Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark
One)
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☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2017
or
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
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Commission File Number: 001-37761
VistaGen Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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20-5093315
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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)
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
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post 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.
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Large
accelerated filer
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[
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Accelerated
filer
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[
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Non-Accelerated
filer
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[
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Smaller
reporting company
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[X]
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Emerging
growth company
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[
]
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(do
not check if a smaller reporting 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
☒
As of
August 11,
2017, 9,380,044 shares of the
registrant’s common stock, $0.001 par value, were issued and
outstanding.
VistaGen Therapeutics, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2017
TABLE OF CONTENTS
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Page
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2
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3
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4
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5
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12
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20
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21
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21
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52
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53
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53
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54
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PART I. FINANCIAL
INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
VISTAGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Dollars, except share amounts)
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$1,628,200
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$2,921,300
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Prepaid expenses
and other current assets
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498,000
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456,600
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Total current
assets
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2,126,200
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3,377,900
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Property and
equipment, net
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262,900
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286,500
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Security deposits
and other assets
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47,800
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47,800
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Total
assets
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$2,436,900
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$3,712,200
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LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current
liabilities:
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Accounts
payable
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$632,000
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$867,300
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Accrued
expenses
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204,900
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443,000
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Current portion of
notes payable and accrued interest
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165,500
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54,800
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Capital lease
obligations
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2,400
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2,400
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Total current
liabilities
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1,004,800
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1,367,500
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Non-current
liabilities:
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Accrued dividends
on Series B Preferred Stock
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1,825,100
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1,577,800
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Deferred rent
liability
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202,500
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139,200
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Capital lease
obligations
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11,300
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11,900
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Total non-current
liabilities
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2,038,900
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1,728,900
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Total
liabilities
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3,043,700
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3,096,400
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Commitments and
contingencies
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Stockholders’
deficit:
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Preferred stock,
$0.001 par value; 10,000,000 shares authorized at June 30, 2017 and
March 31, 2017:
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Series A Preferred,
500,000 shares authorized and outstanding at June 30, 2017 and
March 31, 2017
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500
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500
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Series B Preferred;
4,000,000 shares authorized at June 30, 2017 and March 31, 2017;
1,160,240 shares issued and
outstanding at June 30, 2017 and March 31, 2017
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1,200
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1,200
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Series C Preferred;
3,000,000 shares authorized at June 30, 2017 and March 31,
2017; 2,318,012 shares issued and outstanding at June 30,
2017 and March 31, 2017
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2,300
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2,300
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Common stock, $0.001
par value; 30,000,000 shares authorized at June 30, 2017 and March
31, 2017; 9,437,137 and 8,974,386 shares issued at June 30,
2017 and March 31, 2017, respectively
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9,400
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9,000
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Additional paid-in
capital
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147,611,900
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146,569,600
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Treasury stock, at
cost, 135,665 shares of common stock held at June 30, 2017 and
March 31, 2017
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(3,968,100)
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(3,968,100)
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Accumulated
deficit
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(144,264,000)
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(141,998,700)
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Total
stockholders’ equity (deficit)
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(606,800)
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615,800
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Total liabilities
and stockholders’ equity (deficit)
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$2,436,900
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$3,712,200
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See
accompanying notes to Condensed Consolidated Financial
Statements.
VISTAGEN THERAPEUTICS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(Unaudited)
(Amounts in dollars, except share amounts)
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Three Months Ended
June 30,
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Operating
expenses:
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Research and
development
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$1,096,200
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$825,700
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General and
administrative
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1,164,300
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1,137,600
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Total operating
expenses
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2,260,500
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1,963,300
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Loss from
operations
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(2,260,500)
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(1,963,300)
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Other expenses,
net:
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Interest expense,
net
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(2,400)
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(1,400)
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Loss before income
taxes
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(2,262,900)
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(1,964,700)
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Income
taxes
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(2,400)
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(2,400)
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Net loss and
comprehensive loss
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(2,265,300)
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(1,967,100)
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Accrued dividend
on Series B Preferred stock
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(247,300)
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(539,800)
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Deemed dividend on
Series B Preferred Units
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-
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(111,100)
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Net loss
attributable to common stockholders
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$(2,512,600)
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$(2,618,000)
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Basic and diluted
net loss attributable to common stockholders
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per common
share
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$(0.28)
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$(0.51)
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Weighted average
shares used in computing basic and diluted net
loss
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attributable to
common stockholders per common share
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9,034,213
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5,097,832
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See
accompanying notes to Condensed Consolidated Financial
Statements.
VISTAGEN THERAPEUTICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Unaudited)
(Amounts in Dollars)
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Three Months Ended
June 30,
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Cash flows from
operating activities:
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Net
loss
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$(2,265,300)
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$(1,967,100)
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Adjustments to
reconcile net loss to net cash used in operating
activities:
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Depreciation and
amortization
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23,600
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13,300
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Stock-based
compensation
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367,000
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107,900
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Expense related to
modification of warrants, including exchange of
warrants for common stock
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40,300
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Amortization of
deferred rent
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63,300
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(7,900)
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Fair value of
common stock granted for services
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49,800
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-
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Fair value of
Series B Preferred stock granted for services
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-
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375,000
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Changes in
operating assets and liabilities:
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Prepaid expenses
and other current assets
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101,000
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34,600
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Accounts payable
and accrued expenses, including accrued interest
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(473,500)
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(267,100)
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Net cash used in
operating activities
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(2,134,100)
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(1,671,000)
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Cash flows from
investing activities:
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Purchases of
equipment
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-
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(2,000)
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Net cash used in
investing activities
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-
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(2,000)
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Cash flows from
financing activities:
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Net proceeds from
issuance of common stock and warrants, including Units
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873,300
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9,537,100
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Net proceeds from
issuance of Series B Preferred Units
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-
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278,000
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Repayment of
capital lease obligations
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(600)
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(300)
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Repayment of
notes
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(31,700)
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(70,400)
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Net cash provided
by financing activities
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841,000
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9,744,400
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Net increase
(decrease) in cash and cash equivalents
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(1,293,100)
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8,071,400
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Cash and cash
equivalents at beginning of period
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2,921,300
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428,500
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Cash and cash
equivalents at end of period
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$1,628,200
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$8,499,900
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Supplemental
disclosure of noncash activities:
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Insurance premiums
settled by issuing note payable
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$142,400
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$117,500
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Accrued dividends
on Series B Preferred
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$247,300
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$539,800
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Accrued dividends
on Series B Preferred settled upon conversion by
issuance
of common stock
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$-
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$1,683,400
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See
accompanying notes to Condensed Consolidated Financial
Statements.
VISTAGEN THERAPEUTICS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business
Overview
VistaGen
Therapeutics, Inc. (NASDAQ: VTGN), a Nevada corporation, is a
clinical-stage biopharmaceutical company focused on developing new
generation medicines for depression and other central nervous
system (CNS)
disorders.
AV-101
is our oral CNS product candidate in Phase 2 clinical development
in the United States, initially as a new generation adjunctive
treatment for Major Depressive Disorder (MDD) in patients with an inadequate
response to standard antidepressants approved by the U.S. Food and
Drug Administration (FDA). AV-101’s
mechanism of action (MOA)
involves both NMDA (N-methyl-D-aspartate) and AMPA
(alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid)
receptors in the brain responsible for fast excitatory synaptic
activity throughout the CNS. AV-101’s MOA is
fundamentally differentiated from all FDA-approved antidepressants,
as well as all atypical antipsychotics often used adjunctively to
augment them. We believe AV-101 also has potential as a new
treatment alternative for several additional CNS indications,
including epilepsy, Huntington’s disease, levodopa
(L-DOPA)-induced
dyskinesia associated with Parkinson’s disease, and as a
non-opioid treatment for neuropathic pain.
Clinical
studies conducted at the U.S. National Institute of Mental Health
(NIMH), part of the U.S.
National Institutes of Health (NIH), by Dr. Carlos Zarate, Jr., Chief
of the NIMH’s Experimental Therapeutics & Pathophysiology
Branch and its Section on Neurobiology and Treatment of Mood and
Anxiety Disorders, have focused on the antidepressant effects of
low dose ketamine hydrochloride injection (ketamine), an NMDA receptor
antagonist, in MDD patients with inadequate responses to multiple
standard antidepressants. These NIMH studies, as well as clinical
research at Yale University and other academic institutions, have
demonstrated robust antidepressant effects in these MDD patients
within twenty-four hours of a single sub-anesthetic dose of
ketamine administered by intravenous (IV) injection.
We
believe orally-administered AV-101 may have potential to deliver
ketamine-like antidepressant effects without ketamine’s
psychological and other negative side effects. As published in the
October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental
Therapeutics, in an article titled, The prodrug 4-chlorokynurenine causes
ketamine-like antidepressant effects, but not side effects, by
NMDA/glycineB-site inhibition, using well-established
preclinical models of depression, AV-101 was shown to induce
fast-acting, dose-dependent, persistent and statistically
significant antidepressant-like responses following a single
treatment. These responses were equivalent to those seen with a
single sub-anesthetic control dose of ketamine. In addition, these
studies confirmed that the fast-acting antidepressant effects of
AV-101 were mediated through both inhibiting the GlyB site of the
NMDA receptor and activating the AMPA receptor pathway in the
brain.
Pursuant
to our Cooperative Research and Development Agreement (CRADA) with the NIMH and Dr. Zarate,
the NIMH is funding, and Dr. Zarate, as Principal Investigator, and
his team are conducting, a small Phase 2 clinical study of AV-101
monotherapy in subjects with treatment-resistant MDD (the
NIMH AV-101 MDD Phase 2
Monotherapy Study). We are preparing to launch our
180-patient Phase 2 multi-center, multi-dose, double blind,
placebo-controlled efficacy and safety study of AV-101 as a new
generation adjunctive treatment of MDD in adult patients with an
inadequate response to standard, FDA-approved antidepressants (the
AV-101 MDD Phase 2 Adjunctive
Treatment Study). Dr. Maurizio Fava, Professor of
Psychiatry at Harvard Medical School and Director, Division of
Clinical Research, Massachusetts General Hospital (MGH) Research Institute, will be the
Principal Investigator of our AV-101 MDD Phase 2 Adjunctive
Treatment Study. Dr. Fava was the co-Principal
Investigator with Dr. A. John Rush of the STAR*D study, the largest
clinical trial conducted in depression to date, whose findings were
published in journals such as the New England Journal of Medicine
(NEJM) and the Journal of
the American Medical Association (JAMA). We currently anticipate
completing our AV-101 MDD Phase 2 Adjunctive Treatment Study by the
end of 2018 with top line results available in the first quarter of
2019.
VistaGen
Therapeutics, Inc., a California corporation dba VistaStem
Therapeutics (VistaStem),
is our wholly-owned subsidiary focused on applying human
pluripotent stem cell (hPSC) technology, internally and with
third-party collaborators, to discover, rescue, develop and
commercialize (i) proprietary new chemical entities (NCEs), including small molecule NCEs
with regenerative potential, for CNS and other diseases and (ii)
cellular therapies involving stem cell-derived blood, cartilage,
heart and liver cells. Our internal drug rescue programs are
designed to utilize CardioSafe
3D, our customized cardiac bioassay system, to develop small
molecule NCEs for our pipeline. To advance potential
regenerative medicine (RM)
applications of our cardiac stem cell technology, in December 2016,
VistaStem exclusively sublicensed to BlueRock Therapeutics LP, a
next generation regenerative medicine company established in 2016
by Bayer AG and Versant Ventures, rights to certain proprietary
technologies relating to the production of cardiac stem cells for
the treatment of heart disease (the BlueRock Agreement). In a manner
similar to its exclusive sublicense agreement with BlueRock
Therapeutics, VistaStem may pursue additional collaborations and
potential RM applications of its stem cell technology platform,
including using blood, cartilage, and/or liver cells derived from
hPSCs, for (i) cell-based therapy, (ii) cell repair therapy, and/or
(iii) tissue engineering.
Subsidiaries
As
noted above, VistaStem 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’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, 2017 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, 2107 are not necessarily
indicative of the operating results to be expected for our fiscal
year ending March 31, 2018, or for any other future interim or
other period.
The
accompanying unaudited Condensed Consolidated Financial Statements
and notes to Condensed Consolidated Financial Statements should be
read in conjunction with our audited Consolidated Financial
Statements for our fiscal year ended March 31, 2017 contained in
our Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission (SEC)
on June 29, 2017.
The
accompanying unaudited Condensed Consolidated Financial Statements
have been prepared assuming we will continue as a going concern. As
a 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
$144.3 million accumulated from inception (May 1998) through June
30, 2017. We expect losses and negative cash flows from operations
to continue for the foreseeable future as we engage in further
development of AV-101, initially as an adjunctive treatment for
MDD, and subsequently as a new treatment alternative for other
CNS-related conditions, as well as exploring and potentially
executing drug rescue and development opportunities using
CardioSafe 3D, and
potential RM programs related to VistaStem’s technology
platform.
From
our inception through June 30, 2017, 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 $45.5 million, as well as from an
aggregate of approximately $17.6 million of government research
grant awards, strategic collaboration payments, intellectual
property sublicensing and other revenues. We have also issued
equity securities with an approximate value at issuance of $30.8
million in non-cash settlements of certain liabilities, including
liabilities for professional services rendered to us or as
compensation for such services. Additionally, pursuant to our
February 2015 Cooperative Research and Development Agreement
(CRADA) with the NIH,
substantial ongoing Phase 2 clinical development activities
relating to AV-101 as a potential new generation antidepressant are
being sponsored in full, at no cost to us other than supplying
clinical trial material, by the NIMH under the direction of Dr.
Carlos Zarate Jr. as Principal Investigator.
At
June 30, 2017, we had a cash and cash equivalents balance of $1.6
million. This amount was not sufficient to enable us to fund our
planned operations, including expected cash expenditures of
approximately $12 million for the twelve months following the
issuance of these financial statements, including expenditures
required to launch and satisfy a significant portion of the
projected expenses associated with our proposed AV-101 MDD Phase 2
Adjunctive Treatment Study.
Our
limited cash position at June 30, 2017 considered with our
recurring and anticipated losses and negative cash flows from
operations make it probable, in the absence of additional
financing, that we will not be able to meet our obligations as they
come due within one year from the date of this Report, raising
substantial doubt that we can continue as a going concern. However,
to alleviate that doubt, we plan, as we have numerous times in the
past, to raise additional financing when and as needed, primarily
through the sale of our equity securities in one or more private
placements to accredited investors or public offerings.
Additionally, we have filed a Registration Statement on Form S-3
(Registration No. 333-215671) (the S-3 Registration Statement) that has
been declared effective by the Securities and Exchange Commission
(the Commission) to cover
our potential future sale of our equity securities in one or more
public offerings from time to time. As of the date of this Report,
we have not yet sold any securities under the S-3 Registration
Statement, nor do we have an obligation to do so. Further, at June
30, 2017, we had a limited number of unallocated or unreserved
shares of our common stock available for issuance in future
offerings or for other purposes. To facilitate potential future
issuances and sales of our equity securities for ordinary corporate
finance and general corporate purposes, our Board of Directors
(Board) has approved an
amendment to our Restated and Amended Articles of Incorporation to
increase the number of shares of common stock available for
issuance thereunder from 30 million shares to 100 million shares,
an amount our Board has determined is customary and appropriate for
a Nasdaq-listed, clinical-stage biopharmaceutical company. Before
taking effect, this amendment must be approved by a majority of our
stockholders at our 2017 annual meeting of stockholders in
September 2017.
In
addition to the sale of our equity securities, we may also seek to
enter research and development collaborations that could generate
revenue or provide substantial funding for development of AV-101
and additional product candidates. We may also seek additional
government grant awards or agreements similar to our current CRADA
with the NIMH, which provides for the NIMH to fully fund the NIMH
AV-101 MDD Phase 2 Monotherapy Study. Such strategic collaborations
may provide non-dilutive resources to advance our strategic
initiatives while reducing a portion of our future cash outlays and
working capital requirements. In a manner similar to the BlueRock
Agreement, we may also pursue similar arrangements with
third-parties covering other of our intellectual property. Although
we may seek additional collaborations with the U.S. government or
other third-parties that could generate revenue and/or non-dilutive
funding for development of AV-101 and other product candidates and
technologies, as well as new government grant awards and/or
agreements similar to our CRADA with NIMH, no assurance can be
provided that any such collaborations, awards or agreements will
occur in the future.
Our
future working capital requirements will depend on many factors,
including, without limitation, 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 AV-101, initially as an adjunctive treatment
for MDD, and for other potential CNS conditions, as well as various
potential 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 and opportunities related to 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 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 stockholders will
authorize the issuance of additional shares of our common stock to
facilitate further financing opportunities and for other general
corporate purposes, or that future financing will be available 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 later in 2017 and beyond,
our business, financial condition, and results of operations may be
harmed, the price of our stock may decline, we may be required to
reduce, defer, or discontinue certain of our research and
development activities and we may not be able to continue as a
going concern. As noted above, these 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 share-based compensation, and assumptions
that have been used historically to value warrants and warrant
modifications. With the exception of the $1.25 million of
sublicense revenue recorded in the quarter ended December 31, 2016
under the BlueRock Agreement, we do not currently have, nor have we
had during the periods covered by this report, any arrangements
requiring the recognition of revenue.
Research and Development Expenses
Research
and development expenses are composed of both internal and external
costs. Internal costs include salaries and employment-related
expenses of our scientific personnel and direct project costs.
External research and development expenses consist primarily of
costs associated with nonclinical and clinical development of
AV-101, now in Phase 2 clinical development, initially for MDD,
stem cell technology-related research and development costs, and
costs related to the filing, maintenance and prosecution of patents
and patent applications, technology licenses and protection of
other intellectual property. All such costs are charged to expense
as incurred.
Stock-Based Compensation
We
recognize compensation cost for all stock-based awards to employees
or consultants based on the grant date fair value of the award.
Non-cash stock-based compensation expense is recognized over the
period during which the employee or consultant is required to
perform services in exchange for the award, which generally
represents the scheduled vesting period. We have no awards with
market or performance conditions. For equity awards to
non-employees, we re-measure the fair value of the awards as they
vest and the resulting change in value is recognized as an expense
during the period over which the services are
performed.
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, 2017 and
2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development expense:
|
|
|
|
Stock option
grants
|
$191,400
|
$44,000
|
|
|
191,400
|
44,000
|
|
General and
administrative expense:
|
|
|
|
Stock option
grants
|
175,600
|
63,900
|
|
|
175,600
|
63,900
|
|
Total
stock-based compensation expense
|
$367,000
|
$107,900
|
In
April 2017, our Board approved the grant of options to purchase an
aggregate of 880,000 shares of our common stock at an exercise
price of $1.96 per share to the independent members of our Board,
our officers and our employees. In June 2016, our Board approved
the grant of options to purchase an aggregate of 655,000 shares of
our common stock at an exercise price of $3.49 per share to the
independent members of our Board and to our officers, including our
then-newly-hired Chief Medical Officer. We valued the options
granted in April 2017 and June 2016 using the Black-Scholes Option
Pricing Model and the following weighted average
assumptions:
|
Assumption:
|
|
|
|
Market price per
share at grant date
|
$1.96
|
$3.49
|
|
Exercise price per
share
|
$1.96
|
$3.49
|
|
Risk-free interest
rate
|
2.02%
|
1.34%
|
|
Contractual or
estimated term in years
|
6.48
|
6.68
|
|
Volatility
|
83.24%
|
81.69%
|
|
Dividend
rate
|
0.0%
|
0.0%
|
|
Shares
|
880,000
|
655,000
|
|
|
|
|
|
Fair Value per share
|
$1.42
|
$2.50
|
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.
Income (Loss) per Common Share
Basic
net income (loss) per share of common stock excludes the effect of
dilution and is computed by dividing net income (loss) by the
weighted-average number of shares of common stock outstanding for
the period. Diluted net income (loss) 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.
As a
result of our net loss for the periods presented, potentially
dilutive securities were excluded from the computation of net loss
per share, as their effect would be antidilutive. For the
three-month periods ended June 30, 2017 and 2016, the accrual for
dividends on our Series B 10% Convertible Preferred Stock
(Series B Preferred) and
the deemed dividend attributable to our sale and issuance of Series
B Preferred Units, each consisting of one share of Series B
Preferred and a five-year warrant to purchase one share of our
common stock for $7.00, represent deductions from our net loss to
arrive at net loss attributable to common stockholders for those
periods.
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
|
|
|
|
|
|
Series B Preferred
stock issued and outstanding (2)
|
1,160,240
|
1,247,740
|
|
|
|
|
|
Series C Preferred
stock issued and outstanding (3)
|
2,318,012
|
2,318,012
|
|
|
|
|
|
Outstanding
options under the Amended and Restated 2016 (formerly 2008) and
1999 Stock Incentive Plans
|
2,522,593
|
986,987
|
|
|
|
|
Outstanding
warrants to purchase common stock
|
4,796,506
|
4,606,480
|
|
|
|
|
|
Total
|
11,547,351
|
9,909,219
|
|
____________
|
|
|
|
(1) Assumes exchange
under the terms of the October 11, 2012 Note Exchange and Purchase
Agreement, as amended
|
|
(2) Assumes exchange
under the terms of the Certificate of Designation of the Relative
Rights and Preferences of the Series B 10% Convertible Preferred
Stock, effective May 5, 2015
|
|
(3) Assumes exchange
under the terms of the Certificate of Designation of the Relative
Rights and Preferences of the Series C Convertible Preferred Stock,
effective January 25, 2016
|
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 at fair value at June 30, 2017 or March 31,
2017.
Recent Accounting Pronouncements
Except
as described below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the
three months ended June 30, 2017, as compared to the recent
accounting pronouncements described in our Form 10-K for the fiscal
year ended March 31, 2017, that are of significance or potential
significance to us.
In
February 2016, the Financial Accounting Standards Board
(FASB) issued Accounting
Standards Update (ASU) No.
2016-2, “Leases.” This ASU requires substantially all
leases, including operating leases, to be recognized by lessees on
their balance sheet as a right-of-use asset and corresponding lease
liability. This ASU is effective for our interim and annual
reporting periods beginning April 1, 2019 and early adoption is
permitted. We are currently evaluating the impact that the adoption
of this ASU will have on our financial statements.
In
March 2016, the FASB issued ASU No. 2016-09, “Improvements to
Employee Share-Based Payment Accounting,” which simplified
several aspects of the accounting for share-based payments,
including immediate recognition of all excess tax benefits and
deficiencies in the income statement, changing the threshold to
qualify for equity classification up to the employees’
maximum statutory tax rates, allowing an entity-wide accounting
policy election to either estimate the number of awards that are
expected to vest or account for forfeitures as they occur, and
clarifying the classification on the statement of cash flows for
the excess tax benefit and employee taxes paid when an employer
withholds shares for tax-withholding purposes. This ASU became
effective for our interim and annual reporting periods beginning
April 1, 2017, and the adoption of this standard did not have a
material impact on our financial statements. As part of the
adoption of this standard, we elected to account for the impact of
option forfeitures as they occur.
Note 4. Prepaid Expenses and Other Current
Assets
Prepaid
expenses and other current assets are composed of the following at
June 30, 2017 and March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
$189,200
|
$85,800
|
|
AV-101
materials and services
|
274,500
|
352,800
|
|
Public
offering expenses
|
22,100
|
11,600
|
|
All
other
|
12,200
|
6,400
|
|
|
$498,000
|
$456,600
|
Accrued
expenses are composed of the following at June 30, 2017 and March
31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
professional services
|
$139,200
|
$37,000
|
|
Accrued
AV-101 development and related expenses
|
59,000
|
402,400
|
|
All
other
|
6,700
|
3,600
|
|
|
$204,900
|
$443,000
|
Note 6. Notes Payable
The
following table summarizes our unsecured promissory notes at June
30, 2017 and March 31, 2017.
|
|
June 30, 2017
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.95% and 8.25%
Notes payable to insurance
|
|
|
|
|
|
|
|
|
premium financing
company (current)
|
$165,500
|
$-
|
$165,500
|
|
$54,800
|
$-
|
$54,800
|
In May
2017, we executed a 7.95% promissory note in the principal amount
of $142,400 in connection with insurance policy premiums. The note
is payable in monthly installments of $14,800, including principal
and interest, through March 2018, and had a remaining outstanding
balance of $128,600 at June 30, 2017. In February 2017, we executed
a promissory note in the principal amount of $60,700 in connection
with other insurance policy premiums. That note is payable in
monthly installments of $6,300, including principal and interest,
and had an outstanding balance of $36,900 at June 30,
2017.
Note 7. Capital Stock
Common Stock and Warrants Issued in Private Placement
During
the quarter ended June 30, 2017, in self-placed private
transactions, we accepted subscription agreements from individual
accredited investors, pursuant to which we sold to such investors
units, at a weighted average purchase price of $2.00 per unit,
consisting of an aggregate of 437,751 unregistered shares of our
common stock and warrants, exercisable through April 30, 2021, to
purchase an aggregate of 218,875 unregistered shares of our common
stock at a weighted average exercise price of $3.99 per share. The
purchasers of the units have no registration rights with respect to
the shares of common stock, warrants or the shares of common stock
issuable upon exercise of the warrants comprising the units sold.
The warrants are not exercisable until six months and one day
following the date of issuance. We received aggregate cash proceeds
of $873,300 in connection with this self-placed private placement
transaction, of which the entire amount was credited to
stockholders’ equity.
Issuance of Common Stock to Professional Services
Providers
During
the quarter ended June 30, 2017, we issued 25,000 shares of our
unregistered common stock having a fair value on the date of
issuance of $49,800 as partial compensation to an investor
relations service provider.
Warrants Outstanding
Following
the warrant issuances in the self-placed private placement
described above, at June 30, 2017, we had outstanding warrants to
purchase shares of our common stock at a weighted average exercise
price of $6.19 per share as follows:
|
|
|
Warrants
Outstandingat
June 30, 2017
|
|
|
|
|
|
$3.51
|
12/31/2021
|
50,000
|
|
$3.96
|
4/30/2021
|
43,750
|
|
$3.98
|
4/30/2021
|
25,125
|
|
$4.00
|
4/30/2021
|
178,625
|
|
$4.50
|
9/26/2019
|
25,000
|
|
$5.30
|
5/16/2021
|
2,705,883
|
|
$6.00
|
9/26/2019 to
11/30/2019
|
97,750
|
|
$7.00
|
12/11/2018 to
3/3/2023
|
1,346,931
|
|
$8.00
|
3/25/2021
|
185,000
|
|
$10.00
|
11/15/2017 to
1/11/2020
|
24,394
|
|
$20.00
|
9/15/2019
|
110,448
|
|
$30.00
|
11/20/2017
|
3,600
|
|
|
4,796,506
|
With
the exception of 2,705,883 shares of common stock underlying the
warrants exercisable at $5.30 per share issued in our May 2016
public offering, all of the common shares issuable upon exercise of
our outstanding warrants are unregistered.
Note 8. Related Party Transactions
Cato
Holding Company (CHC),
doing business as Cato BioVentures (CBV), is the parent of Cato Research
Ltd. (CRL). CRL is a
contract research, development and regulatory services organization
(CRO) recently engaged by
us for certain material aspects of the development and regulatory
affairs associated with Phase 2 development of AV-101 for MDD. CBV
is among our largest institutional stockholders at June 30, 2017,
holding approximately 6.5% of our outstanding common stock. In
October 2012, we issued certain unsecured promissory notes in the
aggregate principal amount of approximately $1.3 million to CBV and
CRL (the Cato Notes) as
payment in full for all contract research and development services
and regulatory advice previously rendered to us by CRL for
preclinical and Phase 1 development of AV-101. In June 2015, the
Cato Notes and additional amounts payable to CRL for CRO services
related to AV-101 were extinguished in exchange for our issuance of
an aggregate of 328,571 shares of Series B Preferred stock to CBV,
which shares of Series B Preferred stock were automatically
converted in accordance with their terms into an equal number of
registered shares of our common stock as a result of our May 2016
public offering.
Under
the terms of our contract research arrangement with CRL related to
the development of AV-101, we incurred expenses of $128,200 and
$50,400 for the three months ended June 30, 2017 and 2016,
respectively. We anticipate periodic expenses for CRO services from
CRL related to Phase 2 development of AV-101 will increase in
future periods.
See
Note 9, Subsequent Events,
for disclosure of additional transactions with CRL.
Note 9. Subsequent Events
We have
evaluated subsequent events through August 11, 2017 and have identified the
following matters requiring disclosure:
Master Services Agreement and Share Issuance to CRL
In July
2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a similar
May 2007 agreement, pursuant to which CRL may assist us in the
evaluation, development, commercialization and marketing of our
potential product candidates, including AV-101, and provide
regulatory and strategic consulting services as requested from time
to time. Specific projects or services will be delineated in
individual work orders negotiated from time-to-time under the
MSA.
In July
2017, we issued to CRL 50,000 shares of our unregistered common
stock having a fair value of $85,500 on the date of issuance in
recognition of a milestone achievement under the terms of a
negotiated AV-101-related work order.
Private Placement of Common Stock and Warrants
In
August 2017, in a self-placed private placement transaction, we
sold to an accredited investor units consisting of (i) 28,572
shares of our unregistered common stock and (ii) warrants
exercisable through April 30, 2021 to purchase 28,572 unregistered
shares of our common stock at an exercise price of $4.00 per share.
The warrants are not exercisable until six months and one day
following the date of issuance. We received cash proceeds of
$50,000 from this sale of our securities.
|
Item 2.
|
|
MANAGEMENT’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 additional financing, the results
of our research and development efforts, the results of
non-clinical and clinical testing, the effect of regulation by the
United States Food and Drug Administration (FDA) and other
agencies, the impact of competitive products, product development,
commercialization and technological difficulties, the effect of our
accounting policies, and other risks as detailed in the section
entitled “Risk Factors” in this
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 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 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
We are
a clinical-stage biopharmaceutical company focused on developing
new generation medicines for depression and other central nervous
system (CNS) disorders.
Unless the context otherwise requires, the words
“VistaGen Therapeutics,
Inc.” “VistaGen,” “we,” “the Company,”
“us” and
“our” refer to
VistaGen Therapeutics, Inc., a Nevada corporation. All references
to future quarters and years in this Item 2 refer to calendar
quarters and calendar years, unless reference is made
otherwise.
AV-101
is our oral CNS product candidate in Phase 2 clinical development
in the United States, initially as a new generation adjunctive
treatment for Major Depressive Disorder (MDD) in patients with an inadequate
response to standard antidepressants approved by the U.S. Food and
Drug Administration (FDA). AV-101’s
mechanism of action (MOA)
involves both NMDA (N-methyl-D-aspartate) and AMPA
(alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid)
receptors in the brain responsible for fast excitatory synaptic
activity throughout the CNS. AV-101’s MOA is
fundamentally differentiated from all FDA-approved antidepressants,
as well as all atypical antipsychotics such as aripiprazole often
used adjunctively to augment them. We believe AV-101 also has
potential as a new treatment alternative for several additional CNS
indications, including epilepsy, Huntington’s disease,
levadopa (L-DOPA)-induced
dyskinesia associated with Parkinson’s disease, and as a
potential non-opioid treatment for neuropathic
pain.
Clinical
studies conducted at the U.S. National Institute of Mental Health
(NIMH), part of the U.S.
National Institutes of Health (NIH), by Dr. Carlos Zarate, Jr., Chief
of the NIMH’s Experimental Therapeutics & Pathophysiology
Branch and its Section on Neurobiology and Treatment of Mood and
Anxiety Disorders, have focused on the antidepressant effects of
low dose ketamine hydrochloride injection (ketamine), an ion-channel blocking
NMDA receptor antagonist, in MDD patients with inadequate responses
to multiple standard antidepressants. These NIMH studies, as well
as clinical research at Yale University and other academic
institutions, have demonstrated robust antidepressant effects in
treatment-resistant MDD patients within twenty-four hours of a
single sub-anesthetic dose of ketamine administered by intravenous
(IV)
injection.
We
believe orally-administered AV-101 may have potential to deliver
ketamine-like antidepressant effects without ketamine’s
psychological and other negative side effects. As published in the
October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental
Therapeutics, in an article titled, The prodrug 4-chlorokynurenine causes
ketamine-like antidepressant effects, but not side effects, by
NMDA/glycineB-site inhibition, using well-established
preclinical models of depression, AV-101 was shown to induce
fast-acting, dose-dependent, persistent and statistically
significant antidepressant-like responses following a single
treatment. These responses were equivalent to those seen with a
single sub-anesthetic control dose of ketamine. In addition, these
studies confirmed that the fast-acting antidepressant effects of
AV-101 were mediated through both inhibiting the GlyB site of the
NMDA receptor and activating the AMPA receptor pathway in the
brain.
Pursuant
to our Cooperative Research and Development Agreement (CRADA) with the NIMH, the NIMH is
funding, and Dr. Zarate, as Principal Investigator, and his team
are conducting, a small Phase 2 clinical study of AV-101
monotherapy in subjects with treatment-resistant MDD (the
NIMH AV-101 MDD Phase 2
Monotherapy Study). We are preparing to launch our
180-patient Phase 2 multi-center, multi-dose, double blind,
placebo-controlled efficacy and safety study of AV-101 as a new
generation adjunctive treatment of MDD in adult patients with an
inadequate response to standard, FDA-approved antidepressants (the
AV-101 MDD Phase 2 Adjunctive
Treatment Study). Dr. Maurizio Fava, Professor of
Psychiatry at Harvard Medical School and Director, Division of
Clinical Research, Massachusetts General Hospital (MGH) Research Institute, will be the
Principal Investigator of our AV-101 MDD Phase 2 Adjunctive
Treatment Study. Dr. Fava was the co-Principal
Investigator with Dr. A. John Rush of the STAR*D study, the largest
clinical trial conducted in depression to date, whose findings were
published in journals such as the New England Journal of Medicine
(NEJM) and the Journal of
the American Medical Association (JAMA). We currently anticipate
launching our AV-101 MDD Phase 2 Adjunctive Treatment Study in the
first quarter of 2018 and completing it by the end of 2018, with
top line results available in the first quarter of
2019.
VistaStem
Therapeutics (VistaStem)
is our wholly owned subsidiary focused on applying human
pluripotent stem cell (hPSC) technology, internally and with
collaborators, to discover, rescue, develop and commercialize (i)
proprietary new chemical entities (NCEs) for CNS and other diseases and
(ii) regenerative medicine (RM) involving hPSC-derived blood,
cartilage, heart and liver cells. Our internal drug rescue
programs are designed to utilize CardioSafe 3D, our customized cardiac
bioassay system, to develop small molecule NCEs for our
pipeline. To advance potential RM applications of its cardiac
stem cell technology, in December 2016, VistaStem exclusively
sublicensed to BlueRock Therapeutics LP, a next generation RM
company established by Bayer AG and Versant Ventures, rights to
certain proprietary technologies relating to the production of
cardiac stem cells for the treatment of heart disease (the
BlueRock
Agreement). In a manner similar to its exclusive
sublicense agreement with BlueRock Therapeutics, VistaStem may
pursue additional RM collaborations or licensing transactions
involving blood, cartilage, and/or liver cells derived from hPSCs
for (A) cell-based therapy, (B) cell repair therapy, and/or (C)
tissue engineering.
AV-101 and Major Depressive Disorder
Background
The
World Health Organization (WHO) estimates that 300 million people
worldwide are affected by depression. According to the NIH, major
depression is one of the most common mental disorders in the U.S.
The NIMH reports that, in 2014, approximately 16 million adults in
the U.S. had at least one major depressive episode in the past
year. According to the U.S. Centers for Disease Control and
Prevention (CDC) one in 10
Americans over the age of 12 takes a standard, FDA-approved
antidepressant.
Most
standard antidepressants target neurotransmitter reuptake
inhibition – either serotonin (antidepressants known as
SSRIs) or
serotonin/norepinephrine (antidepressants known as SNRIs). Even when effective, these
standard depression medications take many weeks to achieve adequate
antidepressant effects. Nearly two out of every three drug-treated
depression patients do not obtain adequate therapeutic benefit from
initial treatment with a standard antidepressant. Even after
treatment with many different standard antidepressants, nearly one
out of every three drug-treated depression patients still do not
achieve adequate therapeutic benefits from their antidepressant
medication. Such patients with an inadequate response to
standard antidepressants often seek to augment their treatment
regimen by adding an atypical antipsychotic (drugs such as
aripiprazole), despite only modest potential therapeutic benefit
and the significant risk of additional side effects.
All
standard antidepressants have risks of side effects, including,
among others, anxiety, metabolic syndrome, sleep disturbance and
sexual dysfunction. Adjunctive use of atypical antipsychotics to
augment inadequately performing standard antidepressants may
increase the risk of significant side effects, including, tardive
dyskinesia, substantial weight gain, diabetes and heart disease,
while offering only a modest potential increase in therapeutic
benefit.
AV-101
AV-101
is our oral CNS drug candidate in Phase 2 development in the United
States, initially focused as a new generation antidepressant for
the adjunctive treatment of MDD patients with an inadequate
response to standard, FDA-approved antidepressants. As published in
the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental
Therapeutics, in an article titled, The prodrug 4-chlorokynurenine causes
ketamine-like antidepressant effects, but not side effects, by
NMDA/glycineB-site inhibition, using well-established
preclinical models of depression, AV-101 was shown to induce
fast-acting, dose-dependent, persistent and statistically
significant ketamine-like antidepressant effects following a single
treatment, responses equivalent to those seen with a single
sub-anesthetic control dose of ketamine, without the negative side
effects seen with ketamine. In addition, these studies confirmed
that the antidepressant effects of AV-101 were mediated through
both inhibition of the GlyB site of NMDA receptors and activation
of the AMPA receptor pathway in the brain, a key final common
pathway feature of certain new generation antidepressants such as
ketamine and AV-101, each with a MOA that is fundamentally
different from all standard antidepressants and atypical
antipsychotics used adjunctively to augment them.
We
have completed two NIH-funded, randomized, double blind,
placebo-controlled AV-101 Phase 1 safety studies. Currently,
pursuant to our CRADA with the NIMH and Dr. Carlos Zarate, Jr., the
NIMH is funding, and Dr. Zarate, as Principal Investigator, and his
team are conducting, a small NIMH AV-101 MDD Phase 2 Monotherapy
Study. Although we are not involved in conducting this study, we
currently anticipate that the NIMH will complete the NIMH AV-101
MDD Phase 2 Monotherapy Study by the end of 2017, with top line
results during the first half of 2018.
We are
currently preparing to launch our 180-patient AV-101 MDD Phase 2
Adjunctive Treatment Study, a study focused on using AV-101 as an
adjunctive treatment of MDD in patients with an inadequate response
to standard, FDA-approved antidepressants. We currently anticipate
the launch of the AV-101 MDD Phase 2 Adjunctive Treatment Study,
with Dr. Maurizio Fava of Harvard Medical School serving as
Principal Investigator, in the first quarter of 2018. Subject to
securing adequate financing, we currently anticipate completing our
AV-101 MDD Phase 2 Adjunctive Treatment Study by the end of 2018,
with top line results available in the first quarter of
2019.
We
believe preclinical studies and Phase 1 safety studies support our
hypothesis that AV-101 may also have potential to treat multiple
additional CNS disorders and diseases beyond MDD, including
epilepsy, neuropathic pain, Huntington’s disease,
L-DOPA-induced dyskinesia associated with Parkinson’s
disease, and other CNS indications where modulation of the NMDA
receptor, activation of AMPA pathways and/or key active metabolites
of AV-101 may achieve therapeutic benefit. We are beginning to plan
additional Phase 2 clinical studies of AV-101 to further evaluate
its therapeutic potential beyond MDD.
CardioSafe 3D™; NCE Drug Rescue and Regenerative
Medicine
VistaStem
Therapeutics is our wholly owned subsidiary focused on applying
hPSC technology to discover, rescue, develop and commercialize
proprietary small molecule NCEs for CNS and other diseases, as well
as potential cellular therapies involving stem cell-derived blood,
cartilage, heart and liver cells. CardioSafe 3D™ is our
customized in
vitro cardiac bioassay system capable of predicting
potential human heart toxicity of small molecule
NCEs in vitro, long
before they are ever tested in animal and human studies. Potential
commercial applications of our stem cell technology platform
involve using CardioSafe 3D internally for NCE
drug discovery and drug rescue to expand our proprietary drug
candidate pipeline. Drug rescue involves leveraging substantial
prior research and development investments by pharmaceutical
companies and others related to public domain NCE programs
terminated before FDA approval due to heart toxicity risks and RM
and cellular therapies. To advance potential RM applications of its
cardiac stem cell technology, in December 2016, VistaStem
exclusively sublicensed to BlueRock Therapeutics LP, a next
generation regenerative medicine company established by Bayer AG
and Versant Ventures, rights to certain proprietary technologies
relating to the production of cardiac stem cells for the treatment
of heart disease. In a manner similar to the BlueRock Agreement,
VistaStem may also pursue additional potential RM applications
using blood, cartilage, and/or liver cells derived from hPSCs for
(A) cell-based therapy (injection of stem cell-derived mature
organ-specific cells obtained through directed differentiation),
(B) cell repair therapy (induction of regeneration by biologically
active molecules administered alone or produced by infused
genetically engineered cells), or (C) tissue engineering
(transplantation of in
vitro grown complex tissues) using hPSC-derived blood,
bone, cartilage, and/or liver cells.
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, 2017, as filed with the SEC on June
29, 2017, and in Note 3 to the accompanying unaudited Condensed
Consolidated Financial Statements included in Part 1, Item 1
of this Report.
Summary
Net Loss
Although
in December 2016 we generated $1.25 million of sublicense revenue
from the BlueRock Therapeutics Agreement, we have not yet achieved
recurring revenue-generating status from any of our product
candidates or technologies. Since our inception in May 1998, we
have devoted substantially all of our time and efforts to
developing our lead CNS product candidate, AV-101, from early
nonclinical studies to our ongoing Phase 2 clinical development
program in MDD, as well as stem cell technology research and
development, bioassay development, small molecule drug development,
and creating, protecting and patenting intellectual property
related to our product candidates and technologies, with the
corollary initiatives of recruiting and retaining personnel and
raising working capital. As of June 30, 2017, we had an accumulated
deficit of approximately $144.3 million. Our net loss for the three
months ended June 30, 2017 and 2016 was approximately $2.3 million
and $2.0 million, respectively. We expect losses to continue for
the foreseeable future, primarily related to our further clinical
development of AV-101 for the adjunctive treatment of MDD, as well
as a range of other CNS indications.
Summary of the Quarter Ended June 30, 2017
During
the quarter ended June 30, 2017, we continued to (i) advance
nonclinical, including manufacturing, and clinical development of
AV-101 as a potential new generation antidepressant and as a
potential new therapeutic alternative for several other CNS
indications with significant unmet medical need, (ii) expand the
regulatory foundation to support broad Phase 2 clinical development
of AV-101 in the U.S. and, (iii) on a limited basis, advance both
(a) the predictive toxicology capabilities of CardioSafe 3D for drug rescue and
development applications, and (b) regenerative medicine
opportunities related to our stem cell technology
platform.
Pursuant
to our February 2015 Cooperative Research and Development Agreement
(CRADA) with the NIH, the
NIH continues to fund, and Dr. Carlos Zarate Jr. of the NIMH
continues to conduct, the NIMH AV-101 MDD Phase 2 Monotherapy
Study, a small Phase 2 clinical study of AV-101 as a monotherapy
for treatment-resistant MDD at no cost to us other than supplying
clinical trial material. Although we do not direct or control the
progress of this study, we currently anticipate that the NIMH will
complete the NIMH AV-101 MDD Phase 2 Monotherapy Study by the end
of 2017, with top line results during the first half of
2018.
We
continue to prepare for the launch of our AV-101 MDD Phase 2
Adjunctive Treatment Study with initiatives that include improving
the efficiency of our AV-101 manufacturing processes and producing
sufficient quantities to enable a robust initiation of the study.
We currently anticipate the launch of the AV-101 MDD Phase 2
Adjunctive Treatment Study, with Dr. Maurizio Fava of Harvard
Medical School serving as Principal Investigator, in the first
quarter of 2018.
Additionally, we are pursuing initiatives to secure a broad
spectrum of intellectual property protection for AV-101 covering
multiple CNS indications in both the U.S. and
abroad. The
European Patent Office (EPO)
has recently issued a Notice of Intention to Grant our European
Patent Application for AV-101. The granted claims, covering
multiple dosage forms of AV-101, treatment of depression and
reduction of dyskinesia associated with L-DOPA treatment of
Parkinson's disease, will be in effect until at least January
2034.
Between
late-March 2017 and June 2017, we entered into self-placed private
placement transactions involving securities purchase agreements
with individual accredited investors, pursuant to which we sold
units consisting of an aggregate of (i) 495,001 shares of our
unregistered common stock; and (ii) warrants which are not
exercisable until six months and one day following issuance and
expire on April 30, 2021, to purchase an aggregate of 247,500
shares of our common stock at a weighted average fixed exercise
price of $3.99 per share, subject to adjustment only for customary
stock dividends, reclassifications, splits and similar
transactions. We received cash proceeds of approximately $1 million
in this self-placed private placement transaction.
Following
the expansion of our Clinical and Regulatory Advisory Board during
2016 with the appointment of pre-eminent opinion leaders in the
field of depression, in July 2017, we appointed Mark Wallace, M.D.,
Distinguished Professor of Clinical Anesthesiology at the
University of California, San Diego, to our Clinical and Regulatory
Advisory Board to assist us in advancing development of AV-101 as a
potential non-opioid treatment alternative for neuropathic pain.
Dr. Wallace is an internationally recognized leader in the field of
multi-modal pain management, with over 30 years of professional
experience, board certifications, licensures, honors/awards,
grants, articles and abstracts
As a
matter of course, we continue to minimize to the greatest extent
possible cash commitments and expenditures for both internal and
external research and development and general and administrative
services. To further advance the nonclinical and clinical
development of AV-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, 2017 and
2016
The
following table summarizes the results of our operations for the
three months ended June 30, 2017 and 2016 (amounts in
thousands).
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Research and
development
|
$1,096
|
$826
|
|
General and
administrative
|
1,165
|
1,138
|
|
Total operating
expenses
|
2,261
|
1,964
|
|
|
|
|
|
Loss from
operations
|
(2,261)
|
(1,964)
|
|
|
|
|
|
Interest expense,
net
|
(3)
|
(1)
|
|
|
|
|
|
Loss before income
taxes
|
(2,264)
|
(1,965)
|
|
Income
taxes
|
(2)
|
(2)
|
|
|
|
|
|
Net
loss
|
(2,266)
|
(1,967)
|
|
Accrued dividend
on Series B Preferred Stock
|
(247)
|
(540)
|
|
Deemed dividend on
Series B Preferred Stock
|
-
|
(111)
|
|
Net loss
attributable to common stockholders
|
$(2,513)
|
$(2,618)
|
Revenue
We
reported no revenue for the quarters ended June 30, 2017 or 2016
and we presently have no recurring revenue generating arrangements
with respect to AV-101 or other potential product candidates. While
we may potentially receive future milestone payments and royalties
under the BlueRock Agreement we entered in December 2016, in the
event certain performance-based milestones and commercial sales are
achieved, there can be no assurance that the BlueRock Agreement
will provide additional revenue to us in the near term or at
all.
Research and Development Expense
Research
and development expense, including both cash and noncash
components, totaled $1,096,200 for the quarter ended June 30, 2017,
an increase of approximately 33% compared to the $825,700 reported
for the quarter ended June 30, 2016. Noncash expenses, including
stock compensation, depreciation and a portion of rent expense in
both periods totaled approximately $251,000 and $48,000 in the
quarters ended June 30, 2017 and 2016, respectively. Current period
expense reflects the increasing impact of our continued nonclinical
and clinical development of AV-101, particularly our preparations
for the launch of the AV-101 MDD Phase 2 Adjunctive Treatment
Study, which is currently anticipated in the first quarter of 2018,
subject to securing adequate financing. 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,
|
|
|
|
|
|
|
|
|
|
Salaries and
benefits
|
$318
|
$250
|
|
Stock-based
compensation
|
191
|
44
|
|
Consulting and
other professional services
|
10
|
27
|
|
Technology
licenses and royalties
|
60
|
160
|
|
Project-related
research and supplies:
|
|
|
|
AV-101
|
324
|
252
|
|
Stem cell and all
other
|
66
|
28
|
|
|
390
|
280
|
|
Rent
|
105
|
56
|
|
Depreciation
|
19
|
9
|
|
All
other
|
3
|
-
|
|
Total Research and
Development Expense
|
$1,096
|
$826
|
The
increase in salaries and benefits reflects the impact of the hiring
of our Chief Medical Officer (CMO) in June 2016, and salary
increases granted to our Chief Scientific Officer (CSO) in June 2016 and to the
non-officer members of our scientific staff in June 2017 and June
2016.
Stock
based compensation expense increased in the current period
primarily as a result of the routine amortization of option grants
made to our CSO, CMO and scientific staff in April 2017 and
November 2016, plus the new-hire grant made to our CMO in June
2016. These grants are being amortized over a three-year or
four-year vesting period based on the terms of the respective
grants. Substantially all option grants made prior to September
2015 were fully-vested and fully-expensed prior to the quarter
ended June 30, 2017.
Consulting
services reflects fees paid or accrued for scientific, nonclinical
and clinical development and regulatory advisory services rendered
to us by third-parties, primarily by members of our scientific and
CNS clinical and regulatory advisory boards. The reduction in
expense in the current period primarily reflects the change in
terms of consulting agreements with our stem cell-related
scientific advisory board members.
Technology
license expense reflects both recurring annual fees as well as
legal counsel and other costs related to patent prosecution and
protection pursuant to our stem cell technology license agreements
or have elected to pursue for commercial purposes. We recognize
these costs as they are invoiced to us by the licensors and they do
not occur ratably throughout the year or between years. In both
periods, but to a greater extent in the quarter ended June 30,
2016, this expense includes legal counsel and other costs we have
incurred to advance in the U.S. and numerous foreign countries
numerous pending patent applications with respect to AV-101 and our
stem cell technology platform.
AV-101
project expense for the quarter ended June 30, 2017 includes
continuing costs incurred to develop more efficient and
cost-effective proprietary manufacturing methods for AV-101, and to
produce clinical trial material for the AV-101 MDD Phase 2
Adjunctive Treatment Study, as well as costs incurred for certain
other nonclinical trial analyses to facilitate further clinical
development of AV-101 in MDD and potentially for other indications.
The increase in stem cell and other project related expenses for
the quarter ended June 30, 2017 primarily reflects in-house costs
associated with our participation in the FDA’s Comprehensive
In Vitro Proarrhythmia Assay (CiPA) project and other in-house stem
cell technology-related initiatives.
The
increase in rent expense for the quarter ended June 30, 2017
reflects both the impact of the scheduled rent increase effective
in August 2016 as well as the impact of accounting for the November
2016 lease amendment extending the lease of our headquarters
facilities by five years from July 31, 2017 to July 31,
2022.
General and Administrative Expense
General
and administrative expense, including both cash and noncash
components, increased slightly to approximately $1,165,000 from
$1,138,000, for the quarters ended June 30, 2017 and 2016,
respectively. Noncash expense, including, in both periods, stock
compensation expense, a portion of investor relations and
investment banking expenses, and a portion of rent expense, and, in
2016, warrant modification expense, aggregated approximately
$253,000 and $443,000 for the quarters ended June 30, 2017 and
2016, respectively. The modest overall increase in general and
administrative expenses was primarily attributable to increased
salary and benefits and noncash stock compensation expenses offset
by a reduction in professional services fees. The following table
indicates the primary components of general and administrative
expenses, including noncash stock compensation expense, for each of
the periods (amounts in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
Salaries and
benefits
|
$271
|
$190
|
|
Stock-based
compensation
|
176
|
64
|
|
Board
fees
|
39
|
33
|
|
Legal, accounting
and other professional fees
|
307
|
542
|
|
Investor
relations
|
166
|
108
|
|
Insurance
|
61
|
40
|
|
Travel
expenses
|
40
|
49
|
|
Rent and
utilities
|
73
|
40
|
|
Warrant
modification expense
|
-
|
40
|
|
All other
expenses
|
32
|
32
|
|
Total General and
Administrative Expense
|
$1,165
|
$1,138
|
The
increase in salaries and benefits reflects the impact of the hiring
of our Vice President of Corporate Development (VP-Corporate Development) in
September 2016 and salary increases granted in June 2016 to our
Chief Executive Officer (CEO) and Chief Financial Officer
(CFO), and in June 2017
and June 2016 to a non-officer member of our administrative
staff.
Stock
based compensation expense increased in the current period
primarily as a result of the routine amortization of option grants
to independent members of our Board of Directors and our CEO, CFO
and administrative staff in April 2017 and November 2016, plus the
new-hire grant made to our VP-Corporate Development in September
2016. These grants are being amortized over a three-year or
four-year vesting period based on the terms of the respective
grants. Substantially all option grants made prior to September
2015 were fully-vested and fully-expensed prior to the quarter
ended June 30, 2017.
Board
fees includes fees recognized for the services of independent
members of our Board of Directors. The Board modified committee
assignments effective in April 2017, resulting in the slight
increase in expense.
Legal,
accounting and other professional fees for the quarters ended June
30, 2017 and 2016 includes expense related to routine legal fees as
well as the accounting expense related to the annual audit of the
prior year’s financial statements and the review of the
financial statements for the first quarter of the current fiscal
year. We incurred no non-cash expense in the quarter ended June 30,
2017. Noncash expense for the quarter ended June 30, 2016 included
approximately $338,000 recognized pursuant to the June 30, 2015
grant of an aggregate of 90,000 shares of our Series B 10%
Convertible Preferred Stock (Series B Preferred) having an aggregate
fair value of $1,350,000 as compensation for financial advisory and
corporate development service contracts with two independent
providers for services to be performed through June 30,
2016.
Investor
relations expense includes the fees of our various external service
providers for a broad spectrum of investor relations and market
awareness and support functions, as well as initiatives that
included numerous meetings in multiple U.S. markets and other
communication activities focused on expanding market awareness of
the Company, including among registered investment professionals
and investment advisors, and individual and institutional
investors. In the quarter ended June 30, 2017, in addition to cash
fees and expenses we incurred, we granted 25,000 unregistered
shares of our common stock to an investor relations and awareness
service provider as partial compensation for its services and
recognized noncash expense of approximately $50,000, representing
the fair value of the stock at the time of issuance. We did not
recognize any noncash investor relations expense in the quarter
ended June 30, 2016.
In
both periods, travel expense reflects costs associated with
presentations to and meetings in multiple U.S. markets with
existing and potential individual and institutional investors,
investment professionals and advisors, media, and securities
analysts, as well as various investor relations, market awareness
and corporate development initiatives.
The
increase in rent expense for the quarter ended June 30, 2017
reflects the impact of the scheduled rent increase effective in
August 2016 as well as the impact of accounting for the November
2016 lease amendment extending the lease of our headquarters
facilities by five years from July 31, 2017 to July 31,
2022.
In
April and May 2016, we entered into warrant exchange agreements
with certain warrant holders pursuant to which the warrant holders
exchanged outstanding warrants to purchase an aggregate of 41,649
shares of our common stock for an aggregate of 31,238 shares of our
unregistered common stock. As we had with similar prior
transactions, we accounted for these transactions as warrant
modifications, resulting in our recognition of approximately
$40,000 in noncash expense in the quarter ended June 30, 2016. We
had no such transactions during the quarter ended June 30,
2017.
Interest and Other Expenses, Net
Interest
expense, net totaled $2,400 for the quarter ended June 30, 2017
compared to $1,400 reported for the quarter ended June 30, 2016.
Interest expense in both periods relates to interest paid on
insurance premium financing and on a capital lease of office
equipment.
We have
recognized $247,300 and $539,800 for the quarters ended June 30,
2017 and 2016, respectively, representing the 10% cumulative
dividend payable on our 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. The reduction in the quarterly dividend accrual results
from the automatic conversion of an aggregate of 2,403,051 shares
of Series B Preferred into an equal number of shares of our common
stock upon our completion of our May 2016 public offering of shares
of our common stock and warrants, and a subsequent voluntary
conversion of 87,500 shares of our Series B Preferred in August
2016. There has been no change in the number of Series B Preferred
shares outstanding since August 2016.
During
the quarter ended June 30, 2016, we allocated the proceeds from our
self-placed private placement sales of Series B Preferred Units to
the Series B Preferred stock and the Series B Warrants based on
their relative fair values on the dates of the sales. The
difference between the relative fair value per share of the Series
B Preferred, approximately $4.20 per share, and its Conversion
Price (or stated value) of $7.00 per share represented a deemed
dividend to the purchasers of the Series B Preferred Units.
Accordingly, we recognized a deemed dividend in the aggregate
amount of $111,100 in arriving at net loss attributable to common
stockholders for the quarter ended June 30, 2016 in the
accompanying Condensed Consolidated Statement of Operations and
Comprehensive Loss included in Part I of this Report.
Liquidity and Capital Resources
From
our inception in May 1998 through June 30, 2017, we have financed
our operations and technology acquisitions primarily through the
issuance and sale of our equity and debt securities, including
convertible promissory notes and short-term promissory notes, for
cash proceeds of approximately $45.5 million, as well as from an
aggregate of approximately $17.6 million of government research
grant awards, strategic collaboration payments, intellectual
property sublicensing and other revenues. We have also issued
equity securities with an approximate aggregate value at issuance
of $30.8 million in non-cash settlements of certain liabilities,
including liabilities for professional services rendered to us or
as compensation for such services. Additionally, pursuant to our
February 2015 Cooperative Research and Development Agreement
(CRADA) with the NIH,
substantial ongoing Phase 2 clinical development activities
relating to AV-101 as a potential new generation antidepressant are
being sponsored in full, at no cost to us other than supplying
clinical trial material, by the NIMH under the direction of Dr.
Carlos Zarate Jr. as Principal Investigator.
Between late-March 2017 and June 30,
2017, we sold to accredited investors, in a self-placed private
placement, units consisting of an aggregate of 495,001 unregistered
shares of our common stock and warrants to purchase an aggregate of
247,500 unregistered shares of our common stock pursuant to which
we received proceeds of approximately $1.0 million (the
Spring 2017
Private Placement), resulting
in our cash and cash equivalents balance of $1.6 million at June
30, 2017. In August 2017, in a self-placed private placement
transaction, we sold to an accredited investor units consisting of
28,572 shares of our unregistered common stock and warrants to
purchase 28,572 unregistered shares of our common stock at an
exercise price of $4.00 per share. We received cash proceeds of
$50,000 from this sale of our securities. Our cash balance at June
30, 2017 plus the proceeds from subsequent sales of our securities
was not sufficient to enable us to
fund our planned operations, including expected cash expenditures
of approximately $12 million for the next twelve months, including
expenditures required to further prepare for, launch and satisfy a
significant portion of the projected expenses associated with our
proposed AV-101 MDD Phase 2 Adjunctive Treatment
Study.
Although
our current financial resources are not yet sufficient to fully
fund completion of the AV-101 MDD Phase 2 Adjunctive Treatment
Study, we anticipate, as we have numerous times in the past,
raising sufficient additional capital as and when necessary and
advisable to sustain our operations and achieve our key corporate
objectives through at least the next twelve months, including
initiating and conducting the AV-101 MDD Phase 2 Adjunctive
Treatment Study in an ordinary course manner. We expect to secure
additional capital primarily through the sale of our equity
securities in one or more private placements to accredited
investors or public offerings. We have filed a Registration
Statement on Form S-3 (Registration No. 333-215671) (the
S-3 Registration
Statement) that has been declared effective by the
Securities and Exchange Commission (the Commission) to cover our potential
future sale of our equity securities in one or more public
offerings from time to time. As of the date of this Report, we have
not yet sold any securities under the S-3 Registration Statement,
nor do we have an obligation to do so. There can, however, be no
assurance that future financing will be available in sufficient
amounts, in a timely manner, or on terms acceptable to us, if at
all. Further, at June 30, 2017, we had a limited number of
unallocated or unreserved shares of our common stock available for
issuance in future offerings or for other purposes. To facilitate
potential future issuances and sales of our equity securities for
ordinary corporate finance and general corporate purposes, our
Board of Directors (Board)
has approved an amendment to our Restated and Amended Articles of
Incorporation to increase the number of shares of common stock
available for issuance thereunder from 30 million shares to 100
million shares, an amount our Board has determined is customary and
appropriate for a Nasdaq-listed, clinical-stage biopharmaceutical
company. Before taking effect, this amendment must be approved by a
majority of our stockholders at our 2017 annual meeting of
stockholders in September 2017.
We may
also seek research and development collaborations that could
generate revenue, funding for development of AV-101 and additional
product candidates, as well as additional government grant awards
and agreements similar to our current CRADA with the NIMH, which
provides for the NIMH to fully fund the NIMH’s ongoing NIMH
AV-101 MDD Phase 2 Monotherapy Study. Such strategic collaborations
may provide non-dilutive resources to advance our strategic
initiatives while reducing a portion of our future cash outlays and
working capital requirements. In a manner similar to the BlueRock
Agreement, we may also pursue similar arrangements with
third-parties covering other of our intellectual property. Although
we may seek additional collaborations that could generate revenue
and/or non-dilutive funding for development of AV-101 and other
product candidates, as well as new government grant awards and/or
agreements similar to our CRADA with NIMH, no assurance can be
provided that any such collaborations, awards or agreements will
occur in the future.
Our
future working capital requirements will depend on many factors,
including, without limitation, 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 AV-101 as an adjunctive treatment for MDD and
other potential CNS conditions, 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 and 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 the timing of and projected costs relating to key research
and development projects, including our expenses associated with
our proposed AV-101 MDD Phase 2 Adjunctive Treatment Study,
regulatory consulting, CRO services, investor relations and
corporate development, legal, acquisition and protection of
intellectual property, public company compliance and other
professional services and working capital costs.
Notwithstanding
the foregoing, substantial additional financing may not be
available to us on a timely basis, on acceptable terms, or at all.
If we are unable to obtain substantial additional financing on a
timely basis when needed in 2017 and beyond, our business,
financial condition, and results of operations may be harmed, the
price of our stock may decline, we may be required to reduce,
defer, or discontinue certain of our research and development
activities and we may not be able to continue as a going
concern.
Cash and Cash Equivalents
The
following table summarizes changes in cash and cash equivalents for
the periods stated (in thousands):
|
|
Three Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities
|
$(2,134)
|
$(1,671)
|
|
Net cash used in
investing activities
|
-
|
(2)
|
|
Net cash provided
by financing activities
|
841
|
9,744
|
|
Net increase
(decrease) in cash and cash equivalents
|
(1,293)
|
8,071
|
|
Cash and cash
equivalents at beginning of period
|
2,921
|
429
|
|
Cash and cash
equivalents at end of period
|
$1,628
|
$8,500
|
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
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, 2017
filed with the Securities and Exchange Commission on June 29, 2017,
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 has
determined 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.
PART II: OTHER
INFORMATION
Item 1. Legal Proceedings
None.
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 the fiscal
year ended March 31, 2017 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.
Risks Related to Product Development, Regulatory Approval and
Commercialization
We depend heavily on the success of AV-101. We cannot be certain
that we will be able to obtain regulatory approval for, or
successfully commercialize AV-101, or any product
candidate.
We
currently have no drug products for sale and may never be able to
develop and commercialize marketable drug products. Our business
depends heavily on the successful development, regulatory approval
and commercialization of AV-101 for depression, including for MDD,
and, potentially, various other diseases and disorders involving
the CNS, as well as, but to a more limited extent, our ability to
produce, develop and commercialize NCEs from our drug rescue
programs. AV-101 will require substantial additional non-clinical
and clinical development, testing and regulatory approval before it
may be commercialized. It is unlikely to achieve regulatory
approval, if at all, until at least 2021. Each drug rescue NCE will
require substantial non-clinical development, all phases of
clinical development, and regulatory approval before it may be
commercialized. The non-clinical and clinical development of our
product candidates are, and the manufacturing and marketing of our
product candidates will be, subject to extensive and rigorous
review and regulation by numerous government authorities in the
United States 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 non-clinical studies and
clinical trials that the product candidate is safe and effective
for use in each target indication. Drug development is a long,
expensive and uncertain process, and delay or failure can occur at
any stage of any of our non-clinical or clinical studies. This
process can take many years and may also include post-marketing
studies and surveillance, which will require the expenditure of
substantial resources beyond the proceeds we have raised to date.
Of the large number of drugs in development in the United States,
only a small percentage will successfully complete the FDA
regulatory approval process and will be commercialized.
Accordingly, even if we are able to obtain the requisite financing
to continue to fund our non-clinical and clinical studies, we
cannot assure you that AV-101, any drug rescue NCE, or any other
future product candidate will be successfully developed or
commercialized.
We are
not permitted to market our product candidates in the United States
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. We expect the FDA to require us to complete the planned
AV-101 MDD Phase 2 Adjunctive Treatment Study and at least two
pivotal Phase 3 clinical trials in order to submit an NDA for
AV-101 as an adjunctive treatment for MDD patients with an
inadequate response to standard, FDA-approved antidepressants.
Also, we anticipate that the FDA will require that we conduct
additional toxicity studies, additional non-clinical and certain
small clinical studies before submitting an NDA for AV-101. The
results of all of these studies are not known until after the
studies are concluded.
Obtaining
FDA approval of an NDA is a complex, lengthy, expensive and
uncertain process, and the FDA may delay, limit or deny approval of
AV-101 or any of our product candidates for many reasons,
including, among others:
●
if we
submit an NDA and it is reviewed by an advisory committee, the FDA
may have difficulties scheduling an advisory committee meeting in a
timely manner or the advisory committee may recommend against
approval of our application or may recommend that the FDA require,
as a condition of approval, additional non-clinical or clinical
studies, limitations on approved labeling or distribution and use
restrictions;
●
the
FDA may require development of a Risk Evaluation and Mitigation
Strategy ( REMS) as a
condition of approval or post-approval;
●
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 AV-101 or any other product candidate we
may develop, including drug rescue NCEs. Any such setback in our
pursuit of regulatory approval for any product candidate would have
a material adverse effect on our business and
prospects.
We intend to seek a Fast Track designation from the FDA for AV-101,
initially for adjunctive treatment of MDD patients with an
inadequate response to standard antidepressants. Even if the FDA
approves Fast Track designation for AV-101 for this indication, it
may not actually lead to a faster development or regulatory review
or approval process.
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 threatening
conditions. Compounds selected must demonstrate the potential to
address unmet medical needs. The 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
approval or expedited approval of any application for the
product.
We
intend to seek FDA Fast Track designation for AV-101, initially for
adjunctive treatment of MDD patients with an inadequate response to
standard antidepressants, and we may do so for other CNS
indications, as well as for other product candidates. The FDA has
broad discretion whether or not to grant a Fast Track designation,
and even if we believe AV-101 and other product candidates are
eligible for this designation, we cannot be sure that the review or
approval will compare to conventional FDA procedures. Even if
granted, the FDA may withdraw Fast Track designation if it believes
that the designation is no longer supported by data from our
clinical development programs.
The
number of patients suffering from MDD has not been established with
precision. If the actual number of patients with MDD is smaller
than we anticipate, we or our collaborators may encounter
difficulties in enrolling patients in AV-101 clinical trials,
including the NIMH AV-101 MDD Phase 2 Monotherapy Study and our
planned AV-101 MDD Phase 2 Adjunctive Treatment Study, thereby
delaying completion such studies or preventing additional clinical
development. Further, if AV-101 is approved for
adjunctive treatment of MDD patients with an inadequate response to
standard antidepressants, and the market for this indication is
smaller than we anticipate, our ability to achieve profitability
could be limited.
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 and other product candidates, including positive results,
may not be predictive of the results of later-stage clinical
trials. AV-101 or other product candidates in later stages of
clinical trials may fail to show the desired safety and efficacy
results despite having progressed through preclinical studies and
initial clinical trials. Many companies in the biopharmaceutical
industry have suffered significant setbacks in advanced 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, preclinical and clinical data are often susceptible to
varying interpretations and analyses, and many companies that
believed their product candidates performed satisfactorily in
preclinical studies and clinical trials nonetheless failed to
obtain FDA approval. We have not yet completed a Phase 2 clinical
trial for AV-101, and if the NIMH fails to produce positive results
in the NIMH AV-101 MDD Phase 2 Monotherapy Study, the development
timeline and regulatory approval and commercialization prospects
for AV-101 and, correspondingly, our business and financial
prospects, could be materially adversely affected.
This drug candidate development risk is heightened by any changes
in planned timing or nature of clinical trials compared to
completed clinical trials. As product candidates are developed
through preclinical to early and late stage clinical trials towards
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 may be
adversely affected if we or our collaborator 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 non-clinical or clinical studies
of our product candidates.
If serious adverse events or other undesirable side effects are
identified during the use of AV-101 in clinical trials, it may
adversely affect our development of AV-101 for MDD and other CNS
indications.
AV-101
as a monotherapy is currently being tested by the NIMH in an
NIMH-investigator sponsored Phase 2 clinical trial for the
treatment of MDD and may be subjected to testing in the future for
other CNS indications in additional investigator sponsored clinical
trials. If serious adverse events or other undesirable side
effects, or unexpected characteristics of AV-101 are observed in
investigator sponsored clinical trials of AV-101 or our clinical
trials, it may adversely affect or delay our clinical development
of AV-101, and the occurrence of these events would have a material
adverse effect on our business.
Failures or delays in the commencement or completion of our planned
clinical trials and non-clinical studies of our product candidates
could result in increased costs to us and could delay, prevent or
limit our ability to generate revenue and continue our
business.
Under
our CRADA, the NIMH is conducting and funding the NIMH AV-101 MDD
Phase2 Monotherapy Study. We will need to complete the planned
AV-101 MDD Phase 2 Adjunctive Treatment Study, at least two
additional large Phase 2b/3 clinical trials, additional toxicity
and non-clinical studies and certain smaller clinical studies prior
to the submission of an NDA for AV-101 as a new generation
adjunctive treatment for MDD. Successful completion of our clinical
trials is a prerequisite to submitting an NDA to the FDA and,
consequently, the ultimate approval and commercial marketing of
AV-101 for MDD and any other product candidates we may develop. We
do not know whether the NIMH AV-101 MDD Phase 2 Monotherapy Study,
the AV-101 MDD Phase 2 Adjunctive Treatment Study or any of our
future-planned non-clinical and clinical trials will be completed
on schedule, if at all, as the commencement and completion of
non-clinical and clinical trials can be delayed or prevented for a
number of reasons, including, among others:
●
the
FDA may deny permission to proceed with our 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 of additional INDs that may be
required;
●
negative results
from our ongoing non-clinical studies;
●
delays
in reaching or failing to reach agreement on acceptable terms with
prospective CROs and clinical trial sites, the terms of which can
be subject to extensive negotiation and may vary significantly
among different CROs and trial sites;
●
inadequate
quantity or quality of a product candidate or other materials
necessary to conduct non-clinical or clinical trials, for example
delays in the manufacturing of sufficient supply of finished drug
product;
●
difficulties
obtaining Institutional Review Board ( IRB) approval to conduct a clinical
trial at a prospective 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 the clinical trial, the nature of the 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 drug-related side effects experienced by patients in
a clinical trial;
●
delays
in validating any endpoints utilized in a clinical
trial;
●
the
FDA may disagree with our clinical trial design and our
interpretation of data from prior non-clinical 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
non-clinical 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 trials, lack of
efficacy, side effects, personal issues or loss of
interest.
Clinical
trials may also be delayed or terminated prior to completion as a
result of ambiguous or negative interim results. In addition, a
clinical trial may be suspended or terminated by us, the FDA, 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
our clinical protocols;
●
inspection of the
clinical trial operations or trial sites by the FDA or other
regulatory authorities that reveals deficiencies or violations that
require us to undertake corrective action, including the imposition
of a clinical hold;
●
unforeseen safety
issues, including any that could be identified in our ongoing
non-clinical carcinogenicity studies, adverse side effects or lack
of effectiveness;
●
changes in
government regulations or administrative actions;
●
problems with
clinical supply materials; and
●
lack
of adequate funding to continue clinical trials.
Changes in regulatory requirements, FDA guidance or unanticipated
events during our non-clinical studies and clinical trials of our
product candidates may occur, which may result in changes to
non-clinical studies and clinical trial protocols or additional
non-clinical studies and clinical trial requirements, which could
result in increased costs to us and could delay our development
timeline.
Changes
in regulatory requirements, FDA guidance or unanticipated events
during our non-clinical studies and clinical trials may force us to
amend non-clinical studies and clinical trial protocols or the FDA
may impose additional non-clinical studies and clinical trial
requirements. Amendments or changes to our clinical trial protocols
would require resubmission to the FDA and IRBs for review and
approval, which may adversely impact the cost, timing or successful
completion of clinical trials. Similarly, amendments to our
non-clinical studies may adversely impact the cost, timing, or
successful completion of those non-clinical studies. If we
experience delays completing, or if we terminate, any of our
non-clinical studies or clinical trials, or if we are required to
conduct additional non-clinical studies or clinical trials, the
commercial prospects for our 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 non-clinical and clinical trials of AV-101 and any other
product candidates. If these third parties do not successfully
carry out their contractual duties or meet expected deadlines,
completion of non-clinical and clinical trials and development of
AV-101 and other product candidates may be delayed and we may not
be able to obtain regulatory approval for or commercialize AV-101
or other product candidates and our business could be substantially
harmed.
We do
not have the internal staff resources to independently conduct
non-clinical and clinical trials completely on our own. We rely on
our strategic relationships with various medical institutions,
non-clinical and clinical investigators, contract laboratories and
other third parties, such as contract research and development
organizations (CROs), to
conduct non-clinical 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 non-clinical and clinical trials for our product
candidates and control only certain aspects of their activities. As
a result, we have less direct control over the conduct, timing and
completion of these non-clinical and clinical trials and the
management of data developed through non-clinical and clinical
trials than would be the case if we were relying entirely upon our
own staff. Communicating with outside parties can also be
challenging, potentially leading to mistakes as well as
difficulties in coordinating activities. Outside parties
may:
●
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 non-clinical 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 non-clinical studies and clinical trials is conducted in
accordance with the applicable protocol, legal, regulatory and
scientific requirements and standards, and our reliance on CROs or
the NIH does not relieve us of our regulatory responsibilities. We
and our CROs and the NIMH are required to comply with regulations
and guidelines, including current 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 or any of our CROs fail to comply with
applicable cGCPs, the clinical data generated in our clinical
trials 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 regulations and will require a large number of test
patients. Our failure or the failure of our CROs 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, we plan
to have CROs, and in the case of the NIMH AV-101 MDD Phase 2
Monotherapy Study, the NIMH, conduct the AV-101 Phase 2 and Phase 3
clinical trials. As a result, many important aspects of our drug
development programs are outside of our direct control. In
addition, the CROs or the NIMH, as the case may be, may not perform
all of their obligations under arrangements with us or in
compliance with regulatory requirements, but we remain responsible
and are 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 our
clinical trials. If the NIMH or CROs do not perform clinical trials
in a satisfactory manner, breach their obligations to us or fail to
comply with regulatory requirements, the development and
commercialization of AV-101 and other product candidates may be
delayed or our development program materially and irreversibly
harmed. We cannot control the amount and timing of resources these
CROs or the NIMH devote to our program or our clinical products. If
we are unable to rely on non-clinical and clinical data collected
by our CROs or the NIMH, 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 any
of our relationships with these third-party CROs or the NIMH
terminate, we may not be able to enter into arrangements with
alternative CROs or collaborators. If CROs or the NIMH
do not successfully carry out their contractual duties or
obligations or meet expected deadlines, if they need to be replaced
or if the quality or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, any clinical trials
that such CROs or the NIMH 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 and prepare our
clinical supplies of AV-101 and other product candidates, and we
intend to rely on third parties to produce non-clinical, clinical
and commercial supplies of AV-101 and any future product
candidate.
We do
not currently have, nor do we plan to acquire, the infrastructure
or capability to internally manufacture our drug supply of AV-101
or any other product candidates for use in the conduct of our
non-clinical studies and clinical trials, and we lack the internal
resources and the capability to manufacture any product candidates
on a research, development or commercial scale. The
facilities used by our contract manufacturers to manufacture the
active pharmaceutical ingredient and final drug product must
complete a pre-approval inspection by the FDA and other comparable
foreign regulatory agencies to assess compliance with applicable
requirements, including cGMPs, after we submit our NDA or relevant
foreign regulatory submission to the applicable regulatory
agency.
We do
not directly control the manufacturing process of, and are
completely dependent on, our contract manufacturers to comply with
cGMPs for manufacture of both active drug substances and finished
drug products. If our contract manufacturers cannot successfully
manufacture material that conforms to our specifications and the
strict regulatory requirements of the FDA or applicable foreign
regulatory agencies, they will not be able to secure and/or
maintain regulatory approval for their manufacturing facilities. In
addition, we have no direct control over our contract
manufacturers’ ability to maintain adequate quality control,
quality assurance and qualified personnel. Furthermore, all of our
contract manufacturers are engaged with other companies to supply
and/or manufacture materials or products for such other companies,
which exposes our third-party contract manufacturers 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 contract manufacturers’
facilities generally. If the FDA or an applicable foreign
regulatory agency determines now or in the future that these
facilities for the manufacture of our product candidates 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 contract manufacturers 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.
We do
not yet have long-term supply agreements in place with our contract
manufacturers and each batch of our product candidates are
individually contracted under a quality and supply agreement. If we
engage new contract manufacturers, such contractors must complete
an inspection by the FDA and other applicable foreign regulatory
agencies. We plan to continue to rely upon contract manufacturers
and, potentially, collaboration partners, to manufacture research,
development and commercial quantities of AV-101 and other product
candidates, if approved. Our current scale of manufacturing for
AV-101 is adequate to support our currently planned needs for
additional non-clinical studies and clinical trials.
Recently enacted and future legislation may increase the difficulty
and cost for us to obtain marketing approval for and commercialize
AV-101 and affect the prices we may obtain.
In the
United States and some foreign jurisdictions, there have been, and
we expect there will continue to be, a number of legislative and
regulatory changes and proposed changes regarding the healthcare
system, including the ACA, that could, among other things, prevent
or delay marketing approval of AV-101, restrict or regulate
post-approval activities, and affect our ability to profitably sell
any products for which we obtain marketing approval.
In
March 2010, the ACA was enacted to broaden access to health
insurance, reduce or constrain the growth of healthcare spending,
enhance remedies against fraud and abuse, add new transparency
requirements for health care and health insurance industries,
impose new taxes and fees on the health industry, and impose
additional health policy reforms. The law has continued the
downward pressure on pharmaceutical pricing, especially under the
Medicare program, and increased the industry’s regulatory
burdens and operating costs. We cannot predict the full impact of
the ACA on pharmaceutical companies, as many of the reforms require
the promulgation of detailed regulations implementing the statutory
provisions, some of which have not yet fully occurred.
Further,
there have been judicial and Congressional challenges to certain
aspects of the ACA, and we expect there will be additional
challenges and amendments to the ACA in the future. In January
2017, the President of the United States signed an Executive Order
directing federal agencies with authorities and responsibilities
under the ACA to waive, defer, grant exemptions from, or delay the
implementation of any provision of the ACA that would impose a
fiscal or regulatory burden on states, individuals, healthcare
providers, health insurers, or manufacturers of pharmaceuticals or
medical devices. In May 2017, the United States House of
Representatives passed legislation known as the American Health
Care Act, which, if enacted, would amend or repeal significant
portions of the ACA. The United States Senate could adopt the
American Health Care Act as passed by the United States House of
Representatives or other legislation to amend or replace elements
of the ACA. Thus, it is uncertain when or if the American Health
Care Act will become law. We continue to evaluate the effect that
the ACA and its possible repeal and replacement has on our
business.
Other
legislative changes have been proposed and adopted since the ACA
was enacted. For example, in August 2011, the President of the
United States signed into law the Budget Control Act of 2011,
which, among other things, created the Joint Select Committee on
Deficit Reduction to recommend to Congress proposals in spending
reductions. The Joint Select Committee did not achieve a targeted
deficit reduction of at least $1.2 trillion for the years 2013
through 2021, triggering the legislation’s automatic
reduction to several government programs. This included further
reductions to Medicare payments to providers of 2% per fiscal year,
which went into effect in April 2013 and, due to subsequent
legislative amendments to the statute, will stay in effect through
2025 unless additional Congressional action is taken. Additionally,
in January 2013, the American Taxpayer Relief Act of 2012 was
signed into law, which, among other things, reduced Medicare
payments to several types of providers and increased the statute of
limitations period in which the government may recover overpayments
to providers from three to five years. Further, there have been
several recent United States Congressional inquiries and proposed
federal and state legislation designed to, among other things,
bring more transparency to drug pricing, review the relationship
between pricing and manufacturer patient programs, reduce the
out-of-pocket cost of prescription drugs, and reform government
program reimbursement methodologies for drugs.
Moreover,
the Drug Supply Chain Security Act, which was enacted in 2012 as
part of the Food and Drug Administration Safety and Innovation Act,
imposes new obligations on manufacturers of pharmaceutical products
related to product tracking and tracing. Legislative and regulatory
proposals have been made to expand post-approval requirements and
restrict sales and promotional activities for pharmaceutical
products. We are not sure whether additional legislative changes
will be enacted, or whether the current regulations, guidance or
interpretations will be changed, or what the impact of such changes
on our business, if any, may be. In addition, increased scrutiny by
the United States Congress of the FDA’s approval process may
significantly delay or prevent marketing approval, as well as
subject us to more stringent product labeling and post-marketing
testing and other requirements.
We
expect that additional state and federal healthcare reform measures
will be adopted in the future, any of which could limit the amounts
that federal and state governments will pay for healthcare products
and services, which could result in reduced demand for our product
candidates or additional pricing pressures.
Even if we receive marketing approval for our product candidates in
the United States, we may never receive regulatory approval to
market our product candidates outside of the United
States.
We
have not yet selected any markets outside of the United States
where we intend to seek regulatory approval to market our product
candidates. In order to market any product outside of the United
States, however, we must establish and comply with the numerous and
varying safety, efficacy and other regulatory requirements of other
countries. Approval procedures vary among countries and can involve
additional product candidate testing and additional administrative
review periods. The time required to obtain approvals in other
countries might differ from that required to obtain FDA approval.
The marketing approval processes in other countries may implicate
all of the risks detailed above regarding FDA approval in the
United States as well as other risks. In particular, in many
countries outside of the United States, 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 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 an infrastructure for the sale, marketing and
distribution of pharmaceutical products, nor do we intend to create
such capabilities. Therefore, in order 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. 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, 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 non-clinical 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 has 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 also has
the authority to require, as part of an NDA or post-approval, the
submission of a REMS. Any REMS required by the FDA 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 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
pharmaceuticals 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 our product candidates or address similar
markets. It is probable that the number of companies seeking to
develop product candidates similar to 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 action and safety
profile as AV-101. However, new antidepressant products with other
mechanisms of action or products approved for other indications,
including the anesthetic ketamine hydrochloride, are being or may
be used off-label for treatment of MDD, as well as other CNS
indications for which AV-101 may have therapeutic potential.
Additionally, other non-pharmaceutical treatment options, such
psychotherapy and electroconvulsive therapy (ECT) are sometimes used before or
instead of standard antidepressant medications to treat patients
with MDD.
In the
field of new generation, orally available, adjunctive treatments of
adult MDD patients with an inadequate response to standard
antidepressants, we believe our principal competitor is
Alkermes’ orally available drug candidate in Phase 3
development, ALKS-5461.
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. We believe that a range of
pharmaceutical and biotechnology companies have programs to develop
small molecule drug candidates for the treatment of depression,
including MDD, epilepsy, neuropathic pain, dyskinesia associated
with L-DOPA therapy for Parkinson’s disease and other
neurological conditions and diseases, including, but not limited
to, Abbott Laboratories, Acadia, Allergan, Alkermes, Astra Zeneca,
Eli Lilly, GlaxoSmithKline, IntraCellular, Johnson &
Johnson/Janssen, Lundbeck, Merck, Novartis, Ono, Otsuka, Pfizer,
Roche, Sage, Sumitomo Dainippon, and Takeda, as well as any
affiliates of the foregoing companies. Mergers and
acquisitions in the biotechnology and pharmaceutical industries may
result in even more resources being concentrated among a smaller
number of our competitors. Our commercial opportunity could be
reduced or eliminated if our competitors develop and commercialize
products that are safer, more effective, have fewer or less severe
side effects, are more convenient or are less expensive than any
products that we may develop. Our competitors also may obtain FDA
or other regulatory approval for their products more rapidly than
we may obtain approval for ours, which could result in our
competitors establishing a strong market position before we are
able to enter the market.
We may seek to establish collaborations, and, if we are not able to
establish them on commercially reasonable terms, we may have to
alter our development and commercialization plans.
Our
drug development programs and the potential commercialization of
our product candidates will require substantial additional cash to
fund expenses. For some of our product candidates, we may decide to
collaborate with pharmaceutical and biotechnology companies for the
development and potential commercialization of those product
candidates.
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 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 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 depression, we may fail to
pursue additional CNS-related Phase 2 development opportunities for
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, with additional limited focus on NCE drug
rescue and RM. 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 that later prove to have greater
commercial potential. Our resource allocation decisions may cause
us to fail to capitalize on viable commercial drugs or profitable
market opportunities. Our spending on current and future research
and development programs and product candidates for specific
indications may not yield any commercially viable drugs. If we do
not accurately evaluate the commercial potential or target market
for a particular product candidate, we may relinquish valuable
rights to that product candidate through future collaboration,
licensing or other royalty arrangements in cases in which it would
have been more advantageous for us to retain sole development and
commercialization rights to such product candidate.
If any
of these events occur, we may be forced to abandon our development
efforts for a program or programs, which would have a material
adverse effect on our business and could potentially cause us to
cease operations. Research and development programs to identify and
advance new product candidates require substantial technical,
financial and human resources. We may focus our efforts and
resources on potential programs or product candidates that
ultimately prove to be unsuccessful.
We are subject to healthcare laws and regulations, which could
expose us to criminal sanctions, civil penalties, contractual
damages, reputational harm and diminished profits and future
earnings.
Although
we do not currently have any products on the market, once we begin
commercializing our products, 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.
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, including
anticipated activities to be conducted by our sales team, 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 is found not to be
in 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, 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 marketing approval for AV-101 as an
adjunctive treatment of MDD, physicians may nevertheless prescribe
AV-101 to their patients in a manner that is inconsistent with the
approved label. 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 promotion and has enjoined several
companies from engaging in off-label promotion. The FDA has also
requested that companies enter into consent decrees or 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 U.S. 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, including AV-101. Even if we have obtained FDA
Orphan Drug designation for AV-101 of other product candidates,
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 product candidates, including AV-101. Even if we
obtain Orphan Drug designation from the FDA for AV-101 or any other
product candidates, there are limitations to the exclusivity
afforded by such designation. In the United States, the company
that first obtains FDA approval for a designated orphan drug for
the specified rare disease or condition receives orphan drug
marketing exclusivity for that drug for a period of seven years.
This orphan drug exclusivity prevents the FDA from approving
another application, including a full NDA to market the same drug
for the same orphan indication, except in very limited
circumstances, including when the FDA concludes that the later drug
is safer, more effective or makes a major contribution to patient
care. For purposes of small molecule drugs, the FDA defines
“same drug” as a drug that contains the same active
moiety and is intended for the same use as the drug in question. To
obtain Orphan Drug status for a drug that shares the same active
moiety as an already approved drug, it must be demonstrated to the
FDA that the drug is safer or more effective than the approved
orphan designated drug, or that it makes a major contribution to
patient care. In addition, a designated orphan drug may not receive
orphan drug exclusivity if it is approved for a use that is broader
than the indication for which it received orphan designation. In
addition, orphan drug exclusive marketing rights in the United
States 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. 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 in some foreign
countries;
●
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 drug, biological and/or regenerative medicine
candidates, including conducting clinical trials and other areas
required for the successful development and commercialization of
therapeutic products, which makes it difficult to assess our future
viability.
We are
a development stage biopharmaceutical company. Although our lead
drug candidate is in Phase 2 development, we 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 strategic
collaborators:
●
produce product
candidates;
●
develop and obtain
required regulatory approvals for commercialization of product
candidates we produce;
●
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 products; 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 AV-101 and discover, as well
as produce, develop and commercialize proprietary drug rescue NCEs
using our stem cell technology, and we cannot provide any assurance
that we will successfully develop and commercialize AV-101 or drug
rescue NCEs, or that, if produced, AV-101 or any drug rescue NCE
will be successfully commercialized.
Research
programs designed to identify and produce drug rescue NCEs require
substantial technical, financial and human resources, whether or
not any NCEs are ultimately identified and produced. In particular,
our drug rescue programs may initially show promise in identifying
potential NCEs, yet fail to yield a lead NCE suitable for
preclinical, clinical development or commercialization for many
reasons, including the following:
●
our
drug rescue research and development methodology may not be
successful in identifying and developing potential drug rescue
NCEs;
●
competitors may
develop alternatives that render our drug rescue NCEs
obsolete;
●
a drug
rescue NCE may, on further study, be shown to have harmful side
effects or other characteristics that indicate it is unlikely to be
effective or otherwise does not meet applicable regulatory
criteria;
●
a drug
rescue NCE may not be capable of being produced in commercial
quantities at an acceptable cost, or at all; or
●
a drug
rescue NCE may not be accepted as safe and effective by regulatory
authorities, patients, the medical community or third-party
payors.
In
addition, we do not 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, drug rescue NCEs and/or other product candidates if and
when they are developed. 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 in entering into arrangements
with third parties to sell, market and distribute 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, 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
assessment of potential drug rescue NCEs and no operating history
with respect to the production of drug rescue NCEs, and we may
never be able to produce a drug rescue NCE.
If we
are unable to develop and commercialize AV-101 or produce
suitable drug rescue NCEs, we may not be able to generate
sufficient revenues to execute our business plan, which likely
would result in significant harm to our financial position and
results of operations, which could adversely impact our stock
price.
There
are a number of factors, in addition to the utility of CardioSafe 3D, that may impact our
ability to identify and produce, develop or out-license and
commercialize drug rescue NCEs, independently or with strategic
partners, including:
●
our
ability to identify potential drug rescue candidates in the public
domain, obtain sufficient quantities of them, and assess them using
our bioassay systems;
●
if we
seek to rescue drug rescue candidates that are not available to us
in the public domain, the extent to which third parties may be
willing to out-license or sell certain drug rescue candidates to us
on commercially reasonable terms;
●
our
medicinal chemistry collaborator’s ability to design and
produce proprietary drug rescue NCEs based on the novel biology and
structure-function insight we provide using CardioSafe 3D; and
●
financial
resources available to us to develop and commercialize lead drug
rescue NCEs internally, or, if we out-license them to strategic
partners, the resources such partners choose to dedicate to
development and commercialization of any drug rescue NCEs they
license from us.
Even
if we do produce proprietary drug rescue NCEs, we can give no
assurance that we will be able to develop and commercialize them as
a marketable drug, on our own or in collaboration with others.
Before we generate any revenues from AV-101 and/or additional drug
rescue NCEs we or our potential collaborators must complete
preclinical and clinical developments, submit clinical and
manufacturing data to the FDA, qualify a third party contract
manufacturer, receive regulatory approval in one or more
jurisdictions, satisfy the FDA that our contract manufacturer is
capable of manufacturing the product in compliance with cGMP, build
a commercial organization, make substantial investments and
undertake significant marketing efforts ourselves or in partnership
with others. We are not permitted to market or promote any of our
product candidates before we receive regulatory approval from the
FDA or comparable foreign regulatory authorities, and we may never
receive such regulatory approval for any of our product
candidates.
If CardioSafe 3D
fails to predict accurately and
efficiently the cardiac effects, both toxic and nontoxic, of drug
rescue candidates and drug rescue NCEs, then our drug rescue
programs will be adversely affected.
Our
success is partly dependent on our ability to use CardioSafe 3D to identify and predict,
accurately and efficiently, the potential toxic and nontoxic
cardiac effects of drug rescue candidates and drug rescue NCEs. If
CardioSafe 3D is not
capable of providing physiologically relevant and clinically
predictive information regarding human cardiac biology, our drug
rescue business will be adversely affected.
CardioSafe 3D may not be meaningfully more predictive of
the behavior of human cells than existing
methods.
The
success of our drug rescue programs is highly dependent upon
CardioSafe 3D being more
accurate, efficient and clinically predictive than long-established
surrogate safety models, including animal cells and live animals,
and immortalized, primary and transformed cells, currently used by
pharmaceutical companies and others. We cannot give assurance that
CardioSafe 3D will be more
efficient or accurate at predicting the heart safety of new drug
candidates than the testing models currently used. If CardioSafe 3D fails to provide a
meaningful difference compared to existing or new models in
predicting the behavior of human heart, respectively, their utility
for drug rescue will be limited and our drug rescue business will
be adversely affected.
We may invest in producing drug rescue NCEs for which there proves
to be no demand.
To
generate revenue from our drug rescue activities, we must produce
proprietary drug rescue NCEs for which there proves to be demand
within the healthcare marketplace, and, if we intend to out-license
a particular drug rescue NCE for development and commercialization
prior to market approval, then also among pharmaceutical companies
and other potential collaborators. However, we may produce drug
rescue NCEs for which there proves to be no or limited demand in
the healthcare market and/or among pharmaceutical companies and
others. If we misinterpret market conditions, underestimate
development costs and/or seek to rescue the wrong drug rescue
candidates, we may fail to generate sufficient revenue or other
value, on our own or in collaboration with others, to justify our
investments, and our drug rescue business may be adversely
affected.
We may experience difficulty in producing human cells and our
future stem cell technology research and development efforts may
not be successful within the timeline anticipated, if at
all.
Our
human pluripotent stem cell technology is technically complex, and
the time and resources necessary to develop various human cell
types and customized bioassay systems are difficult to predict in
advance. We might decide to devote significant personnel and
financial resources to research and development activities designed
to expand, in the case of drug rescue, and explore, in the case of
drug discovery and regenerative medicine, potential applications of
our stem cell technology platform. In particular, we may conduct
exploratory non-clinical RM programs involving blood, bone,
cartilage, and/or liver cells. Although we and our collaborators
have developed proprietary protocols for the production of multiple
differentiated cell types, we could encounter difficulties in
differentiating and producing sufficient quantities of particular
cell types, even when following these proprietary protocols. These
difficulties could result in delays in production of certain cells,
assessment of certain drug rescue candidates and drug rescue NCEs,
design and development of certain human cellular assays and
performance of certain exploratory non-clinical regenerative
medicine studies. In the past, our stem cell research and
development projects have been significantly delayed when we
encountered unanticipated difficulties in differentiating human
pluripotent stem cells into heart and liver cells. Although we have
overcome such difficulties in the past, we may have similar delays
in the future, and we may not be able to overcome them or obtain
any benefits from our future stem cell technology research and
development activities. Any delay or failure by us, for example, to
produce functional, mature blood, bone, cartilage, and liver cells
could have a substantial and material adverse effect on our
potential drug discovery, drug rescue and regenerative medicine
business opportunities and results of operations.
Restrictions on research and development involving human embryonic
stem cells and religious and political pressure regarding such stem
cell research and development could impair our ability to conduct
or sponsor certain potential collaborative research and development
programs and adversely affect our prospects, the market price of
our common stock and our business model.
Some of
our research and development programs may involve the use of human
cells derived from our controlled differentiation of human
embryonic stem cells (hESCs). Some believe the use of hESCs
gives rise to ethical and social issues regarding the appropriate
use of these cells. Our research related to differentiation of
hESCs may become the subject of adverse commentary or publicity,
which could significantly harm the market price of our common
stock. Although now substantially less than in years past, certain
political and religious groups in the United States and elsewhere
voice opposition to hESC technology and practices. We may use hESCs
derived from excess fertilized eggs that have been created for
clinical use in in vitro
fertilization (IVF)
procedures and have been donated for research purposes with the
informed consent of the donors after a successful IVF procedure
because they are no longer desired or suitable for IVF. Certain
academic research institutions have adopted policies regarding the
ethical use of human embryonic tissue. These policies may have the
effect of limiting the scope of future collaborative research
opportunities with such institutions, thereby potentially impairing
our ability to conduct certain research and development in this
field that we believe is necessary to expand the drug rescue
capabilities of our technology, which would have a material adverse
effect on our business.
The
use of embryonic or fetal tissue in research (including the
derivation of hESCs) in other countries is regulated by the
government, and 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 in order to comply with
current or future environmental, health and safety laws and
regulations. These current or future laws and regulations may
impair our research, development or production efforts. Failure to
comply with these laws and regulations also may result in
substantial fines, penalties or other sanctions, which could have a
material adverse effect on our operations.
To the extent our research and development activities involve using
iPSCs, we will be subject to complex and evolving laws and
regulations regarding privacy and informed consent. Many of these
laws and regulations are subject to change and uncertain
interpretation, and could result in claims, changes to our research
and development programs and objectives, increased cost of
operations or otherwise harm the Company.
To the
extent that we pursue research and development activities involving
iPSCs, we will be subject to a variety of laws and regulations in
the United States and abroad that involve matters central to such
research and development activities, including obligations to seek
informed consent from donors for the use of their blood and other
tissue to produce, or have produced for us, iPSCs, as well as state
and federal laws that protect the privacy of such donors. United
States federal and state and foreign laws and regulations are
constantly evolving and can be subject to significant change. If we
engage in iPSC-related research and development activities in
countries other than the United States, we may become subject to
foreign laws and regulations relating to human subjects research
and other laws and regulations that are often more restrictive than
those in the United States. In addition, both the application and
interpretation of these laws and regulations are often uncertain,
particularly in the rapidly evolving stem cell technology sector in
which we operate. These laws and regulations can be costly to
comply with and can delay or impede our research and development
activities, result in negative publicity, increase our operating
costs, require significant management time and attention and
subject us to claims or other remedies, including fines or demands
that we modify or cease existing business practices.
Legal, social and ethical concerns surrounding the use of iPSCs,
biological materials and genetic information could impair our
operations.
To the
extent that our future stem cell research and development
activities involve the use of iPSCs and the manipulation of human
tissue and genetic information, the information we derive from such
iPSC-related research and development activities could be used in a
variety of applications, which may have underlying legal, social
and ethical concerns, including the genetic engineering or
modification of human cells, testing for genetic predisposition for
certain medical conditions and stem cell banking. Governmental
authorities could, for safety, social or other purposes, call for
limits on or impose regulations on the use of iPSCs and genetic
testing or the manufacture or use of certain biological materials
involved in our iPSC-related research and development programs.
Such concerns or governmental restrictions could limit our future
research and development activities, which could have a material
adverse effect on our business, financial condition and results of
operations.
Our human cellular bioassay systems and human cells we derive from
human pluripotent stem cells, although not currently subject to
regulation by the FDA or other regulatory agencies as biological
products or drugs, could become subject to regulation in the
future.
The
human cells we produce from hPSCs and our customized bioassay
systems using such cells, including CardioSafe 3D, are not currently sold,
for research purposes or any other purpose, to biotechnology or
pharmaceutical companies, government research institutions,
academic and nonprofit research institutions, medical research
organizations or stem cell banks, and they are not therapeutic
procedures. As a result, they are not subject to regulation as
biological products or drugs by the FDA or comparable agencies in
other countries. However, if, in the future, we seek to include
human cells we derive from hPSCs in therapeutic applications or
product candidates, such applications and/or product candidates
would be subject to the FDA’s pre- and post-market
regulations. For example, if we seek to develop and market human
cells we produce for use in performing regenerative medicine
applications, such as tissue engineering or organ replacement, we
would first need to obtain FDA pre-market clearance or approval.
Obtaining such clearance or approval from the FDA is expensive,
time-consuming and uncertain, generally requiring many years to
obtain, and requiring detailed and comprehensive scientific and
clinical data. Notwithstanding the time and expense, these efforts
may not result in FDA approval or clearance. Even if we were to
obtain regulatory approval or clearance, it may not be for the uses
that we believe are important or commercially
attractive.
Risks Related to Our Financial Position
We have incurred significant net losses since inception and we will
continue to incur substantial operating losses for the foreseeable
future. We may never achieve or sustain profitability, which would
depress the market price of our common stock, and could cause you
to lose all or a part of your investment.
We
have incurred significant net losses in each fiscal year since our
inception in 1998, including net losses of $10.3 million and $47.2
million, which includes $26.7 million of non-cash expense related
to the extinguishment of essentially all of our outstanding
promissory notes and certain other indebtedness, during the fiscal
years ended March 31, 2017 and 2016, respectively. We incurred a
net loss of approximately $2.3 million in the quarter ended June
30, 2017 and, as of that date, we had an accumulated deficit of
approximately $144.3 million. We do not know whether or when we
will become profitable. Substantially all of our operating losses
have resulted from costs incurred in connection with our research
and development programs and from general and administrative costs
associated with our operations. We expect to incur increasing
levels of operating losses over the next several years and for the
foreseeable future. Our prior losses, combined with expected future
losses, have had and will continue to have an adverse effect on our
stockholders’ equity (deficit) and working capital. We expect
our research and development expenses to significantly increase in
connection with non-clinical 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
revenues. To date, we have generated approximately $17.7 million in
revenues, including receipt of non-dilutive cash payments from
collaborators, sublicense revenue, and research and development
grant awards from the NIH, not including the fair market value of
the ongoing NIMH AV-101 MDD Phase 2 Monotherapy Study under our
NIMH CRADA. 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, or we enter
into one or more development and commercialization agreements with
respect to AV-101 or one or more other product candidates. Our
ability to generate revenue depends on a number of factors,
including, but not limited to, our ability to:
●
initiate and
successfully complete non-clinical 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;
●
commercialize our
product candidates, if approved, by developing a sales force or
entering into collaborations with third parties; and
●
achieve market
acceptance of our product candidates in the medical community and
with third-party payors.
Unless
we enter into a development and commercialization collaboration or
partnership agreement, we expect to incur significant sales and
marketing costs as we prepare to commercialize AV-101 or other
product candidates. Even if we initiate and successfully complete
pivotal clinical trials of AV-101 or other product candidates, and
AV-101 or other product candidates are approved for commercial
sale, and despite expending these costs, AV-101 or other product
candidates may not be commercially successful. We may not achieve
profitability soon after generating product sales, if ever. If we
are unable to generate product revenue, we will not become
profitable and may be unable to continue operations without
continued funding.
We require additional financing to execute our business plan and
continue to operate as a going concern.
Our
audited consolidated financial statements for the year ended March
31, 2017 as well as the unaudited condensed consolidated financial
statements for the period ended June 30, 2017 included elsewhere in
this Report have been prepared assuming we will continue to operate
as a going concern, although we and our auditors have indicated
that our continuing losses and negative cash flows from operations
raise substantial doubt about our ability to continue as such.
Because we continue to experience net operating losses, our ability
to continue as a going concern is subject to our ability to obtain
necessary funding from outside sources, including obtaining
additional funding from the sale of our securities or obtaining
loans and grant awards from financial institutions and/or
government agencies where possible. Our continued net operating
losses increase the difficulty in completing such sales or securing
alternative sources of funding, and there can be no assurances that
we will be able to obtain such funding on favorable terms or at
all. If we are unable to obtain sufficient financing from the sale
of our securities or from alternative sources, we may be required
to reduce, defer, or discontinue certain or all of our research and
development activities or we may not be able to continue as a going
concern.
Since
our inception, most of our resources have been dedicated to
research and development of AV-101 and the drug rescue capabilities
of our stem cell technology platform. In particular, we have
expended substantial resources advancing AV-101 through preclinical
development and Phase 1 clinical safety studies, and developing
CardioSafe 3D and our
cardiac stem cell technology for drug rescue and potential
regenerative medicine applications, and we will continue to expend
substantial resources for the foreseeable future developing and
commercializing AV-101 for multiple CNS indications, and,
potentially, developing drug rescue NCEs and RM therapies, on our
own or in collaborations similar to the BlueRock Agreement. These
expenditures will include costs associated with general and
administrative costs, facilities costs, research and development,
acquiring new technologies, manufacturing product candidates,
conducting preclinical experiments and clinical trials and
obtaining regulatory approvals, as well as commercializing any
products approved for sale.
At
June 30, 2017, our existing cash and cash equivalents were not
sufficient to fund our current operations for the next 12 months or
to complete our proposed AV-101 MDD Phase 2 Adjunctive Treatment
Study. Further, we have no current source of revenue to sustain our
present activities, and we do not expect to generate revenue until,
and unless, we (i) out-license or sell AV-101, a drug rescue NCE,
and/or another drug candidate unrelated to AV-101 to third-parties,
(ii) enter into 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
compounds.
As the
outcome of our AV-101 and NCE drug rescue activities and future
anticipated 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. 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 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. We are considering
a range of potential sources of funding, 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 in 2017 and beyond. 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, 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,
including AV-101 and drug rescue NCEs;
●
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 our product candidates and any products we
successfully commercialize;
●
our
ability to establish and maintain strategic partnerships, licensing
or other arrangements and the financial terms of such
agreements;
●
market
acceptance of our products;
●
the
effect of competing technological and market
developments;
●
our
ability to obtain government funding for our programs;
●
the
costs involved in obtaining 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 acquire or invest in businesses, products and
technologies, although we currently have no commitments or
agreements relating to any of these types of
transactions.
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, 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, and the terms of
any 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 or exchange 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 candidate
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.
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
and capabilities of the Company’s staff does not permit
appropriate segregation of duties to prevent one individual from
overriding the internal control system by initiating, authorizing
and completing all transactions, and (ii) the Company utilizes
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 (See Item 9A. Controls and Procedures contained
in our Annual Report on Form 10-K filed with the Securities and
Exchange Commission on June 29, 2017.).
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 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 2017 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 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.
We
currently have 30.0 million shares of common stock authorized for
issuance. Based on the current number of shares of our common
stock: (i) outstanding, (ii) reserved for conversion or exchange of
our various series of outstanding preferred stock, including for
payment of accrued dividends on our outstanding Series B Preferred,
(iii) reserved for the exercise of outstanding warrants, and (iv)
reserved for the exercise of options granted or available for grant
pursuant to our equity incentive plans, at June 30, 2017, we have
approximately 8.1 million shares of common stock available for
future financing or other activities. We anticipate seeking
stockholder approval to amend our Articles of Incorporation to
increase the number of shares of common stock we are authorized to
issue in order to achieve our near-term or longer-term financing
objectives.
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. 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, 2017, we had federal and state net operating loss
carryforwards of $77.1 million and $67.6 million, respectively,
which begin to expire in fiscal 2018. 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 AV-101, drug rescue NCEs, other potential
product candidates and other commercial applications of our stem
cell technology.
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 and Chief Financial Officer, as well as other
employees, consultants and scientific collaborators. As of the date
of this 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
AV-101, drug rescue NCEs, other product candidates, and other
applications of our stem cell technology, including our production
and assessment of potential drug recuse NCEs 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 as we 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 diverse range of strategic consultants and
advisors, including manufacturing, scientific and clinical
development, and regulatory advisors, to assist us in designing and
implementing our research and development and regulatory strategies
and plans, including our AV-101 development and drug rescue
strategies and plans. 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 AV-101 for MDD and other CNS-related
conditions, as well as stem cell technology-related drug rescue and
RM programs, we will 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.
If we
develop AV-101, drug rescue NCEs, other product candidates, or
regenerative medicine 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, any drug rescue NCE, other
product candidate, or regenerative medicine 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 products 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;
●
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
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.
Furthermore, these laws, regulations and requirements require us to
observe greater corporate governance practices than we have
employed in the past, including, but not limited to maintaining a
sufficient number of independent directors, increased frequency of
board meetings, and holding annual stockholder meetings. 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, could result in a variety of risks to our business,
including, weakened demand for our product candidates and our
ability to raise additional capital when needed on acceptable
terms, if at all. A weak or declining economy could also strain our
suppliers, possibly resulting in supply disruption, or cause our
customers to delay making payments for our services. Any of the
foregoing could harm our business and we cannot anticipate all of
the ways in which the current economic climate and financial market
conditions could adversely impact our business.
We or the third parties upon whom we depend may be adversely
affected by natural disasters and our business continuity and
disaster recovery plans may not adequately protect us from a
serious disaster.
Natural
disasters could severely disrupt our operations, and have a
material adverse effect on our business, results of operations,
financial condition and prospects. If a natural disaster, power
outage or other event occurred that prevented us from using all or
a significant portion of our headquarters, that damaged critical
infrastructure, such as the manufacturing facilities of our
third-party CMOs, or that otherwise disrupted operations, it may be
difficult or, in certain cases, impossible for us to continue our
business for a substantial period of time. The disaster recovery
and business continuity plans we have in place may prove inadequate
in the event of a serious disaster or similar event. We may incur
substantial expenses as a result of the limited nature of our
disaster recovery and business continuity plans, which could have a
material adverse effect on our business.
Our internal computer systems, or those of our third-party CROs or
other contractors or consultants, may fail or suffer security
breaches, which could result in a material disruption of our
product candidates’ development programs.
Despite
the implementation of security measures, our internal computer
systems and those of our third-party CROs and other contractors and
consultants are vulnerable to damage from computer viruses,
unauthorized access, natural disasters, terrorism, war and
telecommunication and electrical failures. 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
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 products, or form strategic alliances,
in the future, and we may not realize the benefits of such
acquisitions.
We may
acquire additional businesses or products, 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 products resulting
from a strategic alliance 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, we will
achieve the expected synergies to justify the
transaction.
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 products and compositions, their methods of
use and any other inventions we consider are important to the
development of our business. We also rely on trade secrets to
protect aspects of our business that are not amenable to, or that
we do not consider appropriate for, patent protection.
Our
success will depend significantly on our ability to obtain and
maintain patent and other proprietary protection for commercially
important technology, inventions and know-how related to our
business, to defend and enforce our patents, should they issue, to
preserve the confidentiality of our trade secrets and to operate
without infringing the valid and enforceable patents and
proprietary rights of third parties. We also rely on know-how,
continuing technological innovation and in-licensing opportunities
to develop, strengthen and maintain the proprietary position of our
product candidates. We own patent applications related to AV-101
and we own and have licensed patents and patent applications
related to human pluripotent stem cell technology.
Although
we have an issued patent relating to AV-101 in the European Union,
we cannot yet provide any assurances that any of our numerous
pending U.S. and additional foreign patent applications relating to
AV-101 will mature into issued patents and, if they do, that such
patents will include claims with a scope sufficient to protect
AV-101 or otherwise provide any competitive advantage. Moreover,
other parties may have developed technologies that may be related
or competitive to our approach, and may have filed or may file
patent applications and may have received or may receive patents
that may overlap or conflict with our patent applications, 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
patent protection.
The
patent positions of biotechnology and pharmaceutical companies,
including our patent position, 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. Patents, if issued, may be
challenged, deemed unenforceable, invalidated, or circumvented.
U.S. patents and patent applications may also be subject to
interference proceedings, ex
parte reexamination, or inter partes review proceedings,
supplemental examination and challenges in district court. Patents
may be subjected to opposition, post-grant review, or comparable
proceedings lodged in various foreign, both national and regional,
patent offices. These proceedings could result in either loss of
the patent or denial of the patent application or loss or reduction
in the scope of one or more of the claims of the patent or patent
application. In addition, such proceedings may be costly. Thus, any
patents that we may own or exclusively license may not provide any
protection against competitors. Furthermore, an adverse decision in
an interference proceeding can result in a third party receiving
the patent right sought by us, which in turn could affect our
ability to develop, market or otherwise commercialize our product
candidates.
Furthermore,
though a patent is presumed valid and enforceable, its issuance is
not conclusive as to its validity or its enforceability and it may
not provide us with adequate proprietary protection or competitive
advantages against competitors with similar products. Even if a
patent issues and is held to be valid and enforceable, competitors
may be able to design around our patents, such as using
pre-existing or newly developed technology. Other parties may
develop and obtain patent protection for more effective
technologies, designs or methods. We may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or trade
secrets by consultants, vendors, former employees and 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 depends on our ability to
detect infringement. It is difficult to detect infringers who do
not advertise the components 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.
The
degree of future protection for our proprietary rights is
uncertain, and we cannot ensure that:
●
any of
our AV-101 or other pending patent applications, if issued, will
include claims having a scope sufficient to protect AV-101 or any
other products or product candidates, particularly considering that
the compound patent to AV-101 has 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 be found to ultimately be valid and
enforceable;
●
any
patents issued to us 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
●
that
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 and consultants who are parties to these agreements
breach or violate the terms of these agreements, we may not 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.
We may infringe the intellectual property rights of others, which
may prevent or delay our product development efforts and stop us
from commercializing or increase the costs of commercializing our
product candidates, if approved.
Our
success will depend in part on our ability to operate without
infringing the intellectual property and proprietary rights of
third parties. We cannot assure you that our business, products and
methods do not or will not infringe the patents or other
intellectual property rights of third parties.
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 business
strategies designed to impede our successful commercialization.
There may be third-party patents or patent applications with claims
to materials, formulations, methods of manufacture or methods for
treatment related to the use or manufacture of our product
candidates. Because patent applications can take many years to
issue, third parties may have currently pending patent applications
that may later result in issued patents that our product candidates
may infringe, or which such third parties claim are infringed by
our technologies. 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 resources to bring these actions to a successful
conclusion.
Patent
and other types of intellectual property litigation can involve
complex factual and legal questions, and their outcome is
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 be willfully infringing another
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 was
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.
Even
if we are successful in these proceedings, we may incur substantial
costs and divert management time and attention in pursuing these
proceedings, which could have a material adverse effect on us. If
we are unable to avoid infringing the patent rights of others, we
may be required to seek a license, defend an infringement action or
challenge the validity of the patents in court, or redesign our
products. Patent litigation is costly and time-consuming. We may
not have sufficient resources to bring these actions to a
successful conclusion. In addition, intellectual property
litigation or claims could force us to do one or more of the
following:
●
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.
We may be subject to claims challenging the inventorship or
ownership of our patents and other intellectual
property.
We
enter into confidentiality and intellectual property assignment
agreements with our employees, consultants, outside scientific
collaborators, sponsored researchers and other advisors. These
agreements generally provide that inventions conceived by the party
in the course of rendering services to us will be our exclusive
property. However, these agreements may not be honored and may not
effectively assign intellectual property rights to us. For example,
even if we have a consulting agreement in place with an academic
advisor pursuant to which such academic advisor is required to
assign any inventions developed in connection with providing
services to us, such academic advisor may not have the right to
assign such inventions to us, as it may conflict with his or her
obligations to assign all such intellectual property to his or her
employing institution.
Litigation
may be necessary to defend against these and other claims
challenging inventorship or ownership. If we fail in defending any
such claims, in addition to paying monetary damages, we may lose
valuable intellectual property rights, such as exclusive ownership
of, or right to use, valuable intellectual property. Such an
outcome could have a material adverse effect on our business. Even
if we are successful in defending against such claims, litigation
could result in substantial costs and be a distraction to
management and other employees.
Obtaining and maintaining our patent protection depends on
compliance with various procedural, document submission, fee
payment and other requirements imposed by governmental patent
agencies, and our patent protection could be reduced or eliminated
for non-compliance with these requirements.
The
U.S. Patent and Trademark Office (USPTO), European Patent Office
(EPO) and various other
foreign governmental patent agencies require compliance with a
number of procedural, documentary, fee payment and other provisions
during the patent process. There are situations in which
noncompliance can result in abandonment or lapse of a patent or
patent application, resulting in partial or complete loss of patent
rights in the relevant jurisdiction. In such an event, competitors
might be able to enter the market earlier than would otherwise have
been the case.
We may be involved in lawsuits to protect or enforce our patents or
the patents of our licensors, which could be expensive,
time-consuming and unsuccessful.
Even
if the patent applications we own or license are issued,
competitors may infringe these patents. To counter infringement or
unauthorized use, we may be required to file infringement claims,
which can be expensive and time-consuming. In addition, in an
infringement proceeding, a court may decide that a patent of ours
or our licensors is not valid, is unenforceable and/or is not
infringed, or may refuse to stop the other party from using the
technology at issue on the grounds that our patents do not cover
the technology in question. An adverse result in any litigation or
defense proceedings could put one or more of our patents at risk of
being invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.
Interference
proceedings provoked by third parties or brought by us may be
necessary to determine the priority of inventions with respect to
our patents or patent applications or those of our licensors. An
unfavorable outcome could require us to cease using the related
technology 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 a license on commercially reasonable terms.
Our defense of litigation or interference proceedings may fail and,
even if successful, may result in substantial costs and distract
our management and other employees. We may not be able to prevent,
alone or with our licensors, misappropriation of our intellectual
property rights, particularly in countries where the laws may not
protect those rights as fully as in the United States or European
Union.
Furthermore,
because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk
that some of our confidential information could be compromised by
disclosure during this type of litigation. There could also be
public announcements of the results of hearings, motions or other
interim proceedings or developments. If securities analysts or
investors perceive these results to be negative, it could have a
material adverse effect on the price of our common
stock.
Issued patents covering our product candidates could be found
invalid or unenforceable if challenged in court.
If we
or one of our licensing partners initiated legal proceedings
against a third party to enforce a patent, if and when issued,
covering one of our product candidates, the defendant could
counterclaim that the patent covering our product candidate is
invalid and/or unenforceable. In patent litigation in the United
States, defendant counterclaims alleging invalidity and/or
unenforceability are commonplace. Grounds for a validity challenge
include alleged failures to meet any of several statutory
requirements, including lack of novelty, obviousness or
non-enablement. Grounds for unenforceability assertions include
allegations that someone connected with prosecution of the patent
withheld relevant information from the USPTO or EPO, or made a
misleading statement, during prosecution. Third parties may also
raise similar claims before administrative bodies in the United
States or abroad, even outside the context of litigation. Such
mechanisms include re-examination, post grant review and equivalent
proceedings in foreign jurisdictions, e.g., opposition proceedings.
Such proceedings could result in revocation or amendment of our
patents in such a way that they no longer cover our product
candidates or competitive products. The outcome following legal
assertions of invalidity and unenforceability is unpredictable.
With respect to validity, for example, we cannot be certain that
there is no invalidating prior art, of which we and the patent
examiner were unaware during prosecution. If a defendant were to
prevail on a legal assertion of invalidity and/or unenforceability,
we would lose at least part, and perhaps all, of the patent
protection on our product candidates. Such a loss of patent
protection would have a material adverse impact on our
business.
We will not seek to protect our intellectual property rights in all
jurisdictions throughout the world and we may not be able to
adequately enforce our intellectual property rights even in the
jurisdictions where we seek protection.
Filing,
prosecuting and defending patents on product candidates in all
countries and jurisdictions throughout the world is prohibitively
expensive, and our intellectual property rights in some countries
outside the United States could be less extensive than those in the
United States, assuming that rights are obtained in the United
States. In addition, the laws of some foreign countries do not
protect intellectual property rights to the same extent as federal
and state laws in the United States. Consequently, we may not be
able to prevent third parties from practicing our inventions in all
countries outside the United States, 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 patent
applications relating to AV-101, as well as for many of the patent
families that we own or license, the relevant statutory deadlines
have not yet expired. Thus, for each of the patent families that we
believe provide coverage for our lead product candidates or
technologies, we will need to decide whether and where to pursue
protection outside the United States.
Competitors
may use our technologies in jurisdictions where we do not pursue
and obtain patent protection to develop their own products and
further, may export otherwise infringing products to territories
where we have patent protection, but enforcement is not as strong
as that in the United States. These products may compete with our
products and our patents or other intellectual property rights may
not be effective or sufficient to prevent them from competing. Even
if we pursue and obtain issued patents in particular jurisdictions,
our patent claims or other intellectual property rights may not be
effective or sufficient to prevent third parties from so
competing.
The
laws of some foreign countries do not protect intellectual property
rights to the same extent as the laws of the United States. 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. 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. 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.
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.
We are
a party to a number of license agreements under which we are
granted rights to intellectual property 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. See “Business—Intellectual
Property” herein for a description of our license
agreements, which includes a description of the termination
provisions of these agreements.
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 to support our various stem cell
technology-related programs. We may enter into additional
license(s) to third-party intellectual property that are necessary
or useful to our business. Our current licenses and any future
licenses that we may enter into impose various royalty payments,
milestone, and other obligations on us. For example, the licensor
may retain control over patent prosecution and maintenance under a
license agreement, in which case, we may not be able to adequately
influence patent prosecution or prevent inadvertent lapses of
coverage due to failure to pay maintenance fees. If we fail to
comply with any of our obligations under a current or future
license agreement, our licensor(s) may allege that we have breached
our license agreement and may accordingly seek to terminate our
license with them. In addition, future licensor(s) may decide to
terminate our license at will. Termination of any of our current or
future licenses could result in our loss of the right to use the
licensed intellectual property, which could materially adversely
affect our ability to develop and commercialize a product candidate
or product, if approved, as well as harm our competitive business
position and our business prospects.
In
addition, if our licensors fail to abide by the terms of the
license, if the licensors fail to prevent infringement by third
parties, if the licensed patents or other rights are found to be
invalid or unenforceable, or if we are unable to enter into
necessary licenses on acceptable terms our business could
suffer.
Some intellectual property which we have licensed may have been
discovered through government funded programs and thus may be
subject to federal regulations such as “march-in”
rights, certain reporting requirements, and a preference for U.S.
industry. Compliance with such regulations may limit our exclusive
rights, subject us to expenditure of resources with respect to
reporting requirements, and limit our ability to contract with
non-U.S. manufacturers.
Some of
the intellectual property rights we have licensed or license in the
future may have been generated through the use of U.S. government
funding and may therefore be subject to certain federal
regulations. As a result, the U.S. government may have certain
rights to intellectual property embodied in our current or future
product candidates pursuant to the Bayh-Dole Act of 1980
(Bayh-Dole Act). These
U.S. government rights in certain inventions developed under a
government-funded program include a non-exclusive,
non-transferable, irrevocable worldwide license to use inventions
for any governmental purpose. In addition, the U.S. government has
the right to require us to grant exclusive, partially exclusive, or
non-exclusive licenses to any of these inventions to a third party
if it determines that: (i) adequate steps have not been taken
to commercialize the invention; (ii) government action is
necessary to meet public health or safety needs; or
(iii) government action is necessary to meet requirements for
public use under federal regulations (also referred to as
“march-in rights”). The U.S. government also has the
right to take title to these inventions if we fail, or the
applicable licensor fails, to disclose the invention to the
government and fail to file an application to register the
intellectual property within specified time limits. In addition,
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 also 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.
Depending
upon the timing, duration and specifics of FDA marketing approval
of our product candidates, one or more of the U.S. patents we own
or license may be eligible for limited patent term restoration
under the Drug Price Competition and Patent Term Restoration Act of
1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman
Amendments permit a patent restoration term of up to five years as
compensation for patent term lost during product development and
the FDA regulatory review process. However, we may not be granted
an extension because of, for example, failing to apply within
applicable deadlines, failing to apply prior to expiration of
relevant patents or otherwise failing to satisfy applicable
requirements. For example, we may not be granted an extension if
the active ingredient of AV-101 is used in another drug
company’s product candidate and that product candidate is the
first to obtain FDA approval. Moreover, the applicable time period
or the scope of patent protection afforded could be less than we
request. If we are unable to obtain patent term extension or
restoration or the term of any such extension is less than we
request, our competitors may obtain approval of competing products
following our patent expiration, and our ability to generate
revenues could be materially adversely affected.
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 biotechnology companies, our success is heavily
dependent on intellectual property, particularly patents. Obtaining
and enforcing patents in the biotechnology industry involve both
technological and legal complexity, and is therefore costly,
time-consuming and inherently uncertain. In addition, the United
States has recently 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.
In
addition to increasing uncertainty with regard to 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, 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.
If,
instead of identifying drug rescue candidates based on information
available to us in the public domain, we seek to in-license drug
rescue 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 drug rescue NCEs
we may produce and develop. If we are unable to obtain ownership or
substantial economic participation rights over intellectual
property related to drug rescue NCEs we produce and develop, our
business may be adversely affected.
Risks Related to our Securities
The limited public market for our securities may adversely affect
an investor’s ability to liquidate an investment in the
Company.
Our
common stock is currently quoted on The NASDAQ Capital Market,
however, there is presently limited trading activity. We
can give no assurance that an active market will develop, or if
developed, that it will be sustained. If an investor
acquires shares of our common stock, the investor may not be able
to liquidate the shares should there be a need or desire to do
so.
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 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:
●
plans
for, progress of or results from non-clinical and clinical
development activities related to our product
candidates;
●
the
failure of the FDA 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 United States and other
countries;
●
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
of large blocks of our common stock, including sales by our
executive officers, directors and significant
stockholders;
●
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 these 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 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 operating performance.
In certain recent situations in which the market price of a stock
has been volatile, holders of that stock have instituted securities
class action litigation against such 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 significant 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.
Our principal institutional stockholders may continue to have
substantial control over us and could limit your ability to
influence the outcome of key transactions, including changes in
control.
Certain
of our current institutional stockholders own a substantial portion
of our outstanding capital stock, including our common stock,
Series A Preferred, Series B Preferred, and Series C Preferred, all
of which preferred stock is convertible into a substantial number
of shares of common stock. Accordingly, institutional
stockholders may exert significant 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 us, even if such a change
of control would benefit our other stockholders. The significant
concentration of stock ownership may adversely affect the trading
price of our common stock due to investors’ perception that
conflicts of interest may exist or arise. Furthermore, the
interests of our principal institutional stockholders may not
always coincide with your interests or the interests of other
stockholders may act in a manner that advances its best interests
and not necessarily those of other stockholders, including seeking
a premium value for its common stock, which might affect the
prevailing market price for our common stock.
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 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 (the Articles) permit us to issue up to
10.0 million shares of preferred stock. Our Board of
Directors has authorized the issuance of (i) 500,000 shares of
Series A Preferred, all of which shares are issued and outstanding
at June 30, 2017; (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, 2017; 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, 2017. Our Board of Directors 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.
Since
becoming a public company by means of a reverse merger in 2011, we
have been 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 money 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
Issuance of Common Stock to Professional Services
Providers
On July
14, 2017, we issued 50,000 shares of our unregistered common stock
for services provided by our contract research organization under
the terms of a negotiated work order. The shares were issued in a
private placement transaction exempt from registration under the
Securities Act, in reliance on Section 4(2) thereof and Rule 506 of
Regulation D thereunder.
Private Placement of Common Stock and Warrants
On
August 9, 2017, in a self-placed private placement transaction, we
sold to an accredited investor units consisting of (i) 28,572
shares of our unregistered common stock and (ii) warrants
exercisable through April 30, 2021 to purchase 28,572 unregistered
shares of our common stock at an exercise price of $4.00 per share.
The warrants are not exercisable until six months and one day
following the date of issuance. We received cash proceeds of
$50,000 from this sale of our securities, which we expect to use
for general corporate purposes. The securities were issued in a
placement transaction exempt from
registration under the Securities Act, in reliance on Section 4(2)
thereof and Rule 506 of Regulation D
thereunder.
Item 3. Defaults Upon Senior
Securities
None.
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Exhibit
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Number
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Description
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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
|
|
|
|
|
|
|
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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
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101.INS
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XBRL
Instance Document
|
|
101.SCH
|
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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
|
SIGNATURES
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.
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VISTAGEN
THERAPEUTICS, INC.
/s/ Shawn K.
Singh
Shawn
K. Singh
Chief Executive Officer (Principal Executive Officer)
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/s/ Jerrold D.
Dotson
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Jerrold D.
Dotson
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Chief Financial Officer (Principal Financial and Accounting
Officer
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Dated:
August 14, 2017
-54-