collectively, Conversion) are subject to certain beneficial ownership blockers as set forth in the Certificate of Designation and/or securities purchase agreements. Following the completion of the May 2016 Public Offering (defined below), which occurred concurrently with and facilitated the listing of our common stock on the NASDAQ Capital Market, approximately 2.4 million shares of Series B Preferred were converted automatically into approximately 2.4 million shares of our common stock pursuant to the Automatic Conversion provision.
Prior to Conversion, shares of Series B Preferred accrue in-kind dividends (payable only in unregistered shares of our common stock) at a rate of 10% per annum (Accrued Dividends). The Accrued Dividends are payable on the date of either a Voluntary Conversion or Automatic Conversion solely in that number of shares of common stock equal to the Accrued Dividends. At March 31, 2018, weWe have recognized a liability in the amount of $2,608,300$6,272,700 for Accrued Dividends in the accompanying Consolidated Balance Sheet at March 31, 2018,2021, based on the Series B Preferred issued and outstanding net of conversions to common stock, through that date. We have recognized a deduction from net loss of $1,030,400$1,385,600 and $1,257,000$1,263,600 related to dividends on Series B Preferred in arriving at net loss attributable to common stockholders in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the fiscal years ended March 31, 20182021 and 2017,2020, respectively.
In the event of the liquidation, dissolution or winding-up of our affairs, after payment or provision for payment of our debts and other liabilities, the Holdersholders of the Series B Preferred then outstanding shall be entitled to receive distributions out of our assets, if any, of an amount equal to the Stated Value of the Series B Preferred ($7.00 per share), plus any accrued and unpaid dividends thereon, before any distribution or payment shall be made to the holders of any junior securities, including holders of our common stock. If our assets are insufficient to pay, in full, such amounts, then the entire assets to be distributed to the holders of the Series B Preferred shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. Upon liquidation, each share of Series B Preferred ranks pari-passu with our Series A Preferred, and our Series C Preferred (definedand Series D Preferred stock (the latter two defined below).The liquidation value of the Series B Preferred at March 31, 20182021 is approximately $10,729,900.
$14,194,400.
AtIn December 2020, an institutional holder of 28,571 shares of our Series B Preferred converted such shares into an equal number of unregistered shares of our common stock. In accordance with the conversion terms of the Series B Preferred, we also issued 160,062 shares of our unregistered common stock in payment of $124,600 of dividends that had accrued on the holder’s Series B Preferred since issuance. Following the conversion, at March 31, 2018 and 2017,2021 there were 1,160,2401,131,669 shares of Series B Preferred outstanding, which shares are currently subject to beneficial ownership blockers and are exchangeable at the option of the two respective holdersholder by Voluntary Conversion or pursuant to Automatic Conversion to the extent not otherwise subject to beneficial ownership blockers, into an aggregate of 1,160,2401,131,669 shares of our common stock.stock, excluding shares of our common stock which may be issued in payment of Accrued Dividends upon conversion.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C Preferred Stock
In January 2016, our Board authorized the creation of and accordingly, we filed a Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock of VistaGen Therapeutics, Inc. (the Series C Preferred Certificate of Designation) with the Nevada Secretary of State to designate 3.0 million shares of our preferred stock, par value $0.001 per share, as Series C Convertible Preferred Stock (Series C Preferred).
In the event of the liquidation, dissolution or winding up of our affairs, after payment or provision for payment of our debts and other liabilities, the holders of Series C Preferred then outstanding shall be entitled to receive, out of our assets, if any, an amount per share of Series C Preferred calculated by taking the total amount available for distribution to holders of all of our outstanding common stock before deduction of any preference payments for the Series C Preferred, divided by the total of (x), all of the then outstanding shares of our common stock, plus (y) all of the shares of our common stock into which all of the outstanding shares of the Series C Preferred can be exchanged before any payment shall be made or any assets distributed to the holders of the common stock or any other junior stock. Upon liquidation, each share of Series C Preferred ranks pari-passu with our Series A Preferred, our Series B Preferred and our Series A Preferred.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each share of Series C Preferred is convertible, at the option of the holder into one share of our common stock, subject to certain beneficial ownership limitations as set forth in the Series C Preferred Certificate of Designation. Shares of the Series C Preferred do not accrue dividends, and holders of the Series C Preferred have no voting rights. At March 31, 20182021 and 2017,2020, one holder and its affiliates held all 2,318,012 outstanding shares of Series C Preferred.
Series BD Preferred UnitStock
On December 17, 2020, in connection with the December 2020 Public Offering (defined below), our Board authorized the creation of a series of up to 2,000,000 shares of Series D Preferred Stock, par value $0.001 (Series D Preferred), which became effective with the filing of a Certificate of Designation of the Relative Rights and Preferences of the Series D Convertible Preferred Stock (Series D Certificate of Designation) with the State of Nevada on December 21, 2020.
Each share of our Series D Preferred is initially convertible into 23 shares of our common stock at any time at the option of the holder, provided that, the Series D Preferred is not convertible prior to the date on which we have received approval from our stockholders to increase the total authorized shares of our common stock by at least an amount necessary to reserve shares sufficient to satisfy our conversion obligations in respect of the Series D Preferred and an amendment to our Restated and Amended Articles of Incorporation reflecting such increase becomes effective (the Approval Date). Additionally, a holder of shares of Series D Preferred will be prohibited, subject to certain exceptions, from converting such shares into shares of our common stock if, as a result of such conversion, the holder, together with its affiliates and other attribution parties, would own more than 9.99% of the total number of shares of our common stock then issued and outstanding, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 19.99% upon 61 days’ prior notice to us.
Prior to the Approval Date, in the event of our liquidation, dissolution, or winding up of the Company’s affairs, holders of Series D Preferred will receive a payment equal to $0.001 per share before any proceeds are distributed to the holders of our common stock. On and after the Approval Date, the Series D Preferred will have no liquidation preference.
Prior to the Approval Date, holders of shares of our Series D Preferred will have one vote per share of Series D Preferred and will vote as a single class with our shares of common stock. On and after the Approval Date, shares of Series D Preferred will generally have no voting rights, except to the extent expressly provided in our Restated and Amended Articles of Incorporation or as otherwise required by law.
For as long as shares of Series D Preferred are outstanding, the affirmative consent of holders of a majority of the outstanding shares of Series D Preferred will be required before we can:
●
amend, alter, modify or repeal (whether by merger, consolidation or otherwise) the Series D Preferred Certificate of Designation, our articles of incorporation or our bylaws in any manner that adversely affects the rights, preferences, privileges or the restrictions provided for the benefit of, the Series D Preferred;
●
issue further shares of Series D Preferred or increase or decrease (other than by conversion) the number of authorized shares of Series D Preferred; or
●
enter into any agreement to do any of the foregoing that is not expressly made conditional on obtaining the affirmative vote or written consent of the requisite holders.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Between May 2015In the event of the liquidation, dissolution or winding up of our affairs, the Series D Preferred ranks senior to any class or series of our capital stock hereafter created specifically ranking by its terms junior to the preferred stock; until the Approval Date, senior to our common stock; on parity with any class or series of capital stock hereafter created specifically ranking by its terms on parity with the preferred stock; and May 2016,junior to any class or series of capital stock hereafter created specifically ranking by its terms senior to the preferred stock.
At the time of its issuance in self-placed private placement transactions,connection with the December 2020 Public Offering (described below), we solddid not have a sufficient number of authorized shares of our common stock to accredited investorspermit the conversion in full of our Series D Preferred and the issuance upon exercise or conversion of all other outstanding series of preferred stock, warrants to purchase common stock or outstanding stock options or shares reserved for issuance of the same. Accordingly, on March 5, 2021, we held a Special Meeting of Stockholders (the Special Meeting) at which our stockholders approved an amendment to our Restated and Amended Articles of Incorporation to increase the number of authorized shares of our common stock from 175 million shares to 325 million shares (the Charter Amendment), an amount sufficient to permit the conversion of all outstanding shares of Series D Preferred. The affirmative vote by a majority of our common stockholders and Series D Preferred holders, voting as a single class, at the Special Meeting constituted the Approval Date noted above.
Following the Special Meeting, between March 12, 2021 and March 31, 2021, holders of an aggregate of $5,303,800 of units in our Series B Preferred Unit Offering, which units consisted of Series B Preferred and Series B Warrants (togetherSeries B Preferred Units), including $2,650,000 to PLTG. We issued 757,6921,597,851 shares of Series BD Preferred and Series B Warrants to purchase 757,692converted such shares into 36,750,573 registered shares of our common stock. At March 31, 2021, there were 402,149 shares of Series D Preferred outstanding which were convertible into 9,249,427 shares of our common stock. See Note 16, Subsequent Events, for information regarding additional conversions after March 31, 2021.
During our fiscal yearyears ended March 31, 2017,2021 and 2020, we received an aggregate of $278,000completed private placement and public offerings as described below.
Common Stock and Warrants Issued in cash proceeds from ourFall 2019 Private Placement
Between October 30, 2019 and November 7, 2019, in a self-placed private placement and salepursuant to subscription agreements received from certain accredited investors, we sold to such investors units, at a purchase price of 39,174 Series B Preferred Units.$1.00 per unit, consisting of an aggregate of 650,000 unregistered shares of our common stock and warrants, exercisable beginning six months and one day following issuance and through November 1, 2023, to purchase 325,000 unregistered shares of our common stock at an exercise price of $2.00 per share (theFall 2019 Private Placement). We received cash proceeds of $650,000 from the Fall 2019 Private Placement.
TheAs further described below under “Winter 2019 Warrant Modification,” in December 2019, we modified the warrants issued in connection with the Series B Preferred Unit Offering have no anti-dilution or otherFall 2019 Private Placement to (i) reduce the exercise price orfrom $2.00 per share reset features, except as is customary with respect to a change in our capital structure in$0.50 per share and (ii) to allow for the eventwarrants to become immediately exercisable. Further, we issued warrants to purchase an aggregate of a stock split or dividend, and, accordingly, we have accounted for them as equity warrants. We allocated the proceeds from the sale of the Series B Preferred Units sold during our fiscal year ended March 31, 2017 to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. We determined that the fair value of a share of Series B Preferred was equal to the quoted market value of a share325,000 additional shares of our common stock onto the dateparticipants in the Fall 2019 Private Placement (theAdditional Warrants) to increase the number of a Series B Preferred Unit sale. unregistered shares of common stock issuable upon exercise of the warrants from 50% to 100%. The Additional Warrants are immediately exercisable through March 31, 2024 at an exercise price of $0.50 per share.
We calculated the fair value of the Series BAdditional Warrants using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. The table below, also presents the aggregate allocation of the Series B Preferred Unit sales proceeds based on the relative fair values of the Series B Preferred and the Series B Warrantsrecognizing $88,800 as of their respective Series B Preferred Unit sales dates. The difference between the relative fair value per share of the Series B Preferred, approximately $4.20 per share, and its Conversion Price (or stated value) of $7.00 per share represents a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we recognized a deemed dividend in the aggregate amount of $111,100 in arriving at net loss attributable to common stockholders in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2017.
| Unit Warrants | | |
| Weighted Average Issuance Date Valuation Assumptions | Per Share | Aggregate | Aggregate | Aggregate Allocation of Proceeds Based
|
Warrant | | | | Risk free | | | Fair | Fair Value | Proceeds | on Relative Fair Value of: |
Shares | Market | Exercise | Term | Interest | | Dividend | Value of | of Unit | of Unit | | Unit |
| | | | | | | | | | | |
| | | | | | | | | | | | |
| 39,714 | $ 8.45 | $ 7.00 | 5.00 | 1.27% | 78.43% | 0.0% | $ 5.63 | $ 223,500 | $ 278,000 | $ 166,900 | $ 61,100 |
May 2016 Public Offering and Listing of our Common Stock on the NASDAQ Capital Market
Effective on May 16, 2016, we consummated an underwritten public offering of our securities, pursuant to which we issued units consisting of an aggregate of 2,570,040 registered shares of our common stock at a public sales price of $4.24 per share and five-year warrants exercisable at $5.30 per share to purchase an aggregate of 2,705,883 shares of our common stock at a public sales price of $0.01 per warrant share, including shares and warrants issued in June 2016 pursuant to the exercise of the underwriters’ over-allotment option (theMay 2016 Public Offering). We received gross proceeds of approximately $10.9 million and net proceeds of approximately $9.5 million from the May 2016 Public Offering, after deducting underwriters’ commissions and other offering expenses. The warrants issued in the May 2016 Public Offering have no anti-dilution or other exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend, and, accordingly, we have accounted for them as equity warrants.
The securities included in the May 2016 Public Offering were offered, issued and sold under a prospectus filed with the Securities and Exchange Commission (the Commission) pursuant to an effective registration statement (Primary Registration Statement) filed with the Commission on Form S-1 (File No. 333-210152) pursuant to the Securities Act. The Primary Registration Statement was first filed with the Commission on March 14, 2016, and was declared effective on May 10, 2016.
In connection with the completion of our May 2016 Public Offering, NASDAQ approved our common stock for listing on the NASDAQ Capital Market. Our common stock began trading on the NASDAQ Capital Market under the symbol “VTGN” on May 11, 2016.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common Stock and Warrants Issued in September 2017 Public Offering
On September 6, 2017, we completed the September 2017 Public Offering, resulting in gross proceeds of approximately $2.4 million, pursuant to which we offered and sold shares of our common stock and warrants to two of our existing institutional investors. We issued an aggregate of 1,371,430 shares of our common stock, Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 of common stock (collectively, theWarrants), each exercisable for $1.82 per share in the September 2017 Public Offering. The Series A1 Warrants became exercisable by the investors for a five-year period commencing on March 7, 2018, and the Series A2 Warrants were immediately exercisable at any time through September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were offered, issued and sold pursuant to our S-3 Registration Statement (Registration No. 333-215671) that had previously been declared effective by the Commission to cover this and potential future sales of our equity securities in one or more public offerings from time to time. We received net proceeds of approximately $2.0 million from the September 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering.
The Series A1 Warrants to purchase an aggregate of 1,388,931 shares of our common stock issued in the September 2017 Public Offering have no anti-dilution or other exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend, and, accordingly, we have accounted for them as equity warrants. The Series A2 Warrants to purchase an aggregate of 503,641 shares of our common stock contained anti-dilution protection provisions that would take effect upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then-current ($1.82 per share) exercise price of the Series A2 Warrants, with certain exceptions; provided, however, that such anti-dilution protection would terminate automatically on the trading day following the date on which we raised at least $20.0 million in aggregate gross proceeds through one or more issuances of common stock or equity-linked securities. The anti-dilution protection provisions in the Series A2 Warrants constituted a down round feature subject to the guidance in ASU 2017-11. Since the Series A2 Warrants contained no other provisions which required their treatment as liability warrants rather than equity warrants, including exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend and which are also present in the Series A1 Warrants, we also accounted for the Series A2 Warrants as equity warrants. The anti-dilution protection provisions of the Series A2 Warrants were triggered upon our issuance of common stock and warrants in the December 2017 Public Offering (defined below) at a price below the Series A2 Warrants then-current $1.82 per share exercise price.
Common Stock and Warrants Issued in December 2017 Public Offering and Trigger of Anti-Dilution Protection Provisions of Series A2 Warrants Issued in September 2017 Public Offering
On December 13, 2017, we completed the December 2017 Public Offering, resulting in gross proceeds of $15.0 million, pursuant to which we offered and sold shares of our common stock and warrants to purchase shares of our common stock at a combined public offering price of $1.50 per shares and related warrant. We issued an aggregate of 10,000,000 shares of our common stock and warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $1.50 per share (theDecember 2017 Offering Warrants). The common stock and the shares of common stock underlying the December 2017 Offering Warrants issued in the December 2017 Public Offering were offered, issued and sold pursuant to our Registration Statement on Form S-1 (Registration No. 333-221009) that was declared effective by the Commission on December 11, 2017. The December 2017 Offering Warrants are exercisable at any time through December 13, 2022, have no anti-dilution or other exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend, and do not contain any cashless exercise features as long as our Registration Statement on Form S-1 (Registration No. 333-221009) is effective. Accordingly, we accounted for the December 2017 Offering Warrants as equity warrants. We received net proceeds of approximately $13.6 million from the December 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering.
Our sale of units consisting of common stock and warrants in the December 2017 Public Offering at an offering price of $1.50 per unit triggered the anti-dilution provisions of the Series A2 Warrants. In accordance with the anti-dilution terms and formula contained in the Series A2 warrants, the exercise price of the Series A2 Warrants was reduced to $0.001 per share. In December 2017 and January 2018, the holders exercised the reset Series A2 warrants to purchase an aggregate of 503,641 shares of our common stock from which we received nominal cash proceeds. In accordance with the guidance in ASU 2017-11, we recognized the effect of triggering the down round feature as a deemed dividend in our Consolidated Statement of Stockholders’ Equity for the fiscal year ended March 31, 2018 and as an addition to net loss attributable to common stockholders and in our calculation of basic and fully diluted earnings per share in our Consolidated Statement of Operations for the fiscal year ended March 31, 2018.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We calculated the dividend from the trigger of the down round provision feature, $199,200, using the Black Scholes Option Pricing Model and the assumptions indicated in the table below:
| Assumption: | | |
| Market price per share | $1.17 | $1.17 |
| Exercise price per share | $1.82 | $0.001 |
| Risk-free interest rate | 2.09% | 2.09% |
| Remaining contractual term in years | 4.73 | 4.73 |
| Volatility | 97.8% | 97.8% |
| Dividend rate | 0.0% | 0.0% |
| | | |
| Number of warrant shares | 503,641 | 503,641 |
| Fair value per share | $0.77 | $1.17 |
Common Stock and Warrants Issued in Private Placements
During the quarter ended December 31, 2016, in self-placed private transactions, we sold to two individual accredited investors units, at a purchase price of $3.70 per unit, consisting of an aggregate of 67,000 unregistered shares of our common stock and warrants, exercisable through November 30, 2019, to purchase an aggregate of 16,750 unregistered shares of our common stock at an exercise price of $6.00 per share. The purchasers of the units have no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. We received aggregate cash proceeds of $247,900 in connection with this private placement, the entire amount of which was credited to stockholders’ equity.
During the quarter ended March 31, 2017, in a self-placed private transaction, we sold to an accredited investor units, at a purchase price of $2.00 per unit, consisting of an aggregate of 57,250 unregistered shares of our common stock and warrants, exercisable through April 2021, to purchase an aggregate of 28,625 unregistered shares of our common stock at an exercise price of $4.00 per share. The purchaser of the units has no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. We received aggregate cash proceeds of $114,500 in connection with this private placement, the entire amount of which was credited to stockholders’ equity.
During the quarter ended June 30, 2017, in self-placed private placement transactions, we accepted subscription agreements from individual accredited investors, pursuant to which we sold to such investors units, at a weighted average purchase price of $2.00 per unit, consisting of an aggregate of 437,751 unregistered shares of our common stock and warrants, exercisable through April 30, 2021, to purchase an aggregate of 218,875 unregistered shares of our common stock at a weighted average exercise price of $3.99 per share. The purchasers of the units have no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. The warrants are not exercisable until six months and one day following the date of issuance. We received aggregate cash proceeds of $873,300 in connection with these self-placed private placement transactions, and the entire amount of the proceeds was credited to stockholders’ equity.
During the quarter ended September 30, 2017, in a self-placed private placement transaction, we sold to an accredited investor units consisting of 28,572 shares of our unregistered common stock and warrants exercisable through April 30, 2021 to purchase 28,572 unregistered shares of our common stock at an exercise price of $4.00 per share. The purchaser of the units has no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. The warrants are not exercisable until six months and one day following the date of issuance. We received cash proceeds of $50,000 from this sale of our securities, and the entire amount of the proceeds was credited to stockholders’ equity.
During the quarter ended December 31, 2017, in a self-placed private placement transaction, we sold to an accredited investor units consisting of 150,000 shares of our unregistered common stock and warrants exercisable through November 30, 2021 to purchase 150,000 unregistered shares of our common stock at an exercise price of $2.00 per share. The purchaser of the units has no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. The warrants are not exercisable until six months and one day following the date of issuance. We received cash proceeds of $150,000 from this sale of our securities, and the entire amount of the proceeds was credited to stockholders’ equity.
Issuance of Common Stock to Professional Services Providers and in Settlement of Accounts Payable
During our fiscal years ended March 31, 2018 and 2017, we issued the following securities in private placement transactions as compensation for various professional services. Unless otherwise noted, we recorded the related non-cash expense as a component of general and administrative expense in the Consolidated Statement of Operations and Comprehensive Loss for the fiscal years ended March 31, 2018 and 2017, as appropriate.
●
During the quarter ended September 30, 2016, we issued an aggregate of 170,000 shares of our unregistered common stock having an aggregate fair value on the date of issuance of $737,800 as compensation to various professional services providers. Of that amount, we issued 120,000 shares having a fair value of $520,800 on the date of issuance for services to be rendered from October 2016 to December 2016.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●
During the quarter ended December 31, 2016, we issued an aggregate of 135,000 shares of our unregistered common stock having an aggregate fair value on the respective dates of issuance of $479,800 as compensation to various professional services providers.
●
During the quarter ended March 31, 2017, we issued an aggregate of 200,000 unregistered shares of our common stock, of which 150,000 unregistered shares were issued from our 2016 Plan (defined below), having an aggregate fair value of $422,500 on the dates of issuance to various professional services providers.
●
During the quarter ended September 30, 2017, we issued an aggregate of 927,500 unregistered shares of our common stock, of which 477,500 shares were issued from our 2016 Plan, for various professional services, including contract research, legal, investor relations and financial advisory services. The common stock issued had an aggregate fair value of $1,503,600 on the dates issued, of which all but $117,300 has been recognized as noncash expense through March 31, 2018. The un-expensed portion at March 31, 2018, which is included in prepaid expenses in our accompanying Consolidated Balance Sheet, is being recognized in expense ratably through July 2019 in accordance with the terms of work orders for certain contract research services to be provided through that period.
●
During the quarter ended December 31, 2017, we issued an aggregate of 70,000 unregistered shares of our common stock, all of which were issued from our 2016 Plan for additional investor relations and financial advisory services. The common stock issued had an aggregate fair value of $140,800 on the dates issued.
●
During the quarter ended December 31, 2017, we also issued 500,000 unregistered shares of our common stock having a fair value at the time of issuance of $585,000 and a cash payment of $76,500 to our contract manufacturing organization (CMO) in exchange for and settlement of $526,500 of open accounts payable for services provided by the CMO relating to production of AV-101 drug substance. We recognized a corresponding loss on settlement of accounts payable in the amount of $135,000 for the quarter ended December 31, 2017.
●
During the quarter ended March 31, 2018, we issued 30,000 unregistered shares of our common stock to a provider of investor relations and financial advisory services. The common stock issued had an aggregate fair value of $39,000 on the date issued.
Warrant Exchanges into Common Stock
During our fiscal year ended March 31, 2017, we entered into Warrant Exchange Agreements with certain holders of outstanding warrants to purchase an aggregate of 224,693 shares of our common stock pursuant to which the holders agreed to cancel such warrants in exchange for the issuance of an aggregate of 156,246 unregistered shares of common stock.
We accounted for the exchanges of these warrants as warrant modifications, comparing the fair value of the new warrants immediately prior to the exchanges with the fair value of the unregistered common stock issued. We calculated the weighted average fair value of the warrants prior to the respective exchanges using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We determined the post-modification fair value based on the quoted market price of our common stock on the effective date of each exchange and the number of unregistered shares issued in the exchange, as also indicated in the table below. We recognized the incremental fair value of the unregistered common stock issued in excess of the fair value of the warrants cancelled, $350,700, as a component of warrant modification expense which is included in general and administrative expenses in our accompanying Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2017.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Exchanges - FY 2017 |
| | | | | | | | | |
| | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Market Price per share | $8.44 | $8.45 | $3.33 | $3.33 | $4.05 | $4.05 | $3.73 | $3.73 |
| | | | | | | | | |
| Exercise price per share | $7.37 | | $8.00 | | $8.15 | | $10.00 | |
| | | | | | | | | |
| Risk-free interest rate | 1.23% | | 1.10% | | 0.77% | | 0.44% | |
| | | | | | | | | |
| Contractual term (years) | 4.77 | | 4.58 | | 2.40 | | 0.003 | |
| | | | | | | | | |
| Volatility | 79.0% | | 87.0% | | 93.0% | | 100.3% | |
| | | | | | | | | |
| Dividend Rate | 0% | | 0% | | 0% | | 0% | |
| | | | | | | | | |
| Weighted average fair value per share | $5.37 | | $1.64 | | $1.27 | | $- | |
| | | | | | | | | |
| Warrant shares cancelled and exchanged | 41,649 | | 20,000 | | 113,944 | | 49,100 | |
| | | | | | | | | |
| Common shares issued in exchange | | 31,238 | | 15,000 | | 85,458 | | 24,550 |
| | | | | | | | | |
| Fair Value | $223,700 | $264,000 | $32,900 | $50,000 | $144,400 | $346,100 | $- | $91,600 |
| | | | | | | | | |
| Incremental fair value recognized as warrant modification expense | | $40,300 | | $17,100 | | $201,700 | | $91,600 |
Additional Warrant Modifications
In addition to warrants modified in connection with the warrant exchange transactions described immediately above, we modified other outstanding warrants during our fiscal years ended March 31, 2018 and 2017.
In December 2016, our Board authorized the modification of an outstanding warrant to both alter the exercise terms and increase the number of shares for which the warrant was exercisable. We calculated the fair value of the warrant immediately before and after the modification using the Black Scholes Option Pricing Model and the assumptions indicated in the table below. We recognized the incremental fair value, $76,900, as warrant modification expense, included as a component of general and administrative expenses, in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2017.2020.
| Assumption: | |
| Market price per share | $0.44 |
| Exercise price per share | $0.50 |
| Risk-free interest rate | 1.59% |
| Contractual term in years | 4.32 |
| Volatility | 86.64% |
| Dividend rate | 0.0% |
| |
| Number of warrant shares | 325,000 |
| Weighted average fair value per share | $0.27 |
Winter 2019 Warrant Modification
On December 4, 2019, we modified outstanding warrants previously issued as a part of completed private placements to temporarily reduce, for a period of two years or, if sooner, until the expiration of the warrant, the exercise price of such warrants to $0.50 per share, in order to more closely align the exercise price of the warrants with the trading price of our common stock at such time (theWinter 2019 Warrant Modification). Following the two-year period during which the exercise price is reduced, the exercise price of each then-outstanding modified warrant will revert to its pre-modification price. As a result of the Winter 2019 Warrant Modification, outstanding warrants to purchase a total of approximately 6.6 million unregistered shares of our common stock were modified.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Assumption: | | |
| Market price per share | $3.51 | $3.51 |
| Exercise price per share | $8.00 | $3.51 |
| Risk-free interest rate | 1.88% | 2.07% |
| Remaining contractual term in years | 4.26 | 5.03 |
| Volatility | 87.1% | 85.8% |
| Dividend rate | 0.0% | 0.0% |
| | | |
| Number of warrant shares | 25,000 | 50,000 |
| Weighted average fair value per share | $1.71 | $2.39 |
During the quarter ended September 30, 2017, the Board authorized the modification of outstanding warrants issued in private placement transactions between March 2017 and June 2017 to reduce the exercise prices and increase the number of shares issuable thereunder. We calculated the fair value of the warrantmodified warrants, including those issued in the Fall 2019 Private Placement, immediately before and after the modification using the Black Scholes Option Pricing Model for pre-modification valuations and for post-modification valuations for warrants expiring in less than two years. For the warrants expiring after the December 4, 2021 exercise price reversion date, we ran a binomial model using 24 steps, one for each month, and lognormal distribution to estimate our stock price at December 4, 2021, the termination date for the exercise price reduction. We then compared the exercise value of each warrant at each estimated stock price to the remaining option value if the warrant was not exercised on December 4, 2021 and allowed to revert to its original exercise price. For any estimated stock price above $0.50 per share (an in-the-money warrant), we determined that the holders would convert their warrants. For any estimated stock price below $0.50 per share, we determined that the holders would continue to hold their warrants. Given the significant reductions in exercise price (the pre-modification exercise prices ranged from $1.50 to $2.24 per share), if the warrants are not exercised prior to December 4, 2021, the Black-Scholes values upon the reversion of the exercise prices are very low, such that there is nominal additional value for continuing to hold the warrants. Accordingly, our estimated post-modification fair value for warrants having an expiration date later than the two-year exercise price reversion date, December 4, 2021, is equal to the value of an option determined using the Black Scholes Option Pricing Model having an exercise price of $0.50 per share and a two-year term and related assumptions. The table below indicates the pre- and post-modification weighted average assumptions indicatedused in the table below.our valuations. We recognized the incremental fair value, $279,700,$702,500, as warrant modification expense, included as a component of general and administrative expenses, in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2018.2020.
| Assumption: | | | | |
| Market price per share | $1.54 | $0.44 |
| Exercise price per share | $3.99 | $2.00 | $1.85 | $0.50 |
| Risk-free interest rate | 1.62% | 1.58% |
| Remaining contractual term in years | 3.62 | 2.25 | 1.91 |
| Volatility | 95.5% | 87.5% | 88.1% |
| Dividend rate | 0.0% | 0.0% |
| | | |
| Number of warrant shares | 247,500 | 495,001 | 6,611,759 |
| Weighted average fair value per share | $0.71 | $0.92 | $0.08 | $0.19 |
DuringFollowing the Winter 2019 Warrant Modification, investors holding a total of 820,000 warrants exercised their warrants at the reduced price of $0.50 per share, resulting in cash proceeds to us of $410,000 during the quarter ended December 31, 2017, the Board authorized the modification of2019.
December 19, 2019 Warrant Modification
On December 19, 2019, we modified additional outstanding warrants previously issued inas a part of a completed private placement transactions between August 2017 and November 2017 to permanently reduce the exercise pricesprice of such warrants to $0.805 per share and to extend the term of such warrants through December 31, 2022, in order to more closely align the exercise price of the warrants. warrants with the current trading price of our common stock and to provide additional time for the holders to exercise the warrants (theDecember 19,2019 Warrant Modification). As a result of the December 19, 2019 Warrant Modification, we modified outstanding warrants to purchase a total of 80,431 shares of our common stock.
We calculated the fair value of the modified warrants immediately before and after the modification using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We recognized the incremental fair value, $13,000,$35,600, as warrant modification expense, included as a component of general and administrative expenses, in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2018.2020.
| Assumption: | | | | |
| Market price per share | $1.14 | $0.805 |
| Exercise price per share | $2.32 | $1.58 | $7.00 | $0.805 |
| Risk-free interest rate | 2.12% | 1.57% | 1.65% |
| Remaining contractual term in years | 3.85 | 0.58 | 3.034 |
| Volatility | 98.7% | 98.7% | 84.9% |
| Dividend rate | 0.0% | 0.0% |
| | | |
| Number of warrant shares | 178,572 | 80,431 | 80.431 |
| Weighted average fair value per share | $0.64 | $0.71 | $0.00 | $.044 |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants issued in Winter 2019 Warrant Offering
In December 2019, we commenced a self-placed private placement of warrants to purchase unregistered shares of our common stock at an offering price of $0.15 per warrant (theWinter 2019 Warrant Offering). Warrants offered and sold in the Winter 2019 Warrant Offering have an exercise price of $0.50 per share and term of three years from the issuance date. Over the course of the Winter 2019 Warrant Offering, we sold warrants to purchase a total of 2.0 million unregistered shares of common stock for cash proceeds to us of $300,000, which we accounted for with a corresponding credit to additional paid-in capital, an equity account.
Registered Direct Offering of Common Stock and Concurrent Warrant Offering
In January 2020, we entered into a self-placed securities purchase agreement with certain accredited investors pursuant to which we received gross cash proceeds of $2.75 million upon the sale of an aggregate of 3,870,077 shares of our common stock at a purchase price of $0.71058 per share (theJanuary 2020 Offering). Concurrently with the January 2020 Offering, we also commenced a private placement in which we issued and sold warrants (theJanuary 2020 Warrants) exercisable for an aggregate of 3,870,077 unregistered shares of our common stock (theWarrant Shares), having an exercise price of $0.73 per Warrant Share. The 3,870,077 shares of common stock sold in the January 2020 Offering (but not the January 2020 Warrants or the Warrant Shares) were offered and sold pursuant to a prospectus, dated September 30, 2019, and a prospectus supplement dated January 24, 2020, in connection with a takedown from our shelf registration statement on Form S-3 (File No. 333-234025).
The January 2020 Warrants contain customary provisions allowing for adjustment to the exercise price and number of Warrant Shares issuable only in the event of any stock dividend and split, reverse stock split, recapitalization, reorganization or similar transaction, as described in the January 2020 Warrants. In addition, subject to limited exceptions, holders of the January 2020 Warrants will not have the right to exercise any portion of their respective January 2020 Warrants if the holder, together with any affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise.The January 2020 Warrants are exercisable from any time after the six-month anniversary of issuance (theInitial Exercise Date) and will expire on the fifth year anniversary of the Initial Exercise Date. Refer to Note 16, Subsequent Events, for disclosure regarding filing of a registration statement including the shares of common stock underlying the January 2020 Warrants.
Common Stock Purchase Agreement with Lincoln Park
On March 24, 2020, we entered into a purchase agreement and a registration rights agreement with Lincoln Park Capital Fund (LPC) pursuant to which LPC committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (theLPC Agreement). On March 24, 2020, we sold 500,000 unregistered shares of our common stock (theInitial Purchase Shares) to LPC under the purchase agreement at a price of $0.50 per share for gross cash proceeds of $250,000 (theInitial Purchase) and we also issued 750,000 unregistered shares of our common stock to LPC under the terms of the LPC Agreement (theCommitment Shares). To satisfy our obligations under the registration rights agreement, we filed a Registration Statement on Form S-1 (theLPC Registration Statement) with the SEC on March 31, 2020 (Registration No. 333-237514), which the SEC declared effective on April 14, 2020 (theCommencement Date). The LPC Registration Statement included registration of the Initial Purchase Shares and the Commitment Shares. The fair value of the Commitment Shares, $284,400, determined based on the quoted closing market price of our common stock on March 24, 2020, is a component of deferred offering costs attributable to this offering, which costs are amortized ratably to additional paid-in capital as we sell shares of our common stock to LPC under the LPC Agreement.
Following the Commencement Date, on any business day over the term of the LPC Agreement, we have the right, in our sole discretion, to direct LPC to purchase up to 100,000 shares on such business day (the “Regular Purchase”) (subject to adjustment under certain circumstances as provided in the LPC Agreement). The purchase price per share for each such Regular Purchase will be based on prevailing market prices of our common stock immediately preceding the time of sale as computed under the LPC Agreement. In each case, LPC’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. In addition to Regular Purchases, provided that we present LPC with a purchase notice for the full amount allowed for a Regular Purchase, we may also direct LPC to makeaccelerated purchases and additional accelerated purchases as described in the LPC Agreement. Although LPC has no right to require us to sell any shares of our common stock to LPC, LPC is obligated to make purchases as we direct, subject to certain conditions. In all instances, we may not sell shares of our common stock to LPC under the LPC Agreement if such sales would result in LPC beneficially owning more than 9.99% of our common stock. There are no upper limits on the price per share that LPC must pay for shares of our common stock.
Subsequent to the Commencement Date and through July 2020, we sold an additional 6,301,995 registered shares of our common stock to Lincoln Park and received aggregate gross cash proceeds of $2,891,200. We have sold no shares of our common stock under the LPC Agreement since July 2020. At March 31, 2021, there were approximately 2.04 million registered shares of our common stock remaining available for sale under the LPC Agreement; however, we have no obligation to sell any additional shares under the LPC Agreement in the future.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale of Common Stock and Warrants in the Spring 2020 Private Placement
In April 2020, in a self-directed private placement, we sold units of common stock and warrants to an accredited investor to purchase an aggregate of 125,000 unregistered shares of our common stock and four-year warrants to purchase 125,000 shares of our common stock at an exercise price of $0.50 per share and we received cash proceeds of $50,000 (theSpring 2020 Private Placement).
Registration Statement for shares underlying warrants issued in Private Placements and warrant exercises
On May 1, 2020, we filed a registration statement on Form S-3 (Registration No. 333-237968) to register approximately 12.1 million shares of common stock underlying outstanding warrants that we had issued in earlier private placement offerings, including the Spring 2020 Private Placement, as well as common stock underlying warrants that had been previously issued to various consultants as full or partial compensation for their services. Included in the registration statement were shares of our common stock underlying approximately 5.8 million outstanding warrants to purchase shares of our common stock that had been modified in December 2019 to temporarily reduce, for a period of two years or, if sooner, until the expiration of the warrant, the exercise price of such warrants to $0.50 per share, in order to more closely align the exercise price of the warrants with the trading price of our common stock at that time (theWinter 2019 Warrant Modification). We also registered approximately 0.8 million shares of unregistered outstanding common stock held by former holders of warrants who had exercised such warrants subsequent to the Winter 2019 Warrant Modification. Further, we registered the 125,000 shares of common stock issued in the Spring 2020 Private Placement. The SEC declared the registration statement effective on May 13, 2020 (theWarrant Registration Statement). As a result of the effectiveness of this registration statement, the shares of common stock underlying essentially all of our outstanding warrants have been registered.
During July 2020, holders of warrants to purchase an aggregate of 228,000 shares of our common stock exercised such warrants, and we received aggregate cash proceeds of $114,000. We issued 228,000 registered shares of our common stock upon these exercises pursuant to the effectiveness of the Warrant Registration Statement. Between December 2020 and March 31, 2021, holders of outstanding warrants to purchase an aggregate of 6,396,302 registered shares of our common stock exercised such warrants and we received $4,200,900 in cash proceeds.
August 2020 Registered Public Offering of Common Stock
On August 2, 2020, we entered into an underwriting agreement (theUnderwriting Agreement) with Maxim Group, LLC as representative of the underwriters named therein (Maxim), pursuant to which we sold, in an underwritten public offering (theAugust 2020 Public Offering), an aggregate of 15,625,000 shares (theShares) of our common stock for a public offering price of $0.80 per share, resulting in gross proceeds to us of $12,500,000. The August 2020 Public Offering closed on August 5, 2020. Under the terms of the Underwriting Agreement, we granted to Maxim a 45-day over-allotment option to purchase up to an additional 2,343,750 shares at a public offering price of $0.80 per share, which Maxim elected to exercise on August 5, 2020 with respect to an aggregate of 2,243,250 shares (theExercised Option Shares). We completed the sale of the Exercised Option Shares on August 7, 2020 and received additional gross proceeds of $1,794,600. After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $12.9 million from the August 2020 Public Offering.
December 2020 Registered Public Offering of Common Stock and Series D Preferred Stock
On December 18, 2020, we entered into an underwriting agreement (the December 2020 Underwriting Agreement) with Jefferies LLC (Jefferies) and William Blair & Company, L.L.C. (Willian Blair), as representatives of the underwriters named therein (collectively, the Underwriters), pursuant to which we agreed to issue and sell to the Underwriters, in an underwritten public offering (the December 2020 Public Offering), 63,000,000 shares of our common stock, at a public offering price of $0.92 per share and 2,000,000 shares of the newly created Series D Preferred (together with the common stock, the Securities) at a public offering price of $21.16 per share, resulting in gross proceeds to us of $100.28 million. The December 2020 Public Offering closed on December 22, 2020 at which time the shares of common stock and Series D Preferred were sold to the Underwriters. After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $93.6 million from the December 2020 Public Offering.
The Series D Preferred that we issued in the December 2020 Public Offering contained a beneficial conversion feature (aBCF), which arises when a debt or equity security is issued with an embedded conversion option that is deemed beneficial to the investor, that is, in-the-money, at inception because the conversion option has an effective conversion price that is less than the market price of the underlying stock at the commitment date (with respect to the Series D Preferred, the date the security was actually issued rather than the date the agreement to do so was entered into, herein referred to as theCommitment Date). In accordance with Accounting Standards Codification 470-20,Debt- Debt with Conversion and Other Options(ASC 470-20), an embedded BCF is required to be recognized separately by allocating a portion of the proceeds equal to the intrinsic value of the feature to additional paid-in capital. ASC 470-20 also provides that the intrinsic value is to be calculated as of the Commitment Date. The Series D Certificate of Designation provides that the Series D Preferred has a conversion price of $0.92 per share on an as-converted basis (theConversion Price). The Conversion Price compared to the closing price of $1.42 per share of our common stock on the Commitment Date results in a difference of $0.50 per share. That difference multiplied by the 46 million shares of our common stock issuable upon conversion of the Series D Preferred resulted in an aggregate BCF of $23.0 million. We did not recognize the impact of the BCF at December 31, 2020 because the Series D Preferred was not convertible into common stock prior to the Approval Date. Following approval by our stockholders of the Charter Amendment at the Special Meeting in March 2021, the contingency of the BCF was eliminated and we recognized the BCF as a noncash charge in arriving at net loss attributable to common stockholders in our Consolidated Statement of Operations and Comprehensive Loss for the quarter and fiscal year ended March 31, 2021 and as a corresponding increase in additional paid-in capital in our Consolidated Statement of Stockholders’ Equity (Deficit). The BCF was also treated as a deemed dividend in our Consolidated Statement of Stockholders’ Equity (Deficit). Since we have an accumulated deficit, we recorded the deemed dividend as a reduction in additional paid-in capital, resulting in a net impact of $0 to additional paid-in capital. The recognition of the BCF on the Series D Preferred had no impact in aggregate on our stockholders’ equity or on our cash position.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Exercises
During the fiscal year ended March 31, 2021, holders of outstanding stock options, including two members of our Board, exercised options to purchase an aggregate of 252,004 shares of our common stock and we received cash proceeds of $36,500. There were no stock option exercises during the fiscal year ended March 31, 2020.
Warrants Outstanding
TheFollowing the Winter 2019 Warrant Modifications, the December 19, 2019 Warrant Modification, the Winter 2019 Warrant Offering, the issuance of the January 2020 Warrants and the warrants included in the Spring 2020 Private Placement and the warrant exercises noted above, the following table summarizes outstanding and exercisable warrants to purchase shares of our common stock as of March 31, 2018.2021. The weighted average exercise price of outstanding and exercisable warrants at March 31, 20182021 was $2.85$1.78 per share.
| | |
| | |
| Expiration | |
| Date | |
| | |
$0.50 | 4/30/2021 to 3/31/2024 | 4,944,680 |
$0.73 | 7/25/2025 | 1,670,077 |
$0.805 | 12/31/2022 | 80,431 |
$1.50 | 12/13/2022 | 8,375,530 |
$1.82 | 3/7/2023 | 1,388,931 |
$3.51 | 12/31/2021 | 50,000 |
$5.30 | 5/16/2021 | 2,705,883 |
$7.00 | 3/3/2023 | 147,000 |
| | |
| | 19,362,532 |
At March 31, 2021, with the effectiveness of the Warrant Registration Statement in May 2020, the shares of common stock underlying essentially all of the outstanding warrants except those having an exercise price of $7.00 per share have been registered for resale by the warrant holders. Additionally, no outstanding warrant is subject to any down round anti-dilution protection features and $2.86all of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share, respectively.share.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | Warrants | | Warrants |
| Exercise | | | | Outstanding at | | Exercisable at |
| Price | | Expiration | | March 31, | | March 31, |
| per Share | | Date | | 2018 | | 2018 |
| | | | | | | |
| $1.50 | | 11/30/2021 to 12/13/2022 | | 10,150,000 | | 10,000,000 |
| $1.82 | | 3/7/2023 | | 1,388,931 | | 1,388,931 |
| $2.00 | | 4/30/2021 | | 523,573 | | 523,573 |
| $3.51 | | 12/31/2021 | | 50,000 | | 50,000 |
| $4.50 | | 9/26/2019 | | 25,000 | | 25,000 |
| $5.30 | | 5/16/2021 | | 2,705,883 | | 2,705,883 |
| $6.00 | | 9/26/2019 to 11/30/2019 | | 97,750 | | 97,750 |
| $7.00 | | 12/11/2018 to 3/3/2023 | | 1,346,931 | | 1,346,931 |
| $8.00 | | 3/25/2021 | | 185,000 | | 185,000 |
| $10.00 | | 1/11/2020 | | 20,000 | | 20,000 |
| $20.00 | | 9/15/2019 | | 110,448 | | 110,448 |
| | | | | | | |
| | | | | 16,603,516 | | 16,453,516 |
Reserved Shares
At March 31, 2018,2021, we have reserved shares of our common stock for future issuance as follows:
| COMMON STOCK RESERVED FOR FUTURE ISSUANCE AT 3/31/21 | |
| |
| |
Upon exchange of all shares of Series A Preferred Stock currently issued and outstanding (1) | 750,000 |
| | |
Upon exchange of all shares of Series B Preferred Stock currently issued and outstanding (2) | 1,823,7004,000,000 |
| | |
Upon exchange of all shares of Series C Preferred Stock currently issued and outstanding(3) | 2,318,012 |
| |
Upon exchange of all shares of Series D Preferred currently issued and outstanding(4) | 9,249,427 |
| | |
| Pursuant to warrants to purchase common stock: | |
| Subject to outstanding warrants | 16,603,51619,365,532 |
| | |
Pursuant to stock incentive plan:plans: | |
Subject Subject to outstanding options under the Amended and Restated 2016 Stock Incentive
| |
| Plan and the 2019 Omnibus Equity Incentive Plan | 5,300,33814,638,088 |
Available for future grants under the Amended and Restated 2016 Stock2019 Omnibus Equity Incentive Plan | 3,987,1621,843,158 |
| Available for future issuance under the 2019 Employee Stock Purchase Plan | 941,875 |
| | 9,287,50017,423,121 |
Total | |
| Reserved for issuance under Lincoln Park Purchase Agreement | 30,782,728320,272 |
| |
| Total reserves | 53,426,364 |
____________ | ____________ | |
(1)Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement. | |
| |
(2)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015; includes 2,868,331 shares of common stock reserved for payment of dividends on Series B Preferred upon conversion. Refer toSeries B Preferred Stock,above, for additional information regarding payment of dividends in common stock. | |
| |
(3)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016. | |
| |
(4)Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series D Convertible Preferred Stock, effective December 21, 2020. | |
| |
| |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement
(2)Includes 663,460 common shares issuable in payment of accrued dividends on Series B Preferred upon conversion
At March 31, 2018,2021, we have 46,284,65790,958,067 authorized shares of our common stock not subject to reserves and available for future issuance.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9.10. Research and Development Expenses
We recorded research and development expenses of approximately $7.8$12.5 million and $5.2$13.4 million in the fiscal years ended March 31, 20182021 and 2017,2020, respectively, including approximately $0.8 million and $1.4 million of noncash expense in the fiscal years ended March 31, 2021 and 2020, respectively. Research and development expense is composed primarily of employee compensation expenses, including stock–based compensation, direct project expenses, notably including preparationspreclinical and nonclinical projects for PH94B, PH10 and the launch ofAV-101 in both years and costs attributable to our ELEVATEAV-101 clinical trial andin MDD in the fiscal year ended March 31, 2020, as well as costs to maintain and prosecute our intellectual property suite, including new patent applications for AV-101 in combination with probenecid for various indications.indications in the fiscal year ended March 31, 2021.
10.11. Income Taxes
The provision for income taxes for the periods presented in the Consolidated Statements of Operations and Comprehensive Loss represents minimum California franchise taxes.tax, Maryland and North Carolina income tax.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law, which significantly changes existing U.S. tax law. The reduction of the U.S. federal statutory tax rate from 34% to 21% is effective January 1, 2018. Income tax expense (benefit) differed from the amounts computed by applying the U.S.statutory federal income tax rate of 34% for April 1, 2017 to December 31, 2017 and 21% for January 1, 2018 to March 31, 2018 for 2018 year (prorated basis 30.75%) to pretax lossesincome (loss) as a result of the following:
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Computed expected tax benefit | (30.75)% | (34.00)% |
| Tax effect of warrant modifications and other non-deductible items | 0.40% | 1.42% |
| Tax effect of research and development credits | (1.44)% | -% |
| Effect of U.S. tax law change (federal and state) | 88.09% | -% |
| Other losses not benefitted | (56.28)% | 32.58% |
| Other | -% | 0.02% |
| | | |
| Income tax expense | 0.02% | 0.02% |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Computed expected tax benefit | (21.00)% | (21.00)% |
| State income taxes, net of federal benefit | 0.01% | 0.01% |
| Tax effect of warrant modifications | -% | 0.84% |
| Tax effect of research and development credits | (1.45)% | (1.60)% |
| Tax effect of stock compensation | 4.71% | 2.39% |
| Tax effect of other non-deductible items | 0.00% | 0.00% |
| Expired net operating loss carryforwards | 1.99% | 0.36% |
| Change in valuation allowance (federal only) | 15.74% | 19.02% |
| | | |
| Income tax expense | 0.00% | 0.02% |
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets are as follows:
| | | |
| | | | | |
| Deferred tax assets: | | |
| Net operating loss carryovers | $21,402,600 | $30,184,100 | $33,587,300 | $30,607,500 |
| Basis differences in fixed assets | (7,600) | (4,200) | |
| Basis differences in property and equipment | | 12,500 | 9,100 |
| Research and development credit carryforwards | | 2,589,000 | 2,256,400 |
| Stock based compensation | 2,504,500 | 3,673,900 | 3,515,500 | 3,919,900 |
| Operating lease Right of Use asset | | 105,300 | 95,400 |
| Accruals and reserves | 1,352,900 | 927,900 | 67,000 | 66,500 |
| | | |
| Total deferred tax assets | 25,252,400 | 34,781,700 | 39,876,600 | 36,954,800 |
| | | |
| Valuation allowance | (25,252,400) | (34,781,700) | (39,876,600) | (36,954,800) |
| | | |
| Net deferred tax assets | $- | $- |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance decreased by $9,529,300 and increased by $3,567,000$2,921,800 and $4,202,500 during the fiscal years ended March 31, 20182021 and 2017,2020, respectively.
As of March 31, 2018,2021, we had U.S. federal net operating loss carryforwards of approximately $88,477,000, which$139,175,200. Federal net operating loss carryforwards of approximately $86,276,400 generated through our fiscal year ended March 31, 2018 will expire in our fiscal years 2019ending March 31, 2022 through March 31, 2038. Federal net operating loss carryforwards of approximately $52,898,800 generated in fiscal years ending after March 31, 2018 will carry forward indefinitely, but are subject to an 80% taxable income limitation. As of March 31, 2018,2021, we had state net operating loss carryforwards of approximately $63,457,200,$64,556,500, which will expire in fiscal years ending in 2029 through 2038. The Company2041. We also hashave federal and state research and development tax credit carryforwards of approximately $979,900$2,415,500 and $826,500,$1,311,900, respectively. The federal tax credits will expire at various dates beginning in thewith our fiscal year ending March 31, 2029, unless previously utilized. The state tax credits do not expire and will carry forward indefinitely until utilized.
On March 27, 2020 the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (theCARES Act) to provide economic relief in response to the coronavirus pandemic. The CARES Act, among other things, includes provisions to allow certain net operating losses to be carried-back up to five years, to increase interest deduction limitations, and to make technical corrections to tax depreciation methods for qualified improvement property. The CARES Act may affect the corporate income taxes imposed by state governments and may result in future responses by state legislatures, some of which could have retroactive effect. The Company evaluated the provisions of the CARES Act and determined that it did not have a material impact on the Company’s income tax accounts at March 31, 2021 or 2020.
On June 29, 2020, California Assembly Bill 85 (AB 85) was signed into law, suspending the use of California net operating losses and limiting the use of California research tax credits for tax years beginning in 2020 and before 2023. The suspension of net operating losses and the restriction of research tax credits did not result in a significant impact on the value of our deferred tax assets.
U.S. federal and state tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership change of a corporation. We have not performed a change in ownership analysis since our inception in 1998 and accordingly some or all of our net operating loss carryforwards may not be available to offset future taxable income, if any.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We file income tax returns in the U.S. federal, Canada and various U.S. state jurisdictions. We are subject to U.S. federal and state income tax examinations by tax authorities for tax years 19982002 through 20172021 due to net operating losses that are being carried forward for tax purposes, but we are not currently under examination by tax authorities in any jurisdiction.
Uncertain Tax Positions
Our unrecognized tax benefits at March 31, 20182021 and 20172020 relate entirely to research and development tax credits. The total amount of unrecognized tax benefits at March 31, 20182021 and 20172020 is $451,600$931,900 and $290,500,$814,600, respectively. If recognized, none of the unrecognized tax benefits would impact our effective tax rate. The following table summarizes the activity related to our unrecognized tax benefits.
| | Fiscal Years Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| | | |
| Unrecognized benefit - beginning of period | $290,500 | $142,400 | $814,600 | $668,700 |
| Current period tax position increases | 102,300 | 77,700 | 117,300 | 146,000 |
| Prior period tax position increases | 58,800 | 70,400 | |
| Prior period tax position increases (decreases) | | - | (100) |
| | | |
| Unrecognized benefit - end of period | $451,600 | $290,500 | $931,900 | $814,600 |
| | | |
Our policy is to recognize interest and penalties related to income taxes as components of interest expense and other expense, respectively. We incurred no interest or penalties related to unrecognized tax benefits in the years ended March 31, 20182021 or 2017.2020. We do not anticipate any significant changes of our uncertain tax positions within twelve months of this reporting date.
11.12. Licensing, Sublicensing and Collaborative Agreements
PH94B Sublicense Agreement with EverInsight
On June 24, 2020, we entered into a license and collaboration agreement (theEverInsight Agreement) with EverInsight Therapeutics Inc., a company incorporated under the laws of the British Virgin Islands and funded by CBC Group, a global healthcare-focused venture capital firm (EverInsight). Subsequent to entering into the EverInsight Agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, Inc., also funded by CBC Group, which as a combined, complementary entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Accordingly, we are now referring to EverInsight and the EverInsight Agreement as AffaMed and the AffaMed Agreement, respectively. Under the AffaMed Agreement, we granted AffaMed an exclusive license to develop and commercialize PH94B, our neuroactive pherin drug candidate for SAD and other anxiety-related disorders, in Greater China (which includes Mainland China, Hong Kong, Macau and Taiwan), South Korea and Southeast Asia (which includes Indonesia, Malaysia, Philippines, Thailand and Vietnam) (collectively, theTerritory). We retain exclusive development and commercialization rights for PH94B in the rest of the world.
Under the terms of the AffaMed Agreement, AffaMed is responsible for all costs related to developing, obtaining regulatory approval of, and commercializing PH94B for treatment of SAD, and potentially other anxiety-related indications, in the Territory. A joint development committee has been established between AffaMed and us to coordinate and review the development and commercialization plans with respect to PH94B in the Territory.
We are responsible for pursuing clinical development and regulatory submissions of PH94B for acute treatment of anxiety in adults with SAD, and potentially other anxiety-related indications, in the United States on a ‘‘best efforts’’ basis, with no guarantee of success. EverInsight has the option to participate in the Phase 3 global clinical trial of PH94B and will assume all direct costs and expenses of conducting such clinical trial in the Territory and a portion of the indirect costs of the global trial. We will transfer all development data (nonclinical and clinical data) and our regulatory documentation related to PH94B throughout the term as it is developed or generated or otherwise comes into our control. We will grant to AffaMed a Right of Reference to our regulatory documentation and our development data.
Under the terms of the AffaMed Agreement, AffaMed agreed to pay us a non-refundable upfront license payment of $5.0 million within 30 business days of the effective date of the AffaMed Agreement, and AffaMed paid the $5 million in August 2020. Additionally, upon successful development and commercialization of PH94B in the Territory, we are eligible to receive milestone payments of up to $172.0 million. Further, we are eligible to receive royalty payments on a country-by-country basis on net sales for the later of ten years or the expiration of market or regulatory exclusivity in the jurisdiction, except that payments will be reduced on a country-by-country basis in the event that there is no market exclusivity in the period. Royalty payments may also be reduced if there is generic competitive product in the period.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have determined that we have one combined performance obligation for the license to develop and commercialize PH94B in the Territory and related development and regulatory services. In addition, AffaMed has an option that will create manufacturing obligations for us during development upon exercise by AffaMed. This option for manufacturing services was evaluated and determined not to include a material right.
Development and commercialization milestones were not considered probable at inception and therefore were excluded from the initial transaction price. The royalties were excluded from the initial transaction price because they relate to a license of intellectual property and are subject to the royalty constraint.
We recognize revenue as the combined performance obligation is satisfied over time using an output method. The measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the sublicense of PH94B. Significant management judgment is required to determine the level of effort attributable to the AffaMed Agreement and the period over which we expect to complete our performance obligations under the arrangement. The performance period or measure of progress is estimated at the inception of the arrangement and re-evaluated in subsequent reporting periods. This re-evaluation may shorten or lengthen the period over which we recognize revenue. Changes to these estimates are recorded on a cumulative catch up basis. We currently estimate that we will complete our performance obligations at the end of calendar 2023.
The difference between the revenue recognized to-date under the AffaMed Agreement, $1,089,500, and the consideration received to-date, $5,000,000, is recorded as a contract liability/deferred revenue (cash received exceeds revenue earned). At March 31, 2021, we have recorded deferred revenue of $3,910,500. The following table presents changes in our contract liabilities for our fiscal year ended March 31, 2021:
| | | | |
| | | | | |
| Deferred Revenue - current portion | $- | $1,420,200 | $- | $1,420,200 |
| Deferred Revenue - non-current portion | - | 3,579,800 | (1,089,500) | 2,490,300 |
| Total | $- | $5,000,000 | $(1,089,500) | $3,910,500 |
For the single combined performance obligation under the AffaMed Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the sublicense of PH94B. Accordingly, deferred revenue is being recognized on a straight-line basis over the period in which we expect to perform the services.
Contract Acquisition Costs
During the quarter ended September 30, 2020, we made cash payments aggregating $345,000 for sublicense fees, which we were obligated to make pursuant to our PH94B license from Pherin, and fees for consulting services exclusively related to the AffaMed Agreement. Additionally, on June 24, 2020, we issued 233,645 unregistered shares of our common stock, valued at $125,000, as partial compensation for consulting services exclusively related to the AffaMed Agreement. These sublicense fees and consulting payments and the fair value of the common stock issued, aggregating $470,000, were incurred solely as a result of obtaining the AffaMed Agreement, and, accordingly, have been capitalized as deferred contract acquisition costs in our Consolidated Balance Sheet at March 31, 2021. Capitalized contract acquisition costs are amortized over the period in which we expect to satisfy the performance obligations under the AffaMed Agreement and the amortization expense of $102,400 has been included in general and administrative expenses in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2021. There has been no impairment loss in relation to the costs capitalized.
Unless earlier terminated due to certain material breaches of the contract, or otherwise, the AffaMed Agreement will expire on a jurisdiction-by-jurisdiction basis until the latest to occur of the expiration of the last valid claim under a licensed patent of PH94B in such jurisdiction, the expiration of regulatory exclusivity in such jurisdiction or ten years after the first commercial sale of PH94B in such jurisdiction.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
License Agreements with Pherin Pharmaceuticals, Inc. (Pherin)
In September 2018 we issued 1,630,435 shares of our unregistered common stock having a fair market value of $2,250,000 to Pherin to acquire an exclusive worldwide license to develop and commercialize PH94B for social anxiety disorder and an option to acquire a similar license for PH10 for MDD. In October 2018, we exercised our option to acquire an exclusive worldwide license to develop and commercialize PH10 by issuing an additional 925,926 shares of our unregistered common stock having a fair market value of $2,000,000 to Pherin under the terms of the PH10 license agreement. Under the terms of the PH94B and PH10 license agreements, we are obligated to make additional cash payments and pay royalties to Pherin in the event that certain regulatory and performance-based milestones and commercial sales are achieved. Additionally, in connection with the PH94B and PH10 license agreements, we were obligated to pay to Pherin monthly support payments of $10,000 for a term of 18 months, however no monthly support payment was required during the 18-month period identified in the PH10 license agreement if support payments were being made under the terms of the PH94B license agreement. The support payments required under the PH94B license agreement terminated in March 2020 and in April 2020 under the PH10 license agreement. Accordingly, we made support payments of $10,000 under the PH10 license agreement and $120,000 under the PH94B license agreement in the fiscal years ended March 31, 2021 and 2020, respectively.
BlueRock Therapeutics Sublicense Agreement
In December 2016, we entered into an Exclusive License and Sublicense Agreement (BlueRock Therapeutics Agreement) with BlueRock Therapeutics, LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures (BlueRock Therapeutics), pursuant to which BlueRock Therapeutics received exclusive rights to utilize certain technologies exclusively licensed by us from University Health Network (UHN) for the production of cardiac stem cells for the treatment of heart disease. As a result of its acquisition of BlueRock Therapeutics in 2019, Bayer AG now holds the rights to develop and commercialize our hPSC technologies relating to the production of heart cells for the treatment of heart disease (the Bayer Agreement). We retained rights to cardiac stem cell technology licensed from UHN related to small molecule, protein and antibody drug discovery, drug rescue and drug development, including small molecules with cardiac regenerative potential, as well as small molecule, protein and antibody testing involving cardiac cells.
Under the BlueRock Therapeutics Agreement, To date, we received an upfront payment of $1.25 million and we have the potential to receive additional milestone payments and royalties in the future, in the event certain performance-based milestones and commercial sales are achieved. At December 31, 2016, we had no further performance obligations under the BlueRock Therapeutics Agreement and, accordingly, we recorded a receivable for the $1.25 million upfront payment with a corresponding recognition of the sublicense revenue. We received the $1.25 million cash payment due under the BlueRock Therapeutics Agreement in January 2017 and recognized $1.25 million in sublicense revenue, in the accompanying Consolidated Statement of Operations and Comprehensive Loss for theour fiscal year ended March 31, 2017.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. National Institutes of Health
During fiscal years 2006 through 2008,2017, under the NIH awarded a $4.2 million grant to the Company to support preclinical development of AV-101 for pain. In June 2009, the NIH further awarded the Company a $4.2 million grant to support the Phase I clinical development of AV-101, which amount was subsequently increased to a total of $4.6 million in July 2010. The grant expired in the ordinary course on June 30, 2012 and all funds had been expended. AV-101, our oral NMDAR GlyB antagonist product candidate is currently in Phase 2 development, initially for the adjunctive treatment of MDD in patients with an inadequate response to standard antidepressants. In February 2015, we entered into the CRADA with the NIMH to collaborate on an NIH-sponsored Phase 2 clinical study of the efficacy and safety of AV-101 as a monotherapy in subjects with MDD. The first patient in the NIMH AV-101 MDD Phase 2 Monotherapy Study was dosed in November 2015 and we currently anticipate that the NIMH will complete the study during 2018. We believe AV-101 may also have broad therapeutic utility with multiple near term central nervous system pipeline expansion opportunities, including chronic neuropathic pain, epilepsy, Huntington’s disease and Parkinson’s disease.Bayer Agreement.
Cato Research Ltd.
We have built a strategic development relationship with Cato Research Ltd. (CRL), a global contract research and development organization, or CRO, and an affiliate of one of our largest institutional stockholders. CRL has provided us with access to essential CRO services and regulatory expertise supporting our AV-101 preclinical and clinical development programs and other projects. We recorded research and development expenses for CRO services provided by CRL in the amounts of $1,390,700 and $254,600 for the fiscal years ended March 31, 2018 and 2017, respectively.
University Health Network
In September 2007, we entered into a Sponsored Research Collaboration Agreement (SRCA) with University Health Network to develop certain stem cell technologies for drug discovery, development and rescue technologies. Under the terms of the SRCA, we have acquired exclusive worldwide rights to patent applications in the U.S. and foreign countries on multiple inventions arising from studies we have sponsored, under pre-negotiated license terms. Those license terms provide for royalty payments based on product sales that incorporate the licensed technology and milestone payments based on the achievement of certain events. Any drug rescue new chemical entity that we develop will not incorporate the licensed technology and, therefore, will not require any royalty payments. To the extent we incur royalty payment obligations from other business activities, the royalty payments will be subject to anti-stacking provisions, which reduce our payments by a percentage of any royalty payments paid to third parties who have licensed necessary intellectual property to us. These licenses will remain in force for so long as we have an obligation to make royalty or milestone payments to UHN, but may be terminated earlier upon mutual consent, by us at any time, or by UHN for our breach of any material provision of the license agreement that is not cured within 90 days. The SRCA with UHN, as amended, had a term of ten years, ending in September 2017, but was terminated in December 2016, as described below.
In December 2016, we entered into a series of agreements with UHN pursuant to which we (i) executed two new exclusive patent license agreements related to certain cardiac stem cell technologies discovered by Dr. Gordon Keller, Director of UHN's McEwen Centre for Regenerative Medicine, under the SRCA; (ii) amended two exclusive cardiac stem cell technology patent license agreements previously entered into between us and UHN under the SRCA; (iii) terminated the SRCA to facilitate the BlueRock Therapeutics Agreement, described above; and (iv) agreed to make a sublicense consideration payment to UHN with respect to the upfront payment we received under the BlueRock Therapeutics Agreement. All financial obligations related to these agreements with UHN, aggregating $3,600 and $233,400, are reflected in research and development expense in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the fiscal years ended March 31, 2018 and 2017, respectively.
12.13. Stock Option Plans, Employee Stock Purchase Plan, and 401(k) Plan
WeAt March 31, 2021, we have the following share-based compensation plans.plans, which are described below:
●
Amended and Restated 2016 Stock Incentive Plan (the 2016 Plan); and
●
Our Board unanimously approved the Company’s Amended and Restated 2016 Stock Incentive Plan, formerly titled the 2008 Stock2019 Omnibus Equity Incentive Plan (the 2016 Plan), on July 26, 2016, and the 2016 Plan was approved by our stockholders at our 2016 Annual Meeting of Stockholders on September 26, 2016, and further amended at our 2017 Annual Meeting of Stockholders on September 15, 2017. The 2016 Plan provides for the grant of stock options, restricted shares of common stock, stock appreciation rights and dividend equivalent rights, collectively referred to as “Awards”. Stock options granted under the 2016 Plan may be either incentive stock options under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), or non-qualified stock options. We may grant incentive stock options only to employees of the Company or any parent or subsidiary of the Company. Awards other than incentive stock options may be granted to employees, directors and consultants. A total of 10.0 million shares of our common stock are currently authorized for issuance under the 2016 Plan and as of March 31, 2018, approximately 4.0 million registered shares remain available for future equity grants under the plan.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2019 Plan)
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan (the1999 Plan) was adopted by the shareholders of VistaStem on December 6, 1999 and we assumed it in connection with our going-public transaction. We initially reserved 45,000 shares for the issuance of awards under the 1999 Plan. The 1999 Plan has terminated under its own terms and, as a result, no awards may currently be granted under the 1999 Plan. At March 31, 2018, no options granted pursuant to the 1999 Plan remain outstanding.
Description of the 2016 Plan
Our Board unanimously approved the Company’s Amended and Restated 2016 Stock Incentive Plan, formerly titled the 2008 Stock Incentive Plan (the 2016 Plan), on July 26, 2016, and the 2016 Plan was approved by our stockholders at our 2016 Annual Meeting of Stockholders on September 26, 2016, and further amended to increase the number of shares authorized for issuance therefrom at our 2017 Annual Meeting of Stockholders on September 15, 2017. The 2016 Plan providesprovided for the grant of stock options, restricted shares of common stock, stock appreciation rights and dividend equivalent rights, collectively referred to as “Awards”. Stock options granted under the 2016 Plan may bewere either incentive stock options under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the Code), or non-qualified stock options. We maycould grant incentive stock options only to employees of the Company or any parent or subsidiary of the Company. Awards other than incentive stock options maycould be granted to employees, directors and consultants.
The Compensation Committee A total of the Board10.0 million shares of Directors (the Committee), administers the 2016 Plan, including selecting the Award recipients, determining the number of shares to be subject to each Award, the exercise or purchase price of each Award and the vesting and exercise periods of each Award.
The exercise price of all incentiveour common stock options grantedwere authorized for issuance under the 2016 Plan, must be at least equal to 100% of the fair market value of the shares on the date of grant. The maximum term of an incentive stock option granted to any other participant may not exceed 10 years. The Committee determines the term and exercise or purchase price of all other Awards granted under the 2016 Plan.
Under the 2016 Plan, incentive stock options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant. Other Awards shall be transferable:
●
by will and by the laws of descent and distribution; and
●
during the lifetime of the participant, to the extent and in the manner authorized by the Committee by gift or pursuant to a domestic relations order to members of the participant’s Immediate Family (as defined in the 2016 Plan).
The maximum number of shares with respect to which options and stock appreciation rights may be granted to any participant in any calendar year will be 300,000purchase approximately 7.6 million shares remain outstanding at March 31, 2021. Upon the adoption of common stock. In connection with a participant’s commencement of service with the Company, a participant may be granted options and stock appreciation rights for up to an additional 50,000 shares that will not count against the foregoing limitation. In addition, for Awards of restricted stock and restricted shares of common stock that are intended to be “performance-based compensation” (within the meaning of Section 162(m) of the Code), the maximum number of shares with respect to which such Awards may be granted to any participant in any calendar year will be 300,000 shares of common stock. The limits described in this paragraph are subject to adjustment in the event of any change in our capital structure as described below.
The terms and conditions of Awards are determined by the Committee, including the vesting schedule and any forfeiture provisions. Awards under the 20162019 Plan, may vest upon the passage of time or upon the attainment of certain performance criteria. Although we do not currently have any Awards outstanding that vest upon the attainment of performance criteria, the Committee may establish criteria based on any one of, or a combination of, a number of financial measurements.
Effective upon the consummation of a Corporate Transaction (as defined below), all outstanding Awards under the 2016 Plan will terminate unless the acquirer assumes or replaces such Awards. The Committee has the authority, exercisable either in advance of any actual or anticipated Corporate Transaction or Change in Control (as defined below) or at the time of an actual Corporate Transaction or Change in Control and exercisable at the time of the grant of an Award under the 2016 Plan or any time while an Award remains outstanding, to provide for the full or partial automatic vesting and exercisability of one or more outstanding unvested Awardsno further grants were permissible under the 2016 Plan and approximately 1.4 million authorized shares were transferred to the release2019 Plan and became issuable therefrom. All options granted from restrictionsthe 2016 Plan remain operative under the terms of the respective grants.
Description of the 2019 Plan
Our Board approved the VistaGen Therapeutics, Inc. 2019 Omnibus Equity Incentive Plan on transferMay 27, 2019, and repurchaseour stockholders adopted it and ratified all previously issued grants on September 5, 2019. The principal features of the 2019 Plan are summarized below.
The 2019 Plan provides for the grant of stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, and other stock-based awards, and performance awards, collectively referred to as “Awards”. Awards may be granted under the 2019 Plan to officers, employees and consultants of the Company and our subsidiaries and to our non-employee directors. Incentive stock options may be granted only to employees of the Company or forfeiture rightsone of our subsidiaries. The 2019 Plan is administered by the Compensation Committee of the Board. The Compensation Committee, in its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted, and the terms of such Awards in connection with a Corporate Transaction or Change in Control, on such terms and conditions as theawards. The Compensation Committee may specify. The Committee also has thedelegate its authority to condition any such Award vesting and exercisability or release from such limitations upon the subsequent termination of the service of the grantee within a specified period following the effective date of the Corporate Transaction or Change in Control. The Committee may provide that any Awards so vested or released from such limitations in connection with a Change in Control, shall remain fully exercisable until the expiration or sooner termination of the Award.
extent permitted by applicable law.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UnderThe Compensation Committee sets stock option exercise prices and terms, except that stock options must be granted with an exercise price not less than 100% of the 2016 Plan, a Corporate Transaction is generally defined as:fair market value of the common stock on the date of grant. The Compensation Committee may grant either incentive stock options, which must comply with Section 422 of the Code, or nonqualified stock options. At the time of grant, the Compensation Committee determines the terms and conditions of stock options, including the quantity, exercise price, vesting periods, term (which cannot exceed ten years) and other conditions on exercise.
●
an acquisitionThe Compensation Committee may grant SARs as a right in tandem with the number of securities possessing more than fifty percent (50%)shares underlying stock options granted under the 2019 Plan or as a freestanding award. Upon exercise, SARs entitle the holder to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the total combined voting powershare’s fair market value on the date of our outstanding securities but excluding any such transaction or seriesexercise over the grant price of related transactions that the Committee determines shall not be a Corporate Transaction;
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a reverse merger inThe Compensation Committee may also grant awards of restricted stock, which we remain the surviving entity but: (i) theare shares of common stock outstanding immediately priorsubject to such merger are converted or exchanged by virtuespecified restrictions, and restricted stock units, which represent the right to receive shares of the merger into other property, whethercommon stock in the formfuture. These awards may be made subject to repurchase, forfeiture or vesting restrictions at the Compensation Committee’s discretion. The restrictions may be based on continuous service with the Company or the attainment of securities,specified performance goals, as determined by the Compensation Committee. Stock units may be paid in stock or cash or otherwise; or (ii) in which securities possessing more than fifty percent (50%)a combination of stock and cash, as determined by the total combined voting power of our outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger;
●
a sale, transferThe Compensation Committee may condition the grant, exercise, vesting, or settlement of any award on such performance conditions as it may specify. We refer to these awards as “performance awards.” The Compensation Committee may select such business criteria or other disposition of all or substantially all ofperformance measures as it may deem appropriate in establishing any performance conditions. At March 31, 2021, the assets of the Company;
●
a merger or consolidation in whichA total of 7,500,000 shares of common stock were initially authorized for issuance under the Company is not the surviving entity; or
●
a complete liquidation or dissolution.
Under2019 Plan. As noted previously, all awards outstanding under the 2016 Plan at the time the 2019 Plan was adopted remain subject to the 2016 Plan. Upon approval of the 2019 Plan, all shares of common stock remaining authorized and available for issuance under the 2016 Plan, approximately 1.4 million shares, automatically became available for issuance under the 2019 Plan. Additionally, any shares subject to outstanding awards under the 2016 Plan that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares also become available for issuance under the 2019 Plan. Further, if any award under the 2019 Plan is canceled, terminates, expires or lapses for any reason prior to the issuance of shares or if shares are issued under the 2019 Plan and thereafter are forfeited to us, the shares subject to such awards and the forfeited shares will again be available for grant under the 2019 Plan. At March 31, 2021, a Change in Control is generally defined as: (i)total of 1,843,158 shares remain available for grant under the acquisition of2019 Plan.
No more than 50%25% of any equity-based awards granted under the total combined voting power2019 Plan may vest on the grant date of our stock bysuch award. This requirement does not apply to (i) substitute awards resulting from acquisitions or (ii) shares delivered in lieu of fully vested cash awards. In addition, the minimum vesting requirement does not apply to the Compensation Committee’s discretion to provide for accelerated exercisability or vesting of any individual or entity which a majorityaward, including in cases of our Board (who have served on our board for at least 12 months) do not recommend our stockholders accept; (ii)retirement, death, disability or a change in control, in the compositionterms of our Board over a periodthe award or otherwise. Awards are not transferable other than by will or the laws of 12 monthsdescent and distribution, except that in certain instances transfers may be made to or less.for the benefit of designated family members of the participant for no consideration.
In the event of a change in control of the Company, the Compensation Committee may accelerate the time period relating to the exercise of any award. In addition, the Compensation Committee may take other action, including (a) providing for the purchase of any award for an amount of cash or other property that could have been received upon the exercise of such award had the award been currently exercisable, (b) adjusting the terms of the award in a manner determined by the Compensation Committee to reflect the change in control, or (c) causing an award to be assumed, or new rights substituted therefor, by another entity with appropriate adjustments to be made regarding the number and kind of shares and exercise prices of the award. “Change in Control” is defined under the 2019 Plan and requires consummation of the applicable transaction.
Unless earlier terminated sooner,by the 2016Board, the 2019 Plan will automatically terminate, in 2026. Ourand no further awards may be granted, on September 5, 2029, which is ten years after the date on which it was approved by our stockholders. The Board may at any time amend, suspend or terminate the 2016 Plan.2019 Plan at any time. To the extent necessary to comply with applicable provisions of U.S. federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to Awards granted to residents therein, we will obtain stockholder approval of any such amendment to the 20162019 Plan in such a manner and to such a degree as required.The amendment, suspension or termination of the 2019 Plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights under an outstanding award.
During our fiscal year ended March 31, 2018,2021, we granted options to purchase an aggregate of 4,990,000 shares of our common stock from the 2016 Plan:2019 Plan as follows:
●
options to purchase an aggregate of 880,0001,580,000 shares of our common stock at an exercisea price of $1.96$0.398 per share to the independent members of our Board, and to our officers and all non-officer employees and certain consultants and advisors in April 2017;
●
2020. The options to purchase an aggregate of 770,000vested 25% upon grant with the remaining shares of our common stock at an exercise price of $1.56 per share to the independent members of our Board, officers, non-officer employees andvesting ratably over two consultants in September 2017;
●
options to purchase an aggregate of 2,000,000 shares of our common stock at an exercise price of $1.16 per share to the independent members of our Board, officers, non-officer employees and ten consultants in February 2018;
●
options to purchase 25,000 shares of our common stock at an exercise price of $1.21 per share to a legal services consultant in February 2018; and
●
an aggregate of 547,500 shares of unregistered common stock to various legal, investor relations, and financial and strategic advisory consultants in September and October 2017 pursuant to which we recognized an aggregate of $827,900 as a noncash component of general and administrative expense not included in stock compensation expense for the fiscal year.years;
During our fiscal year ended March 31, 2017, we granted from the 2016 Plan:
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
●
options to purchase an aggregate of 655,000365,000 shares of our common stock at prices of between $0.42 and $0.55 per share to various investor and public relations and scientific consultants in May and June 2020. The options vested 25% upon grant with the remaining shares vesting ratably monthly over one year;
●
options to purchase an aggregate of 195,000 shares of our common stock at prices of between $0.62 and $0.73 per share to various investor and public relations and scientific consultants in August through October 2020. Certain grants vested 25% upon grant with the remaining shares vesting ratably over one year or three years; other options vested monthly over a period of one year or two years;
●
options to purchase 200,000 shares of our common stock at a price of $0.7889 per share to a new research and development employee in December 2020. The options vest 25% on the first anniversary of the grant date with the remaining shares vesting ratably monthly over the next 4 years;
●
options to purchase an aggregate of 1,375,000 shares of our common stock at a price of $1.77 per share to independent members of our Board, our officers and employees in December 2020 following the December 2020 Public Offering. The options vested 25% upon grant with the remaining shares vesting ratably over two years; and
●
options to purchase 1,275,000 shares of our common stock at prices from $1.99 to $2.55 per share to new employees during February and March 2021. The options vest 25% on the first anniversary of the grant date with the remaining shares vesting ratably monthly over the next 3 years.
During our fiscal year ended March 31, 2020, we granted options to purchase an aggregate of 3,455,000 shares of our common stock from the 2019 Plan and the 2016 Plan as follows:
●
options from the 2016 Plan to purchase an aggregate of 1,220,000 shares of our common stock at a then above-market exercise price of $1.00 per share to the independent members of our Board, our officers and employees and certain consultants in May 2019. The options vested 25% upon grant with the remaining shares vesting ratably over three years for independent directors, officers and employees, and over two years for consultants;
●
options from the 2019 Plan to one of our officers to purchase 170,000 shares of our common stock at a then above-market exercise price of $1.00 per share, which May 2019 grant was contingent upon the approval of the 2019 Plan by our stockholders. Our stockholders approved the 2019 Plan at our Annual Meeting in September 2019 and ratified the contingent grant. The option vested 25% upon approval of the 2019 Plan and the remaining shares are vesting ratably over three years;
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options from our 2019 Plan to the independent members of our Board, our officers and employees and certain consultants to purchase an aggregate of 1,990,000 shares of our common stock at exercise prices ranging from $0.50 per share to $1.41 per share during the quarter ended December 31, 2019. Options granted to Board members, officers, employees and most consultants were vested 25% at grant, with the remaining options vesting ratably over the following 24 months. In the case of options granted to certain consultants, the options were vested 25% at grant but the remaining vesting period was less than 24 months to coincide with remaining contractual terms;
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options from our 2019 Plan to purchase 75,000 shares of our common stock at an exercise price of $3.49 per share to the independent members of our Board and to our officers, including one newly-employed officer, in June 2016;
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options to purchase 125,000 shares of our common stock at an exercise price of $4.27$0.7074 per share to a newly-employed officerconsultant as partial compensation under a professional services contract in September 2016
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January 2020. The options to purchase an aggregate of 560,000were vested 25% upon grant with the remaining shares of our common stock at an exercise price of $3.80 per share tovesting ratably over the independent members of our Board, officers, non-officer employees and a consultant in November 2016; and
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an aggregate of 150,000 unregistered shares of our common stock pursuant to four consulting agreements in March 2017 pursuant to which we recognized an aggregate of $324,500 as a noncash component of general and administrative expense not included in stock compensation expense for the fiscal year.next twelve months.
The following table summarizes share-basedstock-based compensation expense related to option grants to our officers, independent directors, consultants and service providers included in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the years ended March 31, 20182021 and 2017.2020.
| | Fiscal Years Ended March 31, |
| | | |
| | | |
| Research and development expense | $746,900 | $1,287,200 |
| | | |
| General and administrative expense | 1,559,200 | 2,533,600 |
| | | |
| Total stock-based compensation expense | $2,306,100 | $3,820,800 |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | Fiscal Years Ended March 31, |
| | | |
| Research and development expense: | | |
| | | |
| $969,200 | $375,100 |
| | 969,200 | 375,100 |
| General and administrative expense: | | |
| | | |
| 1,375,000 | 476,200 |
| | 1,375,000 | 476,200 |
| | | |
| Total stock-based compensation expense | $2,344,200 | $851,300 |
We used the Black-Scholes Option Pricing model with the following weighted average assumptions to determine share-based compensation expense related to option grants during the fiscal years ended March 31, 20182021 and 2017:2020:
| | Fiscal Years Ended March 31, | Fiscal Years Ended March 31, |
| | | | | |
| | | |
| Exercise price | $1.44 | $3.69 | $1.27 | $1.14 |
| Market price on date of grant | $1.44 | $3.69 | $1.27 | $1.05 |
| Risk-free interest rate | 2.39% | 1.51% | 0.53% | 1.79% |
| Expected term (years) | 6.87 | 6.69 | 5.58 | 5.41 |
| Volatility | 90.40% | 82.96% | 83.79% | 86.99% |
| Expected dividend yield | 0.00% | 0.00% |
| | | |
| Fair value per share at grant date | $1.10 | $2.68 | $0.87 | $0.73 |
The expected term of options represents the period that our share-based compensation awards are expected to be outstanding. We have calculated the weighted-average expected term of the options using the simplified method as prescribed by Securities and Exchange Commission Staff Accounting Bulletins No. 107 and No. 110 (SAB No. 107 and 110). The utilization of SAB No. 107 and 110 is based on the lack of relevant historical option exercises and relevant historical data due to boththe relatively limited period during which our limited historical experience as astock has been publicly traded company as well ason a major exchange and the historical lack of liquidity resulting from the limited number ofin freely-tradable shares of our common stock. Those factors also resulted in our decision to utilize the historical volatilities of a peer group of public companies’ stock over the expected term of the option in determining our expected volatility assumptions. The risk-free interest rate for periods related to the expected life of the options is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield is zero, as we have not paid any dividends and do not anticipate paying dividends in the near future. We recognize the effect of forfeitures as they occur.
The following table summarizes stock option activity for the fiscal years ended March 31, 2021 and 2020 under the 2019 Plan and the 2016 Plan:
| | Fiscal Years Ended March 31, |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Options outstanding at beginning of period | 10,003,088 | $1.36 | 6,626,088 | $1.48 |
| Options granted | 4,990,000 | $1.27 | 3,455,000 | $1.14 |
| Options exercised | (355,000) | $0.89 | - | $- |
| Options forfeited | - | $- | - | $- |
| Options expired | - | $- | (78,000) | $1.50 |
| | | | | |
| Options outstanding at end of period | 14,638,088 | $1.34 | 10,003,088 | $1.36 |
| Options exercisable at end of period | 10,732,059 | $1.29 | 7,936,290 | $1.39 |
| | | | | |
| Weighted average grant-date fair value of | | | | |
| options granted during the period | | $0.87 | | $0.73 |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity for the fiscal years ended March 31, 2018 and 2017 under our stock option plans:
| | Fiscal Years Ended March 31, |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Options outstanding at beginning of period | 1,659,324 | $4.76 | 336,987 | $9.56 |
| Options granted | 3,675,000 | $1.44 | 1,340,000 | $3.69 |
| Options exercised | - | $- | - | $- |
| Options forfeited | (12,154) | $5.39 | - | $- |
| Options expired | (21,832) | $9.42 | (17,663) | $15.52 |
| | | | | |
| Options outstanding at end of period | 5,300,338 | $2.43 | 1,659,324 | $4.76 |
| Options exercisable at end of period | 1,818,962 | $3.31 | 351,532 | $8.27 |
| | | | | |
| Weighted average grant-date fair value of | | | | |
| options granted during the period | | $1.10 | | $2.69 |
The following table summarizes information on stock options outstanding and exercisable under our stock option plansthe 2019 Plan and the 2016 Plan as of March 31, 2018:2021:
| | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
$1.16 to $1.21 | 2,025,000 | 9.84 | $1.16 | 569,524 | $1.16 |
$1.56 to $1.96 | 1,650,000 | 9.26 | $1.77 | 384,986 | $1.56 |
$3.49 to $4.27 | 1,330,000 | 8.41 | $3.69 | 577,870 | $3.68 |
| 295,338 | 4.79 | $9.19 | 286,582 | $9.19 |
| | | | | | |
| | 5,300,338 | 9.02 | $2.43 | 1,818,962 | $3.31 |
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
$0.398 to $0.89 | 2,590,000 | 9.12 | $0.48 | 1,574,795 | $0.45 |
$0.90 to $1.18 | 3,240,000 | 7.42 | $1.09 | 2,871,049 | $1.10 |
$1.19 to $1.46 | 2,500,000 | 8.13 | $1.36 | 2,155,468 | $1.35 |
$1.47 to $1.63 | 3,177,253 | 5.85 | $1.52 | 3,177,253 | $1.52 |
$1.64 to $15.00 | 3,130,835 | 9.40 | $2.14 | 953,494 | $2.38 |
| 14,638,088 | 7.92 | $1.34 | 10,732,059 | $1.29 |
At March 31, 2018,2021, there were 3,987,1621,843,158 registered shares of our common stock remaining available for grant under the 20162019 Plan. Two members of our Board and certain consultants exercised options to purchase an aggregate of 355,000 shares of our common stock during the fiscal year ended March 31, 2021. There were no option exercises during the yearsfiscal year ended March 31, 2018 or 2017.2020.
Aggregate intrinsic value is the sum of the amount by which the fair value of the underlying common stock exceeds the aggregate exercise price of the outstanding options (in-the-money-options). Based on the $0.93$2.13 per share quoted closing market price of our common stock on March 31, 2018,2021, there was noapproximately $12,205,000 of intrinsic value in any of our outstanding options at that date.
As of March 31, 2018,2021, there was approximately $4,492,300$3,852,300 of unrecognized compensation cost related to non-vested share-based compensation awards from the 2019 Plan and the 2016 Plan, which cost is expected to be recognized through November 2023.
2019 Employee Stock Purchase Plan
Our Board approved the VistaGen Therapeutics, Inc. 2019 Employee Stock Purchase Plan (the 2019 ESPP) on June 13, 2019. Our stockholders approved the 2019 ESPP at our annual meeting on September 2020. 5, 2019. The principal terms of our 2019 ESPP are summarized below.
The 2019 ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Code. The Compensation Committee of the Board administers the 2019 ESPP. The Compensation Committee has authority to construe, interpret and apply the terms of the 2019 ESPP. As approved by our stockholders, a maximum of 1,000,000 shares of our common stock may be purchased under the 2019 ESPP.
The 2019 ESPP is generally expected to operate in consecutive semi-annual periods referred to as “option periods.” The first option period commenced on January 1, 2020 and ended on the last trading day in the semi-annual period ended June 30, 2020, with successive option periods expected to begin on the first day of January and July and to terminate on the last trading day of June and December, respectively. Option periods may not last longer than the maximum period permitted under Section 423 of the Code, which generally limits the length of such offerings to either 5 years or 27 months, depending on the terms of the offering. Generally, all full-time employees of the Company and its subsidiaries are eligible to participate in an option period.
On the first day of each option period (theGrant Date), each eligible employee for that option period will be granted an option to purchase shares of our common stock. Each participant’s option will permit the participant to purchase a number of shares determined by dividing the employee’s accumulated payroll deductions for the option period by the applicable purchase price. A participant must designate the percentage (if any) of compensation to be deducted during that option period for the purchase of stock under the 2019 ESPP. The participant’s payroll deduction election will generally remain in effect for future option periods unless terminated by the participant. A participant may elect to withdraw from any option period prior to the last day of the option period, in which case the participant’s payroll deductions will be refunded and the participant’s outstanding options will terminate.
Each participant’s payroll deductions under the 2019 ESPP will be credited to a liability account in his or her name under the 2019 ESPP. The aggregate liability for participant payroll deductions at March 31, 2021 and 2020 was $18,600 and $14,700, respectively, which amounts are included in accrued expenses in the accompanying Consolidated Balance Sheet at those dates.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each option granted under the 2019 ESPP will automatically be exercised on the last day of the respective option period (referred to as theExercise Date). The number of shares acquired by a participant upon exercise of his or her option will be determined by dividing the participant’s 2019 ESPP account balance as of the Exercise Date for the option period by the purchase price of the option. The purchase price for each option is generally equal to the lesser of (i) 85% of the fair market value of a share of our common stock on the applicable Grant Date, or (ii) 85% of the fair market value of a share of our common stock on the applicable Exercise Date. A participant’s 2019 ESPP account will be reduced upon exercise of his or her option by the amount used to pay the purchase price of the shares acquired by the participant. Following exercise of the option, any excess amount in a participant’s account will be refunded following the Exercise Date. No interest will be paid to any participant under the 2019 ESPP.
Participation in the 2019 ESPP is subject to the following limits:
| ● | A participant cannot contribute less than 1% or more than 15% of his or her compensation to the purchase of stock under the 2019 ESPP in any one payroll period; |
| ● | A participant cannot accrue rights to purchase more than $25,000 of stock (valued at the Grant Date of the applicable offering period and without giving effect to any discount reflected in the purchase price for the stock) for each calendar year in which an option is outstanding; and |
| ● | A participant will not be granted an option under the 2019 ESPP if it would cause the participant to own stock and/or hold outstanding options to purchase common stock constituting 5.0% or more of the total combined voting power or value of all classes of stock of the Company or of one of its subsidiaries or to the extent it would exceed certain other limits under the Code. |
The $25,000 annual purchase and the 5% ownership limitations referred to above are required under the Code.
As is customary, the number of shares of stock available under the 2019 ESPP or subject to outstanding options, is subject to adjustment in the event of certain reorganizations, combinations, recapitalization of shares, stock splits, reverse stock split, subdivision or other similar change in respect of our common stock. A participant’s rights with respect to options or the purchase of shares under the 2019 ESPP, as well as payroll deductions credited to his or her 2019 ESPP account, may not be assigned, transferred, pledged or otherwise disposed of in any way except by will or the laws of descent and distribution.
The Board generally may amend, suspend, or terminate the 2019 ESPP at any time and in any manner, except that stockholder approval is required to increase the number of shares authorized for issuance under the 2019 ESPP and for certain other amendments. No amendment to the 2019 ESPP may materially adversely affect the option rights previously granted to a participant under the 2019 ESPP, except as required by law or regulation.
Our 2019 ESPP became effective on January 1, 2020 and will continue in effect until the earlier of such time as all of the shares of the Company’s common stock subject to the 2019 ESPP have been sold or December 31, 2030, unless terminated earlier by the Board. During the fiscal year ended March 31, 2021, employees purchased an aggregate of 58,125 shares of common stock under the 2019 ESPP and the Company received proceeds of $26,200.
401(k) Plan
Through a third-party agent, we maintain a retirement and deferred savings plan for our employees. This plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. The retirement and deferred savings plan provides that each participant may contribute a portion of his or her pre-tax compensation, subject to statutory limits. Under the plan, each employee is fully vested in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The retirement and deferred savings plan also permits us to make discretionary contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary contributions to the retirement and deferred savings plan on behalf of participating employees.
13.14. Related Party Transactions
Cato Holding Company (CHC), doing business as Cato BioVentures (CBV), isConsulting Agreement
We have we engaged a consulting firm headed by one of the parentindependent members of CRL. CRL is a contractour Board to provide various market research developmentstudies, competitive analyses, and regulatory services organization (CRO) engaged by uscommercial advisory projects for certain aspects of the development and regulatory affairs associated with AV-101. CBV is among our largest institutional stockholders at March 31, 2017, holding approximately 6.9% of our outstanding common stock. In October 2012, we issued certain unsecured promissory notes in the aggregate face amount of approximately $1.3 million to CBV and CRL (theCato Notes) as payment in full for all contract research and development services and regulatory advice previously rendered to us by CRL. The Cato Notes and additional amounts payable to CRL for CRO services were extinguished in June 2015 in exchange for our issuance of an aggregate of 328,571 shares of Series B Preferred to CBV, which shares of Series B Preferred were automatically converted into an equal number of registered shares of our common stock in connection with the May 2016 Public Offering.
In July 2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a substantially similar May 2007 master services agreement,CNS pipeline candidates pursuant to which CRL may assist us in the evaluation, development, commercializationwe recorded expense of $193,000 and marketing of our potential product candidates, including AV-101, and provide regulatory and strategic consulting services as requested from time to time. Specific projects or services are and will be delineated in individual work orders negotiated from time-to-time under the MSA. Under the terms of work orders issued pursuant to the July 2017 MSA and our May 2007 master services agreement with CRL, we incurred expenses of $1,390,700 and $254,600 during$108,400 for the fiscal years ended March 31, 20182021 and 2017,2020, respectively. During our fiscal year endedWe recorded no accounts payable or accrued expenses related to such services at March 31, 2018, we issued an aggregate of 350,000 unregistered shares of our common stock to CRL under the terms of certain work orders for current and future CRO services relating to our development of AV-101 for MDD, the fair value of which represented approximately $465,000 of the reported CRO expense for the fiscal year. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to, AV-101 and other potential product candidates will increase in future periods.2021 or 2020.
14.15. Commitments, Contingencies, Guarantees and Indemnifications
From time to time, we may become involved in claims and other legal matters arising in the ordinary course of business. Management is not currently aware of any claims made or other legal matters that will have a material adverse effect on our consolidated financial position, results of operations or itsour cash flows.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. We will indemnify the officers or directors against any and all expenses incurred by the officers or directors because of their status as one of our directors or executive officers to the fullest extent permitted by Nevada law. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. We have a director and officer insurance policy which limits our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemnification agreements is minimal. Accordingly, there are no liabilities recorded for these agreements at March 31, 20182021 or 2017.2020.
In the normal course of business, we provide indemnifications of varying scopes under agreements with other companies, typically clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, we generally indemnify, hold harmless, and agree to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of our product candidates or with any U.S. patents or any copyright or other intellectual property infringement claims by any third party with respect to our product candidates. The terms of these indemnification agreements are generally perpetual. The potential future payments we could be required to make under these indemnification agreements is unlimited. We maintain liability insurance coverage that limits our exposure. We believe the fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as ofat March 31, 20182021 or 2017.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leases
Financing Lease
At March 31, 20182021 and 2017,2020, the following assets are subject to capitalfinancing lease obligations and included in property and equipment:
| | |
| | | |
| | | |
| Office equipment | 14,700 | 14,700 |
| | | |
| Accumulated depreciation | (3,600) | (700) |
| | | |
| Net book value | $11,100 | $14,000 |
| | | |
| | | |
| | | |
| | | |
| Office equipment subject to financing lease | $14,700 | $14,700 |
| Accumulated depreciation | (12,400) | (9,400) |
| | | |
| Net book value of office equipment subject to | | |
| financing lease | $2,300 | $5,300 |
| | | |
Amortization expense for assets recorded under capitalfinancing leases is included in depreciation expense. Future minimum payments, by year and in the aggregate, required under capital leasesour financing lease are as follows:
| Fiscal Year Ending March 31, | | |
| 2022 | | $3,200 |
| | | |
| Fiscal Years Ending March 31, | | |
| 2019 | $3,800 | |
| 2020 | 3,800 | |
| 2021 | 3,800 | |
| 2022 | 3,300 | |
| Future minimum lease payments | 14,700 | 3,200 |
| | | |
| Less imputed interest included in minimum lease payments | (2,800) | (200) |
| | | |
| Present value of minimum lease payments | 11,900 | 3,000 |
| | | |
| Less current portion | (2,600) | (3,000) |
| | | |
| Non-current capital lease obligation | $9,300 | |
| Financing lease obligation - non-current portion | | $- |
| | | |
Operating Lease
We lease our headquarters office and laboratory space in South San Francisco, California under the terms of a lease that expires on July 31, 2022 and that provides an option to renew for an additional five years at then-current market rates. Consistent with the guidance in ASC 842, effective beginning April 1, 2019, we have recorded this lease in our Consolidated Balance Sheet as an operating lease. For the purpose of determining the right-of-use asset and associated lease liability, upon our adoption of ASC 842, we determined that the renewal of this lease was reasonably probable. The lease of our South San Francisco facilities does not include any restrictions or covenants requiring special treatment under ASC 842.
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AtThe following table summarizes the presentation of the operating lease in our Condensed Consolidated Balance Sheet at March 31, 2018, future2021 and 2020:
| | | |
| Assets | | |
| Right of use asset – operating lease | $3,219,600 | $3,579,600 |
| | | |
| Liabilities | | |
| Current operating lease obligation | $364,800 | $313,400 |
| Non-current operating lease obligation | 3,350,800 | 3,715,600 |
| Total operating lease liability | $3,715,600 | $4,029,000 |
The following table summarizes the effect of operating lease costs in our consolidated statements of operations:
| | For the Fiscal Year Ended | For the Fiscal Year Ended |
| | | |
| Operating lease cost | $838,200 | $822,300 |
The minimum (base rental) lease payments under operating leases relaterelated to our facility lease in South San Francisco California through July 31, 2022 andoperating lease are expected to be as follows:
| Fiscal Years Ending March 31, | | |
| 2019 | 602,800 | |
| 2020 | 623,900 | |
| 2021 | 645,800 | |
| 2022 | 668,400 | $668,400 |
| 2023 | 225,300 | 726,000 |
| | $2,766,200 | |
| 2024 | | 766,000 |
| 2025 | | 789,000 |
| 2026 | | 812,700 |
| Thereafter | | 1,118,700 |
| Total lease expense | | 4,880,800 |
| Less imputed interest | | (1,165,200) |
| Present value of operating lease liabilities | | $3,715,600 |
The following table presents the unaudited statements of operations data for each of the eight quarters in the period ended March 31, 2018.2021. The information has been presented on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period.
