Vistagen Therapeutics, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC 20549

 

Form 10-Q

(Mark One)

☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

or

☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to                      .

 

Commission File Number: 001-37761

 

VistaGen Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Nevada		20-5093315
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

343 Allerton Avenue

South San Francisco, CA 94080

(Address of principal executive offices including zip code)

 

(650) 577-3600

(Registrant’s telephone number, including area code)

 

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.

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-Accelerated filer	[  ]	Smaller reporting company	[X]
		Emerging growth company	[  ]

(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 November 9, 2017, 11,698,974 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 September 30, 2017

 

 

TABLE OF CONTENTS

 

	Page
PART I. FINANCIAL INFORMATION
Item 1.     Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2017 and March 31, 2017	1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2017 and 2016	2
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2017 and 2016	3
Notes to the Condensed Consolidated Financial Statements	4
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 4.     Controls and Procedures	26
PART II. OTHER INFORMATION
Item 1.     Legal Proceedings	27
Item 1A.  Risk Factors	27
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.     Defaults Upon Senior Secured Securities	59
Item 6.     Exhibits	59
SIGNATURES	60

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Dollars, except share amounts)

 

	September 30,	March 31,
	2017	2017
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$1,764,400	$2,921,300
Prepaid expenses and other current assets	563,300	456,600
Total current assets	2,327,700	3,377,900
Property and equipment, net	242,000	286,500
Security deposits and other assets	47,800	47,800
Total assets	$2,617,500	$3,712,200
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$1,151,000	$867,300
Accrued expenses	625,600	443,000
Current notes payable	105,200	54,800
Capital lease obligations	2,500	2,400
Total current liabilities	1,884,300	1,367,500
Non-current liabilities:
Accrued dividends on Series B Preferred Stock	2,081,400	1,577,800
Deferred rent liability	312,700	139,200
Capital lease obligations	10,700	11,900
Total non-current liabilities	2,404,800	1,728,900
Total liabilities	4,289,100	3,096,400
Commitments and contingencies
Stockholders’ equity (deficit):

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2017 and March 31, 2017:
Series A Preferred, 500,000 shares authorized, issued and outstanding at September 30, 2017 and March 31, 2017	500	500
Series B Preferred; 4,000,000 shares authorized at September 30, 2017 and March 31, 2017; 1,160,240 shares issued and outstanding at September 30, 2017 and March 31, 2017	1,200	1,200
Series C Preferred; 3,000,000 shares authorized at September 30, 2017 and March 31, 2017; 2,318,012 shares issued and outstanding at September 30, 2017 and March 31, 2017	2,300	2,300
Common stock, $0.001 par value; 100,000,000 and 30,000,000 shares authorized at September 30, 2017 and March 31, 2017, respectively; 11,764,639 and 8,974,386 shares issued and outstanding at September 30, 2017 and March 31, 2017, respectively	11,800	9,000
Additional paid-in capital	151,541,700	146,569,600
Treasury stock, at cost, 135,665 shares of common stock held at September 30, 2017 and March 31, 2017	(3,968,100)	(3,968,100)
Accumulated deficit	(149,261,000)	(141,998,700)
Total stockholders’ equity (deficit)	(1,671,600)	615,800
Total liabilities and stockholders’ equity (deficit)	$2,617,500	$3,712,200

 

 

 

 

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)

 

	Three Months Ended September 30,		Six Months Ended September 30,
	2017	2016	2017	2016
Operating expenses:
Research and development	$2,426,600	$1,606,100	$3,522,800	$2,431,800
General and administrative	2,567,100	1,493,600	3,731,400	2,631,200
Total operating expenses	4,993,700	3,099,700	7,254,200	5,063,000
Loss from operations	(4,993,700)	(3,099,700)	(7,254,200)	(5,063,000)
Other expenses, net:
Interest expense, net	(3,300)	(1,400)	(5,700)	(2,800)
Loss before income taxes	(4,997,000)	(3,101,100)	(7,259,900)	(5,065,800)
Income taxes	-	-	(2,400)	(2,400)
Net loss and comprehensive loss	(4,997,000)	(3,101,100)	(7,262,300)	(5,068,200)
Accrued dividend on Series B Preferred stock	(256,300)	(241,000)	(503,600)	(780,800)
Deemed dividend on Series B Preferred Units	-	-	-	(111,100)
Net loss attributable to common stockholders	$(5,253,300)	$(3,342,100)	$(7,765,900)	$(5,960,100)
Basic and diluted net loss attributable to common
stockholders per common share	$(0.53)	$(0.42)	$(0.82)	$(0.91)
Weighted average shares used in computing basic
and diluted net loss attributable to common
stockholders per common share	9,892,016	8,041,619	9,465,459	6,577,769

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Dollars)

 

	Six Months Ended September 30,
	2017	2016
Cash flows from operating activities:
Net loss	$(7,262,300)	$(5,068,200)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	46,200	26,000
Stock-based compensation	697,600	306,700
Expense related to modification of warrants, including exchange of warrants
for common stock	279,700	57,400
Amortization of deferred rent	173,500	(18,100)
Fair value of common stock granted for services	1,392,000	217,000
Fair value of Series B Preferred stock granted for services	-	375,000
Fair value of warrants granted for services	-	227,500
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	197,000	40,400
Accounts payable and accrued expenses, including accrued interest	466,400	(36,800)
Net cash used in operating activities	(4,009,900)	(3,873,100)
Cash flows from property and investing activities:
Purchases of equipment	(1,600)	(7,700)
Net cash used in investing activities	(1,600)	(7,700)
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants, including Units	2,947,700	9,537,100
Net proceeds from issuance of Series B Preferred Units	-	278,000
Repayment of capital lease obligations	(1,200)	(500)
Repayment of notes payable	(91,900)	(105,200)
Net cash provided by financing activities	2,854,600	9,709,400
Net increase (decrease) in cash and cash equivalents	(1,156,900)	5,828,600
Cash and cash equivalents at beginning of period	2,921,300	428,500
Cash and cash equivalents at end of period	$1,764,400	$6,257,100
Supplemental disclosure of noncash activities:
Insurance premiums settled by issuing note payable	$142,400	$117,500
Accrued dividends on Series B Preferred	$503,600	$780,800

 

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, such as aripiprazole, often used adjunctively to augment them. We believe AV-101 also has potential as a non-opioid treatment alternative for neuropathic pain, as well as several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including Parkinson’s disease levodopa -induced dyskinesia (PD LID), epilepsy and Huntington’s disease.

 

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 ketamine hydrochloride injection (ketamine), an ion-channel blocking NMDA receptor antagonist approved by the FDA as an anesthetic, in MDD patients with inadequate therapeutic responses to multiple standard antidepressants. These NIMH studies, as well as clinical research at Yale University and other academic institutions, have demonstrated ketamine’s robust antidepressant effects in treatment-resistant MDD patients within twenty-four hours of a single sub-anesthetic dose administered by intravenous (IV) infusion.

 

We believe AV-101 may have potential to deliver ketamine-like antidepressant effects without the need for IV administration and 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 currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, a small Phase 2 clinical study of AV-101 as a monotherapy in adult subjects with treatment-resistant MDD (the NIMH AV-101 MDD Phase 2 Monotherapy Study). In October 2017, we received FDA authorization 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 therapeutic response to standard, FDA-approved antidepressants (the AV-101 MDD Phase 2 Adjunctive Treatment Study).  Subject to obtaining sufficient financing, we intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018, with Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, as Principal Investigator.  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 expect to complete this study 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 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 our cardiac stem cell technology, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, we 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. 

 

 

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 and six months ended September 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 $149.3 million accumulated from inception (May 1998) through September 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 September 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 $47.6 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 $32.3 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 September 30, 2017, we had a cash and cash equivalents balance of $1.76 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 portion of the projected expenses associated with our proposed AV-101 MDD Phase 2 Adjunctive Treatment Study.

 

Our limited cash position at September 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. In September 2017, we completed a firm commitment underwritten public offering pursuant to which we offered and sold shares of our common stock and warrants to two of our existing institutional investors, resulting in gross proceeds of approximately $2.4 million under our Registration Statement on Form S-3 (Registration No. 333-215671) (the S-3 Registration Statement) that had been previously declared effective by the Securities and Exchange Commission (the Commission) to cover potential future sales of our equity securities in one or more public offerings from time to time. (See Note 7, Capital Stock, for additional information regarding the September 2017 public offering.) While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.

 

 

Additionally, in September 2017, to facilitate potential future issuances and sales of our equity securities for ordinary corporate finance and general corporate purposes and as recommended by our Board of Directors (Board), our stockholders 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 determined is customary and appropriate for a Nasdaq-listed, clinical-stage biopharmaceutical company. Following that approval, in October 2017, we filed a Registration Statement on Form S-1 (Registration No. 333-221009) (the S-1 Registration Statement) pursuant to which we anticipate completing an offering of our equity securities with proceeds sufficient to enable the launch and completion of the AV-101 MDD Phase 2 Adjunctive Treatment Study and fund our internal operations for at least the next twelve months. There can be no assurance, however, that we will achieve effectiveness of the S-1 Registration Statement or successfully complete an offering thereunder.

 

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 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 and six months ended September 30, 2017 and 2016.

 

	Three Months Ended		Six Months Ended
	September 30,		September 30,
	2017	2016	2017	2016
Research and development expense:
Stock option grants	$136,900	$82,000	$328,300	$126,000
	136,900	82,000	328,300	126,000
General and administrative expense:
Stock option grants	193,700	116,800	369,300	180,700
	193,700	116,800	369,300	180,700
Total stock-based compensation expense	$330,600	$198,800	$697,600	$306,700

 

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 September 2017, our stockholders approved an amendment to our 2016 Amended and Restated Stock Incentive Plan (the 2016 Plan) to increase the number of shares issuable thereunder from 3.0 million shares to 10.0 million shares. Following that approval, our Board authorized the grant of options to purchase an aggregate of 770,000 shares of our common stock at an exercise price of $1.56 per share to the independent members of our Board, our officers, employees and certain consultants. We valued the options granted in April 2017 and September 2017 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:

 

Assumption:	April 2017	September 2017
Market price per share at grant date	$1.96	$1.56
Exercise price per share	$1.96	$1.56
Risk-free interest rate	2.02%	1.99%
Contractual or estimated term in years	6.48	6.70
Volatility	83.24%	92.29%
Dividend rate	0.0%	0.0%
Shares	880,000	770,000
Fair Value per share	$1.42	$1.20

 

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. In September 2016, the Board approved the grant of an option to purchase 125,000 shares of our common stock at an exercise price of $4.27 per share to another then-newly-hired officer. We valued the options granted in June 2016 and September 2016 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:

 

Assumption:	June 2016	September 2016
Market price per share at grant date	$3.49	$4.27
Exercise price per share	$3.49	$4.27
Risk-free interest rate	1.34%	1.29%
Contractual or estimated term in years	6.68	6.25
Volatility	81.69%	83.26%
Dividend rate	0.0%	0.0%
Shares	655,000	125,000
Fair Value per share	$2.50	$3.05

 

At September 30, 2017, there were stock options outstanding to purchase 3,279,871 shares of our common stock at a weighted average exercise price of $3.23 per share.

 

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 and six-month periods ended September 30, 2017 and 2016, the accrual for dividends on our Series B 10% Convertible Preferred Stock (Series B Preferred) and, in 2016, 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:

 

	As of September 30,
	2017	2016
Series A Preferred stock issued and outstanding (1)	750,000	750,000
Series B Preferred stock issued and outstanding (2)	1,160,240	1,160,240
Series C Preferred stock issued and outstanding (3)	2,318,012	2,318,012
Outstanding options under the Amended and Restated 2016 (formerly 2008) and 1999 Stock Incentive Plans	3,279,871	1,100,643
Outstanding warrants to purchase common stock	6,965,151	4,678,414
Total	14,473,274	10,007,309
____________
(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 September 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 six months ended September 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 July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (ASU 2017-11). Part I of this ASU provides that an entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked financial instrument, such as a free-standing warrant, or an embedded feature, such as a conversion option in a convertible instrument, that reduces the exercise price of such instrument if the entity subsequently sells stock for a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments or embedded features are indexed to its own stock. The definition of a down round feature in ASU 2017-11 excludes standard antidilution provisions related to changes in an entity’s capital structure. Accounting Standards Codification Topic 815-40, “Derivatives and Hedging–Contracts in Entity’s Own Equity” (ASC 815-40) requires that a freestanding equity-linked financial instrument be indexed to the issuer’s own stock to be classified as equity. An equity-linked embedded feature that meets the definition of a derivative may avoid bifurcation and derivative accounting if it is indexed to the issuer’s own stock. Under the terms of prior guidance, a freestanding financial instrument or embedded feature was not considered indexed to the issuer’s own stock if it had a down round provision. Consequently, the freestanding financial instrument was classified as a liability (or asset), and if it met the definition of a derivative, was measured at fair value with changes in fair value recorded through earnings. Similarly, an embedded feature was bifurcated and separately accounted for as a derivative if it met all other criteria for bifurcation under ASC 815-40. The bifurcated embedded feature was also measured at fair value through earnings. Under the provisions of ASU 2017-11, an entity that presents earnings per share (EPS) under Accounting Standards Codification Topic 260, “Earnings Per Share” will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The new guidance requires new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. Part I of ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods therein, however early adoption is permitted. We early-adopted ASU 2017-11 effective for the quarter ended September 30, 2017 and applied its guidance to certain of the warrants issued in the September 2017 Public Offering, as described more completely in Note 7, Capital Stock. No retrospective adjustments to our financial statements were required as a result of our adoption of ASU 2017-11.

 

In February 2016, the FASB issued 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. Pursuant to our 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 September 30, 2017 and March 31, 2017:

 

	September 30,	March 31,
	2017	2017
Insurance	$130,800	$85,800
AV-101 materials and services	357,000	352,800
Public offering expenses	30,900	11,600
All other	44,600	6,400
	$563,300	$456,600

 

Note 5.  Accrued Expenses

 

Accrued expenses are composed of the following at September 30, 2017 and March 31, 2017:

	September 30,	March 31,
	2017	2017
Accrued professional services	$61,300	$37,000
Accrued AV-101 development and related expenses	102,400	402,400
Accrued compensation	451,900	-
All other	10,000	3,600
	$625,600	$443,000

 

 

Note 6.  Notes Payable

 

The following table summarizes our unsecured promissory notes at September 30, 2017 and March 31, 2017.

 

	September 30, 2017			March 31, 2017
	Principal	Accrued		Principal	Accrued
	Balance	Interest	Total	Balance	Interest	Total
7.95% and 8.25% Notes payable to insurance
premium financing company (current)	$105,200	$-	$105,200	$54,800	$-	$54,800
Total notes payable to unrelated parties	$105,200	$-	$105,200	$54,800	$-	$54,800
less: current portion	(105,200)	-	(105,200)	(54,800)	-	(54,800)
Net non-current portion	$-	$-	$-	$-	$-	$-

 

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 $86,600 at September 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 $18,600 at September 30, 2017.

 

Note 7.  Capital Stock

 

At our Annual Meeting of Stockholders on September 15, 2017, as approved by and recommended to our stockholders by our Board, our stockholders approved an amendment to our Restated and Amended Articles of Incorporation to increase the authorized number of shares of common stock that the Company may issue from 30.0 million shares to 100.0 million shares. The amendment became effective on September 15, 2017, upon our filing of a certificate of amendment with the Secretary of State of the state of Nevada.

 

Common Stock and Warrants Issued in Firm Commitment Underwritten Public Offering

 

On September 6, 2017, we completed a firm commitment underwritten public offering pursuant to which we offered and sold shares of our common stock and warrants to two of our existing institutional investors, resulting in gross proceeds of approximately $2.4 million (the September 2017 Public Offering). We issued an aggregate of 1,371,430 shares of our common stock, Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 of common stock (collectively, the Warrants), each exercisable for $1.82 per share in the September 2017 Public Offering. The Series A1 Warrants will be exercisable by the investors for a five-year period commencing on March 7, 2018, and the Series A2 Warrants are exercisable at any time through September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were offered, issued and sold pursuant to our S-3 Registration Statement that had previously been declared effective by the Securities and Exchange Commission (the Commission) to cover this and potential future sales of our equity securities in one or more public offerings from time to time. We received net proceeds of approximately $2.0 million from the September 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering.

 

The 1,388,931 Series A1 Warrants issued in the September 2017 Public Offering have no anti-dilution or other exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend, and, accordingly, we have accounted for them as equity warrants. The 503,641 Series A2 Warrants contain anti-dilution protection provisions that will take effect upon the issuance of any common stock, securities convertible into common stock or certain other issuances at a price below the then-current (currently $1.82 per share) exercise price of the Series A2 Warrants, with certain exceptions; provided, however, that such anti-dilution protection will terminate automatically on the trading day following the date on which we have raised at least $20.0 million in aggregate gross proceeds through one or more issuances of common stock or equity-linked securities. The anti-dilution protection provisions in the Series A2 Warrants constitute a down round feature subject to the guidance in ASU 2017-11. Since the Series A2 Warrants contain no other provisions which require their treatment as liability warrants rather than equity warrants, including the exercise price or share reset features, except as is customary with respect to a change in our capital structure in the event of a stock split or dividend and which are also present in the Series A1 Warrants, we have also accounted for the Series A2 Warrants as equity warrants.

 

Common Stock and Warrants Issued in Private Placements

 

During the quarter ended June 30, 2017, in self-placed private placement transactions, we accepted subscription agreements from individual accredited investors, pursuant to which we sold to such investors units, at a weighted average purchase price of $2.00 per unit, consisting of an aggregate of 437,751 unregistered shares of our common stock and warrants, exercisable through April 30, 2021, to purchase an aggregate of 218,875 unregistered shares of our common stock at a weighted average exercise price of $3.99 per share. The purchasers of the units have no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. The warrants are not exercisable until six months and one day following the date of issuance. We received aggregate cash proceeds of $873,300 in connection with these self-placed private placement transactions, and the entire amount of the proceeds was credited to stockholders’ equity.

 

 

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 exercisable through April 30, 2021 to purchase 28,572 unregistered shares of our common stock at an exercise price of $4.00 per share. The purchaser of the units has no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. The warrants are not exercisable until six months and one day following the date of issuance. We received cash proceeds of $50,000 from this sale of our securities, and the entire amount of the proceeds was credited to stockholders’ equity.

 

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.

 

During the quarter ended September 30, 2017, our Board of Directors (Board) approved the issuance of an aggregate of 927,500 unregistered shares of our common stock, of which 477,500 shares were issued from our 2016 Amended and Restated Stock Incentive Plan, for various professional services, including contract research, legal, investor relations and financial advisory services. The common stock issued had an aggregate fair value of $1,503,600 on the dates issued, of which all but $161,300 has been recognized as noncash expense during the quarter ended September 30, 2017. The un-expensed portion at September 30, 2017 is being recognized in expense ratably through July 2019 in accordance with the terms of work orders for certain contract research services to be provided through that period.

 

Modification of Warrants Issued in Private Placements

 

In September 2017, the Board authorized the modification of outstanding warrants issued in private placement transactions between March 2017 and June 2017 to reduce the exercise prices and increase the number of shares for which the warrants were exercisable. We calculated the fair value of the warrant immediately before and after the modification using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We recognized the additional fair value, $279,700, as warrant modification expense, included as a component of general and administrative expenses, in our Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended September 30, 2017.

 

Assumption:	Pre-modification	Post-modification
Market price per share	$1.54	$1.54
Exercise price per share	$3.99	$2.00
Risk-free interest rate	1.62%	1.62%
Remaining contractual term in years	3.62	3.62
Volatility	95.5%	95.5%
Dividend rate	0.0%	0.0%
Number of warrant shares	247,500	495,001
Weighted average fair value per share	$0.71	$0.92

 

 

 

 

Exercise Price	Expiration	Warrants Outstanding at September 30,
per Share	Date	2017
$1.82	9/6/2022 to 3/7/2023	1,892,572
$2.00	4/30/2021	495,001
$3.51	12/31/2021	50,000
$4.00	4/30/2021	28,572
$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
		6,965,151

 

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 and 1,892,572 shares of common stock underlying the warrants exercisable at $1.82 per share issued in our September 2017 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 a wide range of material aspects related to the nonclinical and clinical development and regulatory affairs associated with our efforts to develop and commercialize AV-101 for MDD and other potential CNS indications. CBV is among our largest institutional stockholders at September 30, 2017, holding approximately 7.8% 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 nonclinical 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.

 

In July 2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a substantially similar May 2007 master services agreement, pursuant to which CRL may assist us in the evaluation, development, 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 are and will be delineated in individual work orders negotiated from time-to-time under the MSA. Under the terms of work orders issued pursuant to the July 2017 MSA and our May 2007 master services agreement with CRL, we incurred expenses of $484,000 and $27,800 during the quarters ended September 30, 2017 and 2016, respectively, and $612,200 and $78,200 in the six-month periods ended September 30, 2017 and 2016, respectively. During the quarter ended September 30, 2017, we issued an aggregate of 300,000 unregistered shares of our common stock to CRL under the terms of certain work orders for current and future CRO services relating to our development of AV-101 for MDD, the fair value of which represented approximately $364,000 of the reported CRO expense for the quarter then ended. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to, AV-101 and other potential product candidates will increase in future periods.

 

Note 9.  Subsequent Events

 

We have evaluated subsequent events through November 9, 2017 and have identified the following matters requiring disclosure:

 

Issuance of Common Stock to Professional Services Providers

 

In October 2017, we issued an aggregate of 70,000 shares of our unregistered common stock having an aggregate fair value of $83,800 to certain professional service providers.

 

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 substantial additional financing, the results of our research and development efforts, the results of nonclinical and clinical testing, the effect of regulation by the U.S. Food and Drug Administration (FDA) and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk Factors” in this Report.  Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board and stockholders.

  

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management or Board to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

Business Overview

 

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 non-opioid treatment alternative for neuropathic pain, as well as several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including Parkinson’s disease levodopa -induced dyskinesia (PD LID), epilepsy and Huntington’s disease.

 

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 ketamine hydrochloride injection (ketamine), an ion-channel blocking NMDA receptor antagonist approved by the FDA as an anesthetic, 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 ketamine’s robust antidepressant effects in treatment-resistant MDD patients within twenty-four hours of a single sub-anesthetic dose administered by intravenous (IV) injection.

 

We believe AV-101 may have potential to deliver ketamine-like antidepressant effects, without the need for IV administration and 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 currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, a small Phase 2 clinical study of AV-101 as a monotherapy in subjects with treatment-resistant MDD (the NIMH AV-101 MDD Phase 2 Monotherapy Study). In October 2017, we received FDA authorization 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 therapeutic response to standard, FDA-approved antidepressants (the AV-101 MDD Phase 2 Adjunctive Treatment Study).  Subject to obtaining sufficient financing, we intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018 with Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, as Principal Investigator.  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). If started in the first quarter of 2018, we expect to complete this study 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 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 our cardiac stem cell technology, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, we 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 antidepressants take many weeks to achieve adequate therapeutic 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 product 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 currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, the 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 during the first half of 2018.

 

We are preparing to begin the AV-101 MDD Phase 2 Adjunctive Treatment Study, which will test the safety, efficacy and tolerability of AV-101 as an adjunctive treatment of MDD in adult patients with an inadequate response to standard, FDA-approved antidepressants. Subject to receiving sufficient financing, we intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018. In connection with our preparation for this study, as well as potential Phase 3 development and commercialization of AV-101, we, together with our contract manufacturing organization (CMO), developed a novel process for the production of AV-101 drug substance. We believe our new proprietary production process will significantly improve AV-101 manufacturing efficiency, thereby reducing the current and future cost of manufacturing AV-101 drug substance and improving the yield of AV-101 drug substance manufactured. While developing our new manufacturing process, our CMO produced a batch of AV-101 drug substance that contained certain impurities not within the limits set out by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (the ICH Guidelines). The FDA routinely utilizes the ICH Guidelines as an industry standard for development stage programs such as our AV-101 Phase 2 program. Consequently, the FDA placed a clinical hold on the launch of the AV-101 MDD Phase 2 Adjunctive Treatment Study until we either (a) further improved our AV-101 manufacturing process to remove the impurities or reduce the impurities below applicable limits in the ICH Guidelines, or (b) conducted a bridging toxicology study to qualify the impurities as safe for clinical use. In response to the FDA’s requests, we did both. We further improved our AV-101 manufacturing process, produced a new batch of AV-101 drug substance using the improved process, and now have analytical results from that batch showing that the impurities were reduced to a level below the limits of the ICH Guidelines. In addition, we conducted a bridging toxicology study, the results of which confirmed that the impurities found in the AV-101 drug substance tested were safe for clinical use.

 

The FDA also requested additional contraceptive protection in the upcoming clinical study until we complete preclinical reproductive toxicology studies that are routinely conducted later in stages of clinical development. Although previous toxicology studies for AV-101 do not suggest any reproductive organ involvement, and we have confirmed with the FDA that our proposed study is a Phase 2 study, we have implemented additional contraceptive measures in the revised protocol for the AV-101 MDD Phase 2 Adjunctive Treatment Study that will remain in effect until standard reproductive toxicology studies are completed in the ordinary course prior to commencement of Phase 3 development. We have confirmed with the FDA that our recently implemented contraceptive measures are appropriate for the current stage of development of AV-101.

 

In September 2017, we requested, and were granted, a pre-IND Type A meeting with the FDA’s Division of Psychiatry to discuss certain matters pertaining to our AV-101 development program and the AV-101 MDD Phase 2 Adjunctive Treatment Study. Subsequent to our Type A Meeting with the FDA, we submitted the supplemental data from our new manufacturing process, the bridging toxicology report and our study protocol, revised to address the FDA’s comments. These documents adequately addressed all concerns raised by the FDA to date. Consequently, on October 26, 2017, FDA authorized us to proceed, under our Investigational New Drug (IND) application, with the AV-101 MDD Phase 2 Adjunctive Treatment Study.

 

We believe preclinical studies and Phase 1 safety studies support our hypothesis that AV-101 also has potential as a non-opioid treatment alternative for neuropathic pain, as well as several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including PD LID, epilepsy, and Huntington’s disease. We are beginning to plan additional Phase 2 clinical studies to further evaluate the therapeutic potential of AV-101 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 our cardiac stem cell technology, in December 2016, we 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, we 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

 

Despite generating $1.25 million of sublicense revenue from the BlueRock Agreement in December 2016, 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 September 30, 2017, we had an accumulated deficit of approximately $149.3 million. Our net loss for the six months ended September 30, 2017 and 2016 was approximately $7.3 million and $5.1 million, respectively. We expect losses to continue for the foreseeable future, primarily related to our further development of AV-101 for the adjunctive treatment of MDD, as well as other CNS indications.

 

Summary of the Six Months Ended September 30, 2017

 

During the six months ended September 30, 2017, we have 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 and intellectual property foundation to support broad clinical development and, ultimately, commercialization of AV-101 in the U.S. and foreign markets, and (iii) on a limited basis, advance the predictive toxicology capabilities of CardioSafe 3D for small molecule new chemical entity drug rescue and development applications and collaborative regenerative medicine opportunities related to our cardiac stem cell technology platform.

 

Pursuant to our 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 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 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 have significantly improved the efficiency of our AV-101 manufacturing processes and production of sufficient quantities of AV-101 to enable a more comprehensive 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. We have filed and are pursuing several patent applications in Europe, the U.S. and other selected regions. Several of these patent applications have already been granted or allowed, on both (i) certain novel therapeutic methods of use of AV-101, including depression, and (ii) certain novel methods of producing AV-101. In Europe, the European Patent Office (EPO) recently granted our patent related to methods of treating depression with AV-101 and certain other neurological indications. In the U.S. and other selected regional markets, we are currently pursuing a counterpart AV-101 patent application similar to the patent granted by the EPO. Although the U.S. Patent and Trademark Office (USPTO) has not yet allowed the counterpart application filed in the U.S., we believe that our counterpart patent applications under review by the USPTO and other countries ultimately will be granted.

 

In Europe, the U.S. and other selected regional markets, we are also prosecuting patent applications related to novel methods of producing AV-101. We recently received a Notice of Allowance for the patent application regarding our manufacturing process from the USPTO and the Chinese counterpart has been granted. We have submitted a counterpart application to the EPO, which has not yet been approved. However, given that our application at the USPTO was sufficient to obtain an allowed patent in the U.S., we believe our counterpart patent application at the EPO ultimately will be granted.

 

 

 

Between late-March 2017 and June 2017, we entered into self-placed private placement transactions with individual accredited investors, pursuant to which we sold units consisting of an aggregate of 495,001 shares of our unregistered common stock and 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 aggregate cash proceeds of approximately $1 million in these self-placed private placement transactions (Spring 2017 Private Placement). In September 2017, we reduced the exercise price of each of the warrants issued in the Spring 2017 Private Placement to $2.00 per share and issued additional warrants, also exercisable six months and one day following issuance at an exercise price of $2.00 per share, to purchase an aggregate of 247,501 unregistered shares of our common stock. In August 2017, in a self-placed private placement transaction, we sold units consisting of 28,572 shares of our unregistered common stock and warrants exercisable six months and one day following the date of issuance through April 30, 2021 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 private placement transaction.

 

In September 2017, we completed a firm commitment underwritten public offering, pursuant to which we sold 1,371,430 shares of our common stock and Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 of common stock (collectively, the Warrants), each exercisable for $1.82 per share warrants to two of our existing institutional investors, resulting in net proceeds of approximately $2.0 million (the September 2017 Public Offering). The Series A1 Warrants will be exercisable for a five-year period commencing on March 7, 2018, and the Series A2 Warrants are exercisable at any time and expire on September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were sold pursuant to our effective Registration Statement on Form S-3 (Registration No. 333-215671) to cover this and potential future sales of our equity securities in one or more public offerings from time to time.

 

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 September 30, 2017 and 2016

 

The following table summarizes the results of our operations, including both cash and noncash components, for the three months ended September 30, 2017 and 2016 (amounts in thousands).

 

	Three Months Ended September 30,
	2017	2016
Operating expenses:
Research and development	$2,427	$1,606
General and administrative	2,567	1,494
Total operating expenses	4,994	3,100
Loss from operations	(4,994)	(3,100)
Interest expense, net	(3)	(1)
Loss before income taxes	(4,997)	(3,101)
Income taxes	-	-
Net loss	(4,997)	(3,101)
Accrued dividend on Series B Preferred Stock	(256)	(241)
Deemed dividend on Series B Preferred Stock	-	-
Net loss attributable to common stockholders	$(5,253)	$(3,342)

 

Revenue   

 

We reported no revenue for the quarters ended September 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 upon achievement of certain performance-based milestones and commercial sales. However, 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 $2.4 million for the quarter ended September 30, 2017, an increase of approximately 51% compared to the $1.6 million reported for the quarter ended September 30, 2016. Noncash expenses, including stock compensation, depreciation and a portion of rent expense in both periods and a portion of AV-101 project expenses in the quarter ended September 30, 2017, totaled approximately $592,000 and $83,000 in the quarters ended September 30, 2017 and 2016, respectively. The increase in research and development expense in 2017 reflects our continued focus on 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 additional financing. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):

 

	Three Months Ended September 30,
	2017	2016
Salaries and benefits	$566	$461
Stock-based compensation	137	82
Consulting and other professional services	6	31
Technology licenses and royalties	97	94
Project-related research and supplies:
AV-101	1,476	817
Stem cell and all other	27	51
	1,503	868
Rent	99	62
Depreciation	19	8
Total Research and Development Expense	$2,427	$1,606

 

The increase in salaries and benefits expense reflects the impact of salary increases granted to our Chief Medical Officer (CMO) and Chief Scientific Officer (CSO) in July 2017 and to the non-officer members of our scientific staff in June 2017. Additionally, our then-newly-hired CMO did not receive a bonus payment in July 2016; however, both our CMO and CSO were granted a bonus in September 2017. The full amount of each officer’s 2017 bonus was accrued at the time it was granted, but only 25% of the total amount was paid by September 30, 2017, with the remaining balance to be paid ratably through March 31, 2018.

 

Noncash stock based compensation expense increased in the current period primarily from the routine amortization of option grants made to our CSO, CMO and scientific staff in September 2017, April 2017 and November 2016, which grants, in the aggregate, account for approximately $105,000 of 2017 expense. Expense attributable to these grants is being amortized over two-year to four-year vesting periods, based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.

 

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 that we have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, this expense includes legal counsel and other costs we have incurred to advance pending patent applications in the U.S. and numerous foreign countries with respect to AV-101 and our stem cell technology platform.

 

AV-101 project expense for the quarter ended September 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 studies to facilitate further clinical development of AV-101 in MDD and potentially for other indications, and to comply with applicable FDA regulations. Stem cell and other project related expenses reflects costs associated with our in-house stem cell technology-related initiatives, and, in 2016, our participation in the FDA’s Comprehensive In Vitro Proarrhythmia Assay (CiPA) project.

 

 

 

The increase in rent expense for the quarter ended September 30, 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022 and the related accounting for the extension amendment.

 

General and Administrative Expense

 

General and administrative expense, including both cash and noncash components, increased by 72% to approximately $2.6 million from $1.5 million for the quarters ended September 30, 2017 and 2016, respectively. Noncash expense aggregated approximately $1,494,000 and $579,000 for the quarters ended September 30, 2017 and 2016, respectively, including, in both periods, stock compensation expense, a portion of investor relations and investment banking expenses, warrant modification expense, and a portion of rent expense. The overall increase in general and administrative expenses resulted primarily from increased professional services expenses, including noncash expense attributable to the grant of common stock for services, noncash warrant modification expense and, to a lesser extent, salary and benefits and noncash stock compensation expenses. The following table indicates the primary components of general and administrative expenses, including the cash and noncash components, for each of the periods (amounts in thousands):

 

	Three Months Ended September 30,
	2017	2016
Salaries and benefits	$650	$485
Stock-based compensation	194	117
Board fees	39	36
Legal, accounting and other professional fees	388	207
Investor relations	831	471
Insurance	60	38
Travel expenses	22	23
Rent and utilities	67	45
Warrant modification expense	280	17
All other expenses	36	55
	$2,567	$1,494

 

The increase in salaries and benefits primarily reflects the impact of the hiring of our Vice President of Corporate Development (VP-Corporate Development) in September 2016 and salary increases granted in July 2017 to our Chief Executive Officer (CEO), Chief Financial Officer (CFO), and VP-Corporate Development and, in June 2017, to a non-officer member of our administrative staff. Additionally, each of our officers was granted a bonus in September 2017, but our VP-Corporate Development had not yet joined the Company in July 2016, when our CEO and CFO received a bonus payment. The full amount of each officer’s 2017 bonus was accrued at the time it was granted, but only 25% of the total amount was paid by September 30, 2017, with the remaining balance to be paid ratably through March 31, 2018.

 

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 and our CEO, CFO and administrative staff in September 2017, April 2017 and November 2016, plus the new-hire grant made to our VP-Corporate Development in September 2016, which grants account for approximately $117,000 of 2017 expense. Expense attributable to these grants is being amortized over a two-year to four-year vesting period, based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.

 

Board fees includes fees recognized for the services of independent members of our Board. 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 September 30, 2017 and 2016 includes cash expense related to routine legal services as well as accounting expense related to the review of the financial statements for the second quarter of each fiscal year. In the quarter ended September 30, 2017, additionally, we granted an aggregate of 20,000 unregistered shares of our common stock having an aggregate fair value of $30,800 to legal services providers as compensation for services and an aggregate of 150,000 unregistered shares of our common stock having an aggregate fair value of $234,000 to two investment banking firms pursuant to financial advisory agreements. In the quarter ended September 30, 2016, we granted an aggregate of 25,000 unregistered shares of our common stock having a fair value of $108,500 to a legal services provider as compensation for services.

 

 

 

Investor relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, market awareness and strategic advisory 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 September 30, 2017, in addition to cash fees and expenses we incurred, we granted an aggregate of 457,000 unregistered shares of our common stock to various corporate development, investor relations, market awareness and strategic business advisory service providers for their services and recognized noncash expense of $713,300, representing the fair value of the stock at the time of issuance. In the quarter ended September 30, 2016, we granted an aggregate of 25,000 unregistered shares of our common stock having a fair value at the time of issuance of $108,500 to an investor relations service provider as compensation for services.

 

In both periods, travel expense reflects costs associated with management 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 September 30, 2017 reflects higher commercial property rents prevalent in the local real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities by five years from July 31, 2017 to July 31, 2022 and the related accounting for the extension amendment.

 

In September 2017, we reduced the exercise price of 247,500 warrants issued in the Spring 2017 Private Placement from a weighted average exercise price of $3.99 per share to $2.00 per share. We also issued to each of the Spring 2017 Private Placement investors additional warrants to purchase an aggregate total of 247,501 shares of common stock, with an exercise price of $2.00 per share. We recognized noncash expense of $279,700 in the quarter ended September 30, 2017 representing the increase in fair value of the warrants granted initially before and after the modification and the fair value of the additional warrants granted. In August 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 20,000 shares of our common stock for an aggregate of 15,000 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 $17,100 in noncash expense in the quarter ended September 30, 2016.

 

Interest and Other Expenses   

 

Interest expense totaled $3,300 for the quarter ended September 30, 2017 compared to $1,400 reported for the quarter ended September 30, 2016. Interest expense in both periods relates to interest paid on insurance premium financing and on a capital lease of office equipment.

 

We recognized $256,300 and $241,000 for the quarters ended September 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. There have been no conversions of outstanding shares of our Series B Preferred stock into shares of our common stock since August 2016.

 

Comparison of Six Months Ended September 30, 2017 and 2016

 

The following table summarizes the results of our operations, including both cash and noncash components, for the six months ended September 30, 2017 and 2016 (amounts in thousands).

 

	Six Months Ended September 30,
	2017	2016
Operating expenses:
Research and development	$3,523	$2,432
General and administrative	3,731	2,631
Total operating expenses	7,254	5,063
Loss from operations	(7,254)	(5,063)
Interest expense (net)	(6)	(3)
Loss before income taxes	(7,260)	(5,066)
Income taxes	(2)	(2)
Net loss	(7,262)	(5,068)
Accrued dividend on Series B Preferred Stock	(504)	(781)
Deemed dividend on Series B Preferred Stock	-	(111)
Net loss attributable to common stockholders	$(7,766)	$(5,960)

 

 

 

Revenue   

 

We reported no revenue for the six-month periods ended September 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 upon the achievement of certain performance-based milestones and commercial sales, 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 $3.5 million for the six months ended September 30, 2017, an increase of approximately 45% compared to the $2.4 million reported for the six months ended September 30, 2016. Noncash expenses totaled approximately $843,000 and $131,000 in the six months ended September 30, 2017 and 2016, respectively, including stock compensation, depreciation and a portion of rent expense in both periods, and a portion of AV-101 project expenses in the six months ended September 30, 2017. The increase in research and development expense in 2017 reflects our continued focus on 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 additional financing. The following table indicates the primary cash and noncash components of research and development expense for each of the periods (amounts in thousands):

 

	Six Months Ended September 30,
	2017	2016
Salaries and benefits	$884	$711
Stock-based compensation	328	126
Consulting and other professional services	16	58
Technology licenses and royalties	157	254
Project-related research and supplies:
AV-101	1,800	1,069
Stem cell and all other	93	79
	1,893	1,148
Rent	204	118
Depreciation	38	17
All other	3	-
Total Research and Development Expense	$3,523	$2,432

 

The increase in salaries and benefits reflects the hiring of our Chief Medical Officer (CMO) in June 2016, and salary increases granted to our CMO in July 2017, to our Chief Scientific Officer (CSO) and to the non-officer members of our scientific staff in June 2016 and June 2017. Additionally, our then-newly-hired CMO did not receive a bonus payment in July 2016; however, both our CMO and CSO were granted a bonus in September 2017. The full amount of each officer’s September 2017 bonus was accrued at the time it was granted, but only 25% of the total amount was paid by September 30, 2017, with the remaining balance to be paid ratably through March 31, 2018.

 

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 September 2017, April 2017 and November 2016, plus the new-hire grant made to our CMO in June 2016, which grants account for approximately $193,000 of 2017 expense. The expense attributable to these grants is being amortized over a two-year to four-year vesting period, based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.

 

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 2017 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 that we have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, but to a greater extent in 2016, this expense includes legal counsel and other costs we have incurred to advance numerous pending patent applications in the U.S. and various foreign countries with respect to AV-101 and our stem cell technology platform.

 

 

 

AV-101 project expense for both periods includes continuing costs incurred to develop more efficient and cost-effective proprietary manufacturing methods for AV-101, and to produce clinical trial material enabling the AV-101 MDD Phase 2 Adjunctive Treatment Study, and, primarily in 2017, costs incurred for certain other nonclinical studies to facilitate further clinical development of AV-101 in MDD and potentially for other indications and to comply with applicable FDA regulations. Stem cell and other project related expenses reflects costs associated with our in-house stem cell technology-related initiatives, and, in 2016, our participation in the FDA’s Comprehensive In Vitro Proarrhythmia Assay (CiPA) project.

 

The increase in rent expense for 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years, from July 31, 2017 to July 31, 2022, and the related accounting for the extension amendment.

 

General and Administrative Expense

 

General and administrative expense, including both cash and noncash components, increased approximately 42% to $3.7 million for the six months ended September 30, 2017 from $2.6 million for the six months ended September 30, 2016. Noncash expense aggregated approximately $1.7 million and $1.0 million for the six months ended September 30, 2017 and 2016, respectively, including, in both periods, stock compensation expense, a portion of investor relations and investment banking expenses, warrant modification expense, and a portion of rent expense. The overall increase in general and administrative expenses was primarily attributable to increased salary and benefits expense and noncash stock compensation, professional services and warrant modification expenses. The following table indicates the primary components of general and administrative expenses, including noncash components, for each of the periods (amounts in thousands):

 

	Six Months Ended September 30,
	2017	2016
Salaries and benefits	$921	$675
Stock-based compensation	370	181
Board fees	78	69
Legal, accounting and other professional fees	695	749
Investor relations	997	579
Insurance	121	78
Travel expenses	62	72
Rent and utilities	140	85
Warrant modification expense	280	57
All other expenses	67	86
	$3,731	$2,631

 

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 and July 2017 to our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), and in June 2016 and June 2017 to a non-officer member of our administrative staff. Additionally, each of our officers was granted a bonus in September 2017, but our VP-Corporate Development had not yet joined the Company in July 2016, when our CEO and CFO received a bonus payment. The full amount of each officer’s 2017 bonus was accrued at the time it was granted, but only 25% of the total amount was paid by September 30, 2017, with the remaining balance to be paid ratably through March 31, 2018.

 

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 September 2017, April 2017 and November 2016, plus the new-hire grant made to our VP-Corporate Development in September 2016 in September 2016, which grants account for approximately $232,000 of 2017 expense. The expense attributable to these grants is being amortized over a two-year to four-year vesting period based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.

 

Board fees includes fees recognized for the services of independent members of our Board. The Board modified committee assignments effective in April 2017, resulting in the slight increase in expense.

 

 

 

Legal, accounting and other professional fees for the six months ended September 30, 2017 and 2016 includes expense related to routine legal services 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 and second quarters of the current fiscal year. In addition to cash fees incurred, during the six months ended September 30, 2017, we granted an aggregate of 20,000 unregistered shares of our common stock having an aggregate fair value of $30,800 to legal services providers as compensation for services and an aggregate of 150,000 unregistered shares of our common stock having an aggregate fair value of $234,000 to two investment banking firms pursuant to financial advisory agreements. Noncash expense for the six months ended September 30, 2016 included approximately $338,000 recognized in the quarter ended June 30, 2016 pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B 10% convertible preferred stock having an aggregate 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 and $108,500 recognized in the quarter ended September 30, 2016 representing the fair value of 25,000 unregistered shares of our common stock granted to a legal services provider as compensation for services.

 

Investor relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, market awareness and strategic advisory 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 six months ended September 30, 2017, in addition to cash fees and expenses we incurred, in the quarter ended June 30, 2017, 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; additionally, in the quarter ended September 30, 2017, we granted an aggregate of 457,000 unregistered shares of our common stock to various corporate development, investor relations, market awareness and business advisory service providers as compensation for their services and recognized noncash expense of $713,300, representing the fair value of the stock at the time of issuance. In the six months ended September 30, 2016, we granted an aggregate of 25,000 unregistered shares of our common stock having a fair value at the time of issuance of $108,500 to an investor relations service provider as compensation for its services.

 

In both periods, travel expense reflects costs associated with management 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 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years, from July 31, 2017 to July 31, 2022, and the related accounting for the extension amendment.

 

In September 2017, we reduced the exercise price of 247,500 warrants issued in the Spring 2017 Private Placement from a weighted average exercise price of $3.99 per share to $2.00 per share. We also issued to each of the Spring 2017 Private Placement investors additional warrants to purchase an aggregate total of 247,501 shares of common stock, with an exercise price of $2.00 per share. We recognized noncash expense of $279,700 in the six months ended September 30, 2017, representing the increase in fair value of the warrants granted initially before and after the modification and the fair value of the additional warrants granted. Between April 2016 and August 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 61,649 shares of our common stock for an aggregate of 46,238 shares of our unregistered common stock.  As with similar prior transactions, we accounted for these transactions as warrant modifications, resulting in our recognition of an aggregate of $57,400 in noncash expense during the six-month period ended September 30, 2016.

 

Interest and Other Expenses   

 

Interest expense totaled $5,700 for the six months ended September 30, 2017 compared to $2,800 reported for the six months ended September 30, 2016. Interest expense in both periods relates to interest paid on insurance premium financing and on a capital lease of office equipment.

 

We recognized $503,600 and $780,800 for the six months ended September 30, 2017 and 2016, respectively, representing the 10% cumulative noncash 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 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 have been no conversions of outstanding shares of Series B Preferred into common shares 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 six months ended September 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 September 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 $47.6 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 $32.3 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 CRADA with the NIH, the NIMH continues to conduct Phase 2 clinical development activities relating to AV-101 as a potential new generation antidepressant. The NIMH AV-101 MDD Phase 2 Monotherapy Study is 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 self-placed private placement transactions, 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). 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. We received cash proceeds of $50,000 from this sale of our securities.

 

In September 2017, we completed a firm commitment underwritten public offering, pursuant to which we offered and sold an aggregate of 1,371,430 shares of our common stock and warrants to purchase an aggregate of 1,892,572 shares of our common stock to two of our existing institutional investors, resulting in gross proceeds of approximately $2.4 million under our Registration Statement on Form S-3 (Registration No. 333-215671) (the S-3 Registration Statement) that had been previously declared effective by the Securities and Exchange Commission to cover potential future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so.

 

Additionally, in September 2017, to facilitate potential future issuances and sales of our equity securities for ordinary corporate finance and general corporate purposes and as recommended by our Board, our stockholders approved an amendment to our Restated and Amended Articles of Incorporation to increase the number of shares of common stock available for issuance from 30 million shares to 100 million shares, an amount our Board determined is customary and appropriate for a Nasdaq-listed, clinical-stage biopharmaceutical company. Following that approval, in October 2017, we filed a Registration Statement on Form S-1 (Registration No. 333-221009) (the S-1 Registration Statement) pursuant to which we anticipate completing an offering of our equity securities with proceeds sufficient to enable the launch and completion of the AV-101 MDD Phase 2 Adjunctive Treatment Study and fund our internal operations for at least the next twelve months. There can be no assurance, however, that we will achieve effectiveness of the S-1 Registration Statement or successfully complete an offering thereunder.

 

Our cash balance at September 30, 2017 was not sufficient to enable us to fund our planned operations, including expected cash expenditures of approximately $12 million for the next twelve months, 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 expect, as we have numerous times in the past, to raise additional capital as and when necessary and advisable, potentially including through an offering under the S-1 Registration Statement, one or more offerings under the S-3 Registration Statement or other capital raising activity, 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. 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.

 

We may also seek research and development collaborations that could generate revenue, funding for development of AV-101 and additional product candidates, and/or additional government grant awards and agreements similar to our current CRADA with the NIMH. 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):

 

	Six Months Ended September 30,
	2017	2016
Net cash used in operating activities	$(4,010)	$(3,873)
Net cash used in investing activities	(2)	(8)
Net cash provided by financing activities	2,855	9,709
Net increase (decrease) in cash and cash equivalents	(1,157)	5,828
Cash and cash equivalents at beginning of period	2,921	429
Cash and cash equivalents at end of period	$1,764	$6,257

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

 

 

Item 4.

CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.

 

Internal Control over Financial Reporting

 

In our Annual Report on Form 10-K for our fiscal year ended March 31, 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.

 

Item 1A. Risk Factors

 

Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q (Report) and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for 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 nonclinical and clinical 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 nonclinical development, all phases of clinical development, and regulatory approval before it may be commercialized. The nonclinical and clinical development of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United 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 numerous nonclinical and clinical studies 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 nonclinical or clinical studies. This process takes many years and may also include post-marketing studies and surveillance obligations, which would 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, 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 toxicology studies, additional nonclinical 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 other product candidate we may seek to develop for many reasons, including, among others:

 

 

 

 

 

 

 

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 have applied for 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.

 

In October 2017 we applied for 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/or 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 AV-101 MDD Phase 2 Monotherapy Study and/or our AV-101 MDD Phase 2 Adjunctive Treatment Study fail(s) to produce positive results, 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 nonclinical 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 the NIMH AV-101 MDD Phase 2 Monotherapy Study 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 of AV-101, 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 and financial prospects.

 

Failures or delays in the commencement or completion of our planned clinical trials and nonclinical 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 with the NIMH, the NIMH is conducting and funding the NIMH AV-101 MDD Phase 2 Monotherapy Study. We will need to complete the planned AV-101 MDD Phase 2 Adjunctive Treatment Study, at least two additional large Phase 3 pivotal clinical trials, additional toxicology and other nonclinical 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 nonclinical and clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval required before commercial marketing of AV-101 for MDD and any other product candidates we may develop. Except as disclosed herein, we do not know whether the NIMH AV-101 MDD Phase 2 Monotherapy Study, our AV-101 MDD Phase 2 Adjunctive Treatment Study or any of our future-planned nonclinical and clinical trials will be completed on schedule, if at all, as the commencement and completion of nonclinical and clinical trials can be delayed or prevented for a number of reasons, including, among others: