UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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| ☑ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
or
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| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-37761
VistaGen Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
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| |
| Nevada | | 20-5093315 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
343 Allerton Avenue
South San Francisco, CA 94080
(Address of principal executive offices including zip code)
(650) 577-3600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, par value $0.001 per share | VTGN | Nasdaq Capital Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | |
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-Accelerated filer | [ ] | Smaller reporting company | [X] |
| | | Emerging growth company | [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
| Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | VTGN | Nasdaq Capital Market |
As of August 13, 2019, 42,622,9652020, 73,998,057 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.
VistaGVeistaGenn Therapeutics, Inc. Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 20192020
TABLE OF CONTENTS
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PARTPART I. FINANCIAL INFORMATIONINFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
VISTAGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Dollars, except share amounts)
| | | |
| | | |
| | | |
| | | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $8,297,100 | $13,100,300 |
| Receivable from supplier | - | 300,000 |
| Prepaid expenses and other current assets | 482,600 | 250,900 |
| Total current assets | 8,779,700 | 13,651,200 |
| Property and equipment, net | 286,500 | 312,700 |
| Right of use asset - operating lease | 3,833,300 | - |
| Security deposits and other assets | 47,800 | 47,800 |
| Total assets | $12,947,300 | $14,011,700 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | |
| Current liabilities: | | |
| Accounts payable | $933,900 | $1,055,000 |
| Accrued expenses | 1,847,000 | 1,685,600 |
| Current notes payable | 246,400 | 57,300 |
| Operating lease oligation | 278,100 | - |
| Financing lease obligation | 3,000 | 3,000 |
| Total current liabilities | 3,308,400 | 2,800,900 |
| | | |
| Non-current liabilities: | | |
| Accrued dividends on Series B Preferred Stock | 4,050,700 | 3,748,200 |
| Deferred rent liability | - | 381,100 |
| Operating lease obligation | 3,956,900 | - |
| Financing lease obligation | 5,500 | 6,300 |
| Total non-current liabilities | 8,013,100 | 4,135,600 |
| Total liabilities | 11,321,500 | 6,936,500 |
| | | |
| Commitments and contingencies | | |
Stockholders’ equity: |
|
|
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2019 and March 31, 2019 |
|
|
| Series A Preferred, 500,000 shares authorized, issued and outstanding at June 30, 2019 and March 31, 2019 | 500
| 500
|
Series B Preferred; 4,000,000 shares authorized at June 30, 2019 and March 31, 2019;
|
1,160,240 shares issued and outstanding at June 30, 2019 and March 31, 2019 | 1,200 | 1,200 |
Series C Preferred; 3,000,000 shares authorized at June 30, 2019 and March 31, 2019;
|
2,318,012 shares issued and outstanding at June 30, 2019 and March 31, 2019 | 2,300 | 2,300 |
| Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2019 and March 31, 2019; |
| 42,758,630 shares issued and outstanding at June 30, 2019 and March 31, 2019 | 42,800 | 42,800 |
| Additional paid-in capital | 192,890,400 | 192,129,900 |
| Treasury stock, at cost, 135,665 shares of common stock held at June 30, 2019 and March 31, 2019 | (3,968,100) | (3,968,100) |
| Accumulated deficit | (187,343,300) | (181,133,400) |
| Total stockholders’ equity | 1,625,800 | 7,075,200 |
| Total liabilities and stockholders’ equity | $12,947,300 | $14,011,700 |
| | | |
| | | |
| | | |
| | | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $1,545,900 | $1,355,100 |
| Prepaid expenses and other current assets | 633,000 | 225,100 |
| Total current assets | 2,178,900 | 1,580,200 |
| Property and equipment, net | 184,200 | 209,600 |
| Right of use asset - operating lease | 3,492,100 | 3,579,600 |
| Deferred offering costs | 263,900 | 355,100 |
| Security deposits and other assets | 47,800 | 47,800 |
| $6,166,900 | $5,772,300 |
| | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | |
| Current liabilities: | | |
| Accounts payable | $1,307,300 | $1,836,600 |
| Accrued expenses | 607,800 | 561,500 |
| Current notes payable, including accrued interest | 428,900 | 56,500 |
| Operating lease obligation - current portion | 325,700 | 313,400 |
Financing lease obligation - current portion | 3,400 | 3,300 |
Total current liabilities | 2,673,100 | 2,771,300 |
| | | |
| Non-current liabilities: | | |
| Non-current portion of notes payable | 124,700 | - |
| Accrued dividends on Series B Preferred Stock | 5,347,600 | 5,011,800 |
| Operating lease obligation - non-current portion | 3,631,100 | 3,715,600 |
Financing lease obligation - non-current portion | 2,100 | 3,000 |
Total non-current liabilities | 9,105,500 | 8,730,400 |
| 11,778,600 | 11,501,700 |
| | | |
| Commitments and contingencies (Note 10) | | |
| | | |
| Stockholders’ equity (deficit): | | |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2020 and March 31, 2020: |
| Series A Preferred, 500,000 shares authorized, issued and outstanding at June 30, 2020 and March 31, 2020 | 500 | 500 |
| Series B Preferred; 4,000,000 shares authorized at June 30, 2020 and March 31, 2020; 1,160,240 shares | | |
| issued and outstanding at June 30, 2020 and March 31, 2020 | 1,200 | 1,200 |
| Series C Preferred; 3,000,000 shares authorized at June 30, 2020 and March 31, 2020; 2,318,012 shares |
| issued and outstanding at June 30, 2020 and March 31, 2020 | 2,300 | 2,300 |
| Common stock, $0.001 par value; 175,000,000 shares authorized at June 30, 2020 and March 31, 2020; |
| 55,937,472 and 49,348,707 shares issued and outstanding at June 30, 2020 and March 31, 2020, respectively |
| Additional paid-in capital | 203,330,700 | 200,092,800 |
| Treasury stock, at cost, 135,665 shares of common stock held at June 30, 2020 and March 31, 2020 | (3,968,100) | (3,968,100) |
| (205,034,200) | (201,907,400) |
| Total stockholders’ deficit | (5,611,700) | (5,729,400) |
| Total liabilities and stockholders’ deficit | $6,166,900 | $5,772,300 |
See accompanying notes to Condensed Consolidated Financial Statements.
VISTAGEN THVISTEARAPEUTICS,GEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Amounts in dollars, except share amounts)
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| Operating expenses: | | |
| Research and development | $4,313,900 | $2,743,700 | $1,731,200 | $4,313,900 |
| General and administrative | 1,910,100 | 1,466,300 | 1,390,600 | 1,910,100 |
| Total operating expenses | 6,224,000 | 4,210,000 | 3,121,800 | 6,224,000 |
| Loss from operations | (6,224,000) | (4,210,000) | (3,121,800) | (6,224,000) |
| Other income (expenses), net: | | |
| Interest income (expense), net | 16,500 | (2,100) | (3,200) | 16,500 |
| Other income | | 600 | - |
| Loss before income taxes | (6,207,500) | (4,212,100) | (3,124,400) | (6,207,500) |
| Income taxes | (2,400) | (2,400) |
| Net loss and comprehensive loss | $(6,209,900) | $(4,214,500) | $(3,126,800) | $(6,209,900) |
| | | |
| Accrued dividend on Series B Preferred stock | (302,500) | (273,500) | |
| Accrued dividends on Series B Preferred stock | | (335,800) | (302,500) |
| | | |
| Net loss attributable to common stockholders | $(6,512,400) | $(4,488,000) | $(3,462,600) | $(6,512,400) |
| | | |
| Basic and diluted net loss attributable to common | | |
| stockholders per common share | $(0.15) | $(0.20) | $(0.07) | $(0.15) |
| | | |
| Weighted average shares used in computing | | |
| basic and diluted net loss attributable to common | | |
| stockholders per common share | 42,622,965 | 22,987,066 | 51,321,355 | 42,622,965 |
See accompanying notes to Condensed Consolidated Financial Statements.
VIVISTAGSETAGENN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Dollars)
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| Cash flows from operating activities: | | |
| Net loss | $(6,209,900) | $(4,214,500) | $(3,126,800) | $(6,209,900) |
Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
| Depreciation and amortization | 26,200 | 15,000 | 25,400 | 26,200 |
| Stock-based compensation | 1,063,000 | 612,600 | 674,600 | 1,063,000 |
| Amortization of fair value of common stock issued for services | 69,100 | 145,000 | - | 69,100 |
Amortization of fair value of warrants issued for services | 10,300 | - | - | 10,300 |
| Changes in operating assets and liabilities: | | |
| Receivable from supplier | 300,000 | - | - | 300,000 |
| Prepaid expenses and other current assets | (80,900) | 148,500 | 39,200 | (80,900) |
| Right of use asset - operating lease | 81,700 | - | 87,500 | 81,700 |
| Operating lease liability | (61,100) | - | (72,200) | (61,100) |
| Accounts payable and accrued expenses | 40,200 | 171,700 | (434,400) | 40,200 |
| Deferred rent | - | (13,600) | |
| Net cash used in operating activities | (4,761,400) | (3,135,300) | (2,806,700) | (4,761,400) |
| | | |
| Cash flows from property and investing activities: | | |
| Construction of tenant improvements | - | (35,400) | |
| Net cash used in investing activities | - | (35,400) | - |
| | | |
| Cash flows from financing activities: | | |
| Net proceeds from issuance of common stock and warrants, including Units | - | 57,500 | 62,600 | - |
| Repayment of financing lease obligation | (700) | (600) | |
| Expense related to registration of shares underlying outstanding warrants | | (29,400) | - |
| Net proceeds from sale of common stock under equity line | | 2,790,600 | - |
| Proceeds from issuance of note under Payroll Protection Plan | | 224,400 | - |
| Repayment of capital lease obligations | | (800) | (700) |
| Repayment of notes payable | (41,100) | (33,300) | (49,900) | (41,100) |
| Net cash provided by financing activities | (41,800) | 23,600 | |
| Net increase in cash and cash equivalents | (4,803,200) | (3,147,100) | |
| Cash and cash equivalents at beginning of period | 13,100,300 | 10,378,300 | |
| Cash and cash equivalents at end of period | $8,297,100 | $7,231,200 | |
| Net cash provided by (used in) financing activities | | 2,997,500 | (41,800) |
| Net increase (decrease) in cash and cash equivalents | | 190,800 | (4,803,200) |
| Cash and cash equivalents at beginning of fiscal year | | 1,355,100 | 13,100,300 |
| Cash and cash equivalents at end of fiscal year | | $1,545,900 | $8,297,100 |
| | | |
| | | |
| Supplemental disclosure of noncash activities: | | |
| Insurance premiums settled by issuing note payable | $230,200 | $160,500 | $322,200 | $230,200 |
| Accrued dividends on Series B Preferred | $302,500 | $273,500 | $335,800 | $320,600 |
See accompanying notes to Condensed Consolidated Financial Statements.
VISTAGEN
THERAPEUTICS,THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 20182020
(Unaudited)
(Amounts in Dollars, except share amounts)
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Equity |
| | | | | | | | | | | | | | |
| | | | | | | | | |
| 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 | |
| Proceeds from sale of common stock and warrants for cash in private placement offering | - | - | - | - | - | - | 40,000 | - | 50,000 | - | 50,000 | |
| Proceeds from exercise of warrants | - | - | - | - | - | - | 5,000 | - | 7,500 | - | 7,500 | |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | (273,500) | - | (273,500) | |
| Stock-based compensation expense | - | - | - | - | - | - | - | 612,600 | - | 612,600 | |
| Fair value of common stock issued for services | - | - | - | - | - | - | 100,000 | 100 | 122,900 | - | 123,000 | |
| | | | | | | | | |
| Net loss for the quarter ended June 30, 2018 | - | - | - | - | - | - | - | (4,214,500) | |
| | | | | | | | | |
| Balances at June 30, 2018 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 23,213,280 | $23,200 | $167,920,900 | $(3,968,100) | $(160,758,300) | $3,221,700 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| 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 | 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 |
| | | | | | | | | |
| Accrued dividends on Series B Preferred stock | - | - | - | - | - | - | - | (302,500) | - | (302,500) | - | (302,500) | - | (302,500) |
| Stock-based compensation expense | - | - | - | - | - | - | - | 1,063,000 | - | 1,063,000 | - | 1,063,000 | - | 1,063,000 |
| | | |
| Net loss for the quarter ended June 30, 2019 | - | - | - | - | - | - | - | (6,209,900) | - | (6,209,900) |
| | | | | | | | | |
| Balances at June 30, 2019 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 42,758,630 | $42,800 | $192,890,400 | $(3,968,100) | $(187,343,300) | $1,625,800 | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 42,758,630 | $42,800 | $192,890,400 | $(3,968,100) | $(187,343,300) | $1,625,800 |
| | | |
| | | |
| 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) |
| | | |
| Proceeds from sale of units of common stock and warrants | | |
| for cash in private placement | | - | 125,000 | 200 | 49,800 | - | 50,000 |
| Net proceeds from sale of common stock under equity line | | - | 6,201,995 | 6,200 | 2,741,300 | - | 2,747,500 |
| Issuance of common stock at fair value for professional services | | - | 233,645 | 200 | 124,800 | - | 125,000 |
| Sale of common stock pursuant to 2019 Employee Stock | | |
| Purchase Plan | | - | 28,125 | - | 12,600 | - | 12,600 |
| Expenses related to S-3 registration statement for shares | | |
| underlying outstanding warrants | | - | (29,400) | - | (29,400) |
| Accrued dividends on Series B Preferred stock | | | - | (335,800) | - | (335,800) |
| Stock-based compensation expense | | - | 674,600 | - | 674,600 |
| | | |
Net loss for the quarter ended June 30, 2020
| | - | (3,126,800) |
| | | |
| Balances at June 30, 2020 | | 500,000 | $500 | 1,160,240 | $1,200 | 2,318,012 | $2,300 | 55,937,472 | $55,900 | $203,330,700 | $(3,968,100) | $(205,034,200) | $(5,611,700) |
See accompanying notes to Condensed Consolidated Financial Statements.
VISTAGEN THERAPEUTICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business
VistaGen Therapeutics. Inc., a Nevada corporation (which may be referred to as VistaGen, the Company, we, our, or us), is a clinical-stage biopharmaceutical company committed to developing and commercializing new generation medicines to treat diseasestherapies for anxiety, depression and disorders of thecertain additional central nervous system (CNS) withdisorders for which we believe current treatment options are inadequate, resulting in high unmet need.need in multiple CNS markets worldwide. Our CNS pipeline includes three differentiated clinical-stage CNS product candidates, focused on largePH94B, PH10 and growing markets where we believe current treatments fall shortAV-101, each with a differentiated mechanism of patient needs,action, an exceptional safety profile in all clinical studies to date, and therapeutic potential in multiple CNS indications. We are currently preparing PH94B for Phase 3 clinical development for the acute treatment of anxiety in adult patients with significant emphasis onsocial anxiety disorder (SAD). We are also preparing PH94B for an exploratory Phase 2A open-label clinical study in adult patients experiencing adjustment disorder with anxiety (AjDA), including, but not limited to, AjDA as a result of the diverse impact of the COVID-19 pandemic (e.g., anxiety regarding health and safety, economic loss, unemployment, social isolation, remote education and work, etc.), as well as recent social unrest. PH10 has completed successful exploratory Phase 2A clinical development as a new generation treatment for major depressive disorder (MDD) and social anxiety disorder (SAD).
MDD is a serious neurobiologically-based mood disorder, affecting approximately 16 million adults in the U.S., according to the U.S. National Institutes of Health (NIH). Individuals diagnosed with MDD exhibit depressive symptoms, suchWe are currently preparing PH10 for Phase 2B clinical development as a depressed mood or a loss of interest or pleasure in daily activities,potential stand-alone treatment for more than a two-week period, as well as impaired social, occupational, educational or other important functioning which has a negative impact on their quality of life. Globally, MDD affects nearly 300 million people of all ages and is the leading cause of disability worldwide.
SAD affects approximately 20 million Americans and is the third most common psychiatric condition after depression and substance abuse. SAD is characterized by a persistent and unreasonable fear of one or more social or performance situations, where the individual fears that he or she will act in a way or show symptoms that will be embarrassing or humiliating, leading to avoidance of the situations when possible and anxiety or distress when they occur. These fears have a significant impact on the person's employment, social activities and overall quality of life. Only three drugs, all antidepressants, are approved by the U.S Food and Drug Administration (FDA) specifically for treatment of SAD. However, for treatment of both MDD and SAD, current oral antidepressants (ADs) have slow onset of effect (often several weeks to months) and significant side effects that may make them inadequate treatment alternatives for many individuals affected by MDD and SAD.
Our most advanced product candidate, PH94B neuroactive nasal spray, is fundamentally different from all current MDD therapies. In several clinical studies, we have established that AV-101 is orally available and has an excellent safety profile. Based on successful preclinical studies involving AV-101 alone and in combination with probenecid, we are currently assessing additional preclinical data and potential Phase 1B development of AV-101, in combination with probenecid, for treatment of several CNS indications involving abnormal function of the NMDAR (N-methyl-D-aspartate receptor). Additionally, our subsidiary, VistaStem Therapeutics (VistaStem), has pluripotent stem cell technology focused on assessing and developing potential small molecule new chemical entities (NCEs) for our CNS pipeline, or for out-licensing, by utilizing CardioSafe 3D™, VistaStem’s customized human heart cell-based cardiac bioassay system. Our goal is to become a fully integrated biopharmaceutical company that develops and commercializes innovative medicine for large and growing neuropsychiatry and neurology markets worldwide where we believe current treatments for SAD. Developed from proprietary compounds called pherinesare inadequate to meet the needs of millions of patients.
Our Product Candidates
PH94B is a novel, first-in-class neuroactive nasal spray with therapeutic potential in a wide range of indications involving anxiety or phobia. Self-administered in microgram-level doses, PH94B does not require systemic uptake and administereddistribution to produce its rapid-onset anti-anxiety effects. We are initially developing PH94B as a nasal spray,potential rapid-onset (within 15 minutes), non-sedating, non-addictive new generation acute treatment of anxiety in adult patients with SAD, and as an acute treatment for adult patients with AjDA. With its rapid-onset pharmacology, lack of systemic exposure and excellent safety profile, we believe PH94B activates nasal chemosensory neuronsalso has potential as a novel treatment for postpartum anxiety (PPA), post-traumatic stress disorder (PTSD), preoperative anxiety (POA), panic disorder and other anxiety-related disorders. The FDA has granted Fast Track designation for development of PH94B as a potential acute treatment of anxiety in adults with SAD.
PH10 is an odorless, fast-acting synthetic neurosteroid delivered intranasally that trigger neural circuitshas therapeutic potential in the brain that suppress feara wide range of neuropsychiatric indications involving depression. Self-administered in microgram-level doses, PH10 does not require systemic uptake and anxiety. Indistribution to produce its rapid-onset antidepressant effects. We are initially developing PH10 as a published double-blind, placebo-controlled Phase 2 clinical trial, PH94B was significantly more effective than placebo in reducing public-speaking and social interaction anxiety on laboratory challengespotential rapid-onset, non-sedating, non-addictive new generation stand-alone treatment of individuals with SAD. Its novel mechanismMDD. With its rapid-onset pharmacology, lack of pharmacological action, rapid-onset of therapeutic effectssystemic exposure, and exceptional safety and tolerability profile in clinical trialsall studies to date, make our PH94B neuroactive nasal spray an excellent product candidate withwe believe PH10 also has potential to become the first FDA-approved on-demandas a novel treatment for SAD. postpartum depression (Additional potential indications for PH94B include post-traumatic stress disorder (PPDPTSD), general anxiety disordertreatment-resistant depression (TRDGAD), post-partum anxiety (PPA) and other neuropsychiatric indications.suicidal ideation (SI).
AV-101 (4-Cl-KYN), one of our two product candidates for MDD, belongs to a new generation of investigational medicines in neuropsychiatry and neurology known as NMDA (N-methyl-D-aspartate) glutamate receptor modulators. The NMDA receptor is a pivotalnovel, oral prodrug that targets the NMDAR, an ionotropic glutamate receptor in the brain and abnormal NMDAbrain. Abnormal NMDAR function is associated with multiplenumerous CNS diseases and disorders, including MDD, chronic neuropathic paindisorders. AV-101’s active metabolite, 7-chloro-kynurenic acid (7-Cl-KYNANP), epilepsy, levodopa-induced dyskinesia (LID)is a potent and many others. AV-101 is an oral prodrugselective full antagonist of 7-Cl-KYNA which binds uniquely at the glycine coagonist site of the NMDANMDAR that inhibits the function of the NMDAR, but does not block the NMDAR receptor like ketamine and other NMDAR antagonists. We have demonstrated in clinical trials that AV-101 is orally-available, well-tolerated and does not cause dissociative or hallucinogenic psychological side effects or safety concerns similar to those that may be caused by other NMDAR antagonists. With its exceptionally few side effects and excellent safety profile, we believe AV-101 has potential to be aan oral, new at-homegeneration treatment for MDD. AV-101 is currently in Phase 2 development in the U.S. for MDD. ELEVATE is our Phase 2 multicenter, double blind, placebo-controlled clinical studymultiple CNS indications involving abnormal NMDAR function and where current treatments are inadequate to evaluate the efficacy and safety of AV-101 as an add-on treatment for MDD in adult patients with an inadequate therapeutic response to current FDA-approved oral antidepressants (ADs) (the ELEVATE Study). We currently anticipate top line results from the ELEVATE Study in the second half of this calendar year. In addition to MDD, we believe preclinical data and positive safety data in all clinical studies to date support AV-101’s potential to treat LID, NP, and suicidal ideation (SI).meet high unmet patient needs. The FDA has granted Fast Track designation for development of AV-101 as both as a potential add-onadjunctive treatment (together with a current FDA-approved antidepressant (an SSRI or an SNRI)) for adult patients with MDD who have an inadequate response to their current ADs and as a non-opioid treatment for NP. neuropathic pain (AdditionalNP). We are currently assessing AV-101’s potential indicationsin combination with probenecid, to treat both MDD and NP, as well as dyskinesia associated with levodopa therapy for AV-101 include as a non-addictive, non-sedating treatment of NP,Parkinson’s disease, epilepsy and to reduce LID in individuals with Parkinson’s disease.suicidal ideation.
We are collaborating with Baylor College of Medicine (Baylor) and the U.S. Department of Veterans Affairs (VA) on a small Phase 1b clinical trial of AV-101 in healthy volunteer U.S. Military Veterans from Operation Enduring Freedom, Operation Iraqi Freedom or Operation New Dawn (the Baylor Study). The Baylor Study is a randomized, double-blind, placebo-controlled cross-over study designed as a target engagement study as the first-step in plans to test potential anti-suicidal effects of AV-101 in U.S. Military Veterans who respond to ketamine-based therapy. In June 2018, we entered into a Material Transfer Cooperative Research and Development Agreement (MT CRADA) with the VA regarding clinical trial material for the Baylor Study. Government funding from the VA is being provided for substantially all other study costs.
Our other product candidate for MDD in Phase 2 development for MDDVistaStem is PH10 neuroactive nasal spray. PH10 is a potential first-in-class, CNS neuroactive nasal spray administered in microgram doses for MDD. PH10 activates nasal chemosensory neurons that, in turn, engage GABA (gamma-aminobutyric acid) and CRH (corticotropin-releasing hormone) neurons in the limbic amygdala system. The activation of these neural circuits is believed to have the potential to lead to rapid antidepressant effects without psychological side effects, systemic exposure or safety concerns often associated with current antidepressants. Based on positive results of a small exploratory Phase 2a study in MDD in which rapid-onset antidepressant effects were observed without psychological side effects or systemic exposure, we are preparing for planned Phase 2b clinical development of PH10 as a stand-alone treatment for MDD.
Our wholly-owned subsidiary, VistaStem Therapeutics (VistaStem), is focused on applying pluripotent stem cell (hPSC) technology to discover, rescue and develop proprietary new chemical entities (NCEs) for CNS and other diseases. In addition, VistaStem’s hPSC technology has potential applications in cell therapy and regenerative medicine (CT/RM) involving hPSC-derived blood, cartilage, heart and liver cells. VistaStem’s drug rescue activities utilize CardioSafe 3D,, its our customized cardiac bioassay system, to discover and develop, novel small molecule NCEs for our CNS pipeline or for out-licensing. To advance potential CT/cell therapy (CT) and regenerative medicine (RM) applications of our cardiac stem cell technology,VistaStem’s hPSC technologies related to heart cells, in 2016, we have sublicensedlicensed to BlueRock Therapeutics LP, a next generation CT/RM company establishedformed jointly by Bayer AG and Versant Ventures, (BlueRock Therapeutics), rights to develop and commercialize certain proprietary technologies relating to 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 rights to develop and commercialize VistaStem’s hPSC technologies relating to the production of heart cells for the treatment of heart disease (the BlueRockBayer Agreement), which is described more completely in Note 11, Sublicensing and Collaboration Agreements. In
Our product candidates are protected through a manner similar to the BlueRock Agreement, wecombination of patents, trade secrets, and proprietary know‑how. If approved, they may pursue additional CT/RM collaborations or licensing transactions involving hPSC-derived blood, cartilage, and/or liver cells.also be eligible for periods of regulatory exclusivity. Our intellectual property portfolio includes issued U.S. and foreign patents, as well as U.S. and foreign patent applications.
Subsidiaries
As noted above, VistaStem, a California corporation, is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report) also include the accounts of VistaStem and 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.
Note 2. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete consolidated financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information. The accompanying Condensed Consolidated Balance Sheet at March 31, 20192020 has been derived from our audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP. The operating results for the three months ended June 30, 20192020 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2020,2021, or for any other future interim or other period.
The accompanying unaudited Condensed Consolidated Financial Statements and notes to the Condensed Consolidated Financial Statements contained in this Report should be read in conjunction with our audited Consolidated Financial Statements for our fiscal year ended March 31, 20192020 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 25, 2019.29, 2020.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming 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 resulting in a deficit of approximately $187.3$205.0 million accumulated from inception (May 1998) through June 30, 2019.2020. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of AV-101, PH94B, PH10 and PH10,AV-101, execute our drug rescue programs and pursue potential drug development and regenerative medicine opportunities.
Since our inception in May 1998 through June 30, 2019,2020, 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 $79.0$86.1 million, as well as from an aggregate of approximately $17.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials,trials), strategic collaboration payments, intellectual property sublicensinglicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.1$38.2 million 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
At June 30, 2019,2020, we had cash and cash equivalents of approximately $8.3$1.5 million. As more completely described in Note 8,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, through June 30, 2020, we sold 6,201,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,840,200. Refer to Note 12,Subsequent Events, for dislosure of additional sales of our common stock under the LPC Agreement subsequent to June 30, 2020.
As more completely described in Note 11,Sublicensing and Collaboration Agreements, and in Note 12,Subsequent Events, 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, with EverInsight Therapeutics Inc., a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia (theEverInsight Agreement). Under the terms of the EverInsight Agreement, EverInsight agreed to make a non-dilutive upfront license payment of $5.0 million to us. Upon successful development and commercialization of PH94B, we are also eligible to receive up to $172 million in additional development and commercial milestone payments, in addition to royalties on commercial sales. In August 2020, we received the $5.0 million non-dilutive upfront license payment from EverInsight, which 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 EverInsight Agreement.
As described more completely in Note 12,Subsequent Events, on August 2, 2020, we entered into an underwriting agreement (theUnderwriting Agreement) pursuant to which we sold to the Underwriter, in an underwritten public offering (thePublic Offering), an aggregate of 15,625,000 shares (the 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. The Public Offering closed on August 5, 2020. Under the terms of the Underwriting Agreement, we granted to the Underwriter a 45-day over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 Shares (theOption Shares) at a public offering price of $0.80 per share. On August 5, 2020, the Underwriter exercised the Over-Allotment Option with respect to an aggregate of 2,243,250 Option Shares (theExercised Option Shares). We completed the sale of the Exercised Option Shares on August 7, 2020, which resulted in additional gross proceeds to us of $1,794,600. Net proceeds to us from the sale of the Shares and the Exercised Option Shares, after deducting underwriting discounts and commissions and offering expenses payable by us, were approximately $12.9 million.
Going Concern
Although the transactions described above have generated approximately $20.0 million in net cash procceds for us between April 1, 2020 and the date of this Report, we believe it is possible that our cash position at June 30, 2019 is sufficient to complete and announce top line results of our ELEVATE Study, our cash position at June 30, 2019 considered2020, together 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 wesuch net proceeds will not havebe sufficient resources to fund our planned operations for the twelve months following the issuance of these financial statements, during which time we plan to prepare for and launch a pivotal Phase 3 clinical trial of PH94B, prepare for additional Phase 2 clinical studies and certain nonclinical studies involving AV-101 and prepare for a Phase 2b clinical trial of PH10, and raises substantial doubt that we can continue as a going concern. During the next twelve months, subject to securing appropriate and adequate additional financing, we plan to prepare for and launch (i) a pivotal Phase 3 clinical trial of PH94B for acute treatment of anxiety in adult patients with SAD, (ii) a small exploratory open-label Phase 2A study of PH94B for acute treatment of adult patients with AjDA, and (iii) several nonclinical studies involving PH94B, PH10 and AV-101. When necessary and advantageous, we plan to raise additional capital, primarily through the sale of our equity securities in one or more (i) private placements to accredited investors, (ii) public offerings and/or (iii) in public offerings.strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the Everinsight Agreement. Subject to certain restrictions, our effective Registration Statement on Form S-3 (Registration No. 333-215671)333-234025) (the S-3 Registration Statement), which became effective on October 7, 2019, 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 orand institutions.
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 EverInsight Agreement and the Bayer Agreement that could generate revenue or provide funding, including non-dilutive funding, for development of AV-101, PH94B, PH10 and/one or additionalmore of our CNS product candidates.candidate programs. We may also seek additional government grant awards or agreements similar to our relationshipsprior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the VAU.S. Department of Veterans Affairs in connection with the Baylor Study.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 BlueRockEverInsight 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 AV-101, PH94B, PH10 or otherour 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 pndemic, 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 AV-101, 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 EverInsight Agreement and 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 substantial additional financing on a timely basis when needed in 2019 and beyond,2021 or thereafter, 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 Condensed Consolidated Financial Statements do not include any adjustments that might result from the negative outcome of this uncertainty.
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with 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 those relating to revenue recognition, share-based compensation, right-of-use assets and lease liabilities and assumptions that have been used historically to value warrants and warrant modifications. With
Revenue Recognition
We generate revenue from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants. We expect that our primary source of revenue beginning in the exceptionsecond fiscal quarter of our current fiscal year will be from the EverInsight 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, which is described in more detail in Note 11, Sublicensing and Collaboration Agreements. The terms of the BlueRockEverInsight Agreement include a $5.0 million non-refundable upfront license fee, potential payments based upon achievement of certain development and commercial milestones, and royalties on product sales. We also have the Bayer Agreement, pursuant to which we recorded sublicense revenue in the third quarter of our fiscal year ended March 31, 2017, also described in Note 11,Sublicensing and Collaborative Agreements, as a potential revenue generating arrangement.
Under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), we recognize revenue when our customers obtain 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.
Performance Obligations
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 components are separable from the other aspects of the contractual relationship. 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.
Collaboration arrangements can have several promised goods or services including a license for our intellectual property, product supply and development and regulatory services. When the customer could not obtain the intended benefit of the contract from a promised good or service without one or more other promises in the contract, the promise is determined to be not distinct in the context of the contract and is combined with other promises until the combined promises are distinct to identify performance obligations. We have determined that the Everinsight Agreement includes a single combined performance obligation that includes both the license to intellectual property and development and regulatory services.
Arrangements can include promises for optional additional items, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future supply of product for either clinical development or commercial supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. We assess whether these options provide a material right to the customer and if so, such material rights are accounted for as separate performance obligations. When the customer exercises an option, any additional payments related to the option are recorded in revenue when the customer obtains control of the goods or services.
Transaction Price
Arrangements may have both fixed and variable consideration. For collaboration agreements, the non-refundable upfront fees and product supply selling prices are considered fixed, while milestone payments are considered variable consideration when determining the transaction price. At the inception of each arrangement, we evaluate whether the development milestones are considered probable of being achieved and estimate an 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 value of the associated milestone is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as approvals from regulators, are generally not considered probable of being achieved until such approvals are received.
For sales-based royalties, including commercial milestone payments based on the level of sales, for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of when (a) the related sales occur, or (b) the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
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 currentlyassess 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.
Allocation of Consideration
As part of the accounting for collaboration arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The transaction price is allocated to the identified performance obligations in proportion to their stand-alone 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. 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. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have nora significant effect on the allocation of arrangement consideration between multiple performance obligations. Since the EverInsight Agreement includes a single combined performance obligation that is not distinct, there is no allocation of consideration.
Timing of Recognition
Significant management judgment is required to determine the level of effort required under collaboration arrangements 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 each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. Revenue is recognized for products at a point in time and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time using an output or input method. For performance obligations that are a combination of licenses to intellectual property and interdependent services, the nature of the combined performance obligation is considered when determining the method and measure of progress that best represents the satisfaction of the performance obligation. For the single combined performance obligation of the EverInsight Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the license of PH94B.
We have recorded no receivables, contract assets, or contract liabilities as of June 30, 2020 related to the EverInsight Agreement, as there are no rights and obligations as of that date. In subsequent periods, the difference between revenue recognized to-date and the consideration invoiced to-date will be recognized as either a contract asset/unbilled revenue (revenue earned exceeds invoices) or a contract liability/deferred revenue (invoices exceed revenue earned).
Contract Costs
Subsequent to June 30, 2020, we had duringexpect to make cash payments aggregating $345,000 for sublicense fees which we are obligated to make pursuant to our PH94B license from Pherin, and fees for consulting services exclusively related to the EverInsight 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 EverInsight Agreement. These sublicense fees and consulting payments were incurred solely as a result of obtaining the EverInsight Agreement, and will, accordingly, be capitalized as contract acquisition costs. Capitalized contract acquisition costs are amortized over the period in which we expect to satisfy the performance obligations under the arrangement and will be included in general and administrative expenses. At June 30, 2020, the $125,000 fair value of the common stock issued has been recorded as a prepaid asset. In subsequent periods, covered by this Report, any arrangements requiring the recognitionaggregate costs of revenue.$470,000 incurred to obtain the EverInsight Agreement will be capitalized as contract acquisition costs and amortized as indicated. In the quarter ended June 30, 2020, no amounts were amortized to expense, as services have not yet commenced under the arrangement.
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-clinical development of AV-101, PH94B, PH10, AV-101, and stem cell research and development costs, and costs related to the application and prosecution of patents related to those product candidates and, to a lesser extent, 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,contract research and development organizations, clinical sites, investigators and other professional service providers. We analyze the progress of the clinical trial,trials, 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. 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 and October 2018, we acquireduses, as was the case with our acquisition of the exclusive worldwide licenses to develop and commercializefor PH94B and PH10 by issuing an aggregate of 2,556,361 unregistered shares of our common stock having an issuance-date fair market value of $4,250,000. Since, at the date of each acquisition, neither product candidate had achieved regulatory approval and each will require significant additional development and expense, we expensed the costs related to acquiring the licenses and the optionfrom Pherin during our fiscal year ended March 31, 2019.
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 non-cash, 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 nor do we have any awards with market or performance conditions. Non-cash expense attributable to compensatory grants of shares 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 expensedamortized ratably over the term of the related service agreement, depending on the terms of the specific agreement.
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2019 and 2018.2020.
| | Three Months Ended June 30, | |
| | | | Three Months Ended June 30, |
| | | | |
| | | |
| Research and development expense | $390,600 | $230,100 | $226,600 | $390,600 |
| | | |
| | | |
| General and administrative expense | 672,400 | 382,500 | 448,000 | 672,400 |
| | | |
| | | |
| Total stock-based compensation expense | $1,063,000 | $612,600 | $674,600 | $1,063,000 |
Expense amounts reported above include $2,500 and $1,500 in research and development expense and general and administrative expense, respectively, attributable to our 2019 Employee Stock Purchase Plan for the quarter ended June 30, 2020.
In May 2019,During the Compensation Committee of our Board of Directors (theBoard) approved the grant of optionsquarter ended June 30, 2020, we granted from our 2016 Amended and Restated Stock2019 Omnibus Equity Incentive Plan (the 20162019 Plan) options to purchase an aggregate of 1,220,0001,945,000 shares of our common stock at a then above-market exercise prices at or above the closing market price of $1.00 per shareour common stock on the date of grant to the independent members of our Board, our officers and employees and certain consultants. The options vested 25% upon grant with the remaining shares vesting ratably over threetwo years for independent directors, officers and employees, and over one or two years for consultants. We valued the options granted in May 2019during the quarter ended June 30, 2020 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
Assumption: | |
Market price per share at grant date | $0.80
|
Exercise price per share | $1.00
|
Risk-free interest rate | 2.12%
|
Expected term in years | 5.53
|
Volatility | 85.90%
|
Dividend rate | 0.0%
|
Shares | 1,220,000
|
| |
Fair Value per share | $0.54
|
| Assumption: | | |
| Market price per share at grant date | $0.41 | $0.40 to 0.54 |
| Exercise price per share | $0.41 | $0.40 to 0.55 |
| Risk-free interest rate | 0.39% | |
| Expected term in years | 5.36 | |
| Volatility | 84.10% | |
| Dividend rate | 0.0% | 0.0% |
| Shares | 1,945,000 | |
| | | |
| Fair Value per share | $0.28 | |
Additionally, in May 2019, the Board approved, subject to subsequent stockholder approval at our 2019 Annual Meeting of Stockholders to be held in September 2019, the 2019 Omnibus Equity Incentive Plan (the2019 Plan) and designated 7.5 million shares of our authorized common stock to be reserved thereunder. Further, in May 2019, the Compensation Committee of the Board granted options pursuant to 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 grant is contingent upon the approval of the 2019 Plan by our stockholders. The option will vest 25% upon approval of the 2019 Plan with the remaining shares vesting over three years. We did not recognize any expense attributable to the conditional option grant from the 2019 Plan in the quarter ended June 30, 2019. Upon approval of the 2019 Plan by our stockholders, no further option or other equity awards will be made from our 2016 Plan and all remaining authorized shares of our common stock available for issuance under the 2016 Plan will become available for issuance under the 2019 Plan.
At June 30, 2019,2020, there were stock options outstanding under our 2016 Equity Incentive Plan (the2016 Plan) and our 2019 Plan to purchase 7,844,83811,948,088 shares of our common stock at a weighted average exercise price of $1.76$1.21 per share. At that date, there were also 1,388,4124,785,162 shares of our common stock available for future issuance under the 2019 Plan. There are no additional shares available for issuance under our 2016 Plan.
Leases, Right-of-Use Assets and Lease Liabilities
On April 1, 2019, we adopted Financial Accounting Standards Board (FASB) ASU(Accounting Standards Update (ASU) No. 2016-02, Leases, which replaced the existing guidance in Accounting Standards Codification (ASC) 840, “Leases”, and its subsequent amendments including ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (ASC 842) using the modified transition method.
We determine whether an arrangement is an operating or financing lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and 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 that we will exercise that option. In determining the present value of the lease payments, we use the interest rate implicit in the lease when it is readily determinable and we use our estimated incremental borrowing rate based upon information available at the commencement date when the implicit rate is not readily determinable.
The lease payments used to determine our operating lease assets include lease incentives and stated rent increases and may include escalation or other clauses linked to rates of inflation or other factors when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.
Our operating leases are reflected in right of use asset – operating leases, other current liabilities and non-current operating lease liability in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. 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.
Our accounting for financing leases, previously referred to as “capital leases” under priorearlier guidance, remained substantially unchanged with our adoption of ASC 842. Financing leases are included in property and equipment, net and as current and non-current financing lease liabilities in our condensed consolidated balance sheets. Refer to “Recent Accounting Pronouncements” below and Note 10, Commitments and Contingencies, for additional information regarding our adoption of ASC 842 and its impact on our condensed consolidated financial statements.
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
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), 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 all periods presented, potentially dilutive securities were excluded from the computation of diluted net loss per share, as their effect would be antidilutive. Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:
| | | | | |
| | | | | | |
| | | | | | |
Series A Preferred stock issued and outstanding (1) | | 750,000 | | 750,000 | 750,000 |
| | | | | | |
Series B Preferred stock issued and outstanding (2) | | 1,160,240 | | 1,160,240 | 1,160,240 |
| | | | | | |
Series C Preferred stock issued and outstanding (3) | | 2,318,012 | | 2,318,012 | 2,318,012 |
| | | | | | |
Outstanding options under the Amended and Restated 2016 (formerly 2008) Stock Incentive Plan (4) | 7,844,838 | | 5,300,338 | |
| | | | | | |
| Outstanding options under the Company's Amended and Restated 2016 (formerly 2008) Stock Incentive Plan and 2019 Omnibus Equity Incentive Plan | | 11,948,088 | 10,003,088 |
| Outstanding warrants to purchase common stock | | 21,453,402 | | 16,638,516 | 26,589,834 | 26,555,281 |
| | | | | | |
| Total | | 33,526,492 | | 26,167,106 | 42,766,174 | 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 unegistered common sharesstock 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)
Excludes options to purchase 170,000 shares granted subject to stockholder approval of the Company's 2019 Omnibus Equity Incentive Plan.
Fair Value Measurements
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. We carried no assets or liabilities that are measured on a recurring basis at fair value at June 30, 20192020 or March 31, 2019.2020.
Recent Accounting Pronouncements
ExceptOther than as described below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended June 30, 2019, as compared to the recent accounting pronouncements described in our Form 10-K for our fiscal year ended March 31, 2019,2020, we do not expect that are of significanceaccounting standards that have been issued or potential significance to us.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaced the existing guidance in ASC 840, “Leases”, and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842):Targeted Improvements (ASC 842). The new leasing standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standards require lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchaseproposed by the lessee. This classificationFinancial Accounting Standards Board (FASB) or other standards-setting bodies that do not require adoption until a future date will determine whether lease expense is recognized basedhave a material impact 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 prior guidance for operating leases. We adopted the standards on the required effective date of April 1, 2019 and did not restate lease expense or lease-related assets or liabilities reported in prior comparative periods. Presentation of our financing lease for office equipment in the consolidated balance sheet is generally consistent with capitalized lease presentation under the prior lease accounting guidance. Presentation of leases within the consolidatedfinancial statements of operations and consolidated statements of cash flows is generally consistent with the prior lease accounting guidance. We elected the package of practical expedients permitted under the transition guidance and, accordingly, the adoption of ASC 842 did not change the prior classification of any of our leases. We elected not to record a right-of-use asset or a lease liability on the balance sheet for leases with a term of 12 months or less and will recognize the associated lease payments in the consolidated statements of operations over the lease term. On the April 1, 2019 adoption date, we recognized approximately $4.3 million as total lease liabilities and $3.9 million as total right-of-use assets in our Condensed Consolidated Balance Sheet and derecognized a deferred rent liability of approximately $0.4 million attributable to the operating lease of our primary office and laboratory facilities recorded in accordance with prior guidance.upon adoption.
Note 4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets are composed of the following at June 30, 20192020 and March 31, 2019:2020:
| | | | | |
| | | |
| | | |
| AV-101 and PH94B materials and contract services | $134,100 | $5,900 | |
| Clinical and nonclinical materials and contract services | | $115,200 |
| Fair value of securities issued for professional services | 26,500 | 105,900 | 125,000 | - |
| Insurance | 292,700 | 96,300 | 391,200 | 107,200 |
| Public offering filing fees and expenses | 22,300 | |
| All other | 7,000 | 20,500 | 1,600 | 2,700 |
| | $482,600 | $250,900 | $633,000 | $225,100 |
The fair value of securities issued for professional services reflects the unexpensed portion of the fair value of securities we have issued to certain professional service providers as full or partial compensation for services. The fair value of the securities issued is being expensed ratably over the term of the related service agreement.
Note 5. Property and Equipment
Property and equipment is composed of the following at June 30, 20192020 and March 31, 2019:2020:
| | | | | |
| | | |
| | | |
| Laboratory equipment | $892,500 | $892,500 |
| Tenant improvements | 214,400 | 214,400 |
| Computers and network equipment | 54,600 | 54,600 |
| Office furniture and equipment | 84,600 | 84,600 |
| | 1,246,100 | 1,246,100 |
| | | |
| Accumulated depreciation and amortization | (959,600) | (933,400) | (1,061,900) | (1,036,500) |
| Property and equipment, net | $286,500 | $312,700 | $184,200 | $209,600 |
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 June 30, 20192020 and March 31, 20192020 are as follows:
| | | | | |
| | | |
| | | |
| Office equipment subject to financing lease | $14,700 | $14,700 |
| Accumulated depreciation | (7,300) | (6,500) | (10,100) | (9,400) |
| Net book value of office equipment subject to financing lease | $7,400 | $8,200 | |
| Net book value of ofice equipment subject to | | |
| financing lease | | $4,600 | $5,300 |
Note 6. Accrued Expenses
Accrued expenses are composed of the following at June 30, 20192020 and March 31, 2019:2020:
| | | |
| | | |
| | | |
| Accrued expenses for AV-101, PH94B, and PH10 | | |
| clinical trial, development and related expenses | $1,643,600 | $1,067,600 |
| Accrued compensation | - | 439,200 |
| Accrued professional services | 195,700 | 172,100 |
| All other | 7,700 | 6,700 |
| | $1,847,000 | $1,685,600 |
| | | |
| | | |
| | | |
| Accrued expenses for clinical and nonclinical | | |
| materials, development and contract services | $397,100 | $462,300 |
| Accrued professional services | 194,600 | 76,500 |
| All other | 16,100 | 22,700 |
| | $607,800 | $561,500 |
Note 7. Notes Payable
The following table summarizes our unsecured promissory notes at June 30, 20192020 and March 31, 2019:2020:
| | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | |
| 7.75% and 7.15% Notes payable | | |
| 7.30% and 6.30% Notes payable | | |
| to insurance premium financing company (current) | $246,400 | $- | $246,400 | $57,300 | $- | $57,300 | $328,800 | $- | $328,800 | $56,500 | $- | $56,500 |
| | | |
| 1% Note payable under Paycheck Protection Program | | 224,400 | 400 | 224,800 | - |
| less: current portion | | (99,700) | (400) | (100,100) | - |
| | | |
| Non-current portion | | $124,700 | $- | $124,700 | $- |
| | | |
| Total current notes payable | | $428,500 | $400 | $428,900 | $56,500 | $- | $56,500 |
In May 2019,2020, we executed a 7.15%6.30% promissory note in the principal amount of $230,200$322,200 in connection with certain insurance policy premiums. The note is payable in monthly installments of $23,800,$33,200, including principal and interest, through March 2020,2021, and had an outstanding principal balance of $207,800$290,800 at June 30, 2019.2020. In February 2019,2020, we executed a 7.75%7.30% promissory note in the principal amount of $63,500$62,600 in connection with other insurance policy premiums. That note is payable in monthly installments of $6,600$6,500 including principal and interest, through December 20192020 and had an outstanding principal balance of $38,600$38,000 at June 30, 2019.2020.
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). The PPP Loan matures on April 22, 2022. Under the CARES Act and the PPP Loan Agreement, all payments of both principal and interest are deferred until at least October 22, 2020, after which time we will be required to make monthly principal payments of approximately $12,500 until maturity, unless the loan is forgiven prior to maturity. The PPP Loan will accrue interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. The CARES Act (including subsequent guidance issued by SBA and U.S. Department of the Treasury related thereto) provides that all or a portion of the PPP Loan may be forgiven upon our request to the Lender, subject to requirements in the PPP Loan Agreement and the CARES Act. While we currently believe that the use of the PPP Loan proceeds will meet the conditions for forgiveness under the PPP, there can be no assurance that we will obtain full or partial forgiveness of the loan.
Note 8. Capital Stock
Common Stock Purchase Agreement with Lincoln Park Capital Fund
DuringOn 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 quarter endedpurchase 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 for its purchase commitments under the LPC Agreement (theCommitment Shares). To satisfy our obligations under the registration rights agreement associated with the LPC 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. Subsequent to the Commencement Date and through June 30, 2019,2020, we did not engagesold an additional 6,201,995 registered shares of our common stock to LPC and received aggregate gross cash proceeds of $2,840,200. At June 30, 2020, there were approximately 2.1 million registered shares of our common stock remaining available for sale under the LPC Agreement.
On any business day during 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 capital-raising transactions, nor didsingle Regular Purchase may not exceed $1,000,000. In addition to Regular Purchases, provided that we grantpresent LPC with a purchase notice for the full amount allowed for a Regular Purchase, we may also direct LPC to make accelerated purchases and additional accelerated purchases as described in the LPC Agreement. Although LPC has no right to require us to sell any equity securitiesshares 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. See Note 12, Subsequent Events, for disclosure regarding sales of our common stock under the LPC Agreement after June 30, 2020.
Sale of Common Stock and Warrants in the Spring 2020 Private Placement
In April 2020, in a self-directed private placement, we sold to an accredited investor units 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
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 consultants, other thanpurchase shares of our common stock options as describedthat had been modified in Stock Based CompensationDecember 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 Note 3,order to more closely align the exercise price of the warrants with the trading price of our common stock at that time (the SummaryWinter 2019 Warrant Modification). We also registered approximately 0.8 million shares of Significant Accounting Policiesunregistered 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.
Warrants Outstanding
During the quarter endedThe following table summarizes warrants outstanding and exercisable as of June 30, 2019, warrants issued2020 subsequent to the issuance in private placement transactions during calendar 2018 to purchase an aggregate of 805,800 shares of our common stock at exercise prices between $1.50 per share and $1.75 per share became fully-exercisable in accordance with their terms. Accordingly, all warrants outstanding at June 30, 2019 are now fully-exercisable at athe Spring 2020 Private Placement described above. The weighted average exercise price of $2.53 per share as follows:
| Weighted |
| |
| | Expiration | |
| | | |
| | | |
$1.50 | $1.50 | 11/30/2021 to 12/13/2022 | 14,335,200 |
$1.59 - $1.80
| $1.67 | 2/28/2022 to 10/10/2022 | 625,619 |
$1.82 | $1.82 | 3/7/2023 | 1,388,931 |
$2.00 - $4.50 | $2.23 | 9/26/2019 to 10/19/2022 | 721,693 |
$5.30 | $5.30 | 5/16/2021 | 2,705,883 |
$6.00 - $20.00 | $7.94 | 9/15/2019 to 3/3/2023 | 1,676,076 |
| $2.53 | | 21,453,402 |
Of theoutstanding and exercisable warrants outstanding at June 30, 2019, 2,705,8832020 is $1.64 per share and $1.80 per share, respectively.
| | | |
| | | |
| Expiration | | |
| Date | | |
| | | |
$0.50 | 3/25/2021 to 4/30/2024 | 8,151,312 | 8,026,312 |
$0.73 | 7/25/2025 | 3,870,077 | - |
$0.805 | 12/31/2022 | 80,431 | 80,431 |
$1.50 | 12/13/2022 | 9,596,200 | 9,596,200 |
$1.82 | 3/7/2023 | 1,388,931 | 1,388,931 |
$3.51 | 12/31/2021 | 50,000 | 50,000 |
$5.30 | 5/16/2021 | 2,705,883 | 2,705,883 |
$7.00 | 9/2/2020 to 3/3/2023 | 747,000 | 747,000 |
| | | |
| | 26,589,834 | 22,594,757 |
At June 30, 2020, with the effectiveness of the Warrant Registration Statement in May 2020, the shares of common stock underlying essentially all of the outstanding warrants exercisable at $5.30except those having an exercise price of $7.00 per share issued in our May 2016 public offering, 1,388,931 shares of common stock underlying the warrants exercisable at $1.82 per share issued in our September 2017 public offering and 9,596,200 shares of common stock underlying the warrants exercisable at $1.50 per share issued in our December 2017 public offering arehave been registered for resale by the warrant holders. The common shares issuable upon exercise of our remainingwarrants exercisable at $0.73 per share become exercisable on July 25, 2020. Additionally, no outstanding warrants are unregistered. At June 30, 2019, none of our outstanding warrants arewarrant is subject to any down round anti-dilution protection features and all of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share.
Note 9. Related Party Transactions
Contract Research and Development Agreement with Cato Research Ltd.
Cato Holding Company (CHC), doing business as Cato BioVentures (CBV), iswas the parent of Cato Research Ltd. (CRL)., now known as Cato Research LLC. CRL is a contract research, development and regulatory services organization (CRO) that we have engagedin the past, and continue to engage for a wide range of material aspects related to the nonclinical and clinical development, manufacturing and regulatory affairs associated with our efforts to develop and commercialize AV-101 for MDD, including our ELEVATE Study, and other potential CNS indications, PH94B, PH10, AV-101. In October 2018, CHC completed the sale of CRL to an independent third party. As a result of this transaction, CHC and/or CBV is no longer affiliated with or has any control over CRL. Prior to the sale of CRL, CBV held shares of our common stock and other potential product candidates. Atat June 30 2019,2020, CBV held approximately 2%1.7% of our outstanding common stock.
In July 2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a substantially similar May 2007 master services agreement, pursuant to which CRL may assist us in the evaluation, development, manufacturing, commercialization and marketing of our potential product candidates, 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 prior May 2007 master services agreement, we incurred expenses of $1,405,100$124,800 and $877,500$1,405,100 during the quarters ended June 30, 2020 and 2019, respectively. At June 30, 2020 and 2018,March 31, 2020, we had recorded accounts payable and accrued expenses related to CRL aggregating $422,800 and $578,800, respectively. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to AV-101, PH94B, PH10, AV-101 and other potential product candidates will increaseremain significant in future periods.
License and Option Agreements with Pherin Pharmaceuticals, Inc.
During our fiscal year ended March 31, 2019, we issued an aggregate of 2,556,361 shares of our unregistered common stock having an issue-date fair market value of $4,250,000 to Pherin Pharmaceuticals, Inc. (Pherin) to acquire exclusive worldwide licenses to develop and commercialize PH94B and PH10. We recorded the acquisition of the licenses as research and development expense during our fiscal year ended March 31, 2019. During the quarterquarters ended June 30, 2020 and 2019, we recorded an aggregate of$10,000 and $30,000, representingrespectively, as research and development expense for monthly support payments to Pherin under the terms of the PH94B and PH10 license agreements. Our liability for such monthly support payments terminated in April 2020 under the terms of the PH10 license agreement. We recorded no amounts payable to Pherin at June 30, 2020 or March 31, 2020. At June 30, 2019,30,2020, Pherin held approximately 5%2.4% of our outstanding common stock.
Consulting Agreement
During the quarterquarters ended June 30, 2020 and 2019, we engaged thea consulting firm headed by one of the independent members of our Board to provide various market research studies, competitive analyses, and commercial advisory projects for certain of our productCNS pipeline candidates andpursuant to which we recorded research and development expense of $15,000 and $27,700 for the quarters ended June 30, 2020 and 2019, respectively. We recorded accounts payable and accrued expenses of $15,000 at June 30, 2020 and no amounts payable at March 31, 2020 related to such studies.these projects and services.
Note 10. Commitments and Contingencies
Operating Leases
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 Accounting Standards Codification Topic 842, Leases (ASC 842 effective), beginning April 1, 2019, we have recorded this lease in our Condensed Consolidated Balance Sheet as an operating lease. For the purpose of determining the right-of-use asset and associated lease liability, we determined that the renewal of this lease is reasonably probable. The lease of our South San Francisco facilities does not include any restrictions or covenants requiring special treatment under ASC 842.
The following table summarizes the presentation of the operating lease in our Condensed Consolidated Balance Sheet at June 30, 2019:2020 and March 31, 2020:
| |
Assets | |
Right of use asset – operating lease
| $3,833,300
|
| |
Liabilities | |
Current operating lease obligation | $278,100
|
Non-current operating lease obligation | 3,956,900
|
Total operating lease liability
| $4,235,000
|
| | | |
| Assets | | |
| Right of use asset – operating lease | $3,492,100 | $3,579,600 |
| | | |
| Liabilities | | |
| Current operating lease obligation | $325,700 | $313,400 |
| Non-current operating lease obligation | 3,631,100 | 3,715,600 |
| Total operating lease liability | $3,956,800 | $4,029,000 |
The following table summarizes the effect of operating lease costs in the Company’s condensed consolidated statements of operations:
| For the Three
Months Ended
|
| |
Operating lease cost | $208,800
|
We lease a small office in the San Francisco Bay Area under a month-to-month arrangement at immaterial cost and have made an accounting policy election not to apply the ASC 842 operating lease recognition requirements to such short-term lease. We recognize the lease paymentsoperations for this lease in general and administrative expense over the lease term. For the three months ended June 30, 2019, we recorded $3,400 of expense attributable to this lease.2020 and 2019:
| | For the Three Months Ended | For the Three Months Ended |
| | | |
| Operating lease cost | $212,800 | $208,800 |
The minimum (base rental) lease payments related to our South San Francisco operating lease are expected to be as follows:
Fiscal Years Ending March 31, | |
| 2020 (remaining nine months) | $471,500
|
| 2021 | 645,800
|
| 2022 | 668,400
|
| 2023 | 726,000
|
| 2024 | 766,000
|
| Thereafter | 2,720,500
|
| Total lease expense | 5,988,200
|
| Less imputed interest | (1,763,200) |
| Present value of operating lease liabilities | $4,235,000 |
Under the prior lease guidance, future minimum lease payments, under the non-cancellable portion (excluding the five-year extension assumed under ASC 842) of the South San Francisco operating lease were as follows at March 31, 2019:
Fiscal Years Ending March 31, | | |
| 2020 | $623,900 | |
| 2021 | 645,800 | |
| 2021 (remaining nine months) | | $488,000 |
| 2022 | 668,400 | 668,400 |
| 2023 | 225,300 | 726,000 |
| 2024 | - | 766,000 |
| 2025 | | 789,000 |
| Thereafter | - | 1,931,400 |
| | $2,163,400 | |
| Total lease expense | | 5,368,800 |
| Less imputed interest | | (1,412,000) |
| Present value of operating lease liabilities | | $3,956,800 |
The remaining lease term, including the assumed five-year extension at the expiration of the current lease period, and the discount rate assumption for our South San Francisco operating lease is as follows:
| | |
| Assumed remaining lease term in years | 8.097.08 |
| Assumed discount rate | 8.54% |
The interest rate implicit in lease contracts is typically not readily determinable and, as such, we used our estimated incremental borrowing rate based on information available at the adoption of ASC 842, which represents an internally developed 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.
Supplemental disclosure of cash flow information related to the Company’sour operating leaseslease included in cash flows used by operating activities in the condensed consolidated statements of cash flows is as follows:
| For the Three
Months Ended
|
| June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities | $188,200
|
| | For the Three Months Ended | For the Three Months Ended |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities | $197,500 | $188,200 |
During the three months ended June 30, 2019, other than the initial adoption of ASC 842 that required right of use assets and lease liabilities to be recorded,2020, we recorded no new right of use assets arising from new lease liabilities.
We also lease a small office in the San Francisco Bay Area under a month-to-month arrangement at insignificant cost and have made an accounting policy election not to apply the ASC 842 operating lease recognition requirements to such short-term lease. We recognize the lease payments for this lease in general and administrative expense over the lease term. We recorded rent expense of $3,500 and $3,400 for the three months ended June 30, 2020 and 2019, respectively, attributable to this lease.
Note 11. 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 (EverInsight), pursuant to which we granted EverInsight an exclusive license to develop and commercialize PH94B, our neurosteroid drug candidate for multiple 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 EverInsight Agreement, EverInsight is be 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 us and EverInsight to coordinate and review the development and commercialization plans with respect to PH94B in the Territory.
We are responsible to pursue 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 global Phase 3 clinical trials 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 EverInsight a Right of Reference to all of our regulatory documentation and our development data.
Under the terms of the EverInsight Agreement, EverInsight agreed to pay us a non-refundable upfront license payment of $5.0 million within 30 business days of the effective date of the agreement. Refer to Note 12,Subsequent Events, for disclosure regarding receipt of this payment in August 2020. Additionally, upon successful development and commercializatipn 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.
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, EverInsight has an option that will create manufacturing obligations for us during development upon exercise by EverInsight. These 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 are 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 license of PH94B. As of June 30, 2020, no revenue related to this agreement has been recognized. As of June 30, 2020, the aggregate amount of the transaction price allocated to the remaining performance obligation is $5.0 million and will be recognized as revenue as the services are completed, which is expected to occur over approximately the next four years beginning in the quarter ending September 30, 2020.
Unless earlier terminated due to certain material breaches of the contract, or otherwise, the License Agreement will expire on a jurisdiction-by-jurisdiction basis until the latest to occur of 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.
BlueRock Therapeutics Sublicense Agreement
In December 2016, we entered into an Exclusive License and Sublicense 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. To date, we have recognized $1.25 million in sublicense revenue, in our fiscal year ended March 31, 2017, under the Bayer Agreement.
Note 11.12. Subsequent Events
We have evaluated subsequent events through August 13, 2019the date of this Report and have determined that there are noidentified the following matters requiring disclosure.disclosure:
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 (theUnderwriter), pursuant to which we sold to the Underwriter, in an underwritten public offering (thePublic 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 Public Offering closed on August 5, 2020 at which time we sold the Shares to the Underwriter. Under the terms of the Underwriting Agreement, we granted to the Underwriter a 45-day over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 Shares (theOption Shares) at a public offering price of $0.80 per share. On August 5, 2020, the Underwriter elected to exercise the Over-Allotment Option with respect to an aggregate of 2,243,250 Option 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 sale of the Shares and the Exercised Option Shares.
Receipt of $5,000,000 Upfront License Payment from EverInsight
On August 3, 2020, we received the $5,000,000 non-dilutive upfront license fee payment from EverInsight, which 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 EverInsight Agreement.
Exercise of Warrants
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.
Sales of Common Stock under the LPC Agreement
During July 2020, we sold an additional 100,000 registered shares of our common stock to LPC under the terms of the LPC Agreement and received cash proceeds of $51,000.
| Item 2. | | MAMNAAGEMENT’SNAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (Report) includes forward-looking statements. All statements contained in this 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 substantial additional financing, the results of our research and development efforts, the results of nonclinical and clinical testing, the effect of regulation by the U.S. 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 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 (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 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 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
VistaGen Therapeutics.Therapeutics, Inc., a Nevada corporation (which may be referred to as VistaGen, the Company, we, our, or us), is a clinical-stage biopharmaceutical company committed to developing and commercializingdifferentiated new generation medicines to treat diseasesmedications for anxiety, depression and disorders of theother central nervous system (CNS) with high unmet need.disorders. Our CNS pipeline includes three clinical-stage CNS drug candidates, each with a differentiated clinical-stage product candidates focused onmechanism of action, an exceptional safety profile in all clinical studies to date, and therapeutic potential in multiple CNS markets. We aim to become a fully-integrated biopharmaceutical company that develops and commercializes innovative CNS therapies for large and growing mental health and neurology markets where we believe current treatments fall shortare inadequate to meet the needs of patient needs,millions of patients and their caregivers worldwide.
PH94B Neuroactive Nasal Spray for Anxiety-related Disorders
PH94B neuroactive nasal spray is a rapid-onset synthetic neurosteroid with significant emphasis on major depressive disorder (MDD) andtherapeutic potential in a wide range of neuropsychiatric indications involving anxiety or phobia. Conveniently self-administered in microgram-level doses without systemic exposure, we are initially developing PH94B as a potential fast-acting, non-sedating, non-addictive new generation acute treatment of anxiety in adults with social anxiety disorder (SAD).
MDD is a serious neurobiologically-based mood disorder, affecting approximately 16 SAD affects over 20 million adults in the U.S.,Americans and, according to the U.S. National Institutes of Health (NIH). Individuals diagnosed with MDD exhibit depressive symptoms, such as a depressed mood or a loss of interest or pleasure in daily activities, for more than a two-week period, as well as impaired social, occupational, educational or other important functioning which has a negative impact on their quality of life. Globally, MDD affects nearly 300 million people of all ages and is the leading cause of disability worldwide.
SAD affects approximately 20 million Americans and, is the third most common psychiatric condition after depression and substance abuse. A person with SAD feels symptoms of anxiety or fear in certain social situations, such as meeting new people, dating, being on a job interview, answering a question in class, or having to talk to a cashier in a store. Doing everyday things in front of people - such as eating or drinking in front of others or using a public restroom - also causes anxiety or fear. A person with SAD may also feel symptoms of fear and anxiety in performance situations, such as giving a lecture, a speech or a presentation to classmates at school or colleagues at work, as well as playing in a sports game, or dancing or playing a musical instrument on stage. A person with SAD is characterized by a persistent and unreasonable fear of one or more social or performance situations, where the individual fearsafraid that he or she will actbe humiliated, judged, and rejected. The fear and anxiety that people with SAD have in social and performance situations is so strong that they feel they are beyond their ability to control. As a result, SAD gets in the way of going to work, attending school, or show symptomsdoing everyday things in situations with potential for interpersonal interaction. People with SAD may worry about these and other things for weeks before they happen. Sometimes, they end up staying away from places or events where they think they might have to do something that will be embarrassingembarrass or humiliating, leading to avoidancehumiliate them. Without treatment, SAD can last for many years or a lifetime and prevent a person from reaching his or her full potential.
Only three drugs, all oral antidepressants (ADs), are approved by the U.S Food and Drug Administration (FDA) specifically for treatment of SAD. However, for treatment of both MDD and SAD, current oral antidepressants (These FDA-approved ADs) have slow onset of therapeutic effect (often severaltaking many weeks to months), require chronic administration and often cause significant side effects beginning soon after administration. Slow onset of effect, chronic administration and significant side effects that may make themthe FDA-approved ADs inadequate or inappropriate treatment alternatives for many individuals affected by MDD and SAD.
SAD episodically. Our most advanced product candidate, PH94B neuroactive nasal spray, is fundamentally different from all current treatmentsanti-anxiety drugs, including all ADs approved by the FDA for treatment of SAD. Developed from proprietary compounds called pherines and administered as
Intranasal self-administration of a nasal spray,microgram level dose (3.2 mcg) of PH94B activatesengages specific nasal chemosensory neurons that trigger(NCNs). NCNs activate olfactory bulb neurons (OBNs) on the base of the brain. OBNs send neural circuitsconnections to neurons in the central limbic amygdala, the brain that suppresscenter where fear and anxiety.anxiety are regulated. Neurons in the limbic amygdala modulate inhibitory/excitatory neurotransmitters, resulting in rapid-onset anti-anxiety effects, without requiring systemic uptake and distribution to produce such rapid-onset effects. In all clinical studies to date, PH94B has not shown psychological side effects (such as dissociation or hallucinations), detectable systemic exposure, sedation or other side effects and safety concerns that may be caused by the current ADs approved by the FDA for treatment of SAD, as well as by benzodiazepines and beta blockers, which are not approved by the FDA to treat SAD but which are be prescribed by psychiatrists and physicians for treatment of SAD on an off-label basis.
In a peer-reviewed, published double-blind, placebo-controlled Phase 2 clinical trial, PH94B neuroactive nasal spray was highly significantly more effective than placebo in reducing both public-speaking (performance) anxiety (p=0.002) and social interaction anxiety on laboratory(p=0.009) in laboratory-simulated challenges of individuals with SAD. ItsSAD patients within 15 minutes of self-administration of a non-systemic 1.6 microgram dose of PH94B. Based on its novel mechanism of pharmacological action, rapid-onset of therapeutic effects and exceptional safety and tolerability profile in clinical trials to date, make ourwe are preparing for Phase 3 clinical development of PH94B neuroactive nasal spray an excellent product candidatefor acute treatment of anxiety in adults with potentialSAD. Our goal is to becomedevelop and commercialize PH94B as the first FDA-approved, on-demandrapid-onset, acute treatment of anxiety in adults with SAD, for SAD.Additionalacute use on demand much like a rescue inhaler is used on demand before an asthma attack or a migraine drug is used before a migraine episode. We believe additional potential anxiety-related neuropsychiatric indications for PH94B include general anxiety disorder, postpartum anxiety, perioperative and pre-testing (e.g., pre-MRI) anxiety, panic disorder, post-traumatic stress disorder (and specific social phobias. PTSD), generalThe FDA has granted Fast Track designation for development of PH94B for acute treatment of anxiety disorder (GAD), postpartum anxiety (PPA) and other neuropsychiatric indications.in adults with SAD, which we believe is the FDA’s first such designation for a drug candidate for SAD.
In addition to development of PH94B as a potential treatment for SAD, we are currently planning for exploratory open-label Phase 2A clinical development of PH94B for acute treatment of adjustment disorder with anxiety (AjDA), an emotional or behavioral reaction considered excessive or out of proportion to a stressful event or major life change, occurring within three months of the stressor, and/or significantly impairing a person’s social, occupational and/or other important areas of functioning. Given the diverse impact of the COVID-19 pandemic, including, among other things, fear and axiety about health and safety, economic loss, unemployment, social isolation, disruption of established education and work practices, we submitted our preliminary protocol for the study to the FDA through the FDA’s Coronavirus Treatment Acceleration Program (CTAP). As a result of that submission, we are currently in discussions wih the FDA’s Division of Psychiatric Products to determine the appropriate next steps for the study, including the study protocol. We are planning to conduct the proposed Phase 2A study in New York City and enroll approximately 25 to 30 subjects suffering from AjDA-provoking stressors, including, but not limited to, stressors related to the diverse impact of the COVID-19 pandemic and recent social unrest in the U.S.
PH10 Neuroactive Nasal Spray for Depression and Suicidal Ideation
AV-101 (4-Cl-KYN),PH10 neuroactive nasal spray is an odorless, fast-acting synthetic neurosteroid drug candidate with therapeutic potential in a wide range of neuropsychiatric indications involving depression and suicidal ideation. Conveniently self-administered in microgram-level doses without systemic exposure, we are initially developing PH94B as a potential rapid-onset, treatment of major depressive disorder (MDD).
Depression is a serious medical illness and a global public health concern that can occur at any time over a person's life. While most people will experience depressed mood at some point during their lifetime, MDD is different. MDD is the chronic, pervasive feeling of utter unhappiness and suffering, which impairs daily functioning. Symptoms of MDD include diminished pleasure or loss of interest in activities, changes in appetite that result in weight changes, insomnia or oversleeping, psychomotor agitation, loss of energy or increased fatigue, feelings of worthlessness or inappropriate guilt, difficulty thinking, concentrating or making decisions, and thoughts of death or suicide and attempts at suicide. Current FDA-approved medications available in the multi-billion-dollar global AD market often fall far short of satisfying the unmet medical needs of millions suffering from the debilitating effects of depression.
While current FDA-approved ADs are widely used, about two-thirds of patients with MDD do not respond to their initial AD treatment. Inadequate response to current ADs is among the key reasons MDD is one of our two product candidatesthe leading public health concerns in the United States, creating a significant unmet medical need for MDD, belongs tonew agents with fundamentally different mechanisms of action and side effect and safety profiles.
PH10 is a new generation antidepressant with a mechanism of investigational medicinesaction that is fundamentally different from all current ADs. After self-administration, a non-systemic microgram-level dose of PH10 binds to nasal chemosensory receptors that, in neuropsychiatryturn, activate key neural circuits in the brain that can lead to rapid-onset antidepressant effects, but without the psychological side effects (such as dissociation and neurology knownhallucinations) or safety concerns that maybe be caused by ketamine-based therapy (KBT), including intravenous ketamine or esketamine nasal spray, or the significant side effects of current ADs. In an exploratory 30-patient Phase 2A clinical trial, PH10, self-administered at a dose of 6.4 micrograms, was well-tolerated and demonstrated significant (p=0.022) rapid-onset antidepressant effects, which were sustained over an 8-week period, as measured by the Hamilton Depression Rating Scale (HAM-D), without side effects or safety concerns that may be caused by KBT. Based on positive results from this exploratory Phase 2A study, we are preparing for Phase 2B clinical development of PH10 in MDD, which preparation includes two additional preclinical toxicology studies required by the FDA to support our new Investigational New Drug (IND) application for proposed Phase 2B clinical development of PH10 in the U.S. With its exceptional safety profile during clinical development to date, we believe PH10, has potential for multiple applications in global depression markets, including first as a stand-alone therapy for MDD, and eventually also an add-on therapy to augment current FDA-approved ADs for patients with MDD who have an inadequate response to standard ADs, and to prevent relapse following successful treatment with KBT.
AV-101, an Oral NMDA (N-methyl-D-aspartate)Receptor Antagonist
AV-101 (4-Cl-KYN) targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor modulators. The NMDA receptor is a pivotal receptor in the brain and abnormal NMDAbrain. Abnormal NMDAR function is associated with multiplenumerous CNS diseases and disorders, including MDD, chronic neuropathic pain (NP), epilepsy, levodopa-induced dyskinesia (LID) and many others.disorders. AV-101 is an oral prodrug of 7-Cl-KYNA7-chloro-kynurenic acid (7-Cl-KYNA), which binds uniquely atis a potent and selective full antagonist of the glycine co-agonist site of the NMDA receptorNMDAR that inhibits the function of the NMDAR. Unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. In all studies to date, AV-101 has exhibited no dissociative or hallucinogenic psychological side effects or safety concerns similar to those that may be caused by amantadine and KBT. With its exceptionally few side effects and excellent safety profile in all studies to date, AV-101 has potential to be a new, at-homedifferentiated oral treatment for MDD. AV-101 is currently in Phase 2 development in the U.S. for MDD. ELEVATE is our Phase 2 multicenter, double blind, placebo-controlled clinical study to evaluate the efficacy and safety of AV-101 as an add-on treatment for MDD in adult patients with an inadequate therapeutic response to current FDA-approved oral antidepressants (ADs) (the ELEVATE Study). We currently anticipate top line results from the ELEVATE Study in the second half of this calendar year. In addition to MDD,multiple large-market CNS indications where we believe preclinical data and positive safety data in all clinical studiescurrent treatments are inadequate to date support AV-101’s potential to treat LID, NP, and suicidal ideation (SI).meet high unmet patient needs. The FDA has granted Fast Track designation for development of AV-101 as both as a potential add-onadjunctive treatment (together with a current FDA-approved antidepressant (an SSRI or an SNRI)) for adult patients with MDD who have an inadequate response to their current ADs and as a non-opioid treatment for NP. neuropathic pain.
Additional potential indications forIn late-2019, we completed a Phase 2 clinical trial of AV-101 include as a non-addictive, non-sedatingpotential adjunctive treatment, together with a standard FDA-approved oral AD (either a selective serotonin reuptake inhibitor (SSRI) or a serotonin norepinephrine reuptake inhibitor (SNRI)), in MDD patients who had an inadequate response to a stable dose of a standard AD (the Elevate Study). Topline results of the Elevate Study (n=199) indicated that the AV-101 treatment arm (1440 mg) did not differentiate from placebo on the primary endpoint (change in the Montgomery-Åsberg Depression Rating Scale (MADRS-10) total score compared to baseline), potentially due to sub-therapeutic levels of 7-Cl-KYNA in the brain. As in prior clinical studies, AV-101 was well tolerated, with no psychotomimetic side effects or drug-related serious adverse events.
Recent discoveries from successful AV-101 preclinical studies suggest that there is a substantially increased brain concentration of AV-101 and its active metabolite, 7-Cl-KYNA, when AV-101 is given together with probenecid, a safe and well-known oral anion transport inhibitor approved by the FDA for treatment of NP, epilepsy,gout. These surprising effects were first revealed as to AV-101 and 7-Cl-KYNA in our recent preclinical studies, although the effects are consistent with well-documented clinical studies of probenecid increasing the therapeutic benefits of several classes of FDA-approved drugs that are unrelated to AV-101 and 7-Cl-KYNA, including certain antibacterial, anticancer and antiviral drugs. When probenecid was administered adjunctively with AV-101 in an animal model, substantially increased brain concentrations of both AV-101 and of 7-Cl-KYNA were discovered.We also recently identified that some of the same kidney transporters that reduce drug concentrations in the blood, by excretion in the urine, are also found in the blood brain barrier and function to reduce LID7-Cl-KYNA levels in individualsthe brain by pumping it out of the brain and back into the blood. In the recent preclinical studies with Parkinson’s disease.AV-101 and probenecid, we discovered that blocking those transporters in the blood brain barrier with probenecid resulted, as noted above, in a substantially increased brain concentration of 7-Cl-KYNA. This 7-Cl-KYNA efflux-blocking effect of probenecid, with the resulting increased brain levels and duration of 7-Cl-KYNA, suggests the potential impact of AV-101 with probenecid could result in far more profound therapeutic benefits for patients with MDD and other NMDAR-focused CNS disorders than demonstrated in the Elevate Study. Some of the new discoveries from our recent AV-101 preclinical studies with adjunctive probenecid were presented by a collaborator of VistaGen at the British Pharmacological Society’s Pharmacology 2019 annual conference in Edinburgh, UK in December 2019.
We are collaborating withIn addition, a Phase 1B target engagement study completed after the Elevate Study by the Baylor College of Medicine (Baylor) andwith financial support from the U.S. Department of Veterans Affairs (VA) on a small Phase 1b clinical trial of AV-101 in, involved 10 healthy volunteer U.S. Militarymilitary Veterans from Operation Enduring Freedom, Operation Iraqi Freedomwho received single doses of AV-101 (720 mg or Operation New Dawn1440 mg) or placebo, in a double-blind, randomized, cross-over controlled trial. The primary goal of the study was to identify and define a dose-response relationship between AV-101 and multiple electrophysiological (EEG) biomarkers related to NMDAR function, as well as blood biomarkers associated with suicidality (the Baylor Study). The findings from the Baylor Study is a randomized, double-blind, placebo-controlled cross-over study designed as a target engagement study assuggest that, in healthy Veterans, the first-step in plans to test potential anti-suicidal effectshigher dose of AV-101 (1440 mg) was associated with dose-related increase in U.S. Military Veterans who respond to ketamine-based therapy. We previously entered intothe 40 Hz Auditory Steady State Response (ASSR), a Material Transfer Cooperative Research and Development Agreement (MT CRADA)robust measure of the integrity of inhibitory interneuron synchronization that is associated with the VA regarding clinical trial material forNMDAR inhibition. Findings from the Baylor Study. Government funding fromStudy were presented at the VA is being provided for substantially all other study costs.58th Annual Meeting of the American College of Neuropsychopharmacology (ACNP) in Orlando, Florida in December 2019.
Our other product candidate for MDDThe successful Baylor Study and the recent discoveries in Phase 2 development for MDD is PH10 neuroactive nasal spray. PH10 is a potential first-in-class, CNS neuroactive nasal spray administered in microgram doses for MDD. PH10 activates nasal chemosensory neuronsour preclinical studies involving AV-101 and adjunctive probenecid suggest that in turn, engage GABA (gamma-aminobutyric acid)it may be possible to increase therapeutic concentrations and CRH (corticotropin-releasing hormone) neuronsduration of 7-Cl-KYNA in the limbic amygdala system. The activation of these neural circuits is believed to have the potential to lead to rapid antidepressant effects without psychological side effects, systemic exposure or safety concerns often associated with current antidepressants. Based on positive results of a small exploratory Phase 2a studybrain, and thus increase NMDAR antagonism in MDD in which rapid-onset antidepressant effects were observed without psychological side effects or systemic exposure,patients with an inadequate response to standard ADs when AV-101 and probenecid are combined. During 2020, we are preparingplan to complete preclinical assessment of of AV-101 with adjunctive probenecid and evaluate its potential for planned Phase 2bfuture clinical development and commercialization for treatment of PH10 as a stand-alone treatmentCNS indications involving abnormal function of the NMDAR.
VistaStem Therapeutics – Stem Cell Technology for MDD.Drug Rescue and Regenerative Medicine
OurIn addition to our current CNS drug candidates, we have stem cell technology-based, pipeline-enabling capabilities through our wholly-owned subsidiary, VistaStem Therapeutics (VistaStem),. VistaStem is focused on applying human pluripotent stem cell (hPSC) technologytechnologies, including our customized cardiac bioassay system,CardioSafe3D, to discover rescue and develop proprietary new chemical entitiessmall molecule New Chemical Entities (NCEs) for our CNS and other diseases.pipeline or out-licensing. In addition, VistaStem’s hPSC technology has potential applications instem cell therapy and regenerative medicine (CT/RM)technologies involving hPSC-derived blood, cartilage, heart and liver cells. VistaStem’s drug rescue activities utilize cells have multiple potential applications in the cell therapy (CardioSafe 3DCT, its customized cardiac bioassay system, to discover) and develop small molecule NCEs for our CNS pipeline or for out-licensing. regenerative medicine (RM) fields.
To advance potential CT/CT and RM applications of our cardiac stem cell technology,VistaStem’s hPSC technologies related to heart cells, in 2016, we have sublicensedlicensed to BlueRock Therapeutics LP, a next generation CT/RM company establishedformed jointly by Bayer AG and Versant Ventures, (BlueRock Therapeutics), rights to develop and commercialize certain proprietary technologies relating to 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 rights to develop and commercialize VistaStem’s hPSC technologies relating to the production of heart cells for the treatment of heart disease (the BlueRockBayer Agreement). In a manner similar to the BlueRockBayer Agreement, we may pursue additional CT/RM collaborations or licensing transactions involving hPSC-derivedrights to develop and commercialize VistaStem’s hPSC technologies for production of blood, cartilage, and/or liver cells.cells for CT and RM applications, including, among other indications, treatment of arthritis, cancer and liver disease.
Subsidiaries
As noted above, VistaStem, a California corporation, is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Report also include the accounts of VistaStem and 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.
Financial Operations Overview and Results of Operations
Our critical accounting policies and estimates and recent accounting pronouncements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019,2020, as filed with the SEC on June 25, 2019,29, 2020, and in Note 3 to the accompanying unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.
Summary
Net Loss
We have not yet achieved recurring revenue-generating status from any of our product candidates or technologies. Since inception, we have devoted substantially all of oursubstantial time and effortseffort to developing our initialAV-101 for multiple CNS indications, including manufacturing research, process development and production of AV-101 drug substance and finished drug product, candidate, AV-101, from early nonclinicalpreclinical efficacy and safety studies, to our ongoing Phase 2and clinical development programefficacy and safety studies in MDD.CNS indications. In addition, since acquiring our exclusive worldwide licenses to PH 94B and PH10 in 2018, we have devoted substantial resources focused on development and commercialization of PH94B and PH10, for which we are actively pursuing 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 development,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 disclosed above, during our fiscal year ended March 31, 2019, we acquired the rights to develop and commercialize PH94B and PH10 and are actively pursuing initiatives to advance their clinical and nonclinical development. As of June 30, 2019,2020, we had an accumulated deficit of approximately $187.3$205.0 million. Our net loss for the quartersthree months ended June 30, 20192020 and 20182019 was approximately $6.2$3.1 million and $4.2$6.2 million, respectively. We expect losses to continue for the foreseeable future, primarily as we complete our ELEVATE Study, pursueengage in further clinical development of PH94B, PH10 and AV-101, for the adjunctive treatmentand pursue potential drug rescue, drug development and CT and RM opportunities.
Summary of the QuarterThree Months Ended June 30, 20192020
During the quarterthree months ended June 30, 2019,2020, we continued to (i) advance nonclinical development, includingour manufacturing, preclinical and clinical development, of AV-101 as a potential new generation antidepressant and as a potential new therapeutic alternative for several CNS indications with significant unmet need, (ii) advance the nonclinical, including manufacturing, and regulatory initiatives necessary to facilitate pivotaldevelop and commercialize our Phase 3 clinical development of PH94B for acute treatment of anxiety in adults with SAD and Phase 2 clinical developmentacute treatment of, PH10 for MDD (iii)and AV-101 for NMDAR-focused indications. In addition, we continued to expand the regulatory and intellectual property foundation to support broad clinical development and, ultimately, commercialization of AV-101our product candidates in the U.S. and foreign markets, and (iv) on a limited basis, advance drug rescue applications of our stem cell technology to further expand our CNS pipeline.
We have continued to conduct our ELEVATE Study throughoutThroughout the quarter ended June 30, 2020 and through the date of this Report, a new strain of coronavirus (COVID-19) has spread to many countries in additionthe world and the outbreak has 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 U.S. in response to producingthe outbreak. Our operations and those of our contract research organizations (CROs) and contract development and manufacturing organizations (CDMOs) have been 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 as our employees have been working remotely throughout this period. Since the beginning of the COVID-19 pandemic, we have experienced delays in the delivery of supplies of AV-101active pharmaceutical product (API) required to continue development of PH94B and conductingPH10. Future unexpected delays may result in a significant, material delay or initiating certain Phase 3-enabling nonclinical studies involving AV-101.
Pursuantdisruption to our MT CRADA with the VAcurrent clinical development plans, programs, and our arrangements with Baylor, Baylor continued the Baylor Study to define a dose-response relationship between AV-101 and relevant biomarkers related to NMDA function and others possibly related to suicidal ideation in U.S. Military Veterans.operations.
We continue to pursue During the quarter ended June 30, 2020, we completedinitiatives to secure a broad portfoliosuccessful and positive meeting with the FDA regarding Phase 3 clinical development of patent protectionPH94B for AV-101 that covers the acute treatment of multiple CNS indications, unit dose formulationsanxiety in adult patients with SAD, reaching consensus with the FDA on key aspects of AV-101 effectivea unique initial pivotal Phase 3 clinical trial of PH94B involving a single-event, laboratory-simulated public speaking challenge in adult patients with SAD. We agreed with the FDA that our initial pivotal Phase 3 study of PH94B will be a randomized, double-blind, placebo-controlled, parallel comparison study conducted at approximately 12 to treat depression15 sites in North America. Dr. Michael Liebowitz, Professor of Clinical Psychiatry at Columbia University, director of the Medical Research Network in New York City, and chemical synthesis methods. With respectcreator of the Liebowitz Social Anxiety Scale (LSAS), is expected to CNS treatments, we obtained patents in several countriesbe the Principal Investigator of the study. Target enrollment for the treatmentstudy (completed patients) is approximately 182 adult patients with SAD. As in the highly statistically significant (p=0.002) Phase 2 study of depression and we are pursuing patent applications relatedPH94B in SAD, our initial pivotal Phase 3 study will involve a single laboratory-simulated, anxiety-provoking public speaking challenge. Also, as in the Phase 2 study, the Subjective Units of Distress Scale (SUDS) will be used to treatmentassess the primary efficacy endpoint of L-DOPA induced dyskinesias, certain types of neuropathic pain, tinnitus and obsessive-compulsive disorder. Additional patent applications to other aspects of prognostic testing and treatment using AV-101 are under consideration.our Phase 3 study.
OverIn June 2020, we entered into a strategic licensing and collaboration agreement for the recent fiscal yearsclinical development and throughout this quarter, we have pursued patent applicationscommercialization of PH94B with EverInsight Therapeutics Inc., a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in the U.S., Australia,Greater China Europe, Japan and other selected countriesparts of Asia (theEverInsight Agreement). Under the terms of the EverInsight Agreement, EverInsight will be responsible for clinical development, regulatory submissions and regions with significant commercial potential. Severalcommercialization of these patent applications, including a patentPH94B for treatment of MDD with AV-101 grantedSAD, and potentially other anxiety-related indications, in Australia, were recently allowed or have been grantedkey markets in Asia, including markets in Greater China, South Korea and Southeast Asia (collectively, theTerritory). Under the terms of the EverInsight greement, in August 2020, we received a non-dilutive upfront license fee payment of $5.0 million from EverInsight. Upon successful development and commercialization of PH94B in the U.S.Territory, we are eligible to receive up to $172 million in additional development and other major pharmaceutical markets. Based on patent issuances or allowances to-date in several countries, we believe that pending counterpart patent applications relatedcommercial milestone payments. After payment of sublicense fees to AV-101 currently under review in other countries also are likelyPherin pursuant to be granted, although there can be no assurance that all pending applications will ultimately be granted.
We have an exclusiveour PH94B license from Pherin, and payment of consulting fees related to its portfolioconsummation of patent assets around PH94B, under clinical development for the treatmentEverInsight Agreement, we received net cash proceeds of SAD. Patents have issued in several countries, including the U.S., Australia, Canada, China, Europe, Japan, Korea and Mexico.approximately $4.655 million.
To satisfy our obligations under the common stock purchase and registration rights agreements that we entered with Lincoln Park Capital Fund (LPC) 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 June 30, 2020, we sold an additional 6,201,995 registered shares of our common stock to LPC and received aggregate cash proceeds to us of $2,840,200. Since June 30, 2020 and through the date of this Report, we have sold an additional 100,000 shares of our common stock to LPC and received $51,000 in cash proceeds.
Subsequent to the end of the quarter, on August 2, 2020, we entered into an underwriting agreement (theUnderwriting Agreement) with Maxim Group, LLC as representative of the underwriters named therein (theUnderwriter), pursuant to which we sold to the Underwriter, in an underwritten public offering (thePublic 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 Public Offering closed on August 5, 2020, at which time we sold the Shares to the Underwriter. Under the terms of the Underwriting Agreement, we granted to the Underwriter a 45-day over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 Shares (theOption Shares) at a public offering price of $0.80 per share. On August 5, 2020, the Underwriter exercised the Over-Allotment Option with respect to an aggregate of 2,243,250 Option Shares. The sale of the exercised Option Shares was completed on August 7, 2020 and resulted in additional gross proceeds to us of $1,794,600. Net proceeds to us from the sale of the Shares and the exercised Option Shares, after deducting underwriting discounts and commissions and offering expenses payable by us, is approximately $12.9 million.
We also have an exclusive license from Pherin to its portfolio of patent assets around PH10, under clinical development for the treatment of depressive disorders. Patents in this portfolio have issued in Australia, China, Europe and Japan. Applications are pending in the U.S., Canada, Korea and Mexico.
As with AV-101, we plan to seek regulatory exclusivity in countries where this is available for the therapeutic use of PH94B, with initial emphasis on treating SAD as our lead indication in clinical development, and for the therapeutic use of PH10, with our lead indication being the treatment of MDD.
We have obtained and are pursuing patent rights to the production of several types of stem cells and cells differentiated from those 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.
Following the completion of our public offering in February 2019, which generated $11.5 million in gross proceeds to us, we did not complete any additional financing transactions during the period ended June 30, 2019. 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 clinicalnonclinical and nonclinicalclinical development of AV-101, PH94B, PH10, AV-101 and our stem cell technology platform, 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.
Results of Operations
Comparison of Three Months Ended June 30, 20192020 and 20182019
The following table summarizes the results of our operations for the three months ended June 30, 20192020 and 20182019 (amounts in thousands).
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| | | |
| Operating expenses: | | |
| Research and development | $4,314 | $2,744 | $1,731 | $4,314 |
| General and administrative | 1,910 | 1,466 | 1,391 | 1,910 |
| Total operating expenses | 6,224 | 4,210 | 3,122 | 6,224 |
| | | |
| Loss from operations | (6,224) | (4,210) | (3,122) | (6,224) |
| | | |
| Interest income (expense), net | 16 | (2) | (3) | 16 |
| Other income | | 1 | - |
| | | |
| Loss before income taxes | (6,208) | (4,212) | (3,124) | (6,208) |
| Income taxes | (2) | (3) | (2) |
| | | |
| Net loss | (6,210) | (4,214) | (3,127) | (6,210) |
| Accrued dividend on Series B Preferred Stock | (302) | (274) | |
| Accrued dividends on Series B Preferred Stock | | (336) | (302) |
| Net loss attributable to common stockholders | $(6,512) | $(4,488) | $(3,463) | $(6,512) |
Revenue
We reported no revenue for either the quarter ended June 30, 20192020 or 20182019. As described more completely in Note 11,Sublicensing and Collaboration Agreements, to our Condensed Consolidated Financial Statements in Part I of this Report, on June 24, 2020 we presently have no recurringentered into the EverInsight Agreement, pursuant to which we received an non-dilutive upfront license fee payment of $5.0 million on August 3, 2020. We expect to recognize revenue generating arrangementspursuant to this payment in future periods beginning with respect to AV-101, PH94B, PH10 or other potential product candidates.the quarter ending September 30, 2020. While we may potentially receive additional cash payments orand royalties in the future under the EverInsight Agreement or the 2016 Bayer Agreement (also described in Note 11,Sublicensing and Collaborative Agreements, to our December 2016 BlueRock AgreementCondensed Consolidated Financial Statements in Part I of this Report) in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the BlueRockEverInsight Agreement or the Bayer 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 expense increased todecreased from $4.3 million compared to $2.7$1.7 million for the quarters ended June 30, 2020 and 2019, and 2018, respectively. Continuing expensesrespectively, primarily due to the completion of the ELEVATEElevate Study in the fourth calendar quarter of 2019. Expenses related to the Elevate Study and variousother AV-101 related nonclinical activities including manufacturing additional quantities of AV-101 and other developmental studies, as well as nonclinical activities supportingdecreased by $2.5 million in the continuing development of PH94B arequarter ended June 30, 2020 compared to expense in the primary reasons for the increase inquarter ended June 30, 2019. Noncash research and development expense. Noncash expenses, included in research and development expense, primarily stockstock-based compensation and depreciation in both periods, accounted for approximately $416,000$249,000 and $255,000$416,000 in the quarters ended June 30, 20192020 and 2018,2019, respectively. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| | | |
| Salaries and benefits | $340 | $316 | $348 | $340 |
| Stock-based compensation | 391 | 230 | 227 | 391 |
| Consulting and other professional services | 136 | 14 | 93 | 136 |
| Technology licenses and royalties | 167 | 124 | 108 | 167 |
| Project-related research and supplies: | | |
| ELEVATE Study and other AV-101 expenses | 2,666 | 1,903 | |
| PH94B and PH10 expenses | 424 | - | |
| Project-related research, licenses and supplies: | | |
| Elevate study and other AV-101 expenses | | 165 | 2,666 |
| PH94B and PH10 project expenses | | 635 | 424 |
| Stem cell and all other | 42 | 39 | 5 | 42 |
| | 3,132 | 1,942 | 805 | 3,132 |
| Rent | 136 | 104 | 138 | 136 |
| Depreciation | 12 | 12 |
| All other | - | 2 | |
| | | |
| Total Research and Development Expense | $4,314 | $2,744 | $1,731 | $4,314 |
The increase in salariesSalaries and benefits expense reflects the impact of salary increases granted tois essentially unchanged between periods, reflecting no changes in compensation levels for our Chief Medical Officer (CMO), Chief Scientific Officer (CSO) and, or members of our scientific staff effectivebetween the periods. The change reflects the return from leave of absence of one member of our scientific staff during the quarter ended June 30, 2019 and modest increases in April 2019.the cost of Company-provided benefits beginning in mid-2019.
Stock-based compensation expense reflects the routine amortization of option grants made to our CMO, CSO, CMO,members of our scientific staff and certain clinical and scientific consultants insince June 2016, and thereafter, all earlier outstanding grants having become fully vested and amortized. Grants awarded after June 201830, 2019, including those granted during the quarter ended June 30, 2020, account for approximately $139,000$101,000 of expense in the quarter ended June 30, 2020, offset by the expense reduction of approximately $199,000 attributable to certain options granted between June 2016 and February 2018 that became fully vested and amortized during the quarter ended June 30, 2020 or earlier. Stock compensation expense is further reduced in the quarter ended June 30, 2020 by approximately $58,000 due to the absence of the $161,000 increaseimpact of immediate vesting attributable to certain options granted in 2019 expense compared to 2018.May 2019. Expense attributable to theserecent option grants is generally being amortized over two-year to three-year vesting periods, with one-quarteressentially all of the grants made in August 2018 andsince May 2019, including those made in the quarter ended June 30, 2020, being immediately vested and expensed upon grant, in accordance with the terms of the respective grants.
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, in 2018, primarilythird parties, including by members of our Scientific Advisory Board and CNS Clinical and Regulatory Advisory Board. The increase in 2019 expense also reflects consulting and analytical servicesBoard, especially in support of our PH94B and PH10 development initiatives.
Technology license and royalties expense 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 theseThese 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 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. Support of the intellectual property portfolios ofplatform, but also nominally with respect to our PH94B and PH10 contributed only nominally to this expense in 2019.intellectual property portfolios.
AV-101 project expense for each of the quarters presented primarilyquarter ended June 30, 2019 reflects the costs of conducting the ELEVATEElevate Study in MDD, including various CRO,CROs, investigator and clinical site costs, and CRO support services for AV-101 projects for indications other than MDD, as well as expense incurred to manufacture additional quantities of AV-101 for use in potential future Phase 3-enabling nonclinical trials and clinical development of AV-101 for MDD and otherin a number of potential CNS indications. In additionAV-101 project expense for the quarter ended June 30, 2020 primarily reflects the cost of certain preclinical studies related to increased ELEVATE Study costs in 2019, we have incurred further costs associatedthe use of AV-101 with various Phase 3-enabling initiativesadjunctive probenecid and nonclinical trials.certain AV-101 manufacturing stability studies.
Current quarter expense related to -25-
PH94B and PH10 project expenses for the quarters ended June 30, 2020 and 2019 primarily reflectsreflect manufacturing and regulatory initiatives necessary to facilitate pivotal Phase 3 clinical development of PH94B for SAD. Similar initiativesacute treatment of anxiety in patients with respect toSAD and Phase 2B development of PH10 for MDD were planned duringMDD. Manufacturing, formulation and analysis of sufficient quantities of API and drug product are currently the current quartercritical path items for advancing the clinical development of both of these product candidates and are scheduledproduction and analytical processes for both have been delayed by issues related to begin in the quarter ending September 30, 2019.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.
shelter-in-place and remote working requirements related to the ongoing COVID-19 pandemic, such expenses have been reduced to an insignificant level in the quarter ended June 30, 2020.
The increase in rentRent 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, for our South San Francisco office and laboratory facility 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. In implementing ASC 842, we also projected that we would exercise a five-year option to extend our tenancy under the lease when it expires in 2022, which extension would be subject to projected market rent conditions at that time. 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. Refer to Note 10, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements in Part I of this Report for additional information. Following our implementation of ASC 842, changes 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.
General and Administrative Expense
General and administrative expense increaseddecreased to approximately $1.9$1.4 million from approximately $1.5$1.9 million for the quarters ended June 30, 20192020 and 2018,2019, respectively. Noncash general and administrative expense, $466,000 in the quarter ended June 30, 2020, decreased from $772,000 in the quarter ended June 30, 2019 increased from $503,000 in the quarter ended June 30, 2018 primarily due to an increasedecreases in stock-based compensation offset by a decrease inand the noncash components of investor and public relations expenses.expense 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 general and administrative expense for each of the periods (amounts in thousands):
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| | | |
| Salaries and benefits | $344 | $299 | $348 | $344 |
| Stock-based compensation | 672 | 382 | 448 | 672 |
| Board fees | 46 | 39 | 46 |
| Legal, accounting and other professional fees | 279 | 251 | 195 | 279 |
| Investor and public relations | 304 | 286 | 112 | 304 |
| Insurance | 82 | 68 | 102 | 82 |
| Travel expenses | 30 | 37 | 4 | 30 |
| Rent and utilities | 90 | 71 | 90 |
| All other expenses | 63 | 33 | 46 | 63 |
| | $1,910 | $1,466 | $1,391 | $1,910 |
The increase in salariesSalaries and benefits primarily reflects the impact of salary increases granted effective April 2019 toexpense is essentially unchanged between periods, reflecting no changes in compensation levels for 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.staff and modest increases in the cost of Coimpany-provided benefits beginning in mid-2019.
Stock-based compensation expense reflects the routine amortization of option grants made to our CEO, CFO, VP Corporate Development, administrative staff, independent members of our Board and certain consultants insince June 2016, and thereafter, all earlier grants having become fully vested and amortized. Grants awarded after June 201830, 2019, including those granted during the quarter ended June 30, 2020, account for approximately $248,500$229,000 of expense in the quarter ended June 30, 2020, offset by the expense reduction of approximately $333,000 attributable to certain options granted between June 2016 and February 2018 that became fully vested and amortized during the quarter ended June 30, 2020 or earlier. Stock compensation expense is further reduced in the quarter ended June 30, 2020 by approximately $98,000 due to the absence of the $290,000 increaseimpact of immediate vesting attributable to certain options granted in 2019 expense compared to 2018 expense.May 2019. Expense attributable to theserecent option grants is generally being amortized over two-year to three-year vesting periods, with one-quarteressentially all of the grants made in August 2018 andsince May 2019, including those made in the quarter ended June 30, 2020, being immediately vested and expensed upon grant, in accordance with the terms of the respective grants.
Board fees represents fees paid as consideration for the Board and Board Committee services ofto the independent members of our Board and the 2019 increase reflects the additionBoard.
Legal, accounting and other professional fees for the quarters ended June 30, 20192020 and 20182019 includes expense related to routine legal fees as well as the accounting expense related to the annual audit of theour prior year’syear financial statements and the review of the financial statements for the first quarter of the fiscal year.statments. In 2019, and 2018, we also incurred $30,000 and $10,000, respectively, attributable to services provided by an international business development consultants.consultant.
Investor and public relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, and public relations and social media services, and well as market awareness and strategic advisory and support functions and initiatives that, in 2019, 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 itstechnologies and our research and development programs, including among registered investment professionals and investment advisors, and individual and institutional investors. Ininvestors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide. During the quarter ended June 30, 2020, we curtailed the number of external service providers engaged in these activities compared to the prior year. Further, in the quarter ended June 30, 2019, in addition to cash fees and expenses we incurred for such activities, we recognized approximately $79,400 of noncash expense attributable to the amortization of the fair value of stock and warrants granted in the prior fiscal yearprevious periods to various corporate development, investor relations, and market awareness service providers. The balance ofNo such noncash expense ws incurred in the fair value of the securities granted remains recorded as a prepaid expense atquarter ended June 30, 20192020.
The increase in insurance expense is primarily attributable to the market-rate increase in the premium for our directors and is being amortized over the remaining service periodofficers liability insurance upon renewal of the respective contracts. our policy in May 2020.
In the quarter ended June 30, 2018, in addition to cash fees and expenses we incurred, we granted an aggregate of 100,000 unregistered shares of our common stock to certain investor relations, market awareness and financial advisory service providers as full or partial compensation for their services and recognized noncash expense of approximately $123,000, representing the fair value of the stock at the time of issuance.
In both periods,2019, travel expense reflects costs associated with in-person management presentations and meetings held in multiple U.S. markets and certain international markets in 2019, 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 in both years.Elevate Study. As a result of shelter-in-place and travel restrictions associated with the ongoing COVID-19 pandemic, such meetings have occurred remotely and there has generally been no in-person business travel by our executives.
The increase in rentRent 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, for our South San Francisco office and laboratory facility 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. In implementing ASC 842, we also projected that we would exercise a five-year option to extend our tenancy under the lease when it expires in 2022, which extension would be subject to projected market rent conditions at that time. 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. Refer to Note 10, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements in Part I of this Report for additional information. Following our implementation of ASC 842, changes 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.
Interest and Other Expenses
Interest expense totaled $3,200 for the quarter ended June 30, 2020 compared to interest income, net of interest expense totaledof $16,500 for the quarter ended June 30, 2019 compared to interest expense of $2,100 for the quarter ended June 30, 2018.2019. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):
| | Three Months Ended June 30, | Three Months Ended June 30, |
| | | | | |
| | | |
| Interest income | $19 | $- | $- | $19 |
| Interest expense on premium financing and capital lease (2018) | (3) | (2) | |
| Interest expense on financing lease, insurance premium financing notes | | |
| and Payroll Protection Program loan | | (3) |
| Interest income (expense), net | $16 | $(2) | $(3) | $16 |
Following the completion of our underwritten public offering in February 2019, which generated $11.5 million in gross proceeds to us, during the quarter ended June 30, 2019, we deposited a portion of the proceeds in interest-bearing cash equivalent accounts and earned interest income. As a result of the decline in market interest rates in 2020 compared to 2019 and a reduction in the amount of cash deposited in such accounts, we earned no interest in the quarter ended June 30, 2020. Interest expense in both periods relates to interest paid on insurance premium financing notes and on aour financing lease of office equipment treated as a capitalized lease in 2018 and as a financing lease subject to ASC 842, and in 2019.2020, interest accrued on our Payroll Protection Program loan.
We recognized $302,500$335,800 and $273,500302,500 for the quarters ended June 30, 20192020 and 2018,2019, respectively, representing the 10% cumulative 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 accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss included in Part I of this Report. There have been no conversions of outstanding shares of Series B Preferred stock into shares of our common stock since August 2016.
Liquidity and Capital Resources
Since our inception in May 1998 through June 30, 2019,2020, 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 $79.0$86.1 million, as well as from an aggregate of approximately $17.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials such as the Baylor Study)trials), strategic collaboration payments, intellectual property sublicensinglicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.1$38.2 million 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
At June 30, 2019,2020, we had cash and cash equivalents of approximately $8.3$1.5 million. As more completely described in Note 8,Capital Stockand Note 12,Subsequent Events, to our Condensed Consolidated Financial Statements in Part I of this Report, on March 24, 2020, we entered into a purchase agreement and a registration rights agreement with 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). To satisfy our obligations under the LPC Agreement, we filed the LPC Registration Statement with the SEC 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 the date of this Report, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200.
As more completely described in Note 11,Sublicensing and Collaboration Agreements, and in Note 12,Subsequent Events,to our Condensed Consolidated Financial Statements in Part I of this Report,on June 24, 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B with EverInsight Therapeutics Inc., a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia (theEverInsight Agreement). Under the terms of the EverInsight Agreement, EverInsight agreed to make a non-dilutive upfront license fee payment of $5.0 million to us, and we are eligible to receive up to $172 million of additional milestone payments upon successful achievement of specific development and commercial milestones in the future, in addition to royalties. We received net cash proceeds of approximately $4.655 million in August 2020, after a required sublicense payment to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin and consulting payments related to consummation of the EverInsight Agreement.
As described more completely in Note 12,Subsequent Events, to our Condensed Consolidated Financial Statements in Part I of this Report, on August 2, 2020, we entered into an underwriting agreement (theUnderwriting Agreement) pursuant to which we sold to the Underwriter, in an underwritten public offering (thePublic Offering), an aggregate of 15,625,000 shares (the 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. The Public Offering closed on August 5, 2020. Under the terms of the Underwriting Agreement, we granted to the Underwriter a 45-day over-allotment option (theOver-Allotment Option) to purchase up to an additional 2,343,750 Shares (theOption Shares) at a public offering price of $0.80 per share. On August 5, 2020, the Underwriter exercised the Over-Allotment Option with respect to an aggregate of 2,243,250 Option Shares (theExercised Option Shares). We completed the sale of the Exercised Option Shares on August 7, 2020, which resulted in additional gross proceeds to us of $1,794,600. Net proceeds to us from the sale of the Shares and the Exercised Option Shares, after deducting underwriting discounts and commissions and offering expenses payable by us, is approximately $12.9 million.
-21-
Although the transactions described above have generated approximately $20.0 million in net cash procceds to us between April 1, 2020 and the date of this Report, we believe it is possible that our cash position at June 30, 2019 is sufficient to complete and announce top line results of our ELEVATE Study, our cash position at June 30, 2019 considered2020, together 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 wesuch net proceeds, will not havebe sufficient resources to fund our planned operations for the twelve months following the issuance of these financial statements, during which time we plan to complete our ELEVATE study, prepare for and launch a pivotal Phase 3 clinical trial of PH94B, prepare for additional Phase 2 clinical studies and certain nonclinical studies involving AV-101 and prepare for a Phase 2b clinical trial of PH10, and raises substantial doubt that we can continue as a going concern. During the next twelve months, subject to securing appropriate and adequate additional financing, we plan to prepare for and launch (i) a pivotal Phase 3 clinical trial of PH94B for acute treatment of anxiety in adult patients with SAD, (ii) a small exploratory open-label Phase 2A study of PH94B for acute treatment of adult patients with AjDA and (iii) several nonclinical studies involving PH94B, PH10 and AV-101. When necessary and advantageous, we plan to raise additional capital, primarily through the sale of our equity securities in one or more (i) private placements to accredited investors, (ii) public offerings and/or (iii) in public offerings.strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the Everinsight Agreement. Subject to certain restrictions, our effective Registration Statement on Form S-3 (Registration No. 333-215671)333-234025) (the S-3 Registration Statement), which became effective on October 7, 2019, 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 orand institutions.
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations that could generate revenue or provide funding, including non-dilutive funding, for development of AV-101, PH94B, PH10 and/one or additionalmore of our CNS product candidates. We may also seek additional government grant awards or agreements similar to our relationships with the NIH, Baylor and the VA in connection with the Baylor Study.certain government-sponsored studies. 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 BlueRockEverInsight Agreement and the Bayer Agreement (described more completely in Note 11,Sublicensing and Collaboration Agreementsto our Condensed Consolidated Financial Statements in Part I of this Report) with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of AV-101, PH94B, PH10 or otherour 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, the scope and nature of opportunities related to our success and the success of certain other companies in 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 AV-101, 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 research and development, investor and public relations and corporate development, legal, 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 EverInsight Agreement and the Bayer Agreement will generate additional 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 substantial additional financing on a timely basis when needed in 2019 and beyond,2020 or thereafter, 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 Condensed Consolidated Financial Statements 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 periods stated (in thousands):
| | Three Months Eneded June 30, |
| | | |
| | | |
| Net cash used in operating activities | $(4,761) | $(3,135) |
| Net cash used in investing activities | - | (35) |
| Net cash (used in) provided by financing activities | (42) | 23 |
| | | |
| Net decrease in cash and cash equivalents | (4,803) | (3,147) |
| Cash and cash equivalents at beginning of period | 13,100 | 10,378 |
| Cash and cash equivalents at end of period | $8,297 | $7,231 |
| | Three Months Ended June 30, |
| | | |
| | | |
| Net cash used in operating activities | $(2,807) | $(4,761) |
| Net cash used in investing activities | - | - |
| Net cash provided by (used in) financing activities | 2,998 | (42) |
| | | |
| Net increase (decrease) in cash and cash equivalents | 191 | (4,803) |
| Cash and cash equivalents at beginning of period | 1,355 | 13,100 |
| | | |
| Cash and cash equivalents at end of period | $1,546 | $8,297 |
The increasedecrease in cash used in operations results primarily from the conductcompletion of our ELEVATEthe Elevate Study, which commenced at the end of the fourthfirst calendar quarter of our fiscal year ended March 31, 2018. Contributing additionally to2018 and was completed during the increase are modest increases in employee cash compensation and benefits and an increase in various investor relations and corporatefourth calendar quarter of 2019, partially offset by nonclinical development and awareness initiatives. Cashmanufacturing advancements related to PH94B and PH10 during our current fiscal year. We used inno cash for investing activities in 2018 reflects the cost of tenant improvements at our office and laboratory facilities in South San Francisco, CA, substantially all of which were reimbursed by our landlord under the terms of our November 2016 lease extension, which reimbursement is reflected in operating activities.either year presented. Cash provided by financing activities in 2018the quarter ended June 30, 2020 primarily reflects the first cash proceeds to us from sales of our Summer 2018common stock pursuant to the LPC Agreement and from the Spring 2020 Private Placement, net of routine insurance premium financing note and financing lease paymentspayments. Cash used in both years.financing activities in the three months ended June 30, 2019 primarily reflects routine insurance premium financing note and financing lease payments.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Recent Accounting Pronouncements
For information relating to recent accounting pronouncements and the expected impact of such pronouncements on our condensed consolidated financial statements, see Note 3 of the Notes to Condensed Consolidated Financial Statements included elsewhere inIn Part I of this Report.
| Item 4. | | CONCTOROLSNTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.
Internal Control over Financial Reporting
In our Annual Report on Form 10-K for our fiscal year ended March 31, 20192020 filed with the Securities and Exchange Commission on June 25, 2019,29, 2020, we identified two material weaknesses in our internal control over financial reporting relating to (i) segregation of duties and (ii) the functionality of our accounting software. Management does not believe that these weaknesses have resulted in any deficient financial reporting and believes that current resources would be more appropriately applied elsewhere and when resources permit, they will alleviate such material weaknesses through various steps, which may include the addition of qualified financial personnel and/or the acquisition and implementation of alternative accounting software. Accordingly, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this Report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PARTPART II: OTHEROTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q (Report) and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for theour fiscal year ended March 31, 20192020 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 results of operations could be materially and adversely affected.
The COVID-19 pandemic has, and continues to have an impact on our business, and may have several adverse effects on our business.
In recent months, a new strain of coronavirus (COVID-19) has spread to many countries in the world and the outbreak has 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 U.S. in response to the outbreak. Considerable uncertainty still surrounds the COVID-19 virus 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 have already resulted in significant negative economic impacts on a global basis.
As the coronavirus pandemic continues to rapidly evolve, we cannot at this time accurately predict the effects of these conditions on our operations. Uncertainties remain as to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length and scope of the travel restrictions and business closures imposed by the governments of impacted countries. The continued outbreak of COVID-19, or another infectious disease with similar characteristics, 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 global COVID-19 pandemic has had an impact on our business, and a continuing outbreak or future outbreaks may have several adverse effects on our business, results of operations and financial condition.
| ● | Delayed product development: We have, and may continue to face delays and other disruptions to our ongoing clinical 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 U.S. and elsewhere, which may impact review and approval timelines for our product candidates in various stages of development. Although we remain focused on advancing our clinical development programs for our current product candidates, our research and development efforts may be impacted if our employees, our contract research organizations (CROs) or our third-party contract development and manufacturing organizations (CDMOs) have reductions in force or are advised to continue to work remotely as part of social distancing measures or other protective measures necessitated by the COVID-19 pandemic. |
| ● | Negative impacts on our suppliers, manufacturers and employees: COVID-19 or similar infectious diseases has impacted and may in the future impact the health of our employees, contractors, suppliers, CROs or CDMOs, or reduce the availability of our workforce or the workforce of one or more of the 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 ingredient (API or drug substance) and formulated drug product required to advance development of PH94B and PH10. Although our supply of raw materials and API remains sufficiently operational, we may experience adverse effects of such events in the future, which may result in a significant, material delay of or disruption to our clinical development programs, and our operations. Additionally, having 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. |
The ongoing COVID-19 pandemic has also created significant disruption to 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 market conditions and general economic environment. Our future results of operations and liquidity could be adversely impacted by supply chain disruptions and operational challenges faced by our CROs, CDMOs and other contractors. Continued outbreaks of COVID-19 or a significant outbreak of contagious diseases in the human population 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 one or more of our current drug candidates and we cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize any of our product 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 one 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. Each of our current CNS drug candidates will require substantial additional nonclinical and clinical development, manufacturing and regulatory approval before any of them may be commercialized, and there can be no assurance that any of them will ever achieve regulatory approval. Any DR new chemical entity (NCE) we may produce through drug rescue activities 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 U.S. and in other countries where we 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, 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 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 any of our current drug candidates or any future product candidates will be successfully developed or commercialized in the U.S. or any market outside the U.S.
We are not permitted to market our product candidates in the U.S. until we receive approval of a New Drug Application (NDA) from the FDA, or in any foreign countries until we receive the requisite approval from such countries. Obtaining FDA approval of a 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 a NDA for many reasons, including, among others:
| ● | 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; |
| ● | 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; |
| ● | 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 |
| ● | 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 any current or future 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. IfAlthough 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. 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 MDDmajor depressive disorder (MDD) and for the treatment of NP.neuropathc pain (NP). However, these designations may not actually lead to faster development or regulatory review or approval processes 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 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, these 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 for either or both indications if it believes that the respective designation is no longer supported by data from our clinical development programs.
In addition, we may apply for Fast Track designation for PH94B, PH10 and AV-101 as a treatment option for other CNS indications, and for our other product candidates.. The FDA has broad discretion whether or not to grant a Fast Track designation, and even if we believe AV-101, PH94B, PH10, and/AV-101 or other product candidates may be eligible for this designation, we cannot be sure that the review or approval will compare to conventional FDA procedures.
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 AV-101, 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. AV-101, PH94B, PH10, AV-101 or any other future product candidates in later stages of clinical development may fail to show the desired safety and efficacy results despite having progressed through nonclinical 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, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in nonclinical studies and clinical trials nonetheless failed to obtain FDA approval. With respect to our current product candidates, if our ELEVATE Study, any future clinical study of AV-101, one or more of the future Phase 3 clinical trials of PH94B for acute treatment of anxiety in adults with SAD, any future clinical study of AV-101 or a future Phase 2 clinical trial of PH10 for MDD fail(s) to produce positive results, the development timeline and regulatory approval and commercialization prospects for AV-101, PH94B, PH10 or PH10AV-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 early- and late-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 CDMOs 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 collaborators 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.
If serious adverse events or other undesirable side effects or safety concerns attributable to AV-101 are identified during the Baylor Study, other investigator-sponsored clinical trials, in ourfuture clinical trials of AV-101, including our ELEVATE study, or our clinical trials of PH94B or PH10,product candidates, it may adversely affect or delay our clinical development and commercialization of AV-101, PH94B, PH10 or PH10.AV-101.
Undesirable side effects or safety concerns caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval. AV-101 was previously tested by the NIMH in the NIMH Study, is currently being tested by Baylor in the Baylor Study and may be subjected to testing in the future for other CNS indications in additional investigator-sponsored clinical trials. Although no treatment-related serious adverse events (SAEs) were observed in the NIMH Study,any clinical trials 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 Baylor Study otherany furture clinical trials, including investigator-sponsored clinical trials, of AV-101, our clinical trials of AV-101, including our ELEVATE Study, or in our future clinical trials of PH94B or PH10, it may adversely affect or delay our clinical development and commercialization of AV-101, PH94B or PH10,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:
●
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
●
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 trials and nonclinical studies of AV-101, 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.
We will need to complete our ELEVATE Study, at least 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 any NDA for regulatory approval for AV-101 as an add-on treatment for MDD in patients with an inadequate response to current ADs, or any other CNS indication. Similarly, we will need to complete at least two pivotal Phase 3 clinical studies of PH94B, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to our submission of an NDA for regulatory approval of PH94B as an on-demandacute treatment forof anxiety in adults with SAD or any other CNS other indication. For PH10, 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 for regulatory approval of PH10 as a stand-alone rapid-onset treatment for MDD, or any other CNS indication. For AV-101, for treatment of any CNS indication, 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 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 Baylor Study, our ELEVATE Study or any of our future-planned nonclinical and clinical trials of AV-101, 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:
| ● | delays due to events resulting from the ongoing COVID-19 pandemic; |
| ● | 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; |
| ● | delays in filing or receiving approvals from regulatory authorities of additional INDs that may be required; |
| ● | negative or ambiguous results from nonclinical or clinical studies; |
| ● | 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; |
| ● | 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; |
| ● | inability to manufacture or obtain clinical supplies of a product candidate meeting required quality standards; |
| ● | difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective clinical site or sites; |
| ● | challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to clinical trial sites; |
| ● | 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; |
| ● | severe or unexpected adverse drug-related side effects experienced by patients in a clinical trial; |
| ● | delays in validating any endpoints utilized in a clinical trial; |
| ● | 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 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; |
| ● | 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; |
| ● | 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; |
| ● | problems with clinical supply materials that may lead to regulatory actions; and |
| ● | lack of adequate funding to continue nonclinical or clinical studies. |
Changes in regulatory requirements, regulatory guidance or unanticipated events during our nonclinical studies and clinical trials of AV-101, PH94B, PH10, AV-101 or other 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, guidance or unanticipated events during our nonclinical studies and clinical trials of AV-101, PH94B, PH10, AV-101 or other product candidates may force us to amend nonclinical studies and clinical trial protocols or the regulatory authority may impose additional nonclinical studies and clinical trial requirements. Amendments or changes to our clinical trial protocols would require resubmission to the regulatory 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 nonclinical 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 AV-101, PH94B, PH10, AV-101 or other 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 our current product candidates and will continue to do so for any other future 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 AV-101, PH94B, PH10, AV-101 or other future product candidates may be delayed and we may not be able to obtain regulatory approval for or commercialize AV-101, PH94B, PH10, AV-101 or other future 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 extensive 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:
| ● | experience disruptions to their operations, such as reduced staffing and supply chain disruptions, as a result of the ongoing COVID-19 pandemic; |
| ● | have staffing difficulties and/or undertake obligations beyond their anticipated capabilities and resources; |
| ● | fail to comply with contractual obligations; |
| ● | 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. |
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, Baylor or other independent investigators does not relieve us of our regulatory responsibilities. We and our CROs, Baylor 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 third-party collaborators fail to comply with applicable cGCPs, the clinical data generated in 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 Baylor 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 our 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, Baylor or the VA 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 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 product candidates in the future.
By strategic design, we do not currently have, nor do we plan to acquire or develop, extensive 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 CMOsCDMOs to manufacture API and formulate, hold and distribute final drug product. The facilities used by our CMOsCDMOs to manufacture AV-101, PH94B, PH10 and PH10AV-101 API and AV-101,formulate PH94B, PH10 and PH10AV-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 CMOsCDMOs to comply with all applicable cGMPs for the manufacturing of both API and finished drug product. If our CMOsCDMOs cannot secure adequate supplies of suitable raw materials or successfully manufacture our product candidates, including AV-101, PH94B, PH10 and PH10AV-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 AV-101, PH94B, PH10 and PH10AV-101 API and finished drug product, may be delayed and our CMOsCDMOs 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’CDMOs’ ability to maintain adequate quality control, quality assurance and qualified personnel. All of our CMOsCDMOs are engaged with other companies to supply and/or manufacture materials or products for such other companies, which exposes our CMOsCDMOs 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’sCDMO’s facilities generally or affect the timing of manufacture of AV-101, PH94B, PH10 and PH10AV-101 for required or planned nonclinical and/or clinical studies. If the FDA or an applicable foreign regulatory agency determines now or in the future that our CMOs’CDMOs’ 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 CMOsCDMOs 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 AV-101, PH94B, PH10 and PH10,AV-101, we do not yet have long-term supply agreements in place with our CMOsCDMOs and each batch of AV-101, PH94B, PH10 and PH10AV-101 is or will be individually contracted under a separate supply agreement. If we engage new CMOs,CDMOs, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon CMOsCDMOs and, potentially, collaboration partners, to manufacture research and development scale, and, if approved, commercial 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 AV-101, PH94B, PH10 and PH10AV-101 API and finished drug product will be adequate to support our planned nonclinical and clinical studies of AV-101, PH94B, PH10 and PH10,AV-101, no assurance can be given that unanticipated supply shortages or CMO-relatedCDMO-related delays in the manufacture and formulation of AV-101, PH94B, PH10 or PH10AV-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 CMOsCDMOs to manufacture our product candidates must be approved by the FDA anf 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 CMOCDMO partners for compliance with cGMPs and QSRs. If our CMOsCDMOs 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. CMOsCDMOs 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 AV-101, PH94B, PH10, AV-101 or any other product candidate in the U.S., we may never receive regulatory approval to market AV-101, PH94B, PH10, AV-101 or any other product candidate outside of the U.S.
In order to market AV-101, PH94B, PH10, AV-101 or any other product candidate outside of the 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 U.S. as well as other risks. In particular, in many countries outside of the 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 product candidates are ultimately regulated as controlled substances, we, our CMOs,CDMOs, 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 U.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 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 candidate to be controlled substances, we cannot yet give any assurance that such product candidates, including AV-101, PH94B, PH10 and PH10AV-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,CDMOs, 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 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 CMOsCDMOs would be subject to initial and periodic DEA inspection. If we or our CMOsCDMOs 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,CDMOs, 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 sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate any revenue.
We do not currently have any internal resources for the sale, marketing and distribution of pharmaceutical products, and we may not create such internal capabilities in the foreseeable future. Therefore, to market our product candidates, if approved by the FDA or any other regulatory body, we must make contractual arrangements with third parties to perform services related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates, or establish those capabilities prior to market approval. If we are unable to establish adequate contractual arrangements for such sales, marketing and distribution capabilities, or if we are unable to do so on commercially reasonable terms, or if we are unable to establish such capabilities on our own, our business, results of operations, financial condition and prospects will be materially adversely affected.
Even if we receive marketing approval for our 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 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:
| ● | 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; |
| ● | limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities; |
| ● | the clinical indications for which our product candidates are approved; |
| ● | availability of alternative treatments already approved or expected to be commercially launched in the near future; |
| ● | 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. |
If our 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 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 by our product candidates could cause us or regulatory authorities to 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 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. |
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 product candidates, we may still face future development and regulatory difficulties.
Even if we receive marketing approval for our 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 and 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 have the authority to require, as part of an NDA or post-approval, the submission of a 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:
| ● | issue warning letters or untitled letters; |
| ● | seek an injunction or impose civil or criminal penalties or monetary fines; |
| ● | suspend or withdraw marketing approval; |
| ● | suspend any ongoing clinical trials; |
| ● | refuse to approve pending applications or supplements to applications submitted by us; |
| ● | suspend or impose restrictions on operations, including costly new manufacturing requirements; or |
| ● | 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 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.
Currently, management is unaware of any FDA-approved oral adjunctive therapy for MDD patients with an inadequate response to standard antidepressants having the same mechanism of pharmacological action and safety profile as our orally-administered AV-101 or our intranasally-administered PH10. 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 AV-101 or PH10 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. Management is also unaware of any FDA-approved rapid-onset, on-demandacute treatment forof anxiety in adults with SAD having the same mechanism of pharmacological action and safety profile as our PH94B.
In the field of new generation, oral adjunctive treatments for adult patients with MDD with an inadequate response to standard FDA-approved ADs, we believe our principal competitors may be Axsome’s AX-05,AXS-05, Alkermes’ ALKS-5461, Allergan’s AGN-241751 and Sage’s Sage-217. Additional potential competitors may include, but not be limited to, academic and private commercial clinics providing intravenous ketamine therapy on an off-label basis and Janssen’s intranasally-administered Spravato (esketamine). With respect to PH94B and current FDA-approved treatment options for SAD in the U.S., our competition may include, but is not limited to, certain current generic ADs approved by the FDA for treatment of SAD and certain classes of drugs used on an off-label basis for treatment of SAD, including benzodiazepines such as alprazolam, and beta blockers such as propranolol.
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. With respect to AV-101 and PH10, we believe that a range of pharmaceutical and biotechnology companies have programs to develop drug candidates for the treatment of depression, including MDD, Parkinson’s disease levodopa-induced dyskinesia, neuropathic pain, epilepsy, and other neurological conditions and diseases, including, but not limited to, Abbott Laboratories, Acadia, Allergan, Alkermes, Aptynix, AstraZeneca, Axsome, Eli Lilly, GlaxoSmithKline, IntraCellular, Janssen, Lundbeck, Merck, Neurocrine, Novartis, Ono, Otsuka, Pfizer, Relmada, Roche, Sage, Sumitomo Dainippon, and Takeda, as well as any affiliates of the foregoing companies. With 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 additional 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 and a sublingual formulation of the sodium channel blocker riluzole in development by Biohaven.Janssen. 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 EverInsight Therapeutics, Inc. in June 2020 for the development and commercialization of PH94B in certain key Asian markets.
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 EverInsight Agreement and/or the Bayer Agreement. Our ability to generate revenue from these arrangements will depend on our collaborators’ abilities to successfully perform the functions assigned to them in these arrangements. In addition, our collaborators may 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.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for collaboration 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 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 product candidates with commercial and therapeutic potential. Although AV-101 is in Phase 2 clinical development for treatment of MDD, and we are planning for Phase 2a studies of AV-101 for treatment of NP and LID, for Phase 3 development of PH94B for on-demand treatment of SAD, and a Phase 2b study of PH10 for treatment of MDD, weWe may fail to pursue additional development opportunities for AV-101, PH94B, PH10 or PH10,AV-101, or identify additional product candidates for clinical development 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 necessarily focus on a limited number of research and development programs and product candidates and are currently focused primarily on development of AV-101, PH94B, PH10 and PH10,AV-101, with additional limited focus on NCE DRdrug rescue and, through a third-party collaboration, RM.regenerative medicine. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other potential CNS-related indications for AV-101, PH94B, PH10 and/or PH10AV-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 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:
| ● | 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 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 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 AV-101, PH94B, PH10 and PH10,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 adjunctivea treatment of MDD,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 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 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 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 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 U.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 EverInsight 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:
| ● | our customers’ ability to obtain reimbursement for our product candidates in foreign markets; |
| ● | our inability to directly control commercial activities because we are relying on third parties; |
| ● | the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements; |
| ● | different medical practices and customs in foreign countries affecting acceptance in the marketplace; |
| ● | import or export licensing requirements; |
| ● | longer accounts receivable collection times; |
| ● | longer lead times for shipping; |
| ● | language barriers for technical training; |
| ● | 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.; |
| ● | the existence of additional potentially relevant third party intellectual property rights; |
| ● | foreign currency exchange rate fluctuations; and |
| ● | 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 current revenues 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 we have one drug candidate in Phase 2 development and are preparing to advance another drug candidate into Phase 2 development and a third drug candidate into pivotal Phase 3 clinical trials, weWe currently have no approved products and currently generate no revenues, 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 the following fundamental objectives, either on our own or with collaborators:
| ● | develop and obtain required regulatory approvals for commercialization of AV-101, PH94B, PH10, AV-101 and/or other product candidates; |
| ● | maintain, leverage and expand our intellectual property portfolio; |
| ● | establish and maintain sales, distribution and marketing capabilities, and/or enter into strategic partnering arrangements to access such capabilities; |
| ● | gain market acceptance for our product candidates; and |
| ● | 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 any of our current product candidates, acquire or license additional product candidates, or discover, as well as produce, develop and commercialize proprietary DR NCEs using our stem cell technology, and we cannot provide any assurance that we will successfully develop and commercialize AV-101, PH94B, PH10, AV-101 or acquire or license additional product candidates or discover and develop DR NCEs, or that, if produced, AV-101, PH94B, PH10, AV-101 or any other 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 DR NCEs require substantial technical, financial and human resources, whether or not any additional product candidate is acquired or licensed or NCEs are ultimately identified and produced.
In addition, we do not have a sales or marketing infrastructure, and we, including our executive officers, do not have any significant pharmaceutical sales, marketing or distribution experience. We may seek to collaborate with others to develop and commercialize AV-101, PH94B, PH10, AV-101, drug rescue NCEs and/or other product candidates if and when they are acquired and 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 AV-101, PH94B, PH10, AV-101, any drug rescue NCEs or other 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 DR NCEs and no operating history with respect to the production of DR NCEs, and we may never be able to produce a DR NCE.
If we are unable to develop and commercialize AV-101, PH94B, PH10, AV-101 or acquire or license additional product candidates, or produce suitable DR 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 DR,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 DR NCEs, independently or with partners, including:
| ● | our ability to identify potential DR candidates in the public domain, obtain sufficient quantities of them, and assess them using our bioassay systems; |
| ● | if we seek to rescue DRdrug 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 DR candidates to us on commercially reasonable terms; |
| ● | our medicinal chemistry collaborator’s ability to design and produce proprietary DR NCEs based on the novel biology and structure-function insight we provide using CardioSafe 3D; and |
| ● | financial resources available to us to develop and commercialize lead DR 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 DR NCEs they acquire or license from us. |
Even if we do acquire additional product candidates or produce proprietary DR 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, PH94B, PH10, AV-101 or additional acquired or licensed products candidates or any DR 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,CDMO, receive regulatory approval in one or more jurisdictions, satisfy the FDA that our CMOCDMO 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 DRdrug rescue candidates and DRdrug rescue NCEs, then our DRdrug 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 DRdrug rescue candidates and DRdrug rescue NCEs. If CardioSafe 3D is not capable of providing physiologically relevant and clinically predictive information regarding human cardiac biology, our DR business will be adversely affected.
CardioSafe 3D may not be meaningfully more predictive of the behavior of human cells than existing methods.
DR drugDrug rescue programs isare 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 DRdrug rescue will be limited and our DR business will be adversely affected.
We may invest in producing DRdrug rescue NCEs for which there proves to be no demand.
To generate revenue from our DRdrug rescue activities, we must produce proprietary DR NCEs for which there proves to be demand within the healthcare marketplace, and, if we intend to out-license a particular DR NCE for development and commercialization prior to market approval, then also among pharmaceutical companies and other potential collaborators. However, we may produce DR 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 DRdrug 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 DR 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 hPSC technology is technically complex, and the time and resources necessary to develop various human cell types and customized bioassay systems, although not significant at present, are difficult to predict in advance. We might decide to devote significant additional personnel and financial resources to research and development activities designed to expand, in the case of DR, and explore, in the case of drug discovery and RM, 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 third-party 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 DRdrug rescue candidates and DRdrug rescue NCEs, design and development of certain human cellular assays and performance of certain exploratory nonclinical RM studies. In the past, our stem cell research and development projects have been significantly delayed when we encountered unanticipated difficulties in differentiating hPSCs 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, DRdrug rescue and RM 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 U.S. 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 DR 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 U.S. 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. U.S. 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 U.S., 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 U.S. 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 RM 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 approximately $24.6$20.8 million and $14.3$24.6 million million during our fiscal years ended March 31, 20192020 and 2018,2019, respectively, and a net loss of approximately $6.2$3.1 million for the quarterthree months ended June 30, 2019.2020. At June 30, 2019,2020, we had an accumulated deficit of approximately $187.3$205.0 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 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 June 30, 2020, we have generated approximately $17.7 million in revenues, consisting of receipt of non-dilutive cash payments from collaborators, sublicense revenue, and research and development grant awards from the 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, AV-101, PH94B, PH10, AV-101 or another future product candidate, or we enter into one or more development and commercialization agreements with respect to AV-101, PH94B, PH10, AV-101 or one or more other future 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 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 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 product candidates in the medical community and with third-party payors. |
Unless we enter into a commercialization collaboration or partnership with respect to the commercialization of our product candidates, we expect to incur significant sales and marketing costs as we prepare to commercialize our product candidates. Even if we initiate and successfully complete pivotal clinical trials of our product candidates, and our product candidates are approved for commercial sale, and despite expending these costs, our 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 business plan and continue to operate as a going concern.
Our audited consolidated financial statements for the year ended March 31, 20192020 included in our Annual Report on Form 10-K forfiled with the year ended March 31, 2019SEC on June 29, 2020 were 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 this offering as well as future sales of our securities or potentially 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 any future 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, most of our resources have been dedicated to research and development of AV-101 and the DRdrug rescue capabilities of VistaStem’s stem cell technology platform. In particular, we have expended substantial resources on research and development of methods and processes relating to the production of AV-101 API and drug product, advancing AV-101 through IND-enabling preclinical development, Phase 1 clinical safety studies, and into ongoing Phase 2 clinical development, including preparation for and launch of our ELEVATEthe Elevate Study completed in 2019, as well as research and development and regulatory expenses related to the development and production of PH94B and PH10 and our stem cell technology platform, including development of CardioSafe 3D for DR and our cardiac stem cell technology for potential RM applications in connection with the BluerockBayer Agreement, and we expect to continue to expend substantial resources for the foreseeable future developing and commercializing our 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 June 30, 2019,2020, we had cash and cash equivalents of approximately $8.3$1.5 million. We do not believe this amount, aloneplus the net cash proceeds received from the EverInsight Agreement and from the Public Offering completed in August 2020, 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 Report. We expect to seek additional capital to produce PH94B and PH10 study material, conduct PH94B prepare for and launch a pivotal Phase 3 clinical trials, produce additional AV-101 study materialtrial of PH94B for future nonclinical and clinical studies, conduct AV-101 Phase 3-enabling toxicology studies, conduct pivotal Phase 3 clinical studiesacute treatment of AV-101 in MDD, conduct AV-101 Phase 2 studies in LID, MDD, NP and SI, produce PH10 study material and conductSAD, prepare for a Phase 2b2B clinical study and certain nonclinical studies involving PH10, PH94B and AV-101 and prepare for and potentially launch a Phase 2B clinical trial of PH10 infor MDD, acquire or license and conduct research and development of additional product candidates and to fund our internal operations.
Further, although we received the $5 million non-dilutive cash upfront payment under the EverInsight 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 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, on our own or through a future collaboration, one or more of our 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 product candidates, on our own or in collaboration with others. As with prior periods, we will continue to incur 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 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 currently 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 complete additional financing arrangements later in 20192020 and thereafter. Raising funds in the current economic environment may present additional challenges. 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 depend on many factors, including:
| ● | the number and characteristics of the product candidates we pursue; |
| ● | the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical studies; |
| ● | the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; |
| ● | the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs; |
| ● | the cost of manufacturing and formulating our product candidates and any products we successfully commercialize; |
| ● | our ability to establish and maintain strategic partnerships, licensing or other collaborative arrangements and the financial terms of such agreements; |
| ● | market acceptance of our product candidates; |
| ● | the effect of competing technological and market developments; |
| ● | our ability to obtain government funding for our research and development programs; |
| ● | the costs involved in obtaining, maintaining and enforcing patents to preserve our intellectual property; |
| ● | 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 timing, receipt and amount of potential future licensee fees, milestone payments, and sales of, or royalties on, our future products, if any; and |
| ● | 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, our ability to engage in certain types of capital raising transactions may be limited by the Listing Rules of the Nasdaq Stock Market and/or General Instruction I.B.6 of Form S-3 so long asif the market value of our common stock held by non-affiliates remainsis ever below $75 million.million at a time we seek to utilize our effective registration statement on Form S-3. We 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.
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 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, as described herein. We have and will continue to use significant capital for the development 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 most recent global financial crisis caused by COVID-19 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 recieved funds from the Paycheck Protection Program enacted by Congres under the Coronavirus Aid, Relief and Economic Security Act, which funds must be repaid if we do not meet the criteria for forgiveness established by the U.S. Small Business Administration.
On April 22, 2020, we entered into a note payable agreement, pursuant to which we received net proceeds of approximately $224,000 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). The PPP Loan provides for working capital to the Company and matures on April 22, 2022. Under the CARES Act and the PPP Loan Agreement, all payments of both principal and interest are deferred until at least October 22, 2020. The PPP Loan will accrue interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. The CARES Act (including subsequent guidance issued by SBA and U.S. Department of the Treasury related thereto) provides that all or a portion of the PPP Loan may be forgiven upon our request to the Lender, subject to requirements in the PPP Loan Agreement and the CARES Act. Although no assurances can be given, the Company currently believes it will be able to satisfy the applicable requirements for forgiveness of the PPP Loan and expects that the PPP Loan will be forgiven.
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 material weaknesses in our internal control over financial reporting. In particular, we concluded that (i) the size of our staff does not permit 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) we utilize accounting software that does not prevent erroneous or unauthorized changes to previous reporting periods and/or can 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 to pursue private and public equity offerings, debt financings, strategic collaborations and licensing arrangements during 20192020 and beyond. 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.
Some of our programs have been partially supported by government grant awards, which may not be available to us in 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 Institute of Neurological Disease and Stroke (NINDS) and the NIMH, and the California Institute for Regenerative Medicine (CIRM). To fund a portion of our future research and development programs, we may apply 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 for a number of reasons.reasons, including the impact of the ongoing COVID-19 pandemic. 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 restriction 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.
Our ability to use net operating losses to offset future taxable income is subject to certain limitations.
As of March 31, 2019,2020, we had federal and state net operating loss carryforwards of approximately $109.0$125.1 million and $63.6$64.1 million, respectively, which begin to expire in fiscal 2020.2021 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, and Vice President – Corporate Development as well as our other employees, consultants and scientific collaborators. As of the date of this Annual Report, we have nine 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 research and development and administrative 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 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 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 AV-101, PH94B, PH10, AV-101, any DR NCE, other product candidate, or RM product candidate we 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:
| ● | decreased demand for product candidates that we may develop; |
| ● | injury to our reputation; |
| ● | withdrawal of clinical trial participants; |
| ● | costs to defend the related litigation; |
| ● | a diversion of management's time and our resources; |
| ● | substantial monetary awards to trial participants or patients; or |
| ● | 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,CDMOs, 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 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, CMOsCDMOs 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, CMOsCDMOs 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 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 AV-101, PH94B, PH10, AV-101 or other product candidates could result in 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 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 we near 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 product candidates, their compositions and 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, 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 AV-101, PH94B, PH10, AV-101 and also to hPSC technology.
Although we own and have licensed issued and allowed patents and patent applications relating to AV-101, PH94B, PH10 and PH10AV-101 in the U.S., selected countries in the EU and other jurisdictions, we cannot yet provide any assurances that any of our pending U.S. and additional foreign patent applications will mature into issued patents and, if they do, that any of our patents will include claims with a scope sufficient to protect our 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 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 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 obtain cannot be predicted with certainty.
Our ability to obtain valid and enforceable patents depends in large measure 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 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 relevant to our patent applications and patents, which may prevent a pending patent application from being granted or result in an issued patent being held invalid or unenforceable.
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 certain of our product candidates or that were evaluated in early (often pre-clinical) studies. 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 our filing of our initial AV-101 patent applications, 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 our pendingtwo depression-related AV-101 patent applications that makehave similar claims and we have received Notices of Allowance from the USPTO in those applications. We are considering entering this web post in the record of the aforementioned two issued U.S. patents. 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 our 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 held unenforceable.
United States and foreign patents and patent applications may be subject to various types of infringement and validity proceedings, including interference proceedings, ex parte reexamination, 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 or courts. These proceedings could result in 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 in such a way that they no longer cover our product candidates or competitive products.
Furthermore, though an 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, for 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 AV-101, PH94B, PH10 or PH10,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 or 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.
Overall, the degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
| ● | any issued patents related to AV-101, 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 AV-101, PH94B, PH10, AV-101 or any other products or product candidates against generic or other competition, particularly considering that any patent rights to these compounds per se have expired; |
| ● | any of our pending patent applications will issue as patents at all; |
| ● | we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire; |
| ● | we were the first to make the inventions covered by each of our patents and pending patent applications; |
| ● | we were the first to file patent applications for these inventions; |
| ● | others will not develop similar or alternative technologies that do not infringe our patents; |
| ● | others will not use pre-existing technology to effectively compete against us; |
| ● | 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; |
| ● | 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; |
| ● | we will develop additional proprietary technologies or product candidates that are separately patentable; or |
| ● | 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.
Third parties may initiate legal proceedings against us alleging that we infringe their intellectual property rights, 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 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 partes reviews 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. Success also will depend on our ability to prevail in litigation if we are sued for infringement or to resolve litigation matters with rights and 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 later result in issued patents that our product candidates may infringe, or that such third parties assert 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 outcomes 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 have willfully infringed 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 is 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.
In addition, intellectual property litigation or claims could force us to do one or more of the following:
| ● | cease developing, selling or otherwise commercializing our product candidates; |
| ● | pay substantial damages for past use of the asserted intellectual property; |
| ● | obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and |
| ● | 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.
The CompanyWe 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 their 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.
We do 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 U.S. could be less extensive than those in the United States, assuming that rights are obtained in the 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 U.S. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the 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 other 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 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 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 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 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 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.
For our PH10, PH94B and certain stem cell technologies, we are a party to a number of license agreements under which we are granted rights to intellectual properties 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. Our existing license agreements impose, and we expect that 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:
| ● | the scope of rights granted under the license agreement and other interpretation-related issues; |
| ● | 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; |
| ● | our right to sublicense patent and other rights to third parties under collaborative development relationships; |
| ● | 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 |
| ● | 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, including the EverInsight Agreement and the Bayer Agreement, 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. 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 further 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.
In 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, for example, if the active ingredient of AV-101, PH94B, PH10 or PH10AV-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. 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 U.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 in Mayo 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 in Association 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, in Ariosa 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:
| ● | 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; |
| ● | we might not have been the first to make the inventions covered by a pending patent application that we own; |
| ● | we might not have been the first to file patent applications covering an invention; |
| ● | others may independently develop similar or alternative technologies without infringing our intellectual property rights; |
| ● | pending patent applications that we own or license may not lead to issued patents; |
| ● | 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; |
| ● | 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. |
Should any of these events occur, they could significantly harm our business and results of operations.
With regard to our stem cell technology, if, instead of identifying DR candidates based on information available to us in the public domain, we seek to in-license DR candidates 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 DR NCEs that we may produce and develop. If we are unable to obtain ownership or substantial economic participation rights over intellectual property related to DR NCEs we produce and develop, our DR business may be adversely affected.
Risks Related to our Securities
If we fail to comply with the continued listing requirements of the Nasdaq Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
On June 17, 2019,January 31, 2020, we were notified by the Nasdaq Stock Market, LLC (Nasdaq) that we were not in compliance with the minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period of 30 consecutive business days. The notification provided that we had 180 calendar days, or until December 16, 2019,July 29, 2020, to regain compliance with Nasdaq Listing Rule 5550(a)(2) (theBid Price Rule). To regain compliance, the bid price of our common stock must have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive business days.
On April 17, 2020, in response to the extraordinary market conditions caused by the COVID-19 pandemic, Nasdaq instituted a longer period of time for companies such as ours to regain compliance with certain continued listing requirements, including the Bid Price Rule. As a result, we now have until October 12, 2020 to regain compliance with the Bid Price Rule. If we do not regain compliance with the Bid Price Rule by December 16, 2019,October 12, 2020, an additional 180 days may be granted to regain compliance, so long as we meet the remaining Nasdaq Capital Market continued listing requirements (except for the bid price requirement) and notify Nasdaq in writing of our intention to cure the deficiency during the second compliance period. If we do not qualify for the second compliance period or fail to regain compliance during the second 180-day period, then Nasdaq will notify us of its determination to delist our common stock, at which point we will have an opportunity to appeal the delisting determination to a hearings panel.
No assurance can be given that we will meet applicable Nasdaq continued listing standards. Failure to meet applicable Nasdaq continued listing standards could result in a delisting of our common stock, which could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable to us, or at all, and may result in the inability to advance our drug development programs, potential loss of confidence by investors and employees, and fewer business development opportunities.
Market volatility may affect our stock price and the value of your investment.
The market price for our common stock, similar to other biopharmaceutical companies, is likely to be 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:
| ● | volatility resulting from uncertainty and general ecomnic conditions caused by the ongoing COVID-19 pandemic; |
| ● | plans for, progress of or results from nonclinical and clinical development activities related to our product candidates; |
| ● | the failure of the FDA or other regulatory authority to approve our product candidates; |
| ● | announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors; |
| ● | the success or failure of other CNS therapies; |
| ● | 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; |
| ● | our ability to raise additional capital and the terms on which we can raise it; |
| ● | sales or purchases of large blocks of our common stock, including sales or purchases by our executive officers, directors and significant stockholders; |
| ● | establishment of short positions by holders or non-holders of our stock or warrants; |
| ● | additions or departures of key personnel; |
| ● | discussion of us or our stock price by the press and by online investor communities; and |
| ● | 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 June 30, 2019;2020; (ii) 4.0 million shares of Series B 10% Convertible Preferred stock, of which approximately 1.2 million shares remain issued and outstanding at June 30, 2019;2020; and (iii) 3.0 million shares of Series C Convertible Preferred Stock, of which approximately 2.3 million shares are issued and outstanding at June 30, 2019.2020. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 6. EXHIBITS
| Exhibit | | |
| Number | | Description |
| | |
| 1.1 | | Underwriting Agreement, dated August 2, 2020, by and between VistaGen Therapeutics, Inc. and Maxim Group LLC, incorporated by reference from Exhibit 1.1 to the Company's Current Report on Form 8-K filed on August 6, 2020. |
| | |
| | Note Payable Agreement by and between VistaGen Therapeutics, Inc and Silicon Valley Bank, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2020. |
| | |
| | License and Collaboration Agreement, by and between VistaGen Therapeutics, Inc. and EverInsight Therapeutics Inc., dated June 24, 2020, filed herewith.
|
| | | |
| | Certification of the Principal Executive Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | Certification of the Principal Financial Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| | Certification of the Principal Executive and Financial Officers required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
+ Pursuant to Item 601(b)(10) of Regulation S-K, certain confidential portions of this exhibit (indicated by “[*****]”) have been omitted as the Company has determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to the Company if publicly disclosed.
* This exhibit was filed as Exhibit 10.1 to the Current Report on Form 8-K filed on June 26, 2020 and is being re-filed to correct an immaterial typographical error.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| | VISTAGEN THERAPEUTICS, INC. /s/ Shawn K. Singh Shawn K. Singh Chief Executive Officer (Principal Executive Officer) | |
| | /s/ Jerrold D. Dotson | |
| | Jerrold D. Dotson | |
| | Chief Financial Officer (Principal Financial and Accounting Officer) | |
| |
Dated: August 13, 20192020