UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Form 10-K
For the fiscal year ended: March 31, 2015
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number: 000-54014
VistaGen Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
20-5093315
(I.R.S. Employer
Identification No.)
343 Allerton Avenue
South San Francisco, California 94080
(650) 577-3600
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)
Securities registered pursuant to Section 12(b) of the Act
None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $0.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
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 x 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 S No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
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 ¨
(Do not check if a smaller
reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on September 30, 2014, the last
business day of the registrant’s second fiscal quarter, was: $10,084,494.
As of June 25, 2015, there were 1,594,461 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
PART I
Item No.
1.
1A.
1B.
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4.
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7A.
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9.
9A.
9B.
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PART II
PART III
PART IV
EXHIBIT INDEX
SIGNATURES
TABLE OF CONTENTS
Page No.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
2
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that involve substantial risks and uncertainties. All statements
contained in this Annual Report on Form 10-K other than statements of historical facts, including statements regarding our strategy, future
operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth, are
forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual
results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the
forward-looking statements.
The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,”
“could,” “should,” “continue,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking
statements contain these identifying words. These forward-looking statements include, among other things, statements about:
•
the availability of capital to satisfy our working capital requirements;
•
•
•
•
•
•
•
•
•
•
•
the accuracy of our estimates regarding expenses, future revenues and capital requirements;
our plans to develop and commercialize our lead product candidate, initially as a treatment for Major Depressive Disorder;
our ability to initiate and complete our clinical trials and to advance our product candidates into additional clinical trials, including
pivotal clinical trials, and successfully complete such clinical trials;
regulatory developments in the United States and foreign countries;
the performance of the U.S. National Institute of Mental Health, our third-party contract manufacturer(s) and contract research
organization(s);
our ability to obtain and maintain intellectual property protection for our proprietary assets;
the size of the potential markets for our product candidates and our ability to serve those markets;
the rate and degree of market acceptance of our product candidates for any indication once approved;
the success of competing products that are or become available for the indications that we are pursuing;
the loss of key scientific or management personnel, internally from one of our third-party collaborators; and
other risks and uncertainties, including those listed under Part I, Item 1A. Risk Factors.
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ
materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. 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 business, financial
condition and operating results. We have included important factors in the cautionary statements included in this Annual Report on Form 10-K,
particularly in Part I, Item 1A. Risk Factors, that could cause actual future results or events to differ materially from the forward-looking statements
that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make.
You should read this Annual Report on Form 10-K and the documents that we have filed as exhibits to the Annual Report on Form 10-K
with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any
forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.
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PART I
All brand names or trademarks appearing in this report are the property of their respective holders. Unless the context requires otherwise,
references in this report to “VistaGen,” the “Company,” “we,” “us,” and “our” refer to VistaGen Therapeutics, Inc., a Nevada corporation.
Item 1.
Business
Company Overview
We are a clinical-stage biopharmaceutical company committed to developing and commercializing product candidates for patients with depression,
other diseases and disorders related to the central nervous system (CNS), and cancer.
More than one billion people worldwide suffer from CNS disorders. Recently, the economic burden of these disorders was estimated at $2.0 trillion
the United States and European Union alone, a figure that is expected to triple by 2030. The World Health Organization estimates that 350 million
people are affected by depression worldwide. According to the NIH, major depression is one of the most common mental disorders in the United
States. In 2012, the NIH estimated 16 million adults aged 18 or older in the U.S. had at least one major depressive episode. This represented 6.9
percent of all U.S. adults.
Our lead product candidate, AV-101, is an orally-active small molecule prodrug in Phase 2 development for Major Depressive Disorder (MDD).
AV-101’s mechanism of action (MOA), as an N-methyl-D-aspartate receptor (NMDAR) antagonist binding selectively at the glycine-binding
(GlyB) co-agonist site of the NMDAR, is fundamentally different from all currently-approved antidepressants. In four preclinical studies utilizing
well-validated animal models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant
antidepressant-like responses, following a single treatment, which were equivalent to responses seen with a control single sub-anesthetic dose of
ketamine (sometimes used by clinicians off-label to treat suicidal behavior). In the same studies, fluoxetine (Prozac) did not induce rapid onset
antidepressant-like responses. Preclinical studies also support the hypothesis that AV-101 has potential to treat several additional CNS disorders,
including chronic neuropathic pain, epilepsy and neurodegenerative diseases, such as Parkinson’s disease and Huntington’s disease where
modulation of the NMDAR may have therapeutic benefit.
Following our two successful randomized, double-blind, placebo-controlled Phase 1 safety studies funded by the U.S. National Institutes of Health
(NIH), AV-101 is the only small molecule product candidate known to management that is (A) in Phase 2 clinical development as a monotherapy
for MDD, (B) designed to modulate the NMDAR through antagonistic binding at the GlyB co-agonist site of the NMDAR and (C) orally-active in
human subjects.
In February 2015, we entered a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health
(NIMH), part of the NIH. Under the CRADA, we will collaborate with the NIH on a Phase 2 clinical study of AV-101 in subjects with treatment
resistant MDD. Pursuant to the CRADA, the study will be conducted at the NIMH and fully-funded by the NIMH. It is contemplated that this
clinical study will begin this year under the direction of Dr. Carlos Zarate, Jr., the NIMH’s Chief of Experimental Therapeutics & Pathophysiology
Branch and of the Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
In addition to developing AV-101 for MDD and other CNS indications, we are using our stem cell technology platform for drug rescue –to identify
and develop proprietary new chemical entities (NCEs) for our internal drug candidate pipeline. Drug rescue involves (1) using our customized in
vitro bioassay systems to predict potential heart and liver toxicity of NCEs, (2) leveraging prior investments by pharmaceutical companies and
others related to large-scale compound library screening, optimizing and testing for efficacy NCEs that were terminated before FDA approval due to
unexpected heart or liver toxicity and are now available in the public domain, and (3) applying modern medicinal chemistry to produce safer NCEs
for our internal development pipeline. Our CardioSafe 3D™ bioassay system uses our human pluripotent stem cell (hPSC)-derived cardiomyocytes,
or heart cells. We believe CardioSafe 3D is more comprehensive and clinically predictive than the hERG assay, which is currently the only in vitro
cardiac safety assay required by FDA guidelines. Our LiverSafe 3D™ bioassay system uses our hPSC-derived hepatocytes, or liver cells, to predict
potential liver toxicity of NCEs, including potential drug metabolism issues and adverse drug-drug interactions. We believe our hPSC-derived
hepatocytes, which we call VSTA-heps™have more functionally useful life-span in culture than, and overcome numerous problems related to,
commercially-available primary (cadaver) hepatocytes currently used in FDA-required in vitro hepatocyte assays for drug metabolism, including
limited supply, unknown health status of the donor and genetic differences. CardioSafe 3D and LiverSafe 3D offer a new paradigm for evaluating
and predicting potential heart and liver toxicity of NCEs, including drug rescue NCEs, early in development, long before costly, high risk animal
studies and human clinical trials. We intend to develop each lead drug rescue NCE internally to establish in vitro and in vivo preclinical proof-of-
concept (POC), as to both efficacy and safety, using both established in vitro and in vivo models, as well as CardioSafe 3D and, when available,
LiverSafe 3D.
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Our Strategy
Our strategy is to develop, and commercialize innovative small molecule drugs that address unmet medical needs related to CNS disorders and
cancer. We have assembled a management team and a team of scientific, clinical, and regulatory advisors, including recognized experts in the fields of
depression and other CNS disorders, with significant industry experience to lead the development and commercialization of our product opportunities.
Key elements of our strategy are to:
• Develop and commercialize our lead product candidate, AV-101, for Major Depressive Disorder (MDD). We are pursuing MDD as
our lead indication for AV-101. We are preparing to launch our initial MDD Phase 2 clinical study in collaboration with the NIH in the
second half of 2015. We intend to develop AV-101 internally, through Phase 3 clinical studies and submission of our NDA. If approved
by the FDA, we plan to commercialize AV-101 for this indication in the U.S. either by (A) establishing or contracting for a specialty U.S.
sales force focused primarily on psychiatrists and long-term care physicians who are high prescribers of currently-approved
antidepressants or (B) collaborating with a pharmaceutical company with an extensive presence in U.S. CNS markets. Outside the U.S.,
we may choose to commercialize AV-101 in selected markets by establishing one or more strategic alliances.
• Leverage the commercial potential AV-101 by expanding to additional CNS-related disorders. We intend to pursue the development
and commercialization of AV-101 in MDD and additional CNS-related indications that are underserved by currently available medicines
and represent large unmet medical needs. Based on AV-101 preclinical studies, and by leveraging our AV-101 IND and successful Phase
1 clinical studies, we now have the opportunity to explore Phase 2 development of AV-101 as a potential treatment for chronic
neuropathic pain, epilepsy and neurodegenerative diseases such as Parkinson’s disease and Huntington’s disease.
• Grow our internal development pipeline by pursuing drug rescue opportunities using our stem cell technology. We are using our
stem cell technology to screen and develop proprietary new chemical entities (NCEs) through drug rescue programs intended to produce
proprietary NCEs for our internal drug development pipeline. We will focus on NCEs with established therapeutic and commercial
potential. Our ability to build on that valuable head start with our biological and electrophysiological insights regarding cardiac and liver
safety effects of NCEs obtained using CardioSafe 3D and, eventually, LiverSafe 3D, we believe will help us produce and then optimize
patentable drug rescue NCEs for our internal pipeline without incurring many of the substantial costs and risks typically inherent in new
drug discovery and nonclinical drug development.
• Pursue other product candidates, including product candidates for treatment of CNS-related disorders. While our resources are
currently focused on developing AV-101 and producing drug rescue NCEs, we may pursue additional product candidates in the future.
These may be directed at CNS-related disorders and may be developed independently or in partnerships. We believe that a diversified
portfolio will mitigate risks inherent in drug development and increase the likelihood of our success.
Our Product Opportunities
AV-101 (L-4-cholorkyurenine or 4-Cl-KYN)
Overview and Mechanism of Action
AV-101 is an orally-active, clinical-stage prodrug candidate that readily gains access to the central nervous system (CNS) after systemic
administration and is rapidly converted in vivo to its active metabolite 7-chlorokynurenic acid (7-Cl-KYNA), a well-characterized, potent and highly
selective antagonist of then N-methyl-D-aspartate receptor (NMDAR) at the glycine-binding co-agonist (GlyB) site. Prodrug pharmaceuticals are
useful for their potential to increase the selectivity of a drug for its intended target and to afford more favorable absorption, distribution, metabolism,
and excretion properties.
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Current evidence suggests that AV-101’s antagonism of NMDAR signaling may provide fast-acting antidepressant effects in the treatment of Major
Depressive Disorder (MDD). In addition, as confirmed in our AV-101 Phase 1 clinical studies, targeting the GlyB site of the NMDAR does not have
the adverse effects typically associated with classic NMDAR antagonists, such as ketamine and other NMDA channel blockers.
We believe Phase 2 clinical development of AV-101 for MDD and multiple CNS-related indications is supported by strong scientific rationale,
significant IND-enabling nonclinical data, and two successful Phase 1 clinical safety studies. To date, the U.S. National Institutes of Health (NIH)
has awarded us $8.8 million of grant funding for our pre-Phase 2 development of AV-101. We are currently preparing to launch our initial Phase
2 clinical trial of AV-101 in MDD.
Major Depressive Disorder
Depression is a serious medical illness and a global public health concern. The World Health Organization estimates that depression is the leading
cause of disability worldwide, and is a major contributor to the global burden of disease, affecting 350 million people globally. According to the
U.S. Centers for Disease Control and Prevention (CDC), approximately one in 10 Americans aged 12 and over takes antidepressant medication.
While most people will experience depressed mood at some point during their lifetime, MDD is different. MDD is the chronic, pervasive feeling of
utter unhappiness and suffering, which impairs daily functioning. Symptoms of MDD include diminished pleasure in activities, changes in appetite
that result in weight changes, insomnia or oversleeping, psychomotor agitation, loss of energy or increased fatigue, feelings of worthlessness or
inappropriate guilt, difficulty thinking, concentrating or making decisions, and thoughts of death or suicide and attempts at suicide. Suicide is
estimated to be the cause of death in up to 15% of individuals with MDD.
Current Antidepressants
For many people, depression cannot be controlled for any length of time without treatment. Current medications available in the multi-billion dollar
global antidepressant market, including commonly-prescribed selective serotonin reuptake inhibitors (SSRIs) and serotonin-norepinephrine reuptake
inhibitors (SNRIs), have limited effectiveness, and, because of their mechanism of action, must be taken for several weeks or months before patients
experience any significant benefit. In addition, most current antidepressant medications have an FDA-required “Black Box” safety warning due to a
risk of worsening depression and an increased risk of suicidal thoughts and behaviors during treatment, a property not expected to occur with AV-
101. Only about 33% of depression sufferers benefit from their initial treatment, and the likelihood of achieving remission of depressive symptoms
declines with each successive treatment attempt. Even after many treatment attempts during the course of up to more than a year, about 33% of
depression sufferers still fail to find an effective therapy. In addition, this trial and error process and the systemic effects of the various
antidepressant medications involved, increases the risks of patient tolerability issues and serious side effects, including suicidal thoughts and
behaviors.
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Ketamine and NIH Clinical Studies in Major Depressive Disorder
Ketamine hydrochloride (ketamine) is an FDA-approved, rapid-acting general anesthetic. The use of ketamine (an NMDA receptor antagonist which
acts as an NMDA channel blocker) to treat MDD has been studied in several clinical trials conducted by depression experts at the U.S. National
Institute of Mental Health (NIMH), part of the NIH, including Dr. Carlos Zarate, Jr., the NIMH’s Chief of Experimental Therapeutics &
Pathophysiology Branch and of the Section on Neurobiology and Treatment of Mood and Anxiety Disorders. In randomized, placebo-controlled,
double-blind clinical trials reported by Dr. Zarate and others at the NIMH, a single intravenous dose of ketamine (0.5 mg/kg over 40 minutes)
produced robust and rapid antidepressant effects in MDD patients who had not responded to currently-approved medications. These results were in
contrast to the slow onset of currently FDA-approved antidepressant medications, which usually require many weeks or months of chronic usage to
achieve similar antidepressant effects. The potential for widespread therapeutic use of ketamine is severely limited by its potential for abuse,
dissociative and psychosis-like side effects, and by practical challenges associated with its intravenous administration in a medical center.
Notwithstanding these limitations, the discovery of ketamine’s fast-acting antidepressant effects revolutionized thinking about the MDD treatment
paradigm. The discovery also increased interest in the development of a new generation of antidepressants with a fast-acting mechanism of action
similar to ketamine’s. Orally-available AV-101 is among the new generation of antidepressants with potential to deliver ketamine-like
antidepressant effects, without ketamine’s side effects or required intravenous administration.
AV-101 and Major Depressive Disorder
AV-101 is an orally-active prodrug candidate that produces, in the brain, 7-chlorokynurenic acid (7 Cl KYNA), one of the most potent and selective
antagonists of the glycine-binding site of the NMDAR, resulting in the down-regulation of NMDAR signaling. Growing evidence suggests that the
glutamatergic system is central to the neurobiology and treatment of MDD and other mood disorders.
AV-101’s mechanism of action is fundamentally different from currently-available antidepressants, placing it among a new generation of
glutamatergic antidepressants with potential to treat millions of MDD sufferers worldwide who are poorly served by SSRIs, SNRIs and other current
depression therapies. AV-101 is functionally similar to ketamine in that both are NMDAR antagonists. However, AV-101 modulated (down-
regulated) NMDAR channel activity and ketamine blocks it. AV-101 accomplishes this NMDAR modulation by selectively binding to the
functionally-required GlyB site of the NMDAR, thus down-regulating the NMDAR in a dose-dependent manner. We believe targeting the GlyB
site of the NMDAR and modulating NMDAR activity rather than blocking it can bypass adverse effects that result when ketamine blocks the
NMDA ion channel, without affecting the robust efficacy observed in previous clinical studies conducted by the NIH and others using ketamine to
treat MDD. This NMDAR modulation by AV-101 may then result in the “glutamate surge,” and the increase in neuronal connections, that has been
associated with the fast-acting antidepressant effects of ketamine.
In preclinical studies, AV-101 has demonstrated the antidepressant-like activity of ketamine, including rapid onset and long duration of effect,
without ketamine’s serious side effects. In two NIH-funded randomized, double-blind, placebo-controlled Phase 1 safety studies, AV-101 was safe,
well-tolerated and not associated with any severe adverse events. There were no signs of sedation, hallucinations or schizophrenia-like side effects
often associated with ketamine and traditional NMDAR channel blockers.
Building on over $8.8 million of prior non-dilutive funding from the NIH for preclinical and Phase 1 clinical development of AV-101, in February
2015, we entered a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health (NIMH). Under
the CRADA, we will collaborate with Dr. Carlos Zarate and the NIMH on a Phase 2 clinical study of AV-101 in subjects with treatment-resistant
MDD. Pursuant to the CRADA, this study will be conducted at the NIMH by Dr. Zarate and fully-funded by the NIH. The primary objective of the
NIH-sponsored Phase 2 study will be to evaluate the ability of AV-101 to improve overall depressive symptomatology in subjects with MDD,
specifically whether subjects with MDD have a greater and more rapid decrease in depressive symptoms when treated with AV-101 than with
placebo. We currently anticipate commencement of the study in the second half of 2015.
AV-101 Nonclinical Studies in Chronic Neuropathic Pain, Epilepsy, Parkinson’s disease and Huntington’s disease
In addition to well-established nonclinical models of depression, AV-101 nonclinical data in other CNS-related disorders support our hypothesis that
it may have therapeutic and commercial potential beyond treatment of depression.
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Chronic Neuropathic Pain and Acute Tissue Injury Hyperalgesia
The effect of AV-101 on chronic neuropathic pain due to inflammation and nerve damage was assessed in rats by using the Chung nerve ligation
model. AV-101 effects were compared to either saline, MK-801 or gabapentin controls. Similarly to what was observed in the formalin and thermal
hyperalgesia test systems, AV-101 had a positive effect on chronic neuropathic pain in the Chung model, with no observed adverse behavioral effects.
The efficacy observed for AV-101 in both the acute and chronic neuropathic pain model systems was dose dependent, and the drug response was not
associated with any side effects within the range of doses administered.
The antihyperalgesic effect of AV-101 has been evaluated in two standard tissue injury model systems: inflammatory thermal hyperalgesia and the
formalin paw test. AV-101 was compared to two positive controls, the classic NMDAR antagonist MK-801 (discontinued in preclinical development
by Merck due to neurotoxicity) and the anticonvulsant gabapentin. A significant drug response was defined as a response that was greater than or
equal to 2 standard deviations (SD) from the response produced by vehicle. Animal behavior and motor function were observed and evaluated
throughout the study.
In the formalin hyperalgesia model, MK-801 caused significant spontaneous locomotor activity that prevented assessment of its analgesic activity.
However, AV-101 displayed dose-dependent antihyperpathic effects in the absence of behavioral deficits for both Phase 1 (acute nociceptive pain)
and Phase 2 (chronic and neuropathic pain) of hyperalgesia. In contrast, gabapentin did not have a significant anti-hyperalgesia response at any dose
during Phase 1, but showed a significant positive response during Phase 2.
For the carrageenan inflammatory thermal hyperalgesia model, neither MK-801, gabapentin, nor AV-101 had an effect on acute thermal nociception,
but produced a dose dependent block of the carrageenan-induced hyperalgesia that were greater than 2 SD of the vehicle: There were no behavioral
changes observed at any AV-101 dose, but signs of behavioral and motor dysfunction were observed for gabapentin and MK-801 treated animals. The
profile of analgesic activity observed for AV-101 in the formalin and inflammatory thermal hyperalgesia model systems supports the conclusion that
AV-101 demonstrates anti-hyperalgesia activity in validated models of facilitated pain processing produced by peripheral tissue inflammation.
Epilepsy
AV-101 has been shown to protect against seizures and neuronal damage in animal models of epilepsy, providing preclinical support for its potential
as a novel treatment of epilepsy. Epilepsy is one of the most prevalent neurological disorders, affecting almost 1% of the worldwide population.
Approximately 2.5 million Americans have epilepsy. Nearly half of the people suffering from epilepsy are not effectively treated with currently
available medications. In addition, the anticonvulsants used today can cause significant side effects, which frequently interfere with compliance.
Glutamate is a neurotransmitter that is critically involved in the pathophysiology of epilepsy. Through its stimulation of the NMDAR subtype,
glutamate has been implicated in the neuropathology and clinical symptoms of the disease. In support of this, NMDAR antagonists are potent
anticonvulsants. However, classic NMDAR antagonists are limited by adverse effects, such as neurotoxicity, declining mental status, and the onset of
psychotic symptoms following administration of the drug. The endogenous amino acid glycine modulates glutamatergic neurotransmission by
stimulating the GlyB co-agonist site of the NMDA receptor. GlyB site antagonists inhibit NMDAR function and are therefore anticonvulsant and
neuroprotective. Importantly, GlyB site antagonists have fewer and less severe side effects than classic NMDAR antagonists and other antiepileptic
agents, making them a safer potential alternative to, and one expected to be associated with greater patient compliance than, available anticonvulsant
medications.
AV-101 has two additional therapeutically important properties as a drug candidate for treatment of epilepsy:
1.
AV-101 is preferentially converted to 7-Cl-KYNA in brain areas related to neuronal injury. This is because astrocytes, which are
responsible for the enzymatic transamination of 4-Cl-KYN prodrug to active 7-Cl-KYNA, are focally activated at sites of neuronal injury.
Due to AV-101’s highly focused site of conversion, local concentrations of newly formed 7-Cl-KYNA are greatest at the site of therapeutic
need. In addition to delivering the drug where it is needed, this reduces the chance of systemic and dangerous side effects with long-term
use of the drug; and
2.
An active metabolite of AV-101, 4-Cl-3-hydroxyanthranilic acid, inhibits the synthesis of quinolinic acid, an endogenous NMDAR
agonist that causes convulsions and excitotoxic neuronal damage.
AV-101’s ability to activate astrocytes for focal delivery of an anti-epileptic principle, and its dual action as a NMDAR GlyB antagonist and
quinolinic acid synthesis inhibitor, make AV-101 a potential Phase 2 development candidate for treatment of epilepsy.
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Parkinson’s Disease
AV-101 has been shown to activate ventral tegmental area (VTA) dopaminergic (DA) neurons. Kynurenic acid (KYNA) is an endogenous NMDA
receptor antagonist, as well as a blocker of the 7-nicotinic acid receptor. Mounting evidence suggests that this compound participates in the
pathophysiology of schizophrenia. Preclinical studies have shown that elevated levels of endogenous KYNA are associated with increased firing of
midbrain DA neurons. AV-101 is converted to the selective NMDAR GlyB antagonist 7-Cl-KYNA, which is 20 times more potent and selective
than KYNA in binding the GlyB site. Utilizing extra cellular single unit cell recording techniques, we have shown that AV-101, which is converted
to the selective NMDAR GlyB antagonist 7-Cl-KYNA, significantly increases the firing rate and percent burst firing activity of VTA DA neurons.
These results have potential therapeutic implications for Parkinson’s disease.
Huntington’s Disease
Working together with metabotropic glutamate receptors, the NMDAR ensures the establishment of long-term potentiation (LTP), a process believed
to be responsible for the acquisition of information. These functions are mediated by calcium entry through the NMDAR-associated channel, which
in turn influences a wide variety of cellular components, like cytoskeletal proteins or second- messenger synthases. However, over activation at the
NMDAR triggers an excessive entry of calcium ions, initiating a series of cytoplasmic and nuclear processes that promote neuronal cell death through
necrosis as well as apoptosis, and these mechanisms have been implicated in several neurodegenerative diseases.
Huntington’s disease (HD), a chronic neurodegenerative disorder, is caused by an expansion in the number of glutamine repeats beyond 35 at the
amino terminal end of a protein termed “huntingtin.” Such a mutation in huntingtin leads to a sequence of progressive cellular changes in the brain
that result in neuronal loss and other characteristic neuropathological features of HD. These are most prominent in the neostriatum and in the cerebral
cortex, but also observed in other brain areas.
The tissue levels of two neurotoxic metabolites of the kynurenine pathway of tryptophan degradation, quinolinic acid (QUIN) and 3-
hydroxykynurenine (3-HK) are increased in the striatum and neocortex, but not in the cerebellum, in early stage HD. QUIN and 3-HK and especially
the joint action of these two metabolites, have long been associated with the neurodegenerative and other features of the pathophysiology of HD. The
neuronal death caused by QUIN and 3-HK is due to both free radical formation and NMDA receptor overstimulation (excitotoxicity).
Based on the hypothesis that 3-HK and QUIN are involved in the progression of HD, early intervention aimed at affecting the kynurenine pathway
in the brain may present a promising treatment strategy. We believe the ability of AV-101 to reduce the brain levels of neurotoxic OUIN and to
potentially produce significant local concentrations of 7-Cl-KYNA on chronic administration, presents an exciting opportunity for Phase 2 clinical
investigation of AV-101 as a potential chronic treatment of HD.
Summary of Additional AV-101 Nonclinical Information
A comprehensive nonclinical pharmacology, pharmacokinetic (PK)/toxicokinetic (TK), and toxicology program has been conducted to support the
clinical use of AV-101 in multiple CNS-related indications. The primary pharmacological activity of AV-101 has been investigated in a series of
in
vitro and in vivo studies. Pharmacology (absorption, distribution, metabolism, and excretion), PK/TK, and toxicology studies have been conducted
with AV-101 in rats, dogs, and monkeys. The excellent safety profile of AV-101 was confirmed by pilot tolerability, single-dose range-finding, and
repeated-dose toxicology studies in rats, dogs and monkeys. The genotoxic potential of AV-101 and its active metabolite, 7-Cl-KYNA, was assessed
in multiple in vitro and in vivo genotoxicity studies (bacterial mutation, chromosomal aberration, mouse lymphoma TK+/-, and micronucleus tests).
The behavioral effects of AV-101 assessed in a Good Laboratory Practice (GLP) Irwin test in rats show it to have no adverse effect on the CNS
following single oral administration at doses up to 2,000 mg/kg. Although AV-101 inhibited the human ether à-go-go–related gene (hERG) current in
a dose-dependent manner (median concentration that causes 50% inhibition for the inhibitory effect [IC50] of 70.5 μM), its active metabolite, 7-Cl-
KYNA, showed no inhibitory effect on the hERG channel current. Electrocardiograms (ECGs) recorded during in vivo dog toxicology studies showed
no AV-101–related adverse cardiovascular effects. Furthermore, in a pivotal GLP dog 14-day toxicology study, no treatment-related effects on ECGs,
including QT interval and QTc, at dose levels up to 120 mg/kg/d. No evidence of any treatment-related adverse effects on the respiratory system has
been noted with AV-101.
Oral administration of AV-101 to Sprague-Dawley rats and mice was shown to result in rapid absorption of AV-101 (rats: time to maximum plasma
concentration [Tmax], approximately 0.25 to 0.5 hours), adequate bioavailability (rats: approximately 39% to 94%), and relatively short plasma
elimination half-life (rats: t1/2 approximately 1 to 3 hours). Furthermore, in rats 7-Cl-KYNA was detected in the plasma and reached the maximum
plasma concentration (Cmax) approximately 0.25 to 0.5 hours after oral administration, suggesting a rapid conversion of AV-101 to 7-Cl-KYNA.
Pharmacokinetic (PK) analyses were conducted in many of the toxicology studies in rats, dogs, and monkeys. These analyses showed that the AV-
101-related clinical signs observed in dogs (versus monkeys) were associated with a significantly higher or similar exposure (Cmax and area under the
curve [AUC]; single doses [equal to or greater than 50 mg/kg]; 2,000 mg/kg in monkeys). Furthermore, although AUC and Cmax values increased
non-proportionately with dose level in dogs, AUC values only marginally increased with dose in monkeys, with little change in Cmax values.
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Table of Contents
Low levels of potential metabolites of AV-101 were detected following in vitro incubations with hepatocytes from the mouse, rat, dog, monkey, and
humans. No appreciable conversion of AV-101 to D-4-Cl-KYN during these hepatocyte incubations was noted. Results from cytochrome P-450
(CYP) inhibition and induction studies showed that AV-101 was not a potent inhibitor or inducer of the human CYP isoforms evaluated.
Single-dose studies in rats and monkeys did not show clear evidence of toxicity at maximal doses of 2,000 mg/kg. In dogs, oral administration of AV-
101 resulted in CNS-related clinical signs, including decreased activity, abnormal gait/stance, ataxia, and prostration.
A repeated-dose (14-day) ocular toxicity study in Sprague-Dawley rats (unpigmented) and brown Norway rats (pigmented) at dose levels up to
2,000 mg/kg/d did not reveal any signs of retinal degeneration at any dose level or rat strain. A subsequent pivotal GLP 14-day repeated-dose
toxicity study in Sprague-Dawley rats showed no treatment-related ocular findings after daily dosing of AV-101 for 14 consecutive days at dose
levels up to 2,000 mg/kg/d.
A GLP 14-day repeated-dose CNS toxicity study conducted in dogs, at dose levels up to 100 mg/kg/d showed no treatment-related lesions in the
brain of any animal. The pivotal GLP 14-day repeated-dose toxicity study in Beagle dogs, also showed no treatment-related CNS findings after
daily dosing of AV-101 for 14 consecutive days at dose levels up to 120 mg/kg/d.
The genotoxic potential of AV-101 and 7-Cl-KYNA was assessed in multiple in vitro and in vivo genotoxicity studies (bacterial reverse mutation,
chromosomal aberration, mouse lymphoma TK+/-, and micronucleus tests), and the overall results confirmed that both AV-101 and 7-Cl-KYNA
are not mutagenic.
A rat Olney lesion study was conducted to assess the potential CNS toxicity. No lesions were observed in the brain after a single oral dose of AV-
101 at doses up to 2,000 mg/kg.
Nonclinical Pharmacology Studies
Primary Pharmacodynamics
Much of the nonclinical pharmacology information of AV-101 is derived from many published research results on L-4-Cl-KYN or 7-Cl-KYNA.
Primary pharmacodynamic studies conducted in rodent models for neuropathic pain demonstrated AV-101’s antihyperalgesic activity in models
of facilitated pain processing, its analgesic properties, its ability to provide neuroprotection from excitotoxic death, its ability to reduce seizures,
and its activity in multiple preclinical models of depression.
-8-
Nonclinical Absorption, Distribution, Metabolism and Excretion Studies
In rats, area under the concentration-time curve from time of dosing extrapolated to infinity (AUC0-∞) values were proportional to dose for AV-
101, but Cmax was less than proportional to dose, suggesting a saturation of absorption rate. 7-Cl-KYNA Cmax was less than proportional to
dose, and generally females tended to have a higher exposure to AV-101 than males, but no sex difference was noted for 7-Cl-KYNA exposure. In
the repeated-dose studies, D-4-Cl-KYN, L-4-Cl-KYN, and 7-Cl-KYNA mean area under the concentration-time curves from time of dosing to the
last sampling time (AUC0-t) and AUC0-∞ values were higher on Day 14 than on Day 1 in both sexes of most treatment groups, indicating that
exposure increased following daily repeated dosing of AV-101. Sex differences were noted for D-4-Cl-KYN and L-4-Cl-KYN, with mean AUC0-t
and AUC0-∞ estimates higher in females relative to males for most treatment groups. Conversely, mean AUC0-t and AUC0-∞ values of 7-Cl-
KYNA were generally higher in males relative to females.
In dogs, AUC0-∞ values were slightly less than proportional to dose up to 100 mg/kg AV-101 and Cmax values were less than proportional to
dose, suggesting a saturation of absorption. No consistent sex differences were noted for Cmax or AUC values. AUC0-∞ and Cmax values for 7-
Cl-KYNA were less than proportional to dose. In the repeated-dose study, D-4-Cl-KYN, L-4-Cl-KYN, and 7-Cl-KYNA showed a proportional
increase in Cmax with the administered dose level of AV-101 in both sexes. There was no evidence of plasma accumulation for any of the
analytes. Sex differences were noted for D-4-Cl-KYN, with slightly higher mean AUC0-t and AUC0-∞ estimates in females relative to males on
Day 1 and Day 14, in all treatment groups. For 7-Cl-KYNA, mean Cmax was elevated in females relative to males at all dose levels on Days 1 and
Day 14, and mean AUC0-t and AUC0-∞ estimates were also generally higher in females relative to males at all dose levels. No clear sex
differences were noted for L-4-Cl-KYN.
In monkeys, AUC0-∞ values were relatively proportional to dose, but Cmax values were not proportional to dose (comparable or lower Cmax with
increasing doses). The AUC0-∞ and Cmax values for 7-Cl-KYNA were less than proportional to dose, and no major sex differences were noted.
Nonclinical Toxicology Studies
The safety profile of AV-101 was determined in single-dose, range-finding, and repeated-dose toxicology studies in rats and dogs, and in a single-
dose study in monkeys. A GLP CNS safety pharmacology study in rats that included a microscopic evaluation for Olney lesions was also conducted.
Additionally, pivotal GLP 14-day repeated-dose toxicology studies in rats and dogs have been conducted. The genotoxic potentials of AV-101 and
7-Cl-KYNA were assessed in multiple in vitro and in vivo genotoxicity studies, including bacterial reverse mutation, chromosomal aberration,
mouse lymphoma TK+/-, and micronucleus tests. Neither were determined to be mutagenic.
Local tolerance studies have not been conducted with AV-101. However, no lesions in the gastrointestinal tract were observed after oral
administration of AV-101 in the repeated-dose toxicity studies in the rat and dog.
Based on all these studies and in accordance with the current FDA guideline and practices for selecting the starting dose of an investigational new
drug, the proposed maximum starting dose in humans will not exceed 1/10 the no observed adverse effect level (NOAEL) in the most sensitive
species, determined from the results of the rat and dog 14 day repeated-dose toxicology studies. The results of the pivotal 14-day studies show the
dog to be the most sensitive species. The dog NOAEL was determined to be the highest dose level (120 mg/kg/d), and therefore the maximum
recommended starting dose (MRSD) would be 6.5 mg/kg (12 mg/kg/d × 0.54 [conversion factor]) or 390 mg per subject for a 60-kg person. As a
further added margin of safety for the clinical use of AV-101, VistaGen applied an additional safety factor to the calculated MRSD, and set the
starting dose in the proposed Phase 1a clinical trial at 0.5 mg/kg (i.e., 30 mg for 60 kg subjects).
Summary of AV-101 Phase 1 Clinical Safety Studies
The safety data from two NIH-funded AV-101 clinical safety studies indicate that AV-101 was safe and well-tolerated at all three doses tested.
Overall, 57 AEs were reported by 34 subjects, with 17 AEs (29.8%) occurring in the placebo group. There was a higher rate of AEs reported from
subjects that received placebo than from subjects that received AV-101. A total of 40 AEs were reported by 24 of 37 (64.9%) subjects receiving AV-
101, and 17 AEs were reported by 10 of 13 (76.9%) subject receiving placebo. Additionally, 49 of the 57 total AEs (85.9%) were considered mild,
and the remaining 8 AEs (14.0%) were considered moderate. Of these AEs, headache was the most commonly reported preferred term. All of the
AEs were completely resolved.
Overall, the safety results indicate AV-101 is safe and well-tolerated in healthy subjects. Subjects receiving AV-101 reported a lower percentage of
AEs relative to subjects receiving placebo. Moreover, there were no AEs reported by subjects that received AV-101 that were graded as probably
related to study drug. The type and distribution of AEs reported by subjects in this study was considered to be typical for a study in healthy
volunteers.
A total of 40 AEs were reported by 24 of 37 (64.9%) subjects receiving AV-101, and 17 AEs were reported by 10 of 13 (76.9%) subject receiving
placebo. The frequency of AEs was similar among the treatment groups. Thirty-four subjects experienced a total of 57 AEs, with 16 (28.1% of the
total AEs) in the 360-mg group, 14 (24.6% of the total AEs) in the 1,040-mg group, 10 (17.5% of the total AEs) in the 1,440-mg group, and 17
(29.8% of the total AEs) in the placebo group. All of the AEs were completely resolved.
Although the Phase 1 safety and pharmacokinetic studies were not designed to measure or evaluate the potential antidepressant effects of AV-101,
approximately 9% (5/57) of the subjects receiving AV-101 and none of the 31 subjects receiving placebo reported “feelings of well-being” (coded as
euphoric mood), similar to the fast-acting antidepressant effects reported in the literature with ketamine.
-9-
Phase 1 Clinical Trials
Phase 1a Study (VSG-CL-101)
A phase 1a, randomized, double-blind, placebo-controlled study to evaluate the safety and pharmacokinetics of single doses of AV-101 in healthy
volunteers was conducted (VSG-CL-001). Seven cohorts (30, 120, 360, 720, 1,080, 1,440, and 1,800 mg) with six subjects per cohort (1:1, AV-101:
placebo) were to be enrolled in the study. For the first five cohorts (30, 120, 360, 710 and 1,080 mg) only two subjects were dosed at a time as a pair
(1:1, AV-101: placebo) on Day 1. The safety and tolerability of AV-101 in each pair of subjects was assessed by the investigator before proceeding to
the next pair within the dose cohort of the study. If no safety concerns were found after analysis of the laboratory samples, physical assessments, and
results of the neurological and ophthalmological examinations, the next two subjects in the cohort were dosed, but no sooner than 48 hours after the
previous pair of subjects. The next cohort was dosed when the investigator and medical monitor agreed that it was safe to proceed based on review of
the previous dose group’s preliminary safety information. In addition, PK assessments were to be reviewed for each cohort starting with the 720 mg
through the 1,800 mg dose cohort. A minimum of four evaluable subjects (two AV-101 and two placebo) were required for determination of
tolerability and safety of a dose level. The PK stopping criteria would be reached when the L-4-C1-KYN mean AUC 0-t reaches 900,486 ng·h/mL, or a
mean Cmax of 81,633 ng/mL, or a PK extrapolation predicts exceeding one of these values in the next cohort.
All the subjects from the 1,440 mg cohort were dosed during a single day (3 subjects receiving active drug and 3 subjects receiving placebo). The
safety and tolerability of AV-101 in the 1,440 mg dose cohort was to be assessed by the investigator and medical monitor before proceeding to the
1,800 mg dose cohort. If no safety concerns were found after analysis of the laboratory samples including the PK results, physical assessments, and
results of the neurological and ophthalmological examinations for the 1,440 mg cohort, the 1,800-mg cohort was to be dosed. However, the PK
stopping criteria were reached at the 1,440-mg cohort, and the study was stopped and did not proceed to the planned 1,800 mg cohort.
Phase 1a Study Pharmacokinetics Summary
Validated bioanalytical methods were used to measure plasma analyte concentrations. These assays had lower limits of quantification of 2 ng/mL for
7-Cl-KYNA and 5 ng/mL for L-4-Cl-KYN and D-4-Cl- KYN. Pharmacokinetic parameters were calculated by using WinNonlin Pro v. 5.2.
Parameters calculated included observed maximal concentration (Cmax), observed time to Cmax (Tmax), area under the concentration-time curve to
the last sample collected (AUC0-t) or extrapolated to infinity (AUC0-∞), and half-life (t1/2). Concentrations of all three analytes were measurable in
both plasma and urine after administration of each of the six dose levels: 30, 120, 360, 720, 1,080 and 1,440 mg.
Concentration-time data were obtained after dosing of the six cohorts. Three subjects received AV-101 and three received placebo in each cohort.
Plasma concentrations of L-4-Cl-KYN (AV-101) and 7-Cl-KYNA were obtained in addition to urine concentrations of these two analytes. Plasma and
urine concentrations of D-4-Cl-KYN also were determined, but will be reported only for the first two cohorts.
This study was conducted under dose escalation stopping criteria as determined by the FDA of L-4-Cl-KYN mean Cmax and AUC limits of 81,633
ng/mL and 900,486 ng∙h/mL, respectively. Although these criteria were not met for the mean data of the 1,440-mg dose, one subject had a Cmax that
was slightly greater than the limit of 81,633 ng/mL. Therefore, dose escalation to the planned seventh cohort of 1,800 mg of AV-101 did not occur in
this study. However, from a safety perspective, a maximum tolerable dose was not achieved. Also, maximum AUC values at the highest dose level
remained substantially lower than the limit.
Concentrations of all three analytes were measurable in both plasma and urine after administration of all dose levels, although many of the samples
from the 30-mg dose group had concentrations below the limit of quantification for 7-Cl-KYNA. Plasma concentration-time profiles were consistent
with rapid absorption of the oral dose and first-order elimination. The plasma concentration-time profiles were well defined for L-4-Cl-KYN at all
dose levels. Maximum concentrations occurred fairly rapidly, with individual values of Tmax ranging from 0.5 to 2 hours, with greater values tending
to be in the higher dose groups. Individual t1/2 values were fairly consistent within cohorts, and mean values ranged from 1.80 to 3.33 hours. Mean t1/2
values also tended to increase with increasing dose. Mean Cmax and AUC0-∞ values appeared to be approximately dose proportional except for those
of the highest dose group.
The 7-Cl-KYNA plasma concentration-time profiles were not well defined for the 30-mg dose. Most samples for the 30-mg dose cohort had
concentrations below the lower limits of quantification, and t1/2 values could not be calculated; however, profiles were sufficient after the 120-mg and
greater doses to calculate all parameters.
In general, 7-Cl-KYNA maximum concentrations occurred at the same time or later than those for L-4-Cl-KYN, as may be expected since 7-Cl-
KYNA is a metabolite of L-4-Cl-KYN. Individual values of Tmax ranged from 0.5 to 2 hours for both analytes. Individual 7-Cl-KYNA t 1/2 values
were fairly consistent within cohorts, and mean values ranged from 2.17 to 3.19 hours. Mean t1/2 values did not appear to be dose-related. Mean 7-Cl-
KYNA Cmax values were somewhat dose proportional for the two initial dose groups, but tended to increase in a more than dose-proportional
manner. Similarly, mean 7-Cl-KYNA AUC0-t values for all dose groups and AUC0-∞ values for dose groups of 120 mg or greater tended to increase in
a more than dose-proportional manner. Mean plasma concentrations of L-4-Cl-KYN (Figure 1) and 7-Cl-KYNA (Figure 2) are depicted for all six
cohorts.
-10-
As with the 120-mg dose cohort, the plasma concentration-time profiles were well defined for both L-4-Cl-KYN and 7-Cl-KYNA at the four higher
dose levels. Interestingly, the mean concentration-time profiles suggest that maximum concentrations were lower than expected, particularly for 7-Cl-
KYNA.
Figure-1. Mean plasma concentrations of L-4-Cl-KYN
after oral administration of a single dose of AV-101.
Figure 2. Mean plasma concentrations of 7-Cl-KYNA
after oral administration of a single dose of AV-101.
Assessment of Dose Proportionality
For L-4-Cl-KYN, mean Cmax and AUC0-∞ values appeared to be approximately dose proportional except for those of the highest dose group. These
values are presented by dose in Figure 3 (Cmax) and in Figure 5-4 (AUC0-∞) below. Figure 3 indicates that for L-4-Cl-KYN the mean Cmax values
are approximately dose linear and proportional up to a dose of 1,080 mg of AV-101. After a dose of 1,440 mg, the mean Cmax values increased only
8.8% while the dose increased by 33.3%. This is evident in the deviation of the graph from linearity at the highest dose.
Although the L-4-Cl-KYN mean Cmax values were not linear after the 1,080-mg dose, AUC0-∞ values are approximately linear and dose
proportional throughout the dose range. The nonlinearity of Cmax values at the highest dose could be a result of an outlier or simply variability in a
small number of subjects (Cmax values of 44,600, 54,900, and 89,500 ng/mL were observed after the dose of 1,040-mg AV-101), it suggests that
the rate or extent of absorption could be limited. The fact that AUC 0-∞ values were linear throughout the dose range suggests that the extent of
absorption was not a limitation, but the rate of absorption may be limited at doses above 1,080 mg.
-11-
The lack of linearity of the L-4-Cl-KYN mean Cmax values would be expected to have a similar effect on the 7-Cl-KYNA mean Cmax values.
Similarly, because the extent of absorption of L-4-Cl-KYN was linear throughout the dose range, exposure to 7-Cl-KYNA would be expected to
also be linear. Mean values of 7-Cl-KYNA are presented by dose in Figure 5 (Cmax) and in Figure 5-6 (AUC0-∞).
Figure 3. Mean Cmax values of L-4-Cl-KYN by dose of AV-101.
Figure 4. Mean AUC0-∞ values of L-4-Cl-KYN by dose of AV-101.
Figure 5. Mean Cmax values of 7-Cl-KYNA by dose of AV-101.
Figure 6. Mean AUC0-∞ values of 7-Cl-KYNA by dose of AV-101.
-12-
Phase 1a Safety Summary
Nine subjects experienced 10 AEs, with four of the AEs occurring in subjects in the placebo group and two of the AEs occurring for one subject
receiving 30 mg AV-101. For the AEs occurring in the AV-101–treated subjects, there were no meaningful differences in the number of AEs
observed at the 30-mg dose (2 AEs) when compared with that at the 120-mg dose (1 AE), 360-mg dose (1 AE), 720-mg dose (0 AEs), 1,080-mg
dose (0 AEs), or 1,440-mg dose (2 AEs). Eight of 10 AEs (80%) were considered mild, and two (20%, headache and gastroenteritis) were
considered moderate. Four subjects on AV-101, one each in Cohorts 1 through 4 and two subjects on placebo in Cohort 5 reported AEs of
headaches. Five headaches were mild with no concomitant treatment, and one was moderate with concomitant drug therapy administered. Most
completely resolved the same day as onset and were considered not serious. One headache started the day after dosing and resolved approximately
one week later on the same day as the concomitant drug therapy was administered. One case of contact dermatitis bilateral lower extremities was
reported in Cohort 2 on placebo that was ongoing. One of the subjects with the headache also reported an AE of gastroenteritis that was unrelated to
AV-101. This AE was considered moderate but did not require any drug therapy and was completely resolved within 2 days of onset. This AE was
also considered not serious.
Even though these safety studies were not designed to quantitatively assess effects on mood, during the interviews 2 out of 3 subjects who received
the highest dose (1440 mg) of AV-101, voluntarily acknowledged positive effects on mood. Similar comments were not made by any of the 18
placebo group subjects. One incident lasted approximately 15 minutes after study drug dosing, and the other event of euphoria lasted approximately
3 hours after study drug dosing. There were no other reported AEs for this cohort. The events resolved and were considered not serious.
Table 1. Summary of Adverse Events, Phase 1a
MedDRA SOC and
Preferred Term
Infections and
Infestations
Gastroenteritis
Nervous System
Disorders
Headache
Psychiatric Disorder
Euphoric mood
Skin and
Subcutaneous Tissue
Disorder
Dermatitis contact
Placebo
(n = 18)
0
(0%)
0
(0%)
1
(5.6%)
1
(5.6%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
Cohorts (mg)
30
(n = 3)
1
(33.3%)
1
(33.3%)
1
(33.3%)
1
(33.3%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
120
(n = 3)
0
(0%)
0
(0%)
1
(33.3%)
1
(33.3%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
360
(n = 3)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
720
(n = 3)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
1,080
(n = 3)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
1,440
(n = 3)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
2
(66.7%)
2
(66.7%)
0
(0%)
0
(0%)
Overall
(n = 36)
1
(2.8%)
1
(2.8%)
3
(8.3%)
3
(8.3%)
2
(5.6%)
2
(5.6%)
0
(0%)
0
(0%)
MedDRA = Medical Dictionary for Regulatory Activities; SOC = system organ class.
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Phase 1b Study (VSG-CL-102)
A Phase 1b clinical study was conducted as a single-site, dose-escalating study to evaluate the safety, tolerability, and PK of multiple doses of AV-
101 administered daily in healthy volunteers. The antihyperalgesic effect of AV-101 on capsaicin-induced hyperalgesia was also assessed. Subjects
were sequentially enrolled into one of three cohorts (360 mg, 1,080 mg, and 1,440 mg) and were randomized to AV-101 or placebo at a 12:4 (AV-
101 to placebo) ratio. Subjects were to have been dosed for 14 consecutive days. Each subject was given a paper diary and instructed to record daily
dose administration, concomitant medications, and AEs during the 14-day treatment period.
The safety and tolerability of AV-101 were assessed by evaluating AEs and by physical examinations, vital signs, and clinical laboratory tests
(chemistry and hematology assessments) that were performed on Days 1, 7 (±1 day), and 14. Blood sampling for PK was performed on Days 1, 2,
14, and 15. Additionally, ophthalmological examinations were performed at screening and Day 15. Physical examinations, including vital signs, 12-
lead electrocardiograms (ECGs), neurocognitive tests, and ataxia tests were performed on Day 1 and Day 14. Before proceeding to the next higher
dose, the following criteria were met:
·
·
Blinded safety and tolerability data were reviewed and assessed as being satisfactory by the investigator and medical monitor.
PK assessments were reviewed by the blinded Cato Research PK specialist to determine if the PK stopping criteria were reached.
The doses evaluated in this Phase 1b multi-dose study of AV-101 were based on results obtained in a previously conducted Phase 1a single-dose
study of AV-101 in healthy adults. The dose-escalation design was consistent with a standard scheme, and careful monitoring occurred to ensure the
safety of all subjects.
The minimum toxic dose was defined as the dose at which the stopping criteria were reached. For this study, the minimum toxic dose was to be (1)
the dose at which a drug-related serious adverse event (SAE) occurred in an AV-101–treated subject, or (2) the dose at which a severe AE that
warranted stopping the study, as determined by the investigator and medical monitor, occurred in an AV-101–treated subject within a cohort. The
minimum toxic dose was not reached in this study.
A total of 40 AEs were reported by 24 of 37 (64.9%) subjects receiving AV-101, and 17 AEs were reported by 10 of 13 (76.9%) subject receiving
placebo (Table 5-6). The frequency of AEs was similar among the treatment groups. Thirty-four subjects experienced a total of 57 AEs, with 16
(28.1% of the total AEs) in the 360-mg group, 14 (24.6% of the total AEs) in the 1,040-mg group, 10 (17.5% of the total AEs) in the 1,440-mg
group, and 17 (29.8% of the total AEs) in the placebo group. All of the AEs were completely resolved.
Table 2. Summary of Adverse Events (Phase 1b)
·Dose Cohorts
·
·
1,080 mg AV-
101
N = 13)
[n (%)]
·
·
360 mgAV-101
N = 12)
[n (%)]
·
·
1,440 mg AV-101
(N = 12)
[n (%)]
· Number of AEs
· Number of subjects with any
AE
· Number of SAEs
· Number of AEs resulting in
death
Number of AEs leading to
discontinuation of study drug
·16
·14
·10
·9 (75.0%)
·8 (61.5%)
·7 (58.3%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
·0 (0%)
AE = adverse event; SAE = serious adverse event.
·
·
Pooled Placebo
(N = 13)
·17
·10 (76.9%)
·0 (0%)
·0 (0%)
·1 (7.7%)
The majority of the reported AEs were nervous system disorders (23 subjects, 46% of subjects) and gastrointestinal disorders (7 subjects, 14.0%).
The remaining AEs were classified as eye disorders (3 subjects, 6.0%); psychiatric disorders (3 subjects, 6.0%); respiratory, thoracic, and
mediastinal disorders (3, 6.0%); skin and subcutaneous tissue disorders (3 subjects, 6.0%); general disorders and administration site conditions (2
subjects, 4.0%); cardiac disorders (1 subject, 2.0%); infections and infestations (1 subject, 2.0%); musculoskeletal and connective tissue disorders (1
subject, 2.0%); and renal disorders (1 subject, 2.0%).
The distribution of AEs by System Organ Class was similar among the cohorts with the exception of headaches and gastrointestinal disorders. Eight
of the 18 (44.4%) reported headaches were in the placebo group, 6 (33.3%) were in the 1,080-mg group, 3 (16.7%) were in the 1,440-mg group, and
1 (5.6%) was in the 360-mg group. Three (42.9%) of the 7 reported gastrointestinal disorders were in the 360-mg group, 2 (28.6%) were in the
placebo group, 1 (14.3%) was in the 1,080-mg group, and 1 (14.3%) was in the 1,440-mg group.
The determination of the relationship of the AE to the study drug was made when the data were blinded. Ten of the 15 AEs (66.7%) that occurred
in the 360-mg AV-101 group, 10 of the 14 AEs (71.4%) that occurred in the 1,040-mg AV-101 group, 7 of the 10 AEs (70.0%) that occurred in the
1,440-mg AV-101 group, and 13 of the 17 AEs (76.5%) that occurred in the placebo group were determined to be possibly related to study drug.
One (5.9%) AE in the placebo group was probably related to study drug (rash around neck). Of the 57 reported AEs, 49 (85.9%) were of mild
intensity and 8 (14.0%) were of moderate intensity. There were 2 moderate intensity AEs in the 360-mg AV-101 group; 1 was unrelated pain in the
right foot, and 1 was a possibly related headache. All other moderate AEs occurred in the placebo group and included nausea or vomiting (2 AEs),
headache (2 AEs), and rash around the neck (1 AE). No severe AEs were reported.
Even though these safety studies were not designed to quantitatively assess effects on mood, during the interviews one, out of 12-13 subjects who
received 360, 1080, and 1440 mg of AV-101, voluntarily acknowledged positive effects on mood. Similar comments were not made by any of the 13
placebo-group subjects.
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Phase 1b Pharmacokinetics Summary
Concentration-time data were obtained after dosing of the three cohorts. Plasma concentrations of L-4-Cl-KYN (AV-101) and the metabolite, 7-Cl-
KYNA, were obtained from subjects that received AV-101. PK parameters were calculated by using WinNonlin Pro Version 5.3. Parameters
calculated included Cmax, Tmax, AUC0-t, AUC0-∞, and t1/2.
Plasma concentration-time profiles obtained for L-4-Cl-KYN after administration of once-daily oral doses of 360, 1,080, or 1,440 mg AV-101 were
consistent with rapid absorption of the oral dose and first-order elimination of both L-4-Cl-KYN and 7-Cl-KYNA, with evidence of
multicompartment kinetics, particularly for the metabolite 7-Cl-KYNA. Several subjects had plasma concentration-time profiles with a last
measurable sample that appeared to be an outlier or suggested multicompartment kinetics, making it challenging to identify a terminal log-linear
elimination phase. Particularly for 7-Cl-KYNA, using the last two measurable samples to calculate t1/2 resulted in unrealistic values for some
subjects.
Plasma concentration-time profiles for L-4-Cl-KYN were more consistently single compartment, but several had a subtle multicompartment
appearance. To be consistent in the calculation of t1/2 and to report a meaningful value, the final three samples with measurable concentrations were
used to calculate t1/2 for subjects for whom those samples appeared to be log-linear. Otherwise, the last sample was essentially treated as an outlier,
and the prior samples in the log-linear phase were used to calculate t1/2 (these samples had a higher coefficient of determination value than the last
three samples). In addition, the AUC0-∞ values reported are calculated using the predicted last value rather than observed.
An absolute bioavailability evaluation is not possible from the data; however, an estimate of exposure can be done by comparing the AUC at the
same doses. The mean AUC 0-∞values in the Phase 1b study were higher at all three doses than seen in Phase 1a study, suggesting similar or even
higher bioavailability than that in the Phase 1a study, i.e ≥ 31%.
In conclusion, the PK of AV-101 was fully characterized across the range of doses in this study. Plasma concentration-time profiles obtained for L-
4-Cl-KYN (AV-101) and 7-Cl-KYNA after administration of a single and multiple, once daily oral doses of 360, 1,080, or 1,440 mg were consistent
with rapid absorption of the oral dose and first-order elimination of both analytes, with evidence of multi-compartment kinetics, particularly for the
metabolite 7-Cl-KYNA.
Phase 1 - Overall Safety Conclusions
The Phase 1a and Phase 1b safety data indicate that AV-101 was safe and well tolerated at all three doses tested. Overall, 57 AEs were reported by
34 subjects, with 17 AEs (29.8%) occurring in the placebo group. There was a higher rate of AEs reported from subjects that received placebo than
from subjects that received AV-101. A total of 40 AEs were reported by 24 of 37 (64.9%) subjects receiving AV-101, and 17 AEs were reported by
10 of 13 (76.9%) subject receiving placebo. Additionally, 49 of the 57 total AEs (85.9%) were considered mild, and the remaining 8 AEs (14.0%)
were considered moderate. Of these AEs, headache (nervous system disorder) was the most commonly reported preferred term. All of the AEs were
completely resolved.
Overall, the safety results indicate AV-101 is safe and well tolerated in healthy subjects. Subjects receiving AV-101 reported a lower percentage of
AEs relative to subjects receiving placebo. Moreover, there were no AEs reported by subjects that received AV-101 that were graded as probably
related to study drug. The type and distribution of AEs reported by subjects in this study was considered to be typical for a study in healthy
volunteers.
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A total of 40 AEs were reported by 24 of 37 (64.9%) subjects receiving AV-101, and 17 AEs were reported by 10 of 13 (76.9%) subject receiving
placebo (Table 5-6). The frequency of AEs was similar among the treatment groups. Thirty-four subjects experienced a total of 57 AEs, with 16
(28.1% of the total AEs) in the 360-mg group, 14 (24.6% of the total AEs) in the 1,040-mg group, 10 (17.5% of the total AEs) in the 1,440-mg
group, and 17 (29.8% of the total AEs) in the placebo group. All of the AEs were completely resolved.
Although the Phase 1 safety and pharmacokinetic studies were not designed to measure or evaluate the potential antidepressant effects of AV-101,
approximately 9% (5/57) of the healthy volunteer subjects receiving AV-101 and none of the 31 subjects receiving placebo reported “feelings of
wellbeing” (coded as euphoric mood), similar to the rapid-onset antidepressant effects reported in the literature with ketamine. Table 1 lists the
percent of adverse events reported by the subjects in each of the two Phase 1 studies and the number of events reported as euphoric mood per
number of subjects on placebo and AV-101.
Table 1. Reports of Well-Being (coded as Euphoric Mood) in Phase 1 Clinical Studies
· Phase 1a
· Nonserious Adverse Events
· Feelings of Well-being (coded as euphoric mood)
· Phase 1b
· Nonserious Adverse Events
· Feelings of Well-being (coded as euphoric mood)
· Phase 1a and 1b
· Feelings of Well-being (coded as euphoric mood)
N = number of subjects
Placebo
% of Adverse Events/N
AV-101
% of Adverse Events/N
22% (4/18)
0% (0/18)
77% (10/13)
0% (0/13)
0% (0/31)
28% (5/18)
11% (2/18)
65% (24/37)
8% (3/37)
9% (5/55)
The five events of feeling of well-being (coded as euphoric mood) occurred in one subject each at 360 (7%, 1 of 15 subjects) and 1,080 mg (6%, 1
of 16 subjects), and three subjects at 1,440 mg (20%, 3 of 15 subjects) in the Phase 1a and Phase 1b clinical studies. Four of the five subjects
reporting well-being/euphoric mood did not have any other adverse experiences, and one subject (1,080 mg) also reported a mild headache. These
results suggest a dose response and that AV-101 at the higher doses may lead to an increased positive mood.
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Stem Cell Technology
Overview
We believe better cells lead to better medicines™ and that the key to making better cells is precisely controlling the differentiation of human
pluripotent stem cells (hPSCs), which are the building blocks of all cells of the human body. Our stem cell technology platform is based on
proprietary and licensed technologies for controlling the differentiation of hPSCs and producing the multiple types of mature, non-transformed,
functional, adult human cells that we use, or plan to use, to reproduce complex human biology and disease and assess, in vitro, the potential
therapeutic benefits and safety risks of new chemical entities (NCEs)..
We have used our hPSC-derived cardiomyocytes (human heart cells we refer to as VSTA-CMs™) to design and develop CardioSafe 3D™, our
novel, customized in vitro bioassay system for predicting potential cardiotoxicity of new chemical entities (NCEs), including drug rescue
NCEs. We believe CardioSafe 3D is more comprehensive and clinically predictive than the hERG assay, currently the only in vitro cardiac safety
assay required by FDA guidelines. We use our stem cell-derived hepatocytes (human liver cells we refer to as VSTA-heps™) as the foundation of
LiverSafe 3D™, our second novel, customized bioassay system for predicting potential liver toxicity of new drug candidates, including potential
drug metabolism issues and adverse drug-drug interactions. VSTA-heps are highly-functional, non-transformed, and have the majority of the
functional properties of mature human hepatocytes. We believe our VSTA-heps have more functionally useful life-span in culture, and overcome
numerous problems related to commercially-available primary (cadaver) hepatocytes currently used in FDA-required in vitro hepatocyte assays for
drug metabolism. These commercially-available primary hepatocytes are generally in limited supply and the health status and genetic differences of
the donor are unknown. We believe our VSTA-CMs, VSTA-heps, CardioSafe 3D and LiverSafe 3D offer a new paradigm for evaluating and
predicting potential heart and liver toxicity of NCEs, including drug rescue NCEs, early in development, long before costly, high risk human clinical
trials.
Scientific Background
Stem cells are the building blocks of all cells of the human body. They have the potential to develop into many different mature cell types. Stem
cells are defined by a minimum of two key characteristics: (i) their capacity to self-renew, or divide in a way that results in more stem cells; and (ii)
their capacity to differentiate, or turn into mature, specialized cells that make up tissues and organs. There are many different types of stem cells that
come from different places in the body or are formed at different times throughout our lives, including pluripotent stem cells and adult or tissue-
specific stem cells, which are limited to differentiating into the specific cell types of the tissues in which they reside. We focus exclusively on human
pluripotent stem cells.
Human pluripotent stem cells (hPSCs) can be differentiated into all of the more than 200 types of cells in the human body, can be expanded readily,
and have diverse medical research, drug discovery, drug rescue, drug development and therapeutic applications. We believe hPSCs can be used to
develop numerous cell types, tissues and customized assays that can mimic complex human biology, including heart and liver biology for drug
rescue.
Human pluripotent stem cells are either embryonic stem cells (hESCs) or induced pluripotent stem cells (iPSCs). Both hESCs and iPSCs have the
capacity to be maintained and expanded in an undifferentiated state indefinitely. We believe these features make them highly useful research and
development tools and as a source of normal, functionally mature cell populations. We use multiple types of these mature cells as the foundation of to
design and develop novel, customized bioassay systems to test the safety and efficacy of NCEs in vitro. These cells also have potential for diverse
regenerative medicine applications.
Human Embryonic Stem Cells (hESCs)
According to the NIH, human embryonic stem cells are derived from excess embryos that develop from eggs that have been fertilized in an in vitro
fertilization (IVF) clinic and then donated for research purposes with the informed consent of the parental donors after a successful IVF procedure.
Human embryonic stem cells are not derived from eggs fertilized in a woman’s body. Human ESCs are isolated when the embryo is approximately
100 cells, well before organs, tissues or nerves have developed.
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Human embryonic stem cells have the potential to both self-renew and differentiate. They undergo increasingly tissue-restrictive developmental
decisions during their differentiation. These “fate decisions” commit the hESCs to becoming only a certain type of mature, functional cells and
ultimately tissues. At one of the first fate decision points, hESCs differentiate into epiblasts. Although epiblasts cannot self-renew, they can
differentiate into the major tissues of the body. This epiblast stage can be used, for example, as the starting population of cells that develop into
millions of blood, heart, muscle, liver and insulin-producing pancreatic beta-islet cells, as well as neurons. In the next step, the presence or absence of
certain growth factors, together with the differentiation signals resulting from the physical attributes of the cell culture techniques, induce the
epiblasts to differentiate into neuroectoderm or mesendoderm cells. Neuroectoderm cells are committed to developing into cells of the skin and
nervous systems. Mesendoderm cells are precursor cells that differentiate into mesoderm and endoderm. Mesoderm cells develop into muscle, bone
and blood, among other cell types. Endoderm cells develop into the internal organs such as the heart, liver, pancreas and intestines, among other cell
types.
Induced Pluripotent Stem Cells (hESCs)
It is also possible to obtain hPSC lines from individuals without the use of embryos. Induced pluripotent stem cells are adult cells, typically human
skin or fat cells that have been genetically reprogrammed to behave like hESCs by being forced to express genes necessary for maintaining the
pluripotential properties of hESCs. Although researchers are exploring non-viral methods, most early iPSCs were produced by using various viruses
to express three or four genes required for the immature pluripotential property similar to hESCs. It is not yet precisely known, however, how each
gene actually functions to induce cellular pluripotency, nor whether each of the three or four genes is essential for this reprogramming. Although
hESCs and iPSCs are believed to be similar in many respects, including their pluripotential ability to form all cells in the body and to self-renew,
scientists do not yet know whether they differ in clinically significant ways or have the same ability to self-renew.
We believe the biology and differentiation capabilities of hESCs and iPSCs are likely to be comparable for most if not all purposes. There are,
however, specific situations in which we may prefer to use one or the other type of hPSC. For example, we may prefer to use iPSCs for potential
drug discovery applications based on the relative ease of generating iPSCs from:
● individuals with specific inheritable diseases and conditions that predispose the individual to respond differently to drugs; or
● individuals with specific variations in genes that directly affect drug levels in the body or alter the manner or efficiency of their metabolism,
breakdown and/or elimination of drugs.
Because they can significantly affect the therapeutic and/or toxic effects of drugs, these genetic variations have an impact on drug discovery and
development. We believe iPSC technologies may allow the rapid and efficient generation of hPSCs from individuals with specific genetic variations.
These hPSCs might then be used to produce cells to model specific diseases and genetic conditions for drug discovery and drug rescue purposes.
Proprietary Stem Cell Differentiation Protocols
Over fifteen years of research, together with Dr. Gordon Keller, our co-founder and Chair of our Scientific Advisory Board, we have developed
proprietary differentiation protocols covering key conditions involved in the differentiation of hPSCs into multiple types of mature human cells. The
human cells generated by following these proprietary differentiation protocols are integral to our stem cell technology platform. We believe they
support more clinically-predictive in vitro bioassay systems than animal testing or cellular assays currently used in drug discovery and
development. Our strategic technology licenses from National Jewish Health in Denver, the Icahn School of Medicine at Mount Sinai in New
York and the University Health Network in Toronto relate to proprietary stem cell differentiation protocols developed by Dr. Keller and involve
precisely-coordinated temporal and quantitative conditions and interaction of biological molecules including the following:
● specific growth and differentiation factors used in the tissue culture medium, applied in specific combinations, at critical concentrations, and at
critical times unique to each desired human cell type;
● the experimentally controlled regulation of developmental genes, which is critical for determining what differentiation path a human cell will
take; and
● biological markers characteristic of precursor cells, which are committed to becoming specific human cells and tissues, and which can be used to
identify, enrich and purify the desired mature human cell type.
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We believe our bioassay systems will allow us to assess the toxicity profile of NCEs for a wide range of diseases and conditions with greater speed
and precision than nonclinical surrogate safety models most often currently used in drug development.
3D “Micro-Organ” Culture Systems
In addition to standard two-dimensional (2D) cultures which work well for some cell types and cellular assays, the proprietary hPSC technologies
underlying our stem cell technology platform enable us to grow large numbers of normal, non-transformed, mature human cells to produce novel in
vitro 3D “micro-organ” culture systems. For example, for CardioSafe 3D, we grow large numbers of normal, non-transformed, human heart cells in
vitro in 3D micro-organ culture systems. The 3D micro-organ cultures induce the cells to grow, mature, and develop 3D cell networks and tissue
structures. We believe these 3D cell networks and structures more accurately reflect the structures and biology inside the human body than traditional
flat, 2D, single cell layers grown on plastic, that are widely used by pharmaceutical companies today. We believe that the more representative human
biology afforded by the 3D system will yield responses to drug candidates that are more predictive of human drug responses.
Medicinal Chemistry
Medicinal chemistry involves designing, synthesizing, or modifying a small molecule compound or drug suitable for clinical development. It is a
highly interdisciplinary science combining organic chemistry, biochemistry, physical chemistry, computational chemistry, pharmacology, and
statistics. The combination of medicinal chemistry with the proprietary and licensed hPSC technologies underlying our stem cell technology platform
are core components of our drug rescue business model.
CardioSafe 3D
The limitations of current preclinical drug testing systems used by pharmaceutical companies contribute to the high failure rate of NCEs. According to
articles published in the Journal of Applied Toxicology, Stem Cell Research and Current Opinion in Cardiology, unexpected cardiotoxicity is one of
the top two major safety-related reasons for failure of both drugs and drug candidates. Incorporating novel in vitro assays using hPSC-derived
cardiomyocytes (hPSC-CMs) early in preclinical development offers the potential to improve clinical predictability, decrease development costs, and
avoid adverse patient effects, late-stage clinical termination, and product recall from the market.
With our proprietary stem cell differentiation technology, we produce fully-functional, non-transformed hPSC-CMs, which we refer to as VSTA-
CMs™, at a level of purity greater than 95% and with normal ratios of all important cardiac cell types. Importantly, our hPSC-CM differentiation
protocols do not involve either genetic modification or antibiotic selection. This is important because genetic modification and antibiotic selection can
distort the ratio of cardiac cell types and have a direct impact on the ultimate results and clinical predictivity of assays that incorporate hPSC-CMs
produced in such a manner. In addition to normal expression all of the key ion channels of the human heart (calcium, potassium and sodium) and
various cardiomyocytic markers of the human heart, our VSTA-CMs function reliably in all of our CardioSafe 3D cardiac toxicity assays, screening
for both direct cardiomyocyte cytotoxicity and arrhythmogenesis (or development of irregular beating patterns). We believe CardioSafe 3D is
sensitive, stable, reproducible and capable of generating data enabling a more accurate prediction of the in vivo cardiac effects of NCEs than is
possible with existing preclinical testing systems, particularly the hERG assay.
Limited Clinical Predictivity of the FDA-Required hERG Assay
The hERG assay, which uses either transformed hamster ovary cells or human kidney cells, is currently the only in vitro cardiac safety assay required
by FDA Guidelines (ICH57B). We believe the clinical predictivity of the hERG assay is limited because it assesses only a single cardiac ion channel -
the hERG potassium ion channel. It does not assess any other clinically relevant cardiac ion channels, including calcium, non-hERG potassium and
sodium ion channels. Also, importantly, the hERG assay does not assess the normal interaction between these ion channels and their regulators. In
addition, the hERG assay does not assess clinically-relevant cardiac biological effects associated with cardiomyocyte viability, including apoptosis
and other forms of cytotoxicity, as well as energy, mitochondria and oxidative stress. As a result of its limitations, results of the hERG assay can lead
to false negative and false positive predictions regarding the cardiac safety of new drug candidates.
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Broad Clinical Predictivity of CardioSafe 3D
As noted above, we have developed and validated two clinically-relevant functional components of our CardioSafe 3D screening system to assess
multiple categories of cardiac toxicities, including both direct cardiomyocyte cytotoxicity and arrhythmogenesis (or development of irregular beating
patterns). The first functional component of CardioSafe 3D consists of a suite of five fluorescence or luminescence based high-throughput hPSC-CM
assays. These five CardioSafe 3D assays measure the following important drug-induced cardiac biological effects:
1. cell viability;
2. apoptosis;
3. mitochondrial membrane depolarization;
4. oxidative stress; and
5. energy metabolism disruption.
These five CardioSafe 3D biological assays were correlated to reported clinical results using reference compounds known to be cardiotoxic in humans
versus compounds known to be safe in humans. These reference compounds were representative of eight different drug classes, including:
1. ion channel blockers: amiodarone, nifedipine;
2. hERG trafficking blockers: pentamidine, amoxapine;
3. α-1 adrenoreceptors: doxazosin;
4. protein and DNA synthesis inhibitors: emetine;
5. DNA intercalating agents: doxorubicin;
6. antibiotics: ampicillin, cefazolin;
7. NSAID: aspirin; and
8. kinase inhibitors: staurosporine.
This suite of five CardioSafe 3D cytotoxicity assays provided measurement of cardiac drug effects with high sensitivity that are consistent with the
expected cardiac responses to each of these compounds. Based on our results, we believe CardioSafe 3D provides valuable and far more
comprehensive bioanalytical tools for both assessing the effects of pharmaceutical compounds on cardiac cytotoxicity than the hERG assay and can
elucidate for us and our medicinal chemistry partner specific mechanisms of cardiac toxicity, thereby laying what we believe is a novel and
advantageous foundation for our drug rescue programs.
The other component of our CardioSafe 3D assay system is a sensitive and reliable medium throughput multi-electrode array (MEA) assay developed
to predict drug-induced alterations of electrophysiological function of the human heart, representing an integrated assessment of not only hERG
potassium ion channel activity analogous to the FDA-mandated hERG assay but, in addition, non-hERG potassium channels, and calcium channels
and sodium channels, which are well beyond the scope of the hERG assay. Functional electrophysiological assessment is a key component of
CardioSafe 3D, and has been validated with reported clinical results involving twelve drugs, each with known toxic or non-toxic cardiac effects in
humans. The twelve clinical correlation study compounds are as follows:
1. One FDA-approved drug (aspirin) without cardiac liability to serve as a negative control;
2. Five FDA-approved drugs (astemizole, sotalol, cisapride, terfenadine and sertindole) that were withdrawn from the market due
3.
to heart toxicity concerns;
Five FDA-approved drugs (fexofenadine, nifedipine, verapamil, lidocaine and propranolol) that have certain measurable non-
toxic cardiac effects consistent with clinical experience with such compounds. Note: fexofenadine is a non-cardiotoxic drug
variant of terfenadine; and
4. One research compound (E-4031) failed in Phase I human clinical study before being discontinued due to inducing heart
arrhythmias.
We have validated that CardioSafe 3D is capable of assessing important electrophysiological activity of drugs or new drug candidates, including
spike amplitude, beat period and field potential duration. Our CardioSafe 3D MEA assay, which we refer to as ECG in a test tube™, was
reproducible and consistent with the known human cardiac effects of all twelve compounds studied, based on the mechanisms of action and dosage of
the compounds. For instance, by using CardioSafe 3D, we were able to distinguish between the arrhythmogenic cardiac effects of terfenadine
(Seldane™), withdrawn by the FDA due to cardiotoxicity, and the cardiac effects of the closely structurally-related compound, fexofenadine
(Allegra™), a safe variant of terfenadine, which remains on the market. We believe our correlation data demonstrate that CardioSafe 3Dprovides
valuable and more comprehensive bioanalytical tools for in vitro cardiac safety screening than the hERG assay. We believe CardioSafe 3D will
contribute to our efficient and rapid identification of novel, potentially safer proprietary NCEs in our drug rescue programs.
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CardioSafe 3D, Going Far Beyond the hERG Assay
The table below reflects the broad cardiotoxicity screening capabilities CardioSafe 3D, which we believe go far beyond what is possible to assess in
vitro using the FDA-required hERG assay:
Detects cardiac effects mediated by:
hERG potassium ion channels
Other potassium ion channels
Calcium ion channels
Sodium ion channels
Interactions between ion channels
Channel regulatory proteins
Cell viability
Apoptosis
Mitochondria
Energy
Oxidative Stress
hERG assay
ü
CardioSafe 3D™
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
CardioSafe 3D Assessment of Kinase Inhibitor-Induced Cardiotoxicity
To further evaluate the potential of CardioSafe 3D to predict cardiac toxicity of drug candidates in vitro, including Drug Rescue Variants, we have
assessed cardiac effects induced by small molecule kinase inhibitors (KIs), which belong to a new category of drugs that have revolutionized cancer
therapy due to decreased systemic toxicity and an increased anti-tumor cell specific effect compared to classic cancer drugs. Since 1998, the FDA has
approved numerous small molecule KIs for cancer therapy. However, many of these FDA-approved KIs have been implicated in causing serious
adverse cardiac events in patients which were not identified during drug development using traditional preclinical testing systems.
In our KI-induced cardiotoxicity study, we evaluated well-known anti-cancer KIs with CardioSafe 3D, some of which are FDA-approved and have
been documented as cardiotoxic. This important validation set of anti-cancer KI compounds is as follows:
1. Inhibitors of growth factor receptors: sunitinib, axitinib, imatinib, dasatinib, sorafenib, erlotinib, lapatinib, tyrphostin and AG1478;
2. Inhibitors of the mTOR pathway: everolimus, temsirolimus;
3. Inhibitors of cell cycle regulators: tozasertib, barasertib, alvocidib;
4. Inhibitors of the PI3K pathway : perifosine, LY294002, XL765;
5. Inhibitors of the MEK pathway: PD325901, AZD6264; and
6. Inhibitors of the JAK and other pathways: lestaurtinib.
Our validation data indicate that CardioSafe 3D successfully detected cardiotoxicity induced by each of the representative compounds, consistent
with adverse cardiac events observed in the clinic. CardioSafe 3D assay system is able to distinguish between cardiotoxic and safe compounds, and
even between those compounds which inhibit the same kinase pathways. For instance, both sunitinib and axitinib inhibit VEGFR, PDGFR and c-Kit
pathways, whereas our CardioSafe 3D assays indicate that sunitinib is cardiotoxic and axitinib is safe, which is consistent with the reported clinical
outcomes.
Importantly, the CardioSafe 3D profile of each KI provided us clues to the potential biological mechanism(s) causing cardiac cytotoxicity. For
example, cardiac cytotoxicity induced by perifosine was most potent for producing apoptotic responses, while imatinib was most potent for
producing oxidative stress. In addition, no cardiac toxicity or alteration in electrophysiology was detected with drugs that do not have a cardiac
liability, emphasizing the specificity of CardioSafe 3D. Having information on the biological pathways associated with the cardiac cytotoxic effects
of compounds provides important clues for novel medicinal chemistry approaches and compound modifications for our CardioSafe 3D drug rescue
programs.
Another example of the capability of our CardioSafe 3D assay system enabling the sensitive measurement of drug effects that are consistent with
reported clinical responses are the results with sunitinib and dasatinib. CardioSafe 3D correctly identified that both compounds would cause QT
prolongation, arrhythmia, and/or altered contraction rates, which are consistent with clinical observations.
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We believe our CardioSafe 3D correlation data demonstrate that CardioSafe 3D will improve clinical predictivity as a more comprehensive and
clinically-relevant in vitro cardiac safety assay system than the hERG assay, helping not only to identify potential cardiac toxicities early in
development, but also to discover important potential biological mechanisms of cardiac cytotoxicity. We believe the results of our CardioSafe 3D
validation studies indicate that CardioSafe 3D may be effectively used to identify NCEs with reduced cardiotoxicity for our pipeline by providing
more accurate and timely indications of alterations in electrophysiological activity, as well as a more clinically relevant assessment of potential
cardiac biological effects of drug candidates contributing to cardiac cytotoxicity, than animal models or the hERG assay currently used by
pharmaceutical companies. We believe the results of our CardioSafe 3D validation studies support the central premise of our drug rescue business
model: by using our hPSC-derived human heart and liver cell bioassay systems at the front end of the drug development process, we have the
opportunity to take advantage of substantial prior investment by pharmaceutical companies and others in drug discovery and in vitro efficacy
optimization of still-promising drug candidates that have been terminated prior to FDA approval due to unexpected heart or liver toxicity concerns.
LiverSafe 3D
We refer to the highly-functional, non-transformed, mature hPSC-derived hepatocytes we produce as VSTA-heps™. VSTA-heps are the foundation of
LiverSafe 3D, a powerful new in vitro hepatotoxicity assay system that we believe goes a step beyond in vitro assays using commercially-available
primary (human cadaver cell-based) hepatocytes. By combining the flexibility of an in vitro, non-transformed human hepatocyte-based assay system
with genetically-consistent, functionally-reliable, and essentially unlimited production based on hPSCs, VSTA-heps, can be maintained in a healthy
state for much longer than the primary hepatocytes used in FDA-required drug metabolism assays, greatly enhancing the reliability and predictability
of our hepatotoxicity testing for our drug rescue programs.
Until now, reliable human cell-based hepatotoxicity screening platforms have been difficult to establish for high throughput drug development with
currently available primary hepatocyte systems. Commercially-available primary (cadaver) hepatocytes are in short supply, are genetically variable,
functionally inconsistent, and have a short lifespan in culture, during which they rapidly lose their drug metabolizing capabilities and develop signs of
cellular stress. Commercially-available primary hepatocytes also have significant batch-to-batch genetic and functional activity that varies widely
batch-to-batch. Primary hepatocytes are derived from individuals with significant genetic differences, unknown differences in health status, and
widely different drug exposures, each potentially contributing significant but unquantifiable effects on hepatocyte function, resulting in very large
unpredictable ranges of drug metabolism activity. Consequently, it is difficult to maintain reproducible quantitative measurements in drug testing
assays using currently available primary (cadaver) hepatocyte assays. This leads to limitations in the quality, reliability, and clinical predictivity of
the results and conclusions drawn assays based on primary (cadaver) hepatocytes.
We believe VSTA-heps overcome the foregoing limitations of primary hepatocytes. Our VSTA-heps are derived from the same hPSC line, are
genetically identical, normal, non-transformed (that is, not tumor-derived) human cells capable of being produced in essentially unlimited
supply. Importantly, VSTA-heps can be indefinitely produced and, we believe, frozen for storage into large, uniform, quality-controlled cell banks.
The table below reflects important characteristics of VSTA-heps compared to commercially-available primary hepatocytes used in FDA-required drug
metabolism studies:
Characteristics of in vitro hepatocyte assays:
Human cells
Liver enzyme activity
Within batch reproducibility
Batch-to-batch reproducibility
Long term culture
Maintenance of function in culture
Parental cells can be expanded into large batches
Uniform genetic background between batches
Uniform donor health status between batches
Gene “reporters” can be genetically inserted
Primary hepatocytes
ü
ü
ü
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VSTA-heps™
ü
ü
ü
ü
ü
ü
ü
ü
ü
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VSTA-heps and CYP3A4 Enzyme Expression for Drug Metabolism
In the past, the challenge to using hPSC-derived hepatocytes has been differentiating the stem cells into mature hepatocytes that express a full
complement of functional drug metabolizing enzymes, nuclear receptors, and transporters at least as well as primary hepatocytes. While many
groups have taken on this challenge in recent years, published reports indicate that current hPSC differentiation protocols yield immature hepatocytes,
especially with respect to extremely low expression of certain key adult drug metabolizing enzymes, such as CYP3A4. CYP3A4 is a critical liver
enzyme responsible for metabolizing approximately one-third of the FDA-approved drugs currently available on the market. It is an important and
well-accepted functional gene found almost exclusively in mature, adult hepatocytes. CYP3A4 is the key functional marker that we have used to
optimize our VSTA-hep differentiation cultures for LiverSafe 3D. We believe our optimized LiverSafe 3D assay system enables us to generate more
mature hPSC-derived hepatocytes than are currently available from others in the field and that our LiverSafe 3D system provides the unique ability to
specifically select for mature CYP3A4-expressing human hepatocytes.
We developed LiverSafe 3D using hPSC differentiation protocols adapted from the laboratory of our co-founder, Dr. Gordon Keller, and our
proprietary hPSC cell line, 3A4BLA. This 3A4BLA cell line is a hESC line that contains a humanized BLA “reporter” that is placed in the CYP3A4
gene in a manner resulting in the expression of BLA only in cells that also express CYP3A4. This allows us to visualize by fluorescence cells that
express CYP3A4 based on expression of the BLA reporter. By producing a cell line capable of tracking CYP3A4 expression, we have been able to
optimize our hPSC differentiation protocols to increase expression of mature hepatocyte markers and drug metabolizing enzymes and to enrich for
CYP3A4-expressing cells by cell sorting. However, even in the absence of cell sorting, our LiverSafe 3D hepatocyte populations contain greater than
80% albumin-positive cells and greater than 40% CYP3A4-positive cells, with CYP3A4 mRNA expression reaching levels nearly 60-fold higher than
side-by-side 38-week human fetal liver controls. Our VSTA-heps secrete urea and albumin, functional markers of hepatocytes, at levels that exceed
commercially-available primary (cadaver) hepatocytes. They also store both glycogen and lipids, which are additional characteristics required of
functional, mature adult hepatocytes. Importantly, expression of fetal liver markers decreases over the time course of maturation of our VSTA-
heps. This transition to a more mature state with decreased fetal gene expression is expected and essential for the production of adult functional
hepatocytes, but it has rarely been reported by others in publications describing their hPSC-derived hepatocytes. With the addition of cell sorting, our
VSTA-heps can be highly enriched for CYP3A4-BLA-positive cells, with CYP3A4 message in the positive cell population reaching greater than 30%
that of an adult human liver pool control. To our knowledge, this level of CYP3A4 expression exceeds levels reported by others in the literature.
The most important capabilities of LiverSafe 3D relate to “Phase I” and “Phase II” drug metabolism, which are functional characteristics of mature
adult hepatocytes. We have validated these capabilities of LiverSafe 3D by demonstrating its ability to metabolize known substrates, such as
testosterone, and its ability to respond properly to known inducers of Phase I-mediated CYP3A4 metabolism, such as rifampicin. Moreover, our
VSTA-heps demonstrate Phase II-mediated testosterone metabolism levels that exceed commercially-available primary hepatocytes. These functional
characteristics of mature adult hepatocytes are critical to the development of a reliable and clinically predictive hepatotoxicity screening platform for
our drug rescue programs. We are currently focused on expanding our panel of validation assays and compounds to include more P450 substrates,
inducers, and inhibitors, as well as adapting the cellular toxicity assays that have been developed for our CardioSafe 3D assay system to our
LiverSafe 3D assay system and to apply specific functional screening, such as albumin and urea secretion assays.
We believe LiverSafe 3D with VSTA-heps offers the capability of producing a genetically-identical, renewable, and reproducible hepatotoxicity assay
system for drug rescue and development that provides advantages over in vitro assays using commercially-available primary hepatocytes. In addition,
it offers the ability to produce hepatocyte assays that contain common genetic variations in drug metabolizing genes that are expressed in subsets of
individuals, and therefore drug development. We have demonstrated that our VSTA-heps, even in the absence of cell sorting, secrete adult hepatocyte
levels of albumin and urea and contain greater than 40% CYP3A4-positive cells, historically difficult to achieve in hPSC differentiation cultures. The
proprietary 3A4BLA cell line component of LiverSafe 3D allows us the unique opportunity to enrich CYP3A4-positive cells, resulting in CYP3A4
expression reaching greater than 30% of an adult human liver pool, and to the best of our knowledge, a level higher than described in current
literature. Most importantly, for drug rescue and development purposes, our VSTA-heps are the foundation of LiverSafe 3D and metabolize known
substrates and respond to known inducers in a manner expected only of mature adult hepatocytes, paving the way for our final validation of LiverSafe
3D system as a novel, clinically-relevant hepatotoxicity assay system that can improve clinical predictivity, decrease the cost of drug development,
reduce reliance on live animal studies, and improve drug safety.
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Using Stem Cell Technology to Produce and Develop Drug Rescue NCEs
We believe using CardioSafe 3D and LiverSafe 3D for our drug rescue programs is the highest-value near term commercial application of the human
cells we produce and the novel, customized bioassay systems we have designed and developed. Our drug rescue activities are focused on producing
for our internal pipeline proprietary, safer variants of still-promising NCEs previously discovered, optimized and tested for efficacy by
pharmaceutical companies and others but terminated before FDA approval due to unexpected heart toxicity or liver toxicity. Our drug rescue strategy
involves using CardioSafe 3D and LiverSafe 3D to assess the toxicity that caused certain NCEs available in the public to be terminated, and use that
biological insight to produce and develop a new, potentially safer, and proprietary NCEs for our pipeline. We believe the pre-existing public domain
knowledge base supporting the therapeutic and commercial potential of NCEs we target for our drug rescue programs will provide us with a valuable
head start as we launch each of our drug rescue programs. Leveraging the substantial prior investments by global pharmaceutical companies and
others in discovery, optimization and efficacy validation of the NCEs we identify in the public domain is an essential component of our drug rescue
strategy.
Our current drug rescue emphasis is on NCEs discontinued prior to FDA market approval due to unexpected cardiac safety concerns. By using
CardioSafe 3D to enhance our understanding of the cardiac liability profile of NCEs, biological insight not previously available when the NCEs were
originally discovered, optimized for efficacy and developed, we believe we can demonstrate preclincial proof-of-concept (POC) as to the efficacy and
safety of new, safer drug rescue NCEs in standard in vitro and in vivo models, as well as in CardioSafe 3D, earlier in development and with
substantially less investment in discovery and preclinical development than was required of pharmaceutical companies and others prior to their
decision to terminate the original NCE.
We have assessed, and established a CardioSafe 3D cardiotoxicity profile for several drug rescue candidates.
We are now preparing to commence our initial CardioSafe 3D drug rescue program. Our goal in each drug rescue program will be to produce a
proprietary drug rescue NCE and establish its preclinical POC, using standard preclinical in vitro and in vivo efficacy and safety models, as well as
CardioSafe 3D. In this context, POC means that the lead drug rescue NCE, as compared to the original, previously-terminated NCE, demonstrates
both (i) equal or superior efficacy in the same, or a similar, in vitro and in vivo preclinical efficacy models used by the initial developer of the
previously-terminated NCE before it was terminated for safety reasons, and (ii) significant reduction of concentration dependent cardiotoxicity in
CardioSafe 3D.
We believe our focus on producing proprietary drug rescue NCEs for our internal pipeline based on previously-terminated NCEs with therapeutic and
commercial potential established by others, and our ability to build on that valuable head start with our novel biological and electrophysiological
insight regarding cardiac effects of NCEs that we can generate with CardioSafe 3D, will help us and our medicinal chemistry partner produce and
optimize drug rescue NCEs without incurring many of the high costs and risks typically inherent in new drug discovery and preclinical development.
Although we plan to continue to identify NCEs for our drug rescue programs in the public domain, we may also seek to acquire rights to previously-
terminated, but still-promising, NCEs not available to us in the public domain by entering into contractual arrangements with third-parties.
Strategic Development and Commercialization of Drug Rescue NCEs
As a result of research and development productivity issues and diminishing product pipelines, as well as generic competition for established products
that are no longer patent protected, we believe there is and will continue to be a critical need among pharmaceutical companies to acquire or in-license
the new, safer drug rescue NCEs we are focused on producing and developing, including companies that originally discovered, developed and
ultimately discontinued the previously-terminated NCEs we select for drug rescue.
Once we optimize a patentable drug rescue NCE, we intend to develop it internally to establish preclinical POC in established in vitro and in vivo
efficacy and safety models, as well as in CardioSafe 3D. After we establish preclinical POC of a patentable drug rescue NCE, we will decide
between continuing to develop it internally and out-licensing it to a pharmaceutical company. If we license it to the pharmaceutical company, it will
be responsible for all subsequent development, manufacturing, regulatory approval, marketing and sale of the drug rescue NCE and we will
generate revenue through payments to us from the license upon signing the license agreement, achievement of development and regulatory
milestones, and, if approved and marketed, upon commercial sales, although no assurances can be given that we will seek and complete a
partnership, or that the terms of such a beneficial arrangement will be available or offered to us.
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Regenerative Medicine and Drug Discovery
Although we believe the best and most valuable near term commercial application of our stem cell technology platform is for small molecule drug
rescue, we also believe stem cell technology-based drug discovery and regenerative medicine has the potential to transform healthcare in the U.S.
over the next decade by providing new approaches for treating the fundamental mechanisms of disease. We currently intend to explore opportunities
to leverage our stem cell technology platform, our expertise in human biology, differentiation of human pluripotent stem cells to develop functional
adult human cells and tissues involved in human disease, including blood, bone, cartilage, heart and liver cells, and our expertise in designing and
developing novel, customized biological assay systems with the cells we produce, for regenerative medicine purposes, with emphasis on developing
novel human disease models for discovery of small molecule drugs with regenerative and therapeutic potential. Among our key objectives will be
to assess our regenerative medicine opportunities through exploratory nonclinical POC studies.
Strategic Transactions and Relationships
Strategic collaborations are an important cornerstone of our corporate development strategy. We believe that our strategic outsourcing and
sponsorship of application-focused research gives us flexible access to medicinal chemistry, hPSC research and development, manufacturing, clinical
development and regulatory expertise at a lower overall cost than developing and maintaining such expertise internally. In particular, we collaborate
with the types of third parties identified below for the following functions:
● academic research institutions, such as the University Health Network (UHN) for hPSC technology research and development;
● contract medicinal chemistry companies, such as Synterys, Inc., to design, produce and analyze drug rescue NCEs; and
● contract clinical development and regulatory organizations (CROs), such as Cato Research, Ltd., for regulatory expertise and clinical
development support.
Cato Research
Cato Research is a CRO with international resources dedicated to helping biotechnology and pharmaceutical companies navigate the regulatory
approval process in order to bring new biologics, drugs and medical devices to markets throughout the world. Cato Research is our CRO for
development of AV-101. Cato Research has in-house capabilities to assist its sponsors with aspects of the drug development process including
regulatory strategy, nonclinical and toxicology development, clinical development, data processing, data management, statistical analysis, regulatory
applications, including INDs and NDAs, chemistry, manufacturing, and control programs, cGCP, cGLP and cGMP audit and compliance activities,
and due diligence review of emerging technologies. Cato Research’s senior management team, including co-founders Allen Cato, M.D., Ph.D. and
Lynda Sutton, has over 25 years of experience interacting with the FDA and international regulatory agencies and a successful track record of product
approvals. Based on our long-term working relationship with Cato Research in connection with the development of AV-101, should we elect to
advance development of Drug Rescue Variants internally, as we have done with AV-101, rather than license or sell them to pharmaceutical
companies or others, we believe our long term strategic relationship with Cato Research provides us with real time access to the global connections,
insight and knowledge necessary to effectively plan, execute and manage successful nonclinical and clinical development programs throughout the
world without incurring the substantial expenses typically associated with establishing and maintaining a wide range of drug development capabilities
in-house.
Cato BioVentures
Cato Holding Company, doing business as Cato BioVentures (Cato BioVentures), is the venture capital affiliate of Cato Research. Through strategic
CRO service agreements with Cato Research, Cato BioVentures invests in therapeutics and medical devices, as well as platform technologies such as
our stem cell technology-based Human Clinical Trials in a Test Tube platform, which its principals believe, based on their experience as management
of Cato Research, are capable of transforming the traditional drug development process and the research and development productivity of the
biotechnology and pharmaceutical industries.
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As a result of the access Cato Research has to potential drug rescue NCEs from its biotechnology and pharmaceutical industry network, as well as
Cato BioVentures’ strategic long term equity interest in the Company, we believe that our relationships with Cato BioVentures and Cato Research
may provide us with unique opportunities relating to our drug rescue efforts that will permit us to leverage both their industry connections and the
CRO resources of Cato Research, either on a contract research basis or in exchange for economic participation rights, should we develop drug
rescue NCEs s internally rather than out-license them to strategic partners.
University Health Network, McEwen Centre for Regenerative Medicine
University Health Network (UHN) in Ontario, Canada is a major landmark in Canada’s healthcare system. UHN is one of the world’s largest research
hospitals, with major research in transplantation, cardiology, neurosciences, oncology, surgical innovation, infectious diseases and genomic medicine.
The McEwen Centre for Regenerative Medicine (McEwen Centre) is a world-renowned center for stem cell biology and regenerative medicine and a
stem cell research facility affiliated with UHN. Dr. Gordon Keller, our co-founder and Chairman of our Scientific Advisory Board, is Director of the
McEwen Centre. Dr. Keller’s lab is considered one of the leaders in successfully applying principles from the study of developmental biology of
many animal systems to the differentiation of pluripotent stem cell systems, resulting in reproducible, high-yield production of human heart, liver,
blood and vascular cells. The results and procedures developed in Dr. Keller’s lab are often quoted and used by academic scientists worldwide.
In September 2007, we entered into a long-term sponsored stem cell research and development collaboration with UHN. In December 2010, we
extended the collaboration to September 2017. The primary goal of this ten-year collaboration is to leverage the stem cell research, technology and
expertise of Dr. Gordon Keller to develop and commercialize industry-leading human pluripotent stem cell differentiation technology and bioassay
systems for drug rescue and development and regenerative cell therapy applications. This sponsored research collaboration builds on our existing
strategic licenses from National Jewish Health and the Icahn School of Medicine at Mount Sinai to certain pluripotent stem cell technologies
developed by Dr. Keller, and is directed to diverse human pluripotent stem cell-based research projects, including, as expanded and amended,
strategic projects related to drug rescue and regenerative medicine. See “Sponsored Research Collaborations and Intellectual Property Rights –
University Health Network, McEwen Centre for Regenerative Medicine, Toronto, Ontario”, “Intellectual Property – National Jewish Health Exclusive
Licenses” and “Intellectual Property – Icahn School of Medicine at Mount Sinai Exclusive Licenses.”
Cardiac Safety Research Consortium
We have joined the Cardiac Safety Research Consortium (CSRC) as an Associate Member. The CSRC, which is sponsored in part by the FDA, was
launched in 2006 through an FDA Critical Path Initiative Memorandum of Understanding with Duke University to support research into the
evaluation of cardiac safety of medical products. CSRC supports research by engaging stakeholders from industry, academia, and government to share
data and expertise regarding several areas of cardiac safety evaluation, including novel stem cell-based approaches, from preclinical through post-
market periods.
Cardiac Safety Technical Committee of the Health and Environmental Sciences Institute – FDA’s CIPA Initiative
We have also joined the Cardiac Safety Technical Committee, Cardiac Stem Cell Working Group, and Proarrhythmia Working Group of the Health
and Environmental Sciences Institute (HESI) to help advance, among other goals, the FDA’s Comprehensive In Vitro Proarrhythmia Assay (CIPA)
initiative, which is focused on developing innovative preclinical systems for cardiac safety assessment during drug development. HESI is a global
branch of the International Life Sciences Institute (ILSI), whose members include most of the world’s largest pharmaceutical and biotechnology
companies.
The goal of the FDA’s CIPA initiative is to develop a new paradigm for cardiac safety evaluation of new drugs that provides a more comprehensive
assessment of proarrhythmic potential by (i) evaluating effects of multiple cardiac ionic currents beyond hERG and ICH S7B Guidelines (inward and
outward currents), (ii) providing more complete, accurate assessment of proarrhythmic effects on human cardiac electrophysiology, and (iii) focusing
on Torsades de Pointes proarrhythmia rather than surrogate QT prolongation alone.
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Centre for Commercialization of Regenerative Medicine
The Toronto-based Centre for Commercialization of Regenerative Medicine (CCRM) is a not-for-profit, public-private consortium funded by the
Government of Canada, six Ontario-based institutional partners and more than 20 companies representing the key sectors of the regenerative medicine
industry. CCRM supports the development of foundational technologies that accelerate the commercialization of stem cell- and biomaterials-based
products and therapies.
In December 2012, we formalized our membership in the CCRM’s Industry Consortium. Other members of CCRM’s Industry Consortium include
such leading global companies as Pfizer, GE Healthcare and Lonza. The industry leaders that comprise the CCRM consortium benefit from
proprietary access to certain licensing opportunities, academic rates on fee-for-service contracts at CCRM and opportunities to participate in large
collaborative projects, among other advantages. Our CCRM membership reflects our strong association with CCRM and its core programs and
objectives, both directly and through our strategic relationships with Dr. Gordon Keller and UHN. We believe our long-term sponsored research
agreement with Dr. Keller, UHN and UHN’s McEwen Centre offers a solid foundation and unique opportunities for expanding the commercial
applications of our stem cell technology platform by building multi-party collaborations with CCRM and members of its Industry Consortium. We
believe these collaborations have the potential to transform medicine and accelerate significant advances in human health and wellness that stem cell
technologies and regenerative medicine promise.
United States National Institutes of Health
Since our inception in 1998, the U.S. National Institutes of Health (NIH) has awarded us $11.3 million in non-dilutive research and development
grants, including $2.3 million to support research and development of our stem cell technology platform and $8.8 million for nonclinical and Phase 1
clinical development of AV-101.
United States National Institute of Mental Health
The U.S. National Institute of Mental Health (NIMH), part of the NIH, is the largest scientific organization in the world dedicated to mental health
research. NIMH is one of 27 Institutes and Centers of the NIH, the world’s leading biomedical research organization. The mission of NIMH is to
transform the understanding and treatment of mental illnesses through basic and clinical research, paving the way for prevention, recovery and cure.
In February 2015, we entered into a Cooperative Research and Development Agreement with the NIH providing for an AV-101 Phase 2 efficacy and
safety study to be conducted at the NIMH by Dr. Carlos Zarate and fully-funded by the NIH. Dr. Zarate is the NIMH’s Chief of Experimental
Therapeutics & Pathophysiology Branch and Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
Synterys, Inc.
We have entered into a strategic medicinal chemistry collaboration agreement with Synterys, Inc. (Synterys), a medicinal chemistry and collaborative
drug discovery company. We believe this important collaboration will further our drug rescue initiatives with the support of Synterys’ medicinal
chemistry expertise. In addition to providing flexible, real-time contract medicinal chemistry services in support of our drug rescue programs, we
anticipate potential collaborative opportunities with Synterys wherein we may jointly identify and develop drug rescue NCEs.
Intellectual Property
AV-101
We have developed a portfolio of intellectual property assets around AV-101 that involves both patents and trade secrets. We obtained a multi-patent
license to certain pharmaceutical formulations of AV-101 and related compounds when we acquired the original licensee, Artemis Neuroscience, Inc.
A composition and therapeutic method patent relevant to AV-101 was originally issued to Merrell Pharmaceuticals and expired in 2011. In early
2013, we filed a provisional application based on discoveries related to specific dosages and dosage ranges of AV-101, as well as to methods of
treating depression and hyperalgesia pain. This case is now pending as a PCT application, and, for example, includes the following claim:
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1. A pharmaceutical composition that per unit dose consists essentially of L-4-chlorokynurenine in an amount of about 360, 1,080 or 1,440
mg, together with pharmaceutically acceptable ingredients such as carriers and excipients.
This PCT patent application also presents method-of-use claims associated with such dosages. And it includes other claims based on discoveries
related to novel clinical activities that are not limited by dose range, for example:
4. A method of treating depression by administering a therapeutically effective amount of L-4-chlorokynurenine.
6. A method of treating hyperalgesia by administering a therapeutically effective amount of L-4-chlorokynurenine.
11. A method for reducing L-DOPA associated dyskinesias comprising the administration of a therapeutically effective amount of 7-
chlorokynurenine.
In the course of our research and development prior to our Phase 1 clinical studies, our CROs developed two novel methods of synthesizing AV-101,
based on extensive research into a range of synthetic routes. As a result, in 2013, we filed two additional provisional applications to these
commercially useful production methods, both of which are also now pending as PCT patent applications (WO2014/152752 and WO2014/152835).
One of these two PCT patent applications includes pharmaceutical composition claims to a sulfated derivative of 4-chlorokynurenine.
A fourth patent application related to additional and expanded clinical uses of AV-101 was recently filed in the U.S. as a provisional application.
We plan to pursue national phase applications broadly for all three pending cases in appropriate global markets.
In addition, among the key components of our commercial protection strategy with respect to AV-101 is the New Drug Product Exclusivity provided
by the FDA under section 505(c)(3)(E) and 505(j)(5)(F) of the Federal Food, Drug, and Cosmetic Act ( FDCA). The FDA’s New Drug Product
Exclusivity is available for new chemical entities (NCEs) such as AV-101, which, by definition, are innovative and have not been approved
previously by the FDA, either alone or in combination. The FDA’s New Drug Product Exclusivity protection provides the holder of an FDA-
approved new drug application (NDA) up to five (5) years of protection from new competition in the U.S. marketplace for the innovation represented
by its approved new drug product. This protection precludes FDA approval of certain generic drug applications under section 505(b)(2) of the
FDCA, as well certain abbreviated new drug applications (ANDAs), during the up to five-year exclusivity period, except that such applications may
be submitted after four years if they contain a certification of patent invalidity or non-infringement.
Our license agreement related to AV-101 with the University of Maryland requires us to make royalty payments on 2% of net sales of products
covered by the licensed patent rights, which have expired. Additionally, the license agreement requires us to pay a 1% royalty on net sales of
combination products covered by the patent rights, which have expired. There are no license, milestone or maintenance fees under the agreement.
The agreement provides that these royalty obligations will remain in force until 10 years after the first commercial sale of the first product even if
the licensed patent rights have expired. However, the U.S. Supreme Court’s recent decision in Kimble v. Marvel Entertainment, LLC determined
that patent license royalties that extend beyond a patent’s expiration are not enforceable. Management will be reviewing the impact of this court
decision on our license. This agreement may also be terminated earlier at the election of the licensor upon our failure to pay any monies due, our
failure to provide updates and reports to the licensor, our failure to provide the necessary financial and other resources required to develop the
products, or our failure to cure within 90 days any breach of any provision of the agreement. We may also terminate the agreement at any time upon
90 days’ written notice so long as we make all payments due through the effective date of termination.
Stem Cell Technology
We have established intellectual property rights to stem cell technology through a combination of exclusive and non-exclusive licenses, patents, and
trade secrets. To our knowledge, we are the first stem cell company focused on stem cell technology-based drug rescue. We have assembled an
intellectual property portfolio around the use of pluripotent stem cell technologies in drug discovery and development and with specific application to
drug rescue. The differentiation protocols we have licensed direct the differentiation of pluripotent stem cells through:
● a combination of growth factors (molecules that stimulate the growth of cells);
● the experimentally controlled regulation of developmental genes, which is critical for determining what differentiation path a human cell will
take; and
● precise selection of immature cell populations for further growth and development.
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By influencing key branch points in the cellular differentiation process, our pluripotent stem cell technologies can produce fully differentiated, non-
transformed, highly functional human cells in vitro in an efficient, highly pure and reproducible process.
As of the date of this report, we either own or exclusively license six issued U.S. patents and four U.S. patent applications, and certain foreign
counterparts, relating to stem cell technologies associated with the cells we produce, as well as three international Patent Cooperation Treaty
(PCT) patent applications and one U.S. patent application relating to AV-101.
Licenses
National Jewish Health (NJH) Exclusive License
We have exclusive licenses to seven issued U.S. patents held by NJH, certain of which were not essential to our current operations and which expired
in November 2014. No foreign counterparts to these U.S. patents and patent application have been obtained. These U.S. patents contain claims
covering composition of matter relating to specific populations of cells and precursors, methods to produce such cells, and applications of such cells
for ES Cell-derived immature pluripotent precursors of all the cells of the mesoderm and endoderm lineages. Among other cell types, this covers cells
of the heart, liver, pancreas, blood, connective tissues, vascular system, gut and lung cells.
This license agreement requires us to pay NJH 1% of our total revenues up to $30 million in each calendar year and 0.5% of all revenues for amounts
greater than $30 million, with minimum annual payments of $25,000. Additionally, this license agreement requires us to make certain royalty
payments on sales of products based on NJH’s patents or the sublicensing of such technology. However, the license agreement also includes anti-
stacking provisions which reduce our payment obligations by a percentage of any royalty payments and fees paid to third parties, who have licensed
necessary intellectual property to us. This agreement remains in force for the life of the patents so long as neither party elects to terminate the
agreement upon the other party’s uncured breach or default of an obligation under the agreement. We also have the right to terminate the agreement
at any time without cause.
Icahn School of Medicine at Mount Sinai School (MSSM) Exclusive License
We have an exclusive, field restricted, license to two U.S. patents and two U.S. patent applications, and their foreign counterparts filed by MSSM.
Foreign counterparts have been filed in Australia (two), Canada (two), Europe (two), Japan (two), Hong Kong and Singapore. Two of the U.S.
applications have been issued and the foreign counterparts in Australia and Singapore have been issued, while the two counterparts in Europe are
pending. These patent applications have claims covering composition of matter relating to specific populations of cells and precursors, methods to
produce such cells, and applications of such cells, including:
● the use of certain growth factors to generate mesoderm (that is, the precursors capable of developing into cells of the heart, blood system,
connective tissues, and vascular system) from hESCs;
● the use of certain growth factors to generate endoderm (that is, the precursors capable of developing into cells of the liver, pancreas, lungs, gut,
intestines, thymus, thyroid gland, bladder, and parts of the auditory system) from hESCs; and
● applications of cells derived from mesoderm and endoderm precursors, especially those relating to drug discovery and testing for applications
in the field of in vitro drug discovery and development applications.
This license agreement requires us to pay annual license and patent prosecution and maintenance fees and royalty payments that vary based on product
sales and services that are covered by the MSSM patent applications, as well as for any revenues received from sublicensing. Any drug candidates
that we develop, including any drug rescue NCEs, will only require royalty payments to the extent they require the practice of the licensed
technology. To the extent we incur royalty payment obligations from other business activities, the royalty payments are subject to anti-stacking
provisions which reduce our payments by a percentage of any royalty payments or fees paid to third parties who have licensed necessary intellectual
property to us. The license agreement will remain in force for the life of the patents so long as neither party terminates the agreement for cause (i) due
to a material breach or default in performance of any provision of the agreement that is not cured within 60 days or (ii) in the case of failure to pay
amounts due within 30 days.
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Our Patents
We have filed two U.S. patent applications on liver stem cells and their applications in drug development relating to toxicity testing; one patent has
issued and a second patent application is pending. Of the related international filings, European, Canadian and Korean patents were issued. The
European patent has been registered in 11 European countries. We have filed a U.S. patent application, with foreign counterpart filing in Canada and
Europe, directed to methods for producing human pluripotent stem cell-derived endocrine cells of the pancreas, with a specific focus on beta-islet
cells, the cells that produce insulin, and their uses in diabetes drug discovery and screening.
The material patents currently related to the generation of human heart and liver cells for use in connection with our drug rescue activities are set forth
below:
Territory
US
US
US
Patent No.
7,763,466
7,955,849
8,143,009
General Subject Matter
Method to produce endoderm cells
Method of enriching population of mesoderm cells
Toxicity typing using liver stem cells
Expiration
May 2025
May 2023
June 2023
With respect to AV-101, we have filed four new patent applications, as noted above.
Trade Secrets
We rely, in part, on trade secrets for protection of some of our intellectual property. We attempt to protect trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they
assign to us their interests in patents and copyrights arising from their work for us.
Sponsored Research Collaborations and Intellectual Property Rights
University Health Network, McEwen Centre for Regenerative Medicine, Toronto, Ontario
We have a long-term strategic stem cell research collaboration with our co-founder, Dr. Gordon Keller, Director of the UHN’s McEwen Centre,
focused on, among other things, developing improved methods for differentiation of cardiomyocytes (heart cells) from pluripotent stem cells, and
their uses in biological assay systems for drug discovery and drug development, including drug rescue. Pursuant to our sponsored research
collaboration agreement with UHN, we have the right to acquire exclusive worldwide rights to any inventions arising from studies we sponsor, under
pre-negotiated license terms. Such pre-negotiated terms provide for royalty payments equal to 3% of the first $25.0 million of certain revenues
received under the agreement, and 2% thereafter, based on product sales that incorporate the licensed technology and milestone payments based on
the achievement of certain events. Any drug rescue NCEs that we develop will not incorporate the licensed technology and, therefore, will not require
any royalty payments. To the extent we incur royalty payment obligations from other business activities, the royalty payments will be subject to anti-
stacking provisions, which reduce our payments by a percentage of any royalty payments paid to third parties who have licensed necessary
intellectual property to us. These licenses will remain in force for so long as we have an obligation to make royalty or milestone payments to UHN,
but may be terminated earlier upon mutual consent, by us at any time, or by UHN for our breach of any material provision of the license agreement
that is not cured within 90 days.
The sponsored research collaboration agreement (SRCA) with UHN, as amended, has a term of ten years, ending on September 18, 2017. We are
currently in discussions with Dr. Keller and UHN regarding the scope of our future sponsored research projects under the agreement. The ten-year
term of the agreement is subject to renewal upon mutual agreement of the parties. The agreement may be terminated earlier upon a material breach by
either party that is not cured within 30 days. UHN may elect to terminate the agreement if we become insolvent or if any license granted pursuant to
the agreement is prematurely terminated. We have the option to terminate the agreement if Dr. Keller stops conducting his research or ceases to work
for UHN.
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UHN Licenses for Stem Cell Culture Technology
In October 2011, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed
rights to a patent application entitled “Methods for enriching pluripotent stem cell derived cardiomyocyte progenitor cells and cardiomyocyte (heart)
cells based on SIRPA expression” covered by U.S. Provisional 61/377,665 and WO/2012/024782 applications, and any future patent application
claiming priority from these. This technology has identified a heretofore unknown cell surface protein, SIRPA (signal-regulatory protein alpha) that
is expressed by early immature precursor for cardiomyocytes. Antibodies specific to SIRPA allow the identification and enrichment of these early
cardiomyocyte precursors, which we believe will provide benefits in terms of purity, functionality and reproducibility for not only CardioSafe 3D in
vitro safety assays for drug screening and development, but also potentially for production of cardiomyocytes for cell therapy and regenerative
medicine applications.
In April 2012, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. The licensed technology may be used
to develop hematopoietic precursor stem cells from human pluripotent stem cells, with the goal of developing drug discovery screening and
regenerative medicine applications for human blood system disorders. This technology is included in a U.S. patent application. We believe this
stem cell technology dramatically advances our ability to produce and purify this important blood stem cell precursor for both in vitro drug
discovery screening and potential regenerative medicine applications. In addition to defining new cell culture methods for our use, the technology
describes the surface characteristics of stem cell-derived adult hematopoietic stem cells. Most groups study embryonic blood development from
stem cells, but we are able to not only purify the stem cell-derived precursor of all adult hematopoietic cells, but also pinpoint the precise timing
when adult blood cell differentiation takes place in these cultures. We believe these early cells have the potential to be the precursors of the
ultimate adult, bone marrow-repopulating hematopoietic stem cells to repopulate the blood and immune system when transplanted into patients
prepared for bone marrow transplantation. These cells have important potential therapeutic applications for the restoration of healthy blood and
immune systems in individuals undergoing transplantation therapies for cancer, organ grafts, HIV infections or for acquired or genetic blood and
immune deficiencies.
In December 2014, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed
rights to a patent application entitled “Methods for generating hepatocytes and cholangiocytes from pluripotent stem cells” covered by
WO/2014/124527 application, and any future patent application claiming priority from these. The licensed technology describes advanced methods
for the production of mature hepatocytes and cholangiocytes, the primary cell types of the liver. The liver plays an important role in many bodily
functions including protein production, blood clotting, as well as glucose, iron and lipid metabolism. Hepatocytes are the major cells responsible for
metabolizing drugs, drug-drug interactions, and are the target for a variety of liver diseases including drug-induced liver failure, Cirrhosis, and viral
infections. Cholangiocytes are the precursors for the biliary system found in the liver, i.e. bile ducts and gallbladder. The biliary system is a
significant target for many conditions, including drug toxicities, cholecystitis, and liver-related abnormal function associated with the cystic fibrosis
mutation. The licensed technology now enables us to more efficiently produce, human hepatocytes and cholangiocytes with more adult-like
functions for in vitro drug discovery and LiverSafe 3D toxicity assays to support our drug rescue programs, as well as the therapeutic potential for
cell-based therapies.
In December 2014, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed
rights to patent application entitled “Methods and Compositions for Generating Epicardium Cells” covered by WO/2015/035506 application, and
any future patent application claiming priority from these. The epicardium is the outer cell layer on top of the heart muscle (cardiomyocytes), and is
essential for proper development of the heart and plays an important role in cardiac recovery during disease. The epicardium plays a critical role in
the differentiation, expansion, and maturation of cardiomyocytes during development, or during cardiac repair responses. This technology will be
important to developing the next generation of engineered cardiac tissue, or their function in cell therapy approaches.
In December 2014, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed
rights to patent application entitled “Methods and compositions for generating chondrocyte lineage cells and/or cartilage like tissue” covered by
WO/2014/161075 application, and any future patent application claiming priority from these. There are two type of chondrocytes, “articular” and
“growth plate”. Articular chondrocytes are responsible for cartilage that lines our joints, whereas growth plate chondrocytes are involved with new
bone formation. Osteoarthritis is debilitating joint diseases resulting from the degeneration of articular cartilage leading to inappropriate bone
development (spurs) in the joint. These technologies will allow us to develop in vitro assays to study the process of the degeneration of articular
cartilage, and provides novel tools for testing drugs that have the potential to reduce this degeneration. These cells also provide the necessary cells
for developing cell therapy approaches for treating osteoarthritis.
Competition
The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental
agencies and other research organizations actively engaged in the research and development of products that may be similar to our product candidates
or address similar markets. It is probable that the number of companies seeking to develop products and therapies similar to our products will increase.
Currently, there are no FDA-approved therapies for MDD with the mechanism of action of AV-101. However, products approved for other
indications, for example, the anesthetic ketamine, are being or may be used off-label for treatment of MDD, as well as other CNS indications for
which AV-101 may have therapeutic potential. Additionally, other treatment options, such psychotherapy and electroconvulsive therapy (ECT), are
sometimes used instead of antidepressant medications to treat patients with MDD.
In the field of new generation antidepressants focused on modulation of the NMDA receptor, our principal competitor is Naurex, Inc., which is
developing GLYX-13 and NRX-1074 for treatment-resistant MDD. Although each of these drug candidates is a peptide and may not be orally-active
(GLYX-13 is only administered intravenously and, we believe, NRX-1074 has not yet been administered orally to human subjects), both are new
generation NMDA modulators focused on the glycine binding site of the NMDA receptor.
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Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and human resources than we
do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of
treatments and the commercialization of those treatments. We believe that a range of pharmaceutical and biotechnology companies have programs to
develop small molecule drug candidates for the treatment of depression, epilepsy, neuropathic pain, Parkinson’s disease and other neurological
conditions and diseases, including, but not limited to, Abbott Laboratories, Actavis, Astra Zeneca, Eli Lilly, GlaxoSmithKline, Johnson & Johnson,
Lundbeck, Merck, Novartis, Otsuka, Pfizer, Roche, Sumitomo Dainippon, and Takeda. Mergers and acquisitions in the biotechnology and
pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial
opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less
severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other
regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market. We expect that AV-101 will have to compete with a variety of therapeutic products and
procedures.
We believe that our human pluripotent stem cell ( hPSC) technology platform, the hPSC-derived human cells we produce, and the customized human
cell-based assay systems we have formulated and developed are capable of being competitive in the diverse and growing global stem cell and
regenerative medicine markets, including markets involving the sale of hPSC-derived cells to third-parties for their in vitro drug discovery and safety
testing, contract predictive toxicology drug screening services for third parties, internal drug discovery, drug development and drug rescue of new ,
and regenerative medicine, including in vivo cell therapy research and development. A representative list of such biopharmaceutical companies
pursuing one or more of these potential applications of adult and/or hPSCl technology includes the following: Acea Biosciences, Advanced Cell
Technology, Athersys, BioTime, Cellectis Bioresearch, Cellerant Therapeutics, Cytori Therapeutics, Fujifilm Holdings, HemoGenix, International
Stem Cell, NeoStem, Neuralstem, Organovo Holdings, PluriStem Therapeutics, Stem Cells, and Stemina BioMarker Discovery. Pharmaceutical
companies and other established corporations such as Bristol-Myers Squibb, GE Healthcare Life Sciences, GlaxoSmithKline, Life Technologies,
Novartis, Pfizer, Roche Holdings and others have been and are expected to continue pursuing internally various stem cell-related research and
development programs. Many of the foregoing companies have greater resources and capital availability and as a result, may be more successful in
their research and development programs than us. We anticipate that acceptance and use of hPSC technology for drug development and regenerative
medicine will continue to occur and increase at pharmaceutical and biotechnology companies in the future.
Government Regulation
Government authorities in the United States at the federal, state and local level and in other countries extensively regulate, among other things, the
research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising,
distribution, post-approval monitoring and reporting, marketing and export and import of drug products. Generally, before a new drug can be
marketed, considerable data demonstrating its quality, safety and efficacy must be obtained, organized into a format specific to each regulatory
authority, submitted for review and approved by the regulatory authority.
U.S. drug development
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. Drugs
are also subject to other federal, state and local statutes and regulations. The process of obtaining regulatory approvals and the subsequent compliance
with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources. Failure to
comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, may subject an
applicant to administrative or judicial sanctions. These sanctions could include, among other actions, the FDA’s refusal to approve pending
applications, withdrawal of an approval, a clinical hold, warning letters, product recalls or withdrawals from the market, product seizures, total or
partial suspension of production or distribution injunctions, fines, refusals of government contracts, restitution, disgorgement, or civil or criminal
penalties. Any agency or judicial enforcement action could have a material adverse effect on us.
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Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States. The
process required by the FDA before a drug may be marketed in the United States generally involves the following:
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Completion of extensive non-clinical, sometimes referred to as non-clinical laboratory tests, non-clinical animal studies and formulation
studies in accordance with applicable regulations, including the FDA’s current Good Laboratory Practice, or GLP, regulations;
Submission to the FDA of an IND application, which must become effective before human clinical trials may begin;
Approval by an independent institutional review board, or IRB, or ethics committee at each clinical trial site before each trial may be
initiated;
Performance of adequate and well-controlled human clinical trials in accordance with applicable IND and other clinical trial-related
regulations, sometimes referred to as good clinical practices, or GCPs, to establish the safety and efficacy of the proposed drug for each
proposed indication;
Submission to the FDA of an NDA, for a new drug;
A determination by the FDA within 60 days of its receipt of an NDA to file the NDA for review;
Satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities where the drug is produced to assess
compliance with cGMP requirements to assure that the facilities, methods and controls are adequate to preserve the drug’s identity,
strength, quality and purity;
Potential FDA audit of the non-clinical and/or clinical trial sites that generated the data in support of the NDA; and
FDA review and approval of the NDA, including consideration of the views of any FDA advisory committee, prior to any commercial
marketing or sale of the drug in the United States.
The non-clinical and clinical testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any
approvals for our product candidates will be granted on a timely basis, if at all. Non-clinical tests include laboratory evaluation of product chemistry,
formulation, stability and toxicity, as well as animal studies to assess the characteristics and potential safety and efficacy of the product.
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The data required to support an NDA is generated in two distinct development stages: non-clinical and clinical. For new chemical entities, the non-
clinical development stage generally involves synthesizing the active component, developing the formulation and determining the manufacturing
process, as well as carrying out non-human toxicology, pharmacology and drug metabolism studies in the laboratory, which support subsequent
clinical testing. The conduct of the non-clinical tests must comply with federal regulations, including GLPs. The sponsor must submit the results of
the non-clinical tests, together with manufacturing information, analytical data, any available clinical data or literature and a proposed clinical
protocol, to the FDA as part of the IND. An IND is a request for authorization from the FDA to administer an investigational drug product to humans.
Some non-clinical testing may continue even after the IND is submitted, but an IND must become effective before human clinical trials may begin.
The central focus of an IND submission is on the general investigational plan and the protocol(s) for human trials. The IND automatically becomes
effective 30 days after receipt by the FDA, unless the FDA raises concerns or questions regarding the proposed clinical trials, including subjects will
be exposed to unreasonable health risks, and places the IND on clinical hold within that 30-day time period. In such a case, the IND sponsor and the
FDA must resolve any outstanding concerns before the clinical trial can begin. The FDA may also impose clinical holds on a drug candidate at any
time before or during clinical trials due to safety concerns or non-compliance. Accordingly, we cannot be sure that submission of an IND will result in
the FDA allowing clinical trials to begin, or that, once begun, issues will not arise that could cause the trial to be suspended or terminated.
The clinical stage of development involves the administration of the drug candidate to healthy volunteers or patients under the supervision of
qualified investigators, generally physicians not employed by or under the trial sponsor’s control, in accordance with GCPs, which include the
requirement that all research subjects provide their informed consent for their participation in any clinical trial. Clinical trials are conducted under
protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria, and the
parameters to be used to monitor subject safety and assess efficacy. Each protocol, and any subsequent amendments to the protocol, must be submitted
to the FDA as part of the IND. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or
servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants
and considers such items as whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to
anticipated benefits. The IRB also approves the informed consent form that must be provided to each clinical trial subject or his or her legal
representative and must monitor the clinical trial until completed. There are also requirements governing the reporting of ongoing clinical trials and
completed clinical trial results to public registries.
A sponsor who wishes to conduct a clinical trial outside the United States may, but need not, obtain FDA authorization to conduct the clinical trial
under an IND. If a foreign clinical trial is not conducted under an IND, the sponsor may submit data from the clinical trial to the FDA in support of an
NDA so long as the clinical trial is conducted in compliance with an international guideline for the ethical conduct of clinical research known as the
Declaration of Helsinki and/or the laws and regulations of the country or countries in which the clinical trial is performed, whichever provides the
greater protection to the participants in the clinical trial.
Clinical trials
Clinical trials are generally conducted in three sequential phases that may overlap, known as Phase 1, Phase 2 and Phase 3 clinical trials.
· Phase 1 clinical trials generally involve a small number of healthy volunteers who are initially exposed to a single dose and then multiple doses
of the product candidate. The primary purpose of these clinical trials is to assess the metabolism, pharmacologic action, side effect tolerability
and safety of the drug.
· Phase 2 clinical trials typically involve studies in disease-affected patients to determine the dose required to produce the desired benefits. At the
same time, safety and further pharmacokinetic and pharmacodynamic information is collected, as well as identification of possible adverse
effects and safety risks and preliminary evaluation of efficacy.
· Phase 3 clinical trials generally involve large numbers of patients at multiple sites (from several hundred to several thousand subjects) and are
designed to provide the data necessary to demonstrate the effectiveness of the product for its intended use, its safety in use, and to establish the
overall benefit/risk relationship of the product and provide an adequate basis for product approval. Phase 3 clinical trials may include
comparisons with placebo and/or other comparator treatments. The duration of treatment is often extended to mimic the actual use of a product
during marketing.
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Post-approval trials, sometimes referred to as Phase 4 clinical trials, may be conducted after initial marketing approval. These trials are used to gain
additional experience from the treatment of patients in the intended therapeutic indication. In certain instances, FDA may mandate the performance of
Phase 4 clinical trials as a condition of approval of an NDA.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and written IND safety reports must be
submitted to the FDA and the investigators for serious and unexpected suspected adverse events, finding from other studies, or any finding from
animal or in vitro testing that suggests a significant risk for human subjects. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed
successfully within any specified period, if at all. The FDA, the IRB, or the sponsor may suspend or terminate a clinical trial at any time on various
grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or
terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the
drug has been associated with unexpected serious harm to patients. Additionally, some clinical trials are overseen by an independent group of
qualified experts organized by the clinical trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for
whether or not a trial may move forward at designated check points based on access to certain data from the trial. Concurrent with clinical trials,
companies usually complete additional animal studies and must also develop additional information about the chemistry and physical characteristics
of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The
manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, we must develop
methods for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected and tested
and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.
NDA and FDA review process
The results of non-clinical studies and of the clinical trials, together with other detailed information, including extensive manufacturing information
and information on the composition of the drug and proposed labeling, are submitted to the FDA in the form of an NDA requesting approval to
market the drug for one or more specified indications. The FDA reviews an NDA to determine, among other things, whether a drug is safe and
effective for its intended use and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s identity,
strength, quality and purity. FDA approval of an NDA must be obtained before a drug may be offered for sale in the United States.
In addition, under the Pediatric Research Equity Act, or PREA, an NDA or supplement to an NDA must contain data to assess the safety and efficacy
of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric
subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of pediatric data or full or partial waivers.
Under the Prescription Drug User Fee Act, or PDUFA, as amended, each NDA must be accompanied by a user fee. The FDA adjusts the PDUFA user
fees on an annual basis. According to the FDA’s fee schedule, effective through December 31, 2014, the user fee for an application requiring clinical
data, such as an NDA, is $2.2 million. PDUFA also imposes an annual product fee for human drugs of $0.1 million and an annual establishment fee
of $0.6 million on facilities used to manufacture prescription drugs. Fee waivers or reductions are available in certain circumstances, including a
waiver of the application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs for products
designated as orphan drugs, unless the product also includes a non-orphan indication.
The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for
filing. The FDA must make a decision on accepting an NDA for filing within 60 days of receipt. Once the submission is accepted for filing, the FDA
begins an in-depth review of the NDA. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has 10 months from the filing date
in which to complete its initial review of a standard NDA and respond to the applicant, and six months from the filing date for a priority NDA. The
FDA does not always meet its PDUFA goal dates for standard and priority NDAs, and the review process is often significantly extended by FDA
requests for additional information or clarification.
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After the NDA submission is accepted for filing, the FDA reviews the NDA to determine, among other things, whether the proposed product is safe
and effective for its intended use, and whether the product is being manufactured in accordance with cGMP to assure and preserve the product’s
identity, strength, quality and purity. Before approving an NDA, the FDA will conduct a pre-approval inspection of the manufacturing facilities for
the new product to determine whether they comply with cGMPs. The FDA will not approve the product unless it determines that the manufacturing
processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required
specifications. In addition, before approving an NDA, the FDA may also audit data from clinical trials to ensure compliance with GCP requirements.
Additionally, the FDA may refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an
advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the
application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers
such recommendations carefully when making decisions. The FDA will likely re-analyze the clinical trial data, which could result in extensive
discussions between the FDA and the applicant during the review process. The review and evaluation of an NDA by the FDA is extensive and time
consuming and may take longer than originally planned to complete, and we may not receive a timely approval, if at all.
After the FDA evaluates an NDA, it may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing
of the drug with specific prescribing information for specific indications. A Complete Response Letter indicates that the review cycle of the
application is complete and the application is not ready for approval. A Complete Response Letter usually describes all of the specific deficiencies in
the NDA identified by the FDA. The Complete Response Letter may require additional clinical data and/or an additional pivotal Phase 3 clinical
trial(s), and/or other significant and time-consuming requirements related to clinical trials, non-clinical studies or manufacturing. If a Complete
Response Letter is issued, the applicant may either resubmit the NDA, addressing all of the deficiencies identified in the letter, or withdraw the
application. Even if such data and information is submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval.
Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we interpret the same data.
There is no assurance that the FDA will ultimately approve a drug product for marketing in the United States and we may encounter significant
difficulties or costs during the review process. If a product receives marketing approval, the approval may be significantly limited to specific diseases
and dosages or the indications for use may otherwise be limited, which could restrict the commercial value of the product. Further, the FDA may
require that certain contraindications, warnings or precautions be included in the product labeling or may condition the approval of the NDA on other
changes to the proposed labeling, development of adequate controls and specifications, or a commitment to conduct post-marketing testing or clinical
trials and surveillance to monitor the effects of approved products. For example, the FDA may require Phase 4 testing which involves clinical trials
designed to further assess a drug’s safety and efficacy and may require testing and surveillance programs to monitor the safety of approved products
that have been commercialized. The FDA may also place other conditions on approvals including the requirement for a risk evaluation and mitigation
strategy, or REMS, to assure the safe use of the drug. If the FDA concludes a REMS is needed, the sponsor of the NDA must submit a proposed
REMS. The FDA will not approve the NDA without an approved REMS, if required. A REMS could include medication guides, physician
communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. Any
of these limitations on approval or marketing could restrict the commercial promotion, distribution, prescription or dispensing of products. Product
approvals may be withdrawn for non-compliance with regulatory requirements or if problems occur following initial marketing.
Orphan drug designation
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug product intended to treat a rare disease or condition, which is generally
a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for
which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for this type of disease
or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting an NDA. After the FDA
grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan
product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
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If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation,
the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications to market the same drug for
the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity.
Competitors, however, may receive approval of different products for the indication for which the orphan product has exclusivity or obtain approval
for the same product but for a different indication than that for which the orphan product has exclusivity. Orphan product exclusivity also could block
the approval of one of our products for seven years if a competitor obtains approval of the same product as defined by the FDA or if our product
candidate is determined to be contained within the competitor’s product for the same indication or disease. If a drug designated as an orphan product
receives marketing approval for an indication broader than what is designated, it may not be entitled to orphan product exclusivity. Orphan drug status
in the European Union has similar, but not identical, benefits.
Expedited development and review programs
The FDA has a Fast Track program that is intended to expedite or facilitate the process for reviewing new drugs that meet certain criteria.
Specifically, new drugs are eligible for Fast Track designation if they are intended to treat a serious or life-threatening condition and demonstrate the
potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific
indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug as a Fast Track product at
any time during the clinical development of the product. Unique to a Fast Track product, the FDA may review sections of the marketing application
on a rolling basis before the complete NDA is submitted, if the sponsor provides a schedule for the submission of the sections of the application, the
FDA agrees to accept sections of the application and determines that the schedule is acceptable, and the sponsor pays any required user fees upon
submission of the first section of the application.
Any product submitted to the FDA for marketing, including under a Fast Track program, may be eligible for other types of FDA programs intended to
expedite development and review, such as priority review and accelerated approval. Any product is eligible for priority review if it has the potential
to provide safe and effective therapy where no satisfactory alternative therapy exists or offers a significant improvement in the treatment, diagnosis or
prevention of a disease compared to marketed products. The FDA will attempt to direct additional resources to the evaluation of an application for a
new drug designated for priority review in an effort to facilitate the review. A product may also be eligible for accelerated approval. Drugs studied for
their safety and efficacy in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may
receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the
product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint
other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor of a drug receiving accelerated approval
perform adequate and well-controlled post-marketing clinical trials. If the FDA concludes that a drug shown to be effective can be safely used only if
distribution or use is restricted, it will require such post-marketing restrictions, as it deems necessary to assure safe use of the drug, such as:
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distribution restricted to certain facilities or physicians with special training or experience; or
distribution conditioned on the performance of specified medical procedures.
The limitations imposed would be commensurate with the specific safety concerns presented by the drug. In addition, the FDA currently requires as a
condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the
product. Additionally, a drug may be eligible for designation as a breakthrough therapy if the drug is intended, alone or in combination with one or
more other drugs, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate
substantial improvement over existing therapies on one or more indications. The benefits of breakthrough therapy designation includes the same
benefits as fast track designation, plus intensive guidance from FDA to ensure an efficient drug development program. Fast Track designation, priority
review, accelerated approval and breakthrough designation do not change the standards for approval, but may expedite the development or approval
process.
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Pediatric trials
The Food and Drug Administration Safety and Innovation Act, or FDASIA, which was signed into law on July 9, 2012, amended the FDCA to
require that a sponsor who is planning to submit a marketing application for a drug that includes a new active ingredient, new indication, new dosage
form, new dosing regimen or new route of administration submit an initial Pediatric Study Plan, or PSP, within sixty days of an end-of-Phase 2
meeting or as may be agreed between the sponsor and FDA. The initial PSP must include an outline of the pediatric study or studies that the sponsor
plans to conduct, including study objectives and design, age groups, relevant endpoints and statistical approach, or a justification for not including
such detailed information, and any request for a deferral of pediatric assessments or a full or partial waiver of the requirement to provide data from
pediatric studies along with supporting information. FDA and the sponsor must reach agreement on the PSP. A sponsor can submit amendments to an
agreed-upon initial PSP at any time if changes to the pediatric plan need to be considered based on data collected from non-clinical studies, early
phase clinical trials, and/or other clinical development programs.
Post-marketing requirements
Following approval of a new product, a pharmaceutical company and the approved product are subject to continuing regulation by the FDA,
including, among other things, monitoring and recordkeeping activities, reporting to the applicable regulatory authorities of adverse experiences with
the product, providing the regulatory authorities with updated safety and efficacy information, product sampling and distribution requirements, and
complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on
promoting drugs for uses or in patient populations that are not described in the drug’s approved labeling (known as “off-label use”), limitations on
industry-sponsored scientific and educational activities, and requirements for promotional activities involving the Internet. Although physicians may
prescribe legally available drugs for off-label uses, manufacturers may not market or promote such off-label uses. Prescription drug promotional
materials must be submitted to the FDA in conjunction with their first use. Further, if there are any modifications to the drug, including changes in
indications, labeling, or manufacturing processes or facilities, the applicant may be required to submit and obtain FDA approval of a new NDA or
NDA supplement, which may require the applicant to develop additional data or conduct additional non-clinical studies and clinical trials. As with
new NDAs, the review process is often significantly extended by FDA requests for additional information or clarification. Any distribution of
prescription drug products and pharmaceutical samples must comply with the U.S. Prescription Drug Marketing Act, or the PDMA, a part of the
FDCA.
In the United States, once a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA
regulations require that products be manufactured in specific approved facilities and in accordance with cGMP. We rely, and expect to continue to
rely, on third parties for the production of clinical and commercial quantities of our products in accordance with cGMP regulations. NDA holders
using contract manufacturers, laboratories or packagers are responsible for the selection and monitoring of qualified firms, and, in certain
circumstances, qualified suppliers to these firms. These manufacturers must comply with cGMP regulations that require among other things, quality
control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct any
deviations from cGMP. Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register
their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state
agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of
production and quality control to maintain cGMP compliance. The discovery of violative conditions, including failure to conform to cGMP, could
result in enforcement actions that interrupt the operation of any such facilities or the ability to distribute products manufactured, processed or tested by
them. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA,
including, among other things, recall or withdrawal of the product from the market.
Discovery of previously unknown problems with a product or the failure to comply with applicable FDA requirements can have negative
consequences, including adverse publicity, judicial or administrative enforcement, warning letters from the FDA, mandated corrective advertising or
communications with doctors, and civil or criminal penalties, among others. Newly discovered or developed safety or effectiveness data may require
changes to a product’s approved labeling, including the addition of new warnings and contraindications, and also may require the implementation of
other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the
FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.
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Other regulatory matters
Manufacturing, sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in
addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and
Human Services, the United States Department of Justice, the Drug Enforcement Administration, the Consumer Product Safety Commission, the
Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency and state and local governments.
In the United States, sales, marketing and scientific/educational programs must also comply with state and federal fraud and abuse laws. These laws
include the federal Anti-Kickback Statute, which makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its
behalf) to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the
purchase, order, or prescription of a particular drug, for which payment may be made under a federal healthcare program, such as Medicare or
Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from
participation in federal healthcare programs. In addition, the Patient Protection and Affordable Health Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010, or collectively the ACA, among other things, amends the intent requirement of the federal Anti-Kickback
Statute and criminal healthcare fraud statutes created by the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA. A person
or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. Moreover, the ACA provides that the government may
assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for
purposes of the False Claims Act.
Although we would not submit claims directly to payors, drug manufacturers can be held liable under the federal False Claims Act, which prohibits
anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items
or services, including drugs, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary
items or services. The government may deem manufacturers to have “caused” the submission of false or fraudulent claims by, for example, providing
inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of
wholesaler or estimated retail prices for our products, the reporting of prices used to calculate Medicaid rebate information and other information
affecting federal, state, and third-party reimbursement for our products, and the sale and marketing of our products, are subject to scrutiny under this
law. Penalties for a False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of
between $5,500 and $11,000 for each separate false claim, the potential for exclusion from participation in federal healthcare programs, and, although
the federal False Claims Act is a civil statute, conduct that results in a False Claims Act violation may also implicate various federal criminal statutes.
If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine and may
suffer a decline in our stock price. In addition, private individuals have the ability to bring actions under the federal False Claims Act and certain
states have enacted laws modeled after the federal False Claims Act.
Pricing and rebate programs must comply with the Medicaid rebate requirements of the U.S. Omnibus Budget Reconciliation Act of 1990 and more
recent requirements in ACA. If products are made available to authorized users of the Federal Supply Schedule of the General Services
Administration, additional laws and requirements apply. The handling of any controlled substances must comply with the U.S. Controlled Substances
Act and Controlled Substances Import and Export Act. Products must meet applicable child-resistant packaging requirements under the U.S. Poison
Prevention Packaging Act. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer protection
and unfair competition laws.
The distribution of pharmaceutical products is subject to additional requirements and regulations, including extensive record-keeping, licensing,
storage and security requirements intended to prevent the unauthorized sale of pharmaceutical products.
The failure to comply with any of these laws or regulatory requirements subjects firms to possible legal or regulatory action. Depending on the
circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or
seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a firm to enter into supply
contracts, including government contracts. Any action against us for violation of these laws, even if we successfully defend against it, could cause us
to incur significant legal expenses and divert our management’s attention from the operation of our business. Prohibitions or restrictions on sales or
withdrawal of future products marketed by us could materially affect our business in an adverse way.
Changes in regulations, statutes or the interpretation of existing regulations could impact our business in the future by requiring, for example:
(i) changes to our manufacturing arrangements; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our products;
or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.
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U.S. patent term restoration and marketing exclusivity
Depending upon the timing, duration and specifics of the FDA approval of our drug candidates, some of our U.S. patents may be eligible for limited
patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, commonly referred to as the Hatch-Waxman
Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during
product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a
total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an
IND and the submission date of an NDA plus the time between the submission date of an NDA and the approval of that application. Only one patent
applicable to an approved drug is eligible for the extension and the application for the extension must be submitted prior to the expiration of the
patent. The U.S. PTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future,
we intend to apply for restoration of patent term for one of our currently owned or licensed patents to add patent life beyond its current expiration date,
depending on the expected length of the clinical trials and other factors involved in the filing of the relevant NDA.
Marketing exclusivity provisions under the FDCA can also delay the submission or the approval of certain marketing applications. The FDCA
provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new
chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety,
which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an
abbreviated new drug application, or ANDA, or a 505(b)(2) NDA submitted by another company for another drug based on the same active moiety,
regardless of whether the drug is intended for the same indication as the original innovator drug or for another indication, where the applicant does
not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains
a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder. The FDCA also
provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability
studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new
indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on
the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the active agent for the
original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an
applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the non-clinical studies and adequate and well-
controlled clinical trials necessary to demonstrate safety and efficacy. Orphan drug exclusivity, as described above, may offer a seven-year period of
marketing exclusivity, except in certain circumstances. Pediatric exclusivity is another type of regulatory market exclusivity in the United States.
Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end
of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric trial in accordance with an FDA-issued
“Written Request” for such a trial.
European Union drug development
In the European Union, our future products may also be subject to extensive regulatory requirements. As in the United States, medicinal products can
only be marketed if a marketing authorization from the competent regulatory agencies has been obtained.
Similar to the United States, the various phases of non-clinical and clinical research in the European Union are subject to significant regulatory
controls. Although the EU Clinical Trials Directive 2001/20/EC has sought to harmonize the EU clinical trials regulatory framework, setting out
common rules for the control and authorization of clinical trials in the EU, the EU Member States have transposed and applied the provisions of the
Directive differently. This has led to significant variations in the member state regimes. Under the current regime, before a clinical trial can be
initiated it must be approved in each of the EU countries where the trial is to be conducted by two distinct bodies: the National Competent Authority,
or NCA, and one or more Ethics Committees, or ECs. Under the current regime all suspected unexpected serious adverse reactions to the investigated
drug that occur during the clinical trial have to be reported to the NCA and ECs of the Member State where they occurred.
The EU clinical trials legislation is currently undergoing a revision process mainly aimed at harmonizing and streamlining the clinical trials
authorization process, simplifying adverse event reporting procedures, improving the supervision of clinical trials, and increasing their transparency.
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European Union drug review and approval
In the European Economic Area, or EEA, (which is comprised of the 27 Member States of the European Union (excluding Croatia) plus Norway,
Iceland and Liechtenstein), medicinal products can only be commercialized after obtaining a Marketing Authorization, or MA. There are two types of
marketing authorizations:
The Community MA is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal
Products for Human Use, or CHMP, of the European Medicines Agency, or EMA, and is valid throughout the entire territory of the EEA. The
Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, and
medicinal products containing a new active substance indicated for the treatment of AIDS, cancer, neurodegenerative disorders, diabetes, auto-
immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for
products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU.
National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available
for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a
Member State of the EEA, this National MA can be recognized in another Member States through the Mutual Recognition Procedure. If the product
has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through
the Decentralized Procedure. Under the Decentralized Procedure an identical dossier is submitted to the competent authorities of each of the Member
States in which the MA is sought, one of which is selected by the applicant as the Reference Member State, or RMS. The competent authority of the
RMS prepares a draft assessment report, a draft summary of the product characteristics, or SPC, and a draft of the labeling and package leaflet, which
are sent to the other Member States (referred to as the Member States Concerned) for their approval. If the Member States Concerned raise no
objections, based on a potential serious risk to public health, to the assessment, SPC, labeling, or packaging proposed by the RMS, the product is
subsequently granted a national MA in all the Member States (i.e., in the RMS and the Member States Concerned).
Under the above-described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an
assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.
European Union new chemical entity exclusivity
In the European Union, new chemical entities, sometimes referred to as new active substances, qualify for eight years of data exclusivity upon
marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the
European Union from referencing the innovator’s data to assess a generic application for eight years, after which generic marketing authorization can
be submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum
of 11 years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new
therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison
with existing therapies.
European Union orphan designation and exclusivity
In the European Union, the EMA’s Committee for Orphan Medicinal Products grants orphan drug designation to promote the development of
products that are intended for the diagnosis, prevention or treatment of life-threatening or chronically debilitating conditions affecting not more than 5
in 10,000 persons in the European Union Community and for which no satisfactory method of diagnosis, prevention, or treatment has been authorized
(or the product would be a significant benefit to those affected). Additionally, designation is granted for products intended for the diagnosis,
prevention, or treatment of a life-threatening, seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that
sales of the drug in the European Union would be sufficient to justify the necessary investment in developing the medicinal product.
In the European Union, orphan drug designation entitles a party to financial incentives such as reduction of fees or fee waivers and ten years of market
exclusivity is granted following medicinal product approval. This period may be reduced to six years if the orphan drug designation criteria are no
longer met, including where it is shown that the product is sufficiently profitable not to justify maintenance of market exclusivity. Orphan drug
designation must be requested before submitting an application for marketing approval. Orphan drug designation does not convey any advantage in, or
shorten the duration of, the regulatory review and approval process.
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Rest of the world regulation
For other countries outside of the European Union and the United States, such as countries in Eastern Europe, Latin America or Asia, the
requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In all cases, the
clinical trials must be conducted in accordance with cGCP requirements and the applicable regulatory requirements and the ethical principles that
have their origin in the Declaration of Helsinki.
If we fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Reimbursement
Sales of our products will depend, in part, on the extent to which our products will be covered by third-party payors, such as government health
programs, commercial insurance and managed healthcare organizations. In the United States no uniform policy of coverage and reimbursement for
drug products exists. Accordingly, decisions regarding the extent of coverage and amount of reimbursement to be provided for any of our products
will be made on a payor by payor basis. As a result, the coverage determination process is often a time-consuming and costly process that will require
us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and
adequate reimbursement will be obtained.
Third-party payors are increasingly reducing reimbursements for medical products and services. Additionally, the containment of healthcare costs has
become a priority of federal and state governments, and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures
and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on
reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of
more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. Decreases in third-party
reimbursement for our product candidate or a decision by a third-party payor to not cover our product candidate could reduce physician usage of the
product candidate and have a material adverse effect on our sales, results of operations and financial condition.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or the MMA, established the Medicare Part D program to provide a
voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by
private entities that provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D
prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that
identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each
therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D
prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of
prescription drugs may increase demand for products for which we receive marketing approval. However, any negotiated prices for our products
covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to
drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment
rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.
The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different
treatments for the same illness. The plan for the research was published in 2012 by the Department of Health and Human Services, the Agency for
Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will
be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private
payors, it is not clear what effect, if any, the research will have on the sales of our product candidate, if any such product or the condition that it is
intended to treat is the subject of a trial. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product
could adversely affect the sales of our product candidate. If third-party payors do not consider our products to be cost-effective compared to other
available therapies, they may not cover our products after approval as a benefit under their plans or, if they do, the level of payment may not be
sufficient to allow us to sell our products on a profitable basis.
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The ACA is expected to have a significant impact on the health care industry. The ACA is expected to expand coverage for the uninsured while at the
same time containing overall healthcare costs. With regard to pharmaceutical products, among other things, the ACA is expected to expand and
increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D
program. We cannot predict the full impact of the ACA on our business as many of the ACA reforms require the promulgation of detailed regulations
implementing the statutory provisions that has not yet occurred. For example, the ACA imposed new reporting requirements on drug manufacturers
for payments made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. Failure to submit required information may result in civil monetary penalties of up to an aggregate of $150,000 per year (or up to an
aggregate of $1 million per year for “knowing failures”), for all payments, transfers of value or ownership or investment interests that are not timely,
accurately and completely reported in an annual submission. Drug manufacturers were required to begin collecting data on August 1, 2013 and were
required to submit reports to CMS by March 31, 2014 (and by the 90th day of each subsequent calendar year). In addition, many states have adopted
laws similar to the federal laws discussed above. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed
by any insurer, not just federal healthcare programs such as Medicare and Medicaid. There has also been a recent trend of increased federal and state
regulation of payments made to physicians. Certain states mandate implementation of compliance programs, impose restrictions on drug
manufacturers’ marketing practices and/or require the tracking and reporting of gifts, compensation and other remuneration to physicians. In addition,
other legislative changes have been proposed and adopted in the United States since the ACA was enacted. On August 2, 2011, the Budget Control
Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with
recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby
triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to
providers of up to 2% per fiscal year, started in April 2013. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act
of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act
of 2011. The ATRA, among other things, also reduced Medicare payments to several providers, including hospitals, imaging centers and cancer
treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We
expect that additional federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, and in turn could significantly reduce the projected value of certain development projects
and reduce our profitability.
In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the
range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products
for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls
on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or
reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products.
Historically, products launched in the European Union do not follow price structures of the United States and generally prices tend to be significantly
lower.
Stem Cell Technology - United States
With respect to our stem cell research and development in the U.S., the U.S. government has established requirements and procedures relating to the
isolation and derivation of certain stem cell lines and the availability of federal funds for research and development programs involving those lines.
All of the stem cell lines that we are using were either isolated under procedures that meet U.S. government requirements and are approved for
funding from the U.S. government, or were isolated under procedures that meet U.S. government requirements.
All procedures we use to obtain clinical samples, and the procedures we use to isolate hESCs, are consistent with the informed consent and ethical
guidelines promulgated by either the U.S. National Academy of Science, the International Society of Stem Cell Research ( ISSCR), or the NIH. These
procedures and documentation have been reviewed by an external Stem Cell Research Oversight Committee, and all cell lines we use have been
approved under one or more of these guidelines.
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The U.S. government and its agencies on July 7, 2009 published guidelines for the ethical derivation of hESCs required for receiving federal funding
for hESC research. Should we seek further NIH funding for our stem cell research and development, our request would involve the use of hESC lines
that meet the NIH guidelines for NIH funding. In the U.S., the President’s Council on Bioethics monitors stem cell research, and may make
recommendations from time to time that could place restrictions on the scope of research using human embryonic or fetal tissue. Although numerous
states in the U.S. are considering, or have in place, legislation relating to stem cell research, including California whose voters approved Proposition
71 to provide up to $3 billion of state funding for stem cell research in California, it is not yet clear what affect, if any, state actions may have on our
ability to commercialize stem cell technologies.
Stem Cell Technology - Canada
In Canada, stem cell research and development is governed by two policy documents and by one legislative statute: the Guidelines for Human
Pluripotent Stem Cell Research (the Guidelines) issued by the Canadian Institutes of Health Research; the Tri-Council Statement: Ethical Conduct for
Research Involving Humans (TCPS); and the Assisted Human Reproduction Act ( Act). The Guidelines and the TCPS govern stem cell research
conducted by, or under the auspices of, institutions funded by the federal government. Should we seek funding from Canadian government agencies or
should we conduct research under the auspices of an institution so funded, we may have to ensure the compliance of such research with the ethical
rules prescribed by the Guidelines and the TCPS.
The Act subjects all research conducted in Canada involving the human embryo, including hESC derivation (but not the stem cells once derived), to a
licensing process overseen by a federal licensing agency. However, as of the date of this report, the provisions of the Act regarding the licensing of
hESC derivation were not in force
We are not currently conducting stem cell research in Canada. We have, however, sponsored pluripotent stem cell research in Canada by Dr. Gordon
Keller at UHN’s McEwen Centre. We anticipate conducting additional pluripotent stem cell research (with both hESCs and hiPSCs), in collaboration
with Dr. Keller and his research team, at UHN’s McEwen Centre during 2015 and beyond. Should the provisions of the Act come into force, we may
have to apply for a license for all hESC research we may sponsor or conduct in Canada and ensure compliance of such research with the provisions of
the Act.
Subsidiaries and Inter-Corporate Relationships
VistaGen Therapeutics. Inc., a California corporation, is our wholly-owned subsidiary and has the following two wholly-owned subsidiaries:
VistaStem Canada Inc., a corporation incorporated pursuant to the laws of the Province of Ontario, intended to facilitate our stem cell-based research
and development and drug rescue activities in Canada should we elect to expand our U.S. operations into Canada; and Artemis Neuroscience, Inc., a
corporation incorporated pursuant to the laws of the State of Maryland. The operations of VistaGen Therapeutics, Inc., a California corporation, and
each of its two wholly owned subsidiaries are managed by our senior management team based in South San Francisco, California.
Employees
As of June 15, 2015, we employed nine full-time employees, three of whom have doctorate degrees. Six full-time employees work in research and
development and laboratory support services and three full-time employees work in general and administrative roles. Staffing for all other functional
areas is achieved through strategic relationships with service providers and consultants, each of whom provides services on a real-time, as-needed
basis, including human resources and payroll, information technology, facilities, legal, stock plan administration, investor relations and website
maintenance, regulatory affairs, and FDA program management.
We have never had a work stoppage, and none of our employees is represented by a labor organization or under any collective bargaining agreement.
We consider our employee relations to be is good.
Facilities
We lease our office and laboratory space, which consists of approximately 10,000 square feet located in South San Francisco, California. Our lease
expires on July 31, 2017.
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Legal Proceedings
As of the date of this Annual Report on Form 10-K, we were not party to any legal matters or claims. In the future, we may become party to legal
matters and claims arising in the ordinary course of business, the resolution of which we do not anticipate would have a material adverse impact on
our results of operations.
Environmental Regulation
Our business does not require us to comply with any particular unique environmental regulations.
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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 Annual Report on Form 10-K 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 marketable drug products. Our business depends heavily on the
successful non-clinical and clinical development, regulatory approval and commercialization of AV-101 for Major Depressive Disorder (MDD) and
other CNS indications, as well as our ability to produce develop and commercialize new chemical entities (NCEs) from our drug rescue programs.
AV-101 will require substantial additional clinical development, testing and regulatory approval before we are permitted to commence its
commercialization. Each drug rescue NCE will require substantial non-clinical development, clinical development, testing and regulatory approval
before we are permitted to commence its commercialization The non-clinical studies and clinical trials of our product candidates are, and the
manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government
authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining
regulatory approvals for the commercial sale of any product candidate, we must demonstrate through non-clinical studies and clinical trials that the
product candidate is safe and effective for use in each target indication. Drug development is a long, expensive and uncertain process, and delay or
failure can occur at any stage of any of our clinical trials. This process can take many years and may include post-marketing studies and surveillance,
which will require the expenditure of substantial resources beyond the proceeds we have raised to date. Of the large number of drugs in development
in the United States, only a small percentage will successfully complete the U.S. Food and Drug Administration, or FDA, regulatory approval process
and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our development and non-clinical
studies and clinical trials, we cannot assure you that AV-101 or any of our product candidates 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, or an NDA, from
the FDA, or in any foreign countries until we receive the requisite approval from such countries. We are preparing to initiate a Phase 2 clinical trial to
study safety, tolerability and efficacy of AV-101 in patients with MDD. If our Phase 2 clinical trial of AV-101 is successful, we expect that the FDA
will require us to complete at least one pivotal trial in order to submit an NDA for AV-101 as a treatment for MDD patients. However, the FDA may
require that we conduct additional pivotal trials before we can submit an NDA for AV-101. The FDA may also require that we conduct additional
toxicity studies and additional non-clinical studies before submitting an NDA for AV-101.
Obtaining approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of any of our
product candidates for many reasons, including, among others:
·
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·
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we may not be able to demonstrate that AV-101 is safe and effective in treating MDD, to the satisfaction of the FDA;
the results of our non-clinical studies and clinical trials may not meet the level of statistical or clinical significance required by the FDA
for marketing approval;
the FDA may disagree with the number, design, size, conduct or implementation of our non-clinical studies and clinical trials;
the FDA may require that we conduct additional non-clinical studies and clinical trials;
the FDA or the applicable foreign regulatory agency may not approve the formulation, labeling or specifications of any of our product
candidates;
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·
·
·
·
·
·
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the contract research organizations, or CROs, that we retain to conduct our non-clinical studies and clinical trials may take actions outside
of our control that materially adversely impact our non-clinical studies and clinical trials;
the FDA may find the data from non-clinical studies and clinical trials insufficient to demonstrate that our product candidates’ clinical and
other benefits outweigh their safety risks;
the FDA may disagree with our interpretation of data from our non-clinical studies and clinical trials;
the FDA may not accept data generated at our non-clinical studies and clinical trial sites;
if our NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory
committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may
recommend that the FDA require, as a condition of approval, additional non-clinical studies or clinical trials, limitations on approved
labeling or distribution and use restrictions;
the FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, as a condition of approval or post-approval;
the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract
manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices, or
cGMPs; or
the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations.
Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market
AV-101, a drug rescue NCE or any other product candidate we may develop. Any such setback in our pursuit of regulatory approval would have a
material adverse effect on our business and prospects.
A Fast Track designation by the FDA may not actually lead to a faster development or regulatory review or approval process.
We intend to seek FDA Fast Track designation for AV-101, and we may do so for other product candidates as well. If a product is intended for the
treatment of a serious or life-threatening condition and the product demonstrates the potential to address unmet medical needs for this condition, the
sponsor may apply for the FDA Fast Track designation. The FDA has broad discretion whether or not to grant this 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 may encounter difficulties in enrolling patients in our AV-101 clinical trials, thereby delaying or preventing clinical
development. Further, if AV-101 is approved for treatment of MDD, 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 or other product candidates 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.
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This drug candidate development risk is heightened by any changes in planned 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 preclinical 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 investigator-sponsored trials, it may adversely
effect our development of AV-101 for MDD and other CNS indications.
AV-101 will be tested in an NIH investigator sponsored clinical trial for the treatment of MDD and may be subjected to testing in the future for other
CNS indications in additional investigator sponsored 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-1-1 or our clinical trials, it may adversely affect or delay our clinical development
of AV-101, and the occurrence of these events would have a material adverse effect on our business.
Positive results from early non-clinical studies and clinical trials of our product candidates are not necessarily predictive of the results of later
non-clinical studies and clinical trials of our product candidates. If we cannot replicate the positive results from our earlier non-clinical studies
and clinical trials of our product candidates in our later non-clinical studies and clinical trials, we may be unable to successfully develop, obtain
regulatory approval for and commercialize our product candidates.
Positive results from non-clinical studies of our product candidates, and any positive results we may obtain from early clinical trials of our product
candidates, may not necessarily be predictive of the results from required later non-clinical studies and clinical trials. Similarly, even if we are able to
complete our planned non-clinical studies or clinical trials of our product candidates according to our current development timeline, the positive
results from our non-clinical studies and clinical trials of our product candidates may not be replicated in subsequent non-clinical studies or clinical
trial results. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after
achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been
caused by, among other things, non-clinical findings made while clinical trials were underway or safety or efficacy observations made in non-clinical
studies and clinical trials, including previously unreported adverse events. Moreover, non-clinical and clinical data are often susceptible to varying
interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in non-clinical studies and clinical
trials nonetheless failed to obtain FDA approval. We have not yet completed any Phase 2 clinical trial for AV-101, and if we fail to produce positive
results in our planned NIH-sponsored Phase 2 clinical trial of AV-101 in MDD, the development timeline and regulatory approval and
commercialization prospects for AV-101 and, correspondingly, our business and financial prospects, would be materially adversely affected.
Failures or delays in the commencement or completion of our planned clinical trials 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.
We are planning to commence an NIH-sponsored Phase 2 clinical trial of AV-101 as a treatment for MDD. We will need to complete at least two
additional clinical trials prior to the submission of an NDA for AV-101 as a treatment for MDD. Successful completion of our clinical trials is a
prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of AV-101 for MDD and any
other product candidates we may develop. We do not know whether the NIH-sponsored Phase 2 study or any of our future-planned clinical trials will
begin or be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of
reasons, including, among others:
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the FDA may deny permission to proceed with our planned clinical trials or any other clinical trials we may initiate, or may place a
clinical trial on hold;
delays in filing or receiving approvals of additional INDs that may be required;
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negative results from our ongoing non-clinical studies;
delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can
be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical trials, for example delays in the
manufacturing of sufficient supply of finished drug product;
difficulties obtaining Institutional Review Board, or IRB, approval to conduct a clinical trial at a prospective site or sites;
challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to trial sites;
eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments for the
relevant disease and competition from other clinical trial programs for similar indications;
severe or unexpected drug-related side effects experienced by patients in a clinical trial;
delays in validating any endpoints utilized in a clinical trial;
the FDA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for
approval even after it has reviewed and commented on the design for our clinical trials;
reports from non-clinical or clinical testing of other CNS therapies that raise safety or efficacy concerns; and
difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trials, lack of
efficacy, side effects, personal issues or loss of interest.
Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or
terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board, or DSMB,
overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:
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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that
require us to undertake corrective action, including the imposition of a clinical hold;
unforeseen safety issues, including any that could be identified in our ongoing non-clinical carcinogenicity studies, adverse side effects or
lack of effectiveness;
changes in government regulations or administrative actions;
problems with clinical supply materials; and
lack of adequate funding to continue clinical trials.
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Changes in regulatory requirements, FDA guidance or unanticipated events during our non-clinical studies and clinical trials of our product
candidates may occur, which may result in changes to non-clinical studies and clinical trial protocols or additional non-clinical studies and
clinical trial requirements, which could result in increased costs to us and could delay our development timeline.
Changes in regulatory requirements, FDA guidance or unanticipated events during our non-clinical studies and clinical trials may force us to amend
non-clinical studies and clinical trial protocols or the FDA may impose additional non-clinical studies and clinical trial requirements. Amendments or
changes to our clinical trial protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the
cost, timing or successful completion of clinical trials. Similarly, amendments to our non-clinical studies may adversely impact the cost, timing, or
successful completion of those non-clinical studies. If we experience delays completing, or if we terminate, any of our non-clinical studies or clinical
trials, or if we are required to conduct additional non-clinical studies or clinical trials, the commercial prospects for our product candidates may be
harmed and our ability to generate product revenue will be delayed.
We rely, and expect that we will continue to rely, on third parties to conduct any clinical trials for our product candidates. If these third parties do
not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or
commercialize our product candidates and our business could be substantially harmed.
We do not have the ability to independently conduct clinical trials. We rely on medical institutions, clinical investigators, contract laboratories and
other third parties, such as CROs, to conduct clinical trials on our product candidates. We enter into agreements with third-party CROs to provide
monitors for and to manage data for our ongoing clinical trials. We rely heavily on these parties for execution of clinical trials for our product
candidates and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these
clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff.
Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside
parties may:
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have staffing difficulties;
fail to comply with contractual obligations;
experience regulatory compliance issues;
undergo changes in priorities or become financially distressed; or
form relationships with other entities, some of which may be our competitors.
These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected
cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance
with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs or the NIH does not relieve us of
our regulatory responsibilities. We and our CROs and the NIH are required to comply with regulations and guidelines, including current Good
Clinical Practices, or cGCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are
scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These
regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign
regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations through periodic inspections of clinical trial
sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before
approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with
cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number
of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the
regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
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Although we intend to design our clinical trials for our product candidates, we plan to have CROs, and in the case of our AV-101 Phase 2 study in
MDD, the NIH, conduct all of the clinical trials. As a result, many important aspects of our drug development programs are outside of our direct
control. In addition, the CROs or the NIH, as the case may be, may not perform all of their obligations under arrangements with us or in compliance
with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including
criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the CROs do not perform clinical trials
in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of our
product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of
resources these CROs or the NIH devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs or the
NIH, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay
commercialization and require significantly greater expenditures.
If any of our relationships with these third-party CROs or the NIH terminate, we may not be able to enter into arrangements with alternative CROs or
collaborators. If CROs or the NIH do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be
replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory
requirements or for other reasons, any clinical trials such CROs or the NIH are associated with may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, we believe that our financial results
and the commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to
generate revenue could be delayed.
We rely completely on third-party suppliers to manufacture our clinical drug supplies for our product candidates, and we intend to rely on third
parties to produce non-clinical, clinical and commercial supplies of any future product candidate.
We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of our product
candidates, for use in the conduct of our non-clinical studies and clinical trials, and we lack the internal resources and the capability to manufacture
any product candidates on a clinical or commercial scale. The facilities used by our contract manufacturers to manufacture the active pharmaceutical
ingredient and final drug product must complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess
compliance with applicable requirements, including cGMPs, after we submit our NDA or relevant foreign regulatory submission to the applicable
regulatory agency.
We do not control the manufacturing process of, and are completely dependent on, our contract manufacturers to comply with cGMPs for
manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that
conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, they will not be able to
secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no direct control over our contract manufacturers’
ability to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, all of our contract manufacturers are engaged
with other companies to supply and/or manufacture materials or products for such companies, which exposes our third-party contract manufacturers
to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of
those materials and products may affect the regulatory clearance of our contract manufacturers’ facilities generally. If the FDA or an applicable
foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidates are noncompliant, we
may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market
our product candidates. Our reliance on contract manufacturers also exposes us to the possibility that they, or third parties with access to their
facilities, will have access to and may appropriate our trade secrets or other proprietary information.
We do not have long-term supply agreements in place with our contract manufacturers and each batch of our product candidates is individually
contracted under a quality and supply agreement. If we engage new contract manufacturers, such contractors must complete an inspection by the FDA
and other applicable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners, to
manufacture commercial quantities our product candidates, if approved. Our current scale of manufacturing for AV-101 is adequate to support all of
our currently planned needs for non-clinical studies and clinical trial supplies.
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Even if we receive marketing approval for our product candidates in the United States, we may never receive regulatory approval to market our
product candidates outside of the United States.
We have not yet selected any markets outside of the United States where we intend to seek regulatory approval to market our product candidates. In
order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy and
other regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product candidate testing and
additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA
approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United
States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval
before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries.
Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one
country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other
setback in obtaining such approval would impair our ability to market our product candidates in such foreign markets. Any such impairment would
reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product
candidates, we may not be able to generate any revenue.
We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products. In order to market our product
candidates, if approved by the FDA or any other regulatory body, we must build our sales, marketing, managerial and other non-technical capabilities
or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution
capabilities, whether independently or with third parties, or if we are unable to do so on commercially reasonable terms, our business, results of
operations, financial condition and prospects will be materially adversely affected.
Even if we receive marketing approval for our product candidates, our product candidates may not achieve broad market acceptance, which
would limit the revenue that we generate from their sales.
The commercial success of our product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the
awareness and acceptance of our product candidates among the medical community, including physicians, patients and healthcare payors. Market
acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:
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the efficacy of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in
connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other
available CNS therapies;
limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory
authorities;
the clinical indications for which our product candidates are approved;
availability of alternative treatments already approved or expected to be commercially launched in the near future;
the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future
alternative treatments;
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
the strength of marketing and distribution support and timing of market introduction of competitive products;
publicity concerning our products or competing products and treatments;
pricing and cost effectiveness;
the effectiveness of our sales and marketing strategies;
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our ability to increase awareness of our product candidates through marketing efforts;
our ability to obtain sufficient third-party coverage or reimbursement; or
the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
If our product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate
sufficient revenue from our product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may
require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to
patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant
resources and may never be successful.
Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of
an approved label, or result in significant negative consequences following marketing approval, if any.
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt non-clinical studies and
clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.
Further, clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of
exposure, rare and severe side effects of our product candidates may only be uncovered with a significantly larger number of patients exposed to the
product candidate. If our product candidates receive marketing approval and we or others identify undesirable side effects caused by such product
candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including:
·regulatory authorities may withdraw or limit their approval of such product candidates;
·regulatory authorities may require the addition of labeling statements, such as a “boxed” warning or a contraindication;
·we may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change
the labeling of the product candidates;
·we may be subject to regulatory investigations and government enforcement actions;
·we may decide to remove such product candidates from the marketplace;
·we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and
·our reputation may suffer.
We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates and could
substantially increase the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our
product candidates and generate revenues.
Even if we receive marketing approval for our product candidates, we may still face future development and regulatory difficulties.
Even if we receive marketing approval for our product candidates, regulatory authorities may still impose significant restrictions on our product
candidates, indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Our product candidates will also
be subject to ongoing FDA requirements governing the labeling, packaging, storage and promotion of the product and record keeping and submission
of safety and other post-market information. The FDA has significant post-marketing authority, including, for example, the authority to require
labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the
use of a drug. The FDA also has the authority to require, as part of an NDA or post-approval, the submission of a REMS. Any REMS required by the
FDA may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on
the sale of approved products, all of which could lead to lower sales volume and revenue.
Manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory
authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with our product candidates, such as
adverse events of unanticipated severity or frequency, or problems with the facility where our product candidates are manufactured, a regulatory
agency may impose restrictions on our product candidates, the manufacturer or us, including requiring withdrawal of our product candidates from the
market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with
applicable regulatory requirements, a regulatory agency may, among other things:
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issue warning letters or untitled letters;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw marketing approval;
suspend any ongoing clinical trials;
refuse to approve pending applications or supplements to applications submitted by us;
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall.
Competing therapies could emerge adversely affecting our opportunity to generate revenue from the sale of our product candidates.
The biopharmaceuticals industry is highly competitive. There are many public and private biopharmaceutical companies, universities, governmental
agencies and other research organizations actively engaged in the research and development of products that may be similar to our product candidates
or address similar markets. It is probable that the number of companies seeking to develop products and therapies similar to our products will increase.
Currently, there are no FDA-approved therapies for MDD with the mechanism of action of AV-101. However, products approved for other
indications, for example, the anesthetic ketamine, are being or may be used off-label for treatment of MDD, as well as other CNS indications for
which AV-101 may have therapeutic potential. Additionally, other treatment options, such psychotherapy and electroconvulsive therapy (ECT), are
sometimes used instead of antidepressant medications to treat patients with MDD.
In the field of new generation antidepressants focused on modulation of the NMDA receptor, our principal competitor is Naurex, Inc., which is
developing GLYX-13 and NRX-1074 for treatment-resistant MDD. Although each of these drug candidates is a peptide and may not be orally-active
(GLYX-13 is only administered intravenously and, we believe, NRX-1074 has not yet been administered orally to human subjects), both are new
generation NMDA modulators focused on the glycine binding site of the NMDA receptor.
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and human resources than we
do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of
treatments and the commercialization of those treatments. We believe that a range of pharmaceutical and biotechnology companies have programs to
develop small molecule drug candidates for the treatment of depression, epilepsy, neuropathic pain, Parkinson’s disease and other neurological
conditions and diseases, including, but not limited to, Abbott Laboratories, Actavis, Astra Zeneca, Eli Lilly, GlaxoSmithKline, Johnson & Johnson,
Lundbeck, Merck, Novartis, Otsuka, Pfizer, Roche, Sumitomo Dainippon, and Takeda. Mergers and acquisitions in the biotechnology and
pharmaceutical industries may result in even more resources being concentrated among a smaller number of our competitors. Our commercial
opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less
severe side effects, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other
regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong
market position before we are able to enter the market
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We may seek to establish collaborations, and, if we are not able to establish them on commercially reasonable terms, we may have to alter our
development and commercialization plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund
expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development
and potential commercialization of those product candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for a collaboration will depend,
among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the
proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval
by the FDA or similar regulatory authorities outside the United States, the potential market for the subject product candidate, the costs and
complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty
with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge
and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar
indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with us for our product
candidate. The terms of any collaboration or other arrangements that we may establish may not be favorable to us.
We may also be restricted under existing collaboration agreements from entering into future agreements on certain terms with potential collaborators.
Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business
combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.
We may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If we are unable to do so, we may have to curtail the
development of the product candidate for which we are seeking to collaborate, reduce or delay its development program or one or more of our other
development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase our expenditures and
undertake development or commercialization activities at our own expense. If we elect to increase our expenditures to fund development or
commercialization activities on our own, we may need to obtain additional capital, which may not be available to us on acceptable terms or at all. If
we do not have sufficient funds, we may not be able to further develop our product candidates or bring them to market and generate product revenue.
In addition, any future collaborations that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on
the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will
apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization
matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the
collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations
with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such
termination or expiration would adversely affect us financially and could harm our business reputation.
We may not be successful in our efforts to identify or discover additional product candidates or we may expend our limited resources to pursue a
particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which
there is a greater likelihood of success.
The success of our business depends primarily upon our ability to identify, develop and commercialize biopharmaceutical product candidates.
Although AV-101 is clinical development, our research programs, we may fail to identify other potential product candidates for clinical development
for a number of reasons. Our research methodology may be unsuccessful in identifying potential product candidates or our potential product
candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to
receive marketing approval.
Because we have limited financial and management resources, we focus on a limited number of research programs and product candidates and are
currently focused on AV-101 and our stem cell technology-based drug rescue programs. As a result, we may forego or delay pursuit of opportunities
with other product candidates or for other indications that later prove to have greater commercial potential. Our resource allocation decisions may
cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future research and
development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate
the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through
future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole
development and commercialization rights to such product candidate.
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If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse
effect on our business and could potentially cause us to cease operations. Research programs to identify new product candidates require substantial
technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to
be unsuccessful.
We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational
harm and diminished profits and future earnings.
Although we do not currently have any products on the market, once we begin commercializing our products, we may be subject to additional
healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we
conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product
candidates, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare
laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our
product candidates, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the
following:
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The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the
purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as
Medicare and Medicaid.
The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against
individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or
fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for
Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program
and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission
of individually identifiable health information.
The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any
materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.
The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care
Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the
Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician
payments and other transfers of value and physician ownership and investment interests.
Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or
marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including
private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary
compliance guidelines and the relevant compliance.
guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to
physicians and other healthcare providers or marketing expenditures and drug pricing.
Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible
that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving
applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales
team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant
civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and
Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do
business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions
from government funded healthcare programs.
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The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to
have improperly promoted off-label uses, we may become subject to significant liability.
The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as AV-101, if
approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the
product’s approved labeling. For example, if we receive marketing approval for AV0-101 as a treatment for MDD, physicians may nevertheless
prescribe AV-101 to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we
may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper
promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent
decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion
of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business and
financial condition.
Even if approved, reimbursement policies could limit our ability to sell our product candidates.
Market acceptance and sales of our product candidates will depend on reimbursement policies and may be affected by healthcare reform measures.
Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they
will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the U.S. healthcare industry and
elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of
reimbursement for particular medications. We cannot be sure that reimbursement will be available for our product candidates and, if reimbursement is
available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, our product candidates. If reimbursement is
not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates.
In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental
control. In these countries, pricing negotiations with governmental authorities can take six months or longer after the receipt of regulatory approval
and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to
conduct a clinical trial that compares the cost-effectiveness of our product candidates with other available therapies. If reimbursement for our product
candidates is unavailable in any country in which we seek reimbursement, if it is limited in scope or amount, if it is conditioned upon our completion
of additional clinical trials, or if pricing is set at unsatisfactory levels, our operating results could be materially adversely affected.
Even if we have obtained orphan drug designation for one or more of our product candidates, there may be limits to the regulatory exclusivity
afforded by such designation.
Even if we obtain orphan drug designation from the FDA for one or more of our product candidates, there are limitations to exclusivity afforded by
such designation. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or
condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from
approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances,
including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small
molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question.
To obtain orphan drug exclusivity for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that
the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a
designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received
orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request
for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the
rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represents a major contribution to
patient care.
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Our future growth may depend, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens
and other risks and uncertainties.
Our future profitability may depend, in part, on our ability to commercialize our product candidates in foreign markets for which we may rely on
collaboration with third parties. If we commercialize our product candidates in foreign markets, we would be subject to additional risks and
uncertainties, including:
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our customers’ ability to obtain reimbursement for our product candidates in foreign markets;
our inability to directly control commercial activities because we are relying on third parties;
the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;
different medical practices and customs in foreign countries affecting acceptance in the marketplace;
import or export licensing requirements;
longer accounts receivable collection times;
longer lead times for shipping;
language barriers for technical training;
reduced protection of intellectual property rights in some foreign countries;
the existence of additional potentially relevant third party intellectual property rights;
foreign currency exchange rate fluctuations; and
the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic
instability, trade restrictions and changes in tariffs.
We are a development stage biopharmaceutical company with no current revenues or approved products, and limited experience developing new
drug, biological and/or regenerative medicine candidates, including conducting clinical trials and other areas required for the successful
development and commercialization of therapeutic products, which makes it difficult to assess our future viability.
We are a development stage biopharmaceutical company. Although our lead drug candidate is in Phase 2 development, we currently have no
approved products and generate no revenues, and we have not yet fully demonstrated an ability to overcome many of the fundamental risks and
uncertainties frequently encountered by development stage companies in new and rapidly evolving fields of technology, particularly biotechnology.
To execute our business plan successfully, we will need to accomplish the following fundamental objectives, either on our own or with strategic
collaborators:
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produce product candidates;
develop and obtain required regulatory approvals for commercialization of products we produce;
● maintain, leverage and expand our intellectual property portfolio;
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establish and maintain sales, distribution and marketing capabilities, and/or enter into strategic partnering arrangements to access such
capabilities;
gain market acceptance for our products; and
obtain adequate capital resources and manage our spending as costs and expenses increase due to research, production, development,
regulatory approval and commercialization of product candidates.
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Our future success is highly dependent upon our ability to successfully develop AV-101 and produce proprietary new chemical entities (NCEs)
using our stem cell technology, human cells derived from stem cells, our proprietary human cell-based bioassay systems and medicinal chemistry,
and we cannot provide any assurance that we will successfully develop AV-101 or NCEs , or that, if produced, AV-101 or any drug rescue-related
NCEs will be successfully commercialized.
Research programs designed to identify and produce drug rescue NCEs require substantial technical, financial and human resources, whether or not
any NCEs are ultimately identified and produced. In particular, our drug rescue programs may initially show promise in identifying potential NCEs,
yet fail to yield a lead NCE suitable for preclinical, clinical development or commercialization for many reasons, including the following:
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our drug rescue research methodology may not be successful in identifying potential drug rescue NCEs;
competitors may develop alternatives that render our drug rescue NCEs obsolete;
a drug rescue NCE may, on further study, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be
effective or otherwise does not meet applicable regulatory criteria;
a drug rescue NCE may not be capable of being produced in commercial quantities at an acceptable cost, or at all; or
a drug rescue NCE may not be accepted as safe and effective by regulatory authorities, patients, the medical community or third-party
payors.
In addition, we do not have a sales or marketing infrastructure, and we, including our executive officers, do not have any significant sales, marketing
or distribution experience. We may seek to collaborate with others to develop and commercialize AV-101, drug rescue NCEs and other future product
candidates if and when they are developed. If we enter into arrangements with third parties to perform sales, marketing and distribution services for
our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed
our products ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute AV-101,
any drug rescue NCEs or other product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over
such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our products
effectively. If we do not establish sales, marketing and distribution capabilities successfully, in collaboration with third parties, we will not be
successful in commercializing our product candidates.
We have limited operating history with respect to drug development, including our anticipated focus on the identification and assessment of
potential drug rescue NCEs and no operating history with respect to the production of drug rescue NCEs, and we may never be able to produce a
drug rescue NCE.
If we are unable to develop and commercialize AV-101 or produce suitable drug rescue NCEs for internal development or out-license to
pharmaceutical companies and others, we may not be able to generate sufficient revenues to execute our business plan, which likely would result in
significant harm to our financial position and results of operations, which could adversely impact our stock price.
There are a number of factors, in addition to the utility of CardioSafe 3D, that may impact our ability to identify and produce, develop or out-license
and commercialize drug rescue NCEs, independently or with strategic partners, including:
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our ability to identify potential drug rescue candidates in the public domain, obtain sufficient quantities of them, and assess them using our
bioassay systems;
if we seek to rescue drug rescue candidates that are not available to us in the public domain, the extent to which third parties may be willing
to out-license or sell certain drug rescue candidates to us on commercially reasonable terms;
our medicinal chemistry collaborator’s ability to design and produce proprietary drug rescue NCEs based on the novel biology and
structure-function insight we provide using CardioSafe 3D or LiverSafe 3D; and
financial resources available to us to develop and commercialize lead drug rescue NCEs internally, or, if we out-license them to strategic
partners, the resources such partners choose to dedicate to development and commercialization of any drug rescue NCEs they license from
us.
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Even if we do produce proprietary drug rescue NCEs, we can give no assurance that we will be able to develop and commercialize them as a
marketable drug, on our own or in a strategic collaboration. Before we generate any revenues from AV-101 and/or additional drug rescue NCEs we or
our potential strategic collaborator must complete preclinical and clinical developments, submit clinical and manufacturing data to the FDA, qualify a
third party contract manufacturer, receive regulatory approval in one or more jurisdictions, satisfy the FDA that our contract manufacturer is capable
of manufacturing the product in compliance with cGMP, build a commercial organization, make substantial investments and undertake significant
marketing efforts ourselves or in partnership with others. We are not permitted to market or promote any of our product candidates before we receive
regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our
product candidates.
If CardioSafe 3D fails to predict accurately and efficiently the cardiac effects, both toxic and nontoxic, of drug rescue candidates and drug rescue
NCEs, then our drug rescue business will be adversely affected.
Our success is highly dependent on our ability to use CardioSafe 3D to identify and predict, accurately and efficiently, the potential toxic and
nontoxic cardiac effects of drug rescue candidates and drug rescue NCEs. If CardioSafe 3D is not capable of providing physiologically relevant and
clinically predictive information regarding human cardiac biology, our drug rescue business will be adversely affected.
We have not yet fully validated LiverSafe 3D for potential drug rescue applications, and we may never do so.
We have developed proprietary protocols for controlling the differentiation of human pluripotent stem cells and producing functional, mature, adult
liver cells we believe are superior to primary (cadaver) hepatocytes used in in vitro testing. However, we have not yet fully validated our ability to use
the human liver cells we produce for LiverSafe 3D to predict important biological effects, both toxic and nontoxic, of reference drugs, drug rescue
candidates or drug rescue NCEs on the human liver, including drug-induced liver injury and adverse drug-drug interactions. Furthermore, we may
never be able to do so, which could adversely affect our business and the potential applications of LiverSafe 3D for drug discovery, drug rescue and
regenerative medicine.
CardioSafe 3D, and, if validated, LiverSafe 3D may not be meaningfully more predictive of the behavior of human cells than existing methods.
The success of our drug rescue business is highly dependent, in the first instance, upon CardioSafe 3D, and, in the second instance, if validated,
LiverSafe 3D, being more accurate, efficient and clinically predictive than long-established surrogate safety models, including animal cells and live
animals, and immortalized, primary and transformed cells, currently used by pharmaceutical companies and others. We cannot give assurance that
CardioSafe 3D, and, when validated, LiverSafe 3D, will be more efficient or accurate at predicting the heart or liver safety of new drug candidates
than the testing models currently used. If CardioSafe 3D and LiverSafe 3D fail to provide a meaningful difference compared to existing or new
models in predicting the behavior of human heart and liver cells, respectively, their utility for drug rescue will be limited and our drug rescue
business will be adversely affected.
We may invest in producing drug rescue NCEs for which there proves to be no demand.
To generate revenue from our drug rescue activities, we must produce proprietary drug rescue NCEs for which there proves to be demand within the
healthcare marketplace, and, if we intend to out-license a particular drug rescue NCE for development and commercialization prior to market
approval, then also among pharmaceutical companies and other potential strategic collaborators. However, we may produce drug rescue NCEs for
which there proves to be no or limited demand in the healthcare market and/or among pharmaceutical companies and others. If we misinterpret market
conditions, underestimate development costs and/or seek to rescue the wrong drug rescue candidates, we may fail to generate sufficient revenue or
other value, on our own or in collaboration with others, to justify our investments, and our drug rescue business may be adversely affected.
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We may experience difficulty in producing human cells and our future stem cell technology research and development efforts may not be
successful within the timeline anticipated, if at all.
Our human pluripotent stem cell technology is new and technically complex, and the time and resources necessary to develop new cell types and
customized bioassay systems are difficult to predict in advance. We intend to devote significant personnel and financial resources to research and
development activities designed to expand, in the case of drug rescue, and explore, in the case of drug discovery and regenerative medicine, potential
applications of our stem cell technology platform. In particular, we may conduct research and development programs related to producing and using
functional, mature adult liver cells to validate LiverSafe 3D as a novel bioassay system for drug rescue, as well as exploratory nonclinical regenerative
medicine programs involving blood, bone, cartilage, heart, and liver. Although we and our collaborators have developed proprietary protocols for the
production of multiple differentiated cell types, we may encounter difficulties in differentiating particular cell types, even when following these
proprietary protocols. These difficulties may result in delays in production of certain cells, assessment of certain drug rescue candidates and drug
rescue NCEs, design and development of certain human cellular assays and performance of certain exploratory nonclinical regenerative medicine
studies. In the past, our stem cell research and development projects have been significantly delayed when we encountered unanticipated difficulties
in differentiating human pluripotent stem cells into heart and liver cells. Although we have overcome such difficulties in the past, we may have
similar delays in the future, and we may not be able to overcome them or obtain any benefits from our future stem cell technology research and
development activities. Any delay or failure by us, for example, to produce functional, mature blood, bone, cartilage, and liver cells could have a
substantial and material adverse effect on our potential drug discovery, drug rescue and regenerative medicine business opportunities and results of
operations.
Restrictions on research and development involving human embryonic stem cells and religious and political pressure regarding such stem cell
research and development could impair our ability to conduct or sponsor certain potential collaborative research and development programs and
adversely affect our prospects, the market price of our common stock and our business model.
Some of our ongoing and planned research and development programs involve the use of human cells derived from our controlled differentiation of
human embryonic stem cells (hESCs). Some believe the use of hESCs gives rise to ethical and social issues regarding the appropriate use of these
cells. Our research related to differentiation of hESCs may become the subject of adverse commentary or publicity, which could significantly harm
the market price of our common stock. Although now substantially less than in years past, certain political and religious groups in the United States
and elsewhere voice opposition to hESC technology and practices. We use hESCs derived from excess fertilized eggs that have been created for
clinical use in in vitro fertilization (IVF) procedures and have been donated for research purposes with the informed consent of the donors after a
successful IVF procedure because they are no longer desired or suitable for IVF. Certain academic research institutions have adopted policies
regarding the ethical use of human embryonic tissue. These policies may have the effect of limiting the scope of future collaborative research
opportunities with such institutions, thereby potentially impairing our ability to conduct certain research and development in this field that we believe
is necessary to expand the drug rescue capabilities of our technology, which would have a material adverse effect on our business.
The use of embryonic or fetal tissue in research (including the derivation of hESCs) in other countries is regulated by the government, and varies
widely from country to country. Government-imposed restrictions with respect to use of hESCs in research and development could have a material
adverse effect on us by harming our ability to establish critical collaborations, delaying or preventing progress in our research and development, and
causing a decrease in the market interest in our stock. These potential ethical concerns do not apply to induced pluripotent stem cells (iPSCs), or our
plans to pursue studies involving human cells derived from iPSCs, because their derivation does not involve the use of embryonic tissues.
We have assumed that the biological capabilities of induced pluripotent stem cells (iPSCs) and hESCs are likely to be comparable. If it is
discovered that this assumption is incorrect, our exploratory research and development activities focused on potential regenerative medicine
applications of our stem cell technology platform could be harmed.
We use both hESCs and iPSCs to produce human cells for our customized in vitro assays for drug discovery and drug rescue purposes. However, we
anticipate that our future exploratory research and development focused on potential regenerative medicine applications of our stem cell technology
platform primarily will involve iPSCs. With respect to iPSCs, we believe scientists are still somewhat uncertain about the clinical utility, life span,
and safety of such cells, and whether such cells differ in any clinically significant ways from hESCs. If we discover that iPSCs will not be useful for
whatever reason for potential regenerative medicine programs, this would negatively affect our ability to explore expansion of our platform in that
manner, including, in particular, where it would be preferable to use iPSCs to reproduce rather than approximate the effects of certain specific genetic
variations.
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If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that
could have a material adverse effect on the success of our business.
We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling,
use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials,
including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the
disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or
injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources.
We also could incur significant costs associated with civil or criminal fines and penalties.
Although we maintain workers' compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting
from the use of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for
environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or
radioactive materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These
current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations
also may result in substantial fines, penalties or other sanctions, which could have a material adverse effect on our operations.
To the extent our research and development activities involve using induced pluripotent stem cells, we will be subject to complex and evolving laws
and regulations regarding privacy and informed consent. Many of these laws and regulations are subject to change and uncertain interpretation,
and could result in claims, changes to our research and development programs and objectives, increased cost of operations or otherwise harm the
Company.
To the extent that we pursue research and development activities involving iPSCs, we will be subject to a variety of laws and regulations in the United
States and abroad that involve matters central to such research and development activities, including obligations to seek informed consent from donors
for the use of their blood and other tissue to produce, or have produced for us, iPSCs, as well as state and federal laws that protect the privacy of such
donors. United States federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. If we engage
in iPSC-related research and development activities in countries other than the United States, we may become subject to foreign laws and regulations
relating to human subjects research and other laws and regulations that are often more restrictive than those in the United States. In addition, both the
application and interpretation of these laws and regulations are often uncertain, particularly in the rapidly evolving stem cell technology sector in
which we operate. These laws and regulations can be costly to comply with and can delay or impede our research and development activities, result in
negative publicity, increase our operating costs, require significant management time and attention and subject us to claims or other remedies,
including fines or demands that we modify or cease existing business practices.
Legal, social and ethical concerns surrounding the use of iPSCs, biological materials and genetic information could impair our operations.
To the extent that our future stem cell research and development activities involve the use of iPSCs and the manipulation of human tissue and genetic
information, the information we derive from such iPSC-related research and development activities could be used in a variety of applications, which
may have underlying legal, social and ethical concerns, including the genetic engineering or modification of human cells, testing for genetic
predisposition for certain medical conditions and stem cell banking. Governmental authorities could, for safety, social or other purposes, call for
limits on or impose regulations on the use of iPSCs and genetic testing or the manufacture or use of certain biological materials involved in our iPSC-
related research and development programs. Such concerns or governmental restrictions could limit our future research and development activities,
which could have a material adverse effect on our business, financial condition and results of operations.
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Our human cellular bioassay systems and human cells we derive from human pluripotent stem cells, although not currently subject to regulation
by the FDA or other regulatory agencies as biological products or drugs, could become subject to regulation in the future.
Our human cells and human cell-based bioassay systems, including CardioSafe 3D and LiverSafe 3D, are not currently sold, for research or any other
purpose, to biotechnology or pharmaceutical companies, government research institutions, academic and nonprofit research institutions, medical
research organizations or stem cell banks, and they are not therapeutic procedures. As a result, they are not subject to regulation as biological products
or drugs by the FDA or comparable agencies in other countries. However, if, in the future, we seek to include cells we derive from human pluripotent
stem cells in therapeutic applications or product candidates, such applications and/or product candidates would be subject to the FDA’s pre- and post-
market regulations. For example, if we seek to develop and market human cells we produce for use in performing cell therapy or for other
regenerative medicine applications, such as tissue engineering or organ replacement, we would first need to obtain FDA pre-market clearance or
approval. Obtaining such clearance or approval from the FDA is expensive, time-consuming and uncertain, generally requiring many years to obtain,
and requiring detailed and comprehensive scientific and clinical data. Notwithstanding the time and expense, these efforts may not result in FDA
approval or clearance. Even if we were to obtain regulatory approval or clearance, it may not be for the uses that we believe are important or
commercially attractive.
General Company-Related Risks
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully produce, develop and
commercialize AV-101, drug rescue NCEs and any additional commercial applications of our stem cell technology.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management and scientific and technical
personnel. We are highly dependent upon our senior management, as well as other employees, consultants and scientific collaborators. As of the date
of this report, we have nine full-time employees, which may make us more reliant on our individual employees than companies with a greater number
of employees. The loss of services of any of these individuals could delay or prevent the successful development of AV-101 and potential expansions
and applications of our stem cell technology platform, including our production and assessment of potential drug recuse NCEs or disrupt our
administrative functions.
Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in
the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will need to hire additional
personnel as we expand our research and development activities. We may not be able to attract and retain quality personnel on acceptable terms.
In addition, we rely on a diverse range of consultants and advisors, including scientific and clinical development advisors, to assist us in designing our
research and development strategies, including our AV-101 development and drug rescue strategies and plans. Our consultants and advisors may be
employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their
availability to us.
We may encounter difficulties in managing our growth and expanding our operations successfully.
As we seek to advance development of AV-101 for MDD and other CNS-related conditions, as well as cell production, assay development, drug
discovery, drug rescue, and drug rescue NCE development programs, we will need to expand our research and development capabilities or contract
with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with
various strategic partners and other third parties. Future growth will impose significant added responsibilities on members of management. Our future
financial performance and our ability to develop and commercialize our product candidates and to compete effectively will depend, in part, on our
ability to manage any future growth effectively. To that end, we must be able to manage our research and development efforts effectively and hire,
train and integrate additional management, administrative and technical personnel. The hiring, training and integration of new employees may be
more difficult, costly and/or time-consuming for us because we have fewer resources than a larger organization. We may not be able to accomplish
these tasks, and our failure to accomplish any of them could prevent us from successfully growing the company.
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If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our
product candidates.
If we develop AV-101, drug rescue NCEs or regenerative medicine-related products, either on our own or in collaboration with others, we will face an
inherent risk of product liability as a result of the required clinical testing of such product candidates, and will face an even greater risk if we or our
collaborators commercialize any such products. For example, we may be sued if AV-101, any drug rescue NCE or regenerative medicine product we
develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product
liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence,
strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend
ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates.
Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims
may result in:
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decreased demand for products that we may develop;
injury to our reputation;
withdrawal of clinical trial participants;
costs to defend the related litigation;
a diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
the inability to commercialize our product candidates; and
a decline in our stock price.
Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could
prevent or inhibit the commercialization of products we develop. Although we maintain liability insurance, any claim that may be brought against us
could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of
our insurance coverage. Our insurance policies also have various exclusions, and we may be subject to a product liability claim for which we have no
coverage. We will have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not
covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.
As we continue to grow, we will need to hire additional qualified accounting and financial personnel with appropriate public company experience.
As we continue to grow our organization, we will need to establish and maintain more elaborate disclosure and financial controls and make changes
in our corporate governance practices. We will need to hire additional accounting and financial personnel with appropriate public company
experience and technical accounting knowledge, and it may be difficult to recruit and maintain such personnel. Even if we are able to hire appropriate
personnel, our existing operating expenses and operations will be impacted by the direct costs of their employment and the indirect consequences
related to the diversion of management resources from product development efforts.
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Unfavorable global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general conditions in the global economy and in the global financial markets. The recent
global financial crisis caused extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as
the recent global financial crisis, could result in a variety of risks to our business, including, weakened demand for our product candidates and our
ability to raise additional capital when needed on acceptable terms, if at all. A weak or declining economy could also strain our suppliers, possibly
resulting in supply disruption, or cause our customers to delay making payments for our services. Any of the foregoing could harm our business and
we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
We or the third parties upon whom we depend may be adversely affected by natural disasters and our business continuity and disaster recovery
plans may not adequately protect us from a serious disaster.
Natural disasters could severely disrupt our operations, and have a material adverse effect on our business, results of operations, financial condition
and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our headquarters,
that damaged critical infrastructure, such as the manufacturing facilities of our third-party CMOs, or that otherwise disrupted operations, it may be
difficult or, in certain cases, impossible for us to continue our business for a substantial period of time. The disaster recovery and business continuity
plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the
limited nature of our disaster recovery and business continuity plans, which, could have a material adverse effect on our business.
Our internal computer systems, or those of our third-party CROs or other contractors or consultants, may fail or suffer security breaches, which
could result in a material disruption of our product candidates’ development programs.
Despite the implementation of security measures, our internal computer systems and those of our third-party CROs and other contractors and
consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and
electrical failures. While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and
cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for our
product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To
the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our
technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further
development of our product candidates could be delayed.
We may acquire businesses or products, or form strategic alliances, in the future, and we may not realize the benefits of such acquisitions.
We may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement
or augment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of
acquiring such businesses if we are unable to successfully integrate them with our existing operations and company culture. We may encounter
numerous difficulties in developing, manufacturing and marketing any new products resulting from a strategic alliance or acquisition that delay or
prevent us from realizing their expected benefits or enhancing our business. We cannot assure you that, following any such acquisition, we will
achieve the expected synergies to justify the transaction.
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Risks Related to Our Financial Position and Need for Capital
We have incurred significant net losses since inception and we will continue to incur substantial operating losses for the foreseeable future. We
may never achieve or sustain profitability, which would depress the market price of our common stock, and could cause you to lose all or a part of
your investment.
We have incurred significant net losses in each fiscal year since our inception in 1998, including net losses of $13.9 million and $3.0 million during
the fiscal years ending March 31, 2015 and 2014, respectively. As of March 31, 2015, we had an accumulated deficit of $84.5 million. We do not
know whether or when we will become profitable. Substantially all of our operating losses have resulted from costs incurred in connection with our
research and development programs and from general and administrative costs associated with our operations. We expect to incur increasing levels of
operating losses over the next several years and for the foreseeable future. Our prior losses, combined with expected future losses, have had and will
continue to have an adverse effect on our stockholders’ deficit and working capital. We expect our research and development expenses to significantly
increase in connection with non-clinical studies and clinical trials of our product candidates. In addition, if we obtain marketing approval for our
product candidates, we will incur significant sales, marketing and outsourced-manufacturing expenses. As a public company, we incur additional
costs associated with operating as a public company. As a result, we expect to continue to incur significant and increasing operating losses for the
foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the
extent of any future losses or when we will become profitable, if at all. Even if we do become profitable, we may not be able to sustain or increase our
profitability on a quarterly or annual basis.
Our ability to become profitable depends upon our ability to generate revenue. To date, although we have generated approximately $16.4 million in
revenues, we have not commercialized any products or generated any revenues from product sales, and we do not know when, or if, we will generate
any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to sell,
AV-101. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:
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initiate and successfully complete clinical trials that meet their clinical endpoints;
initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for our product candidates;
commercialize our product candidates, if approved, by developing a sales force or entering into collaborations with third parties; and
achieve market acceptance of our product candidates in the medical community and with third-party payors.
Absent our entering into a collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to
commercialize our product candidates. Even if we initiate and successfully complete pivotal clinical trials of our product candidates, and our
product candidates are approved for commercial sale, and despite expending these costs, our product candidates may not be a commercially
successful drug. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue,
we will not become profitable and may be unable to continue operations without continued funding.
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Our independent auditors have expressed substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements for the year ended March 31, 2015 included in this Annual Report on Form 10-K have been prepared assuming
we will continue to operate as a going concern. However, due to our ongoing operating losses and our accumulated deficit, there is doubt about our
ability to continue as a going concern. Because we continue to experience net operating losses, our ability to continue as a going concern is subject to
our ability to obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities or obtaining loans
and grants from financial institutions and/or government agencies where possible. Our continued net operating losses increase the difficulty in
completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on
favorable terms or at all. If we are unable to obtain sufficient financing from the sale of our securities or from alternative sources, we may be required
to reduce, defer, or discontinue certain of our research and development activities or we may not be able to continue as a going concern.
We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed could force us to
delay, limit, reduce or terminate our product development or commercialization efforts.
Since our inception, most of our resources have been dedicated to research and development of AV-101 and the drug rescue capabilities of our human
pluripotent stem cell technology. In particular, we have expended substantial resources advancing AV-101 through preclinical development and Phase
1 safety studies and developing CardioSafe 3D and LiverSafe 3D, and we will continue to expend substantial resources for the foreseeable future
developing and commercializing AV-101, validating LiverSafe 3D, and developing drug rescue NCEs. These expenditures will include costs
associated with general and administrative costs, facilities costs, research and development, acquiring new technologies, manufacturing product
candidates, conducting preclinical experiments and clinical trials and obtaining regulatory approvals, as well as commercializing any products
approved for sale. Furthermore, we expect to incur additional costs associated with operating as a public company.
We have no current source of revenue to sustain our present activities, and we do not expect to generate revenue until, and unless, we out-license or
sell AV-101, a drug rescue NCE, customized drug discovery and predictive toxicology assays or other product candidates to a third party, obtain
approval from the FDA or other regulatory authorities and successfully commercialize, on our own or through a future collaboration, one or more of
our compounds. As the outcome of our proposed drug rescue and AV-101 development activities and future anticipated clinical trials is highly
uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our
product candidates, on our own or in collaboration with others. In addition, other unanticipated costs may arise. As a result of these and other factors,
we will need to seek additional capital in the near term to meet our future operating requirements, and may seek additional capital in the event there
exists favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans.
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Our future capital requirements depend on many factors, including:
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the number and characteristics of the product candidates we pursue, including AV-101 or drug rescue NCEs;
the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical studies;
the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates;
the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution
costs;
the cost of manufacturing our product candidates and any products we successfully commercialize;
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
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the effect of competing technological and market developments;
our ability to obtain government funding for our programs;
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims necessary to preserve our freedom
to operate in the stem cell industry, including litigation costs associated with any claims that we infringe third-party patents or violate other
intellectual property rights and the outcome of such litigation;
the timing, receipt and amount of potential future licensee fees, milestone payments, and sales of, or royalties on, our future products, if
any; and
the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or
agreements relating to any of these types of transactions.
Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If adequate funds are not available to us on a
timely basis, we may be required to delay, limit, reduce or terminate research and development activities for one or more of our product candidates, or
cease or reduce our operating activities and/or sell or license to third parties some or all of our intellectual property, any of which could harm our
operating results.
Failure to obtain this necessary capital when needed may force us to delay, limit or terminate our product development efforts or other operations.
We are currently advancing our product candidates through non-clinical and clinical development. Developing small molecule products is expensive,
and we expect our research and development expenses to increase substantially in connection with our ongoing activities, particularly as we advance
our product candidate in clinical trials. Depending on the status of regulatory approval or, if approved, commercialization of our product candidates,
as well as the progress we make in selling our product candidates, we may require additional capital to fund operating needs thereafter. We may also
need to raise additional funds sooner if we choose to pursue additional indications and/or geographies for our product candidates or otherwise expand
more rapidly than we presently anticipate.
At March 31, 2015, our existing cash and cash equivalents were not sufficient to fund our current operations for the next 12 months. As a result, we
are seeking additional funds at this time, and are considering or may consider in the future a range of potential sources of funding, including public or
private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic
alliances and licensing arrangements or a combination of these approaches. In any event, we will require additional capital to obtain regulatory
approval for, and to commercialize, our product candidates. Raising funds in the current economic environment may present additional challenges.
Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are
favorable or if we have specific strategic considerations.
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Any additional fundraising efforts may divert our management from their day-to-day activities, which may adversely affect our ability to develop and
commercialize our product candidates. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms
acceptable to us, if at all. Moreover, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of
additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale
of additional equity or convertible securities would dilute all of our stockholders. The incurrence of indebtedness would result in increased fixed
payment obligations and we may be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt,
limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability
to conduct our business. We could also be required to seek funds through arrangements with collaborative partners or otherwise at an earlier stage
than otherwise would be desirable and we may be required to relinquish rights to some of our technologies or product candidate or otherwise agree to
terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail, delay or discontinue one or more of our research or
development programs or the commercialization of any product candidate or be unable to expand our operations or otherwise capitalize on our
business opportunities, as desired, which could materially affect our business, financial condition and results of operations.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights.
We may seek additional capital through a combination of private and public equity offerings, debt financings, collaborations and strategic and
licensing arrangements. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into
common stock, your ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidation or other
preferences that materially adversely affect your rights as a stockholder. Debt financing, if available, would increase our fixed payment obligations
and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt,
making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensing
arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our intellectual property, future revenue streams
or grant licenses on terms that are not favorable to us
Some of our programs have been partially supported by government grants, which may not be available to us in the future.
Since inception, we have received substantial funds under grant award programs funded by state and federal governmental agencies, such as the NIH,
the NIH’s National Institute of Neurological Disease and Stroke and the California Institute for Regenerative Medicine. To fund a portion of our
future research and development programs, we may apply for additional grant funding from such or similar governmental organizations. However,
funding by these governmental organizations may be significantly reduced or eliminated in the future for a number of reasons. For example, some
programs are subject to a yearly appropriations process in Congress. In addition, we may not receive funds under future grants because of budgeting
constraints of the agency administering the program. Therefore, we cannot assure you that we will receive any future grant funding from any
government organization or otherwise. A restriction on the government funding available to us could reduce the resources that we would be able to
devote to future research and development efforts. Such a reduction could delay the introduction of new products and hurt our competitive position.
Our ability to use net operating losses to offset future taxable income is subject to certain limitations.
As of March 31, 2015, we had federal and state net operating loss carryforwards of $58.7 million and $53.1 million, respectively, which begin to
expire in fiscal 2016. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, changes in our ownership may limit the
amount of our net operating loss carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would
generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation
may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire. Any such
limitation, whether as the result of future offerings, prior private placements, sales of our common stock by our existing stockholders or additional
sales of our common stock by us in the future, could have a material adverse effect on our results of operations in future years. We have not
completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership
changes since our inception, due to the significant costs and complexities associated with such study.
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Risks Related to Our Intellectual Property Rights
If we are unable to adequately protect our proprietary technology, or obtain and maintain issued patents that are sufficient to protect our product
candidates, others could compete against us more directly, which would have a material adverse impact on our business, results of operations,
financial condition and prospects.
We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking patents intended to
cover our products and compositions, their methods of use and any other inventions that are important to the development of our business. We also
rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important
technology, inventions and know-how related to our business, defend and enforce our patents, should they issue, preserve the confidentiality of our
trade secrets and operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how,
continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of our product
candidates. Our owned and licensed patents and patent applications relate to AV-101 and, in general, human pluripotent stem cell technology.
We currently have no issued patents covering AV-101. We cannot provide any assurances that any of our pending patent applications relating to AV-
101 will mature into issued patents and, if they do, that such patents will include, claims with a scope sufficient to protect AV-101 or otherwise
provide any competitive advantage. Moreover, other parties may have developed technologies that may be related or competitive to our approach,
and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent
applications, either by claiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-
party patent positions may limit or even eliminate our ability to obtain patent protection for certain inventories.
The patent positions of biotechnology and pharmaceutical companies, including our patent position, involve complex legal and factual questions, and,
therefore, the issuance, scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if
issued, may be challenged, deemed unenforceable, invalidated, or circumvented. U.S. patents and patent applications may also be subject to
interference proceedings, ex parte reexamination, or inter partes review proceedings, supplemental examination and challenges in district court.
Patents may be subjected to opposition, post-grant review, or comparable proceedings lodged in various foreign, both national and regional, patent
offices. These proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more
of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents, should they issue, that we may own
or exclusively license may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result
in a third party receiving the patent right sought by us, which in turn could affect our ability to develop, market or otherwise commercialize our
product candidates.
Furthermore, though a patent, if it were to issue, is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability
and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Even if a patent
issues and is held to be valid and enforceable, competitors may be able to design around our patents, such as using pre-existing or newly developed
technology. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to
prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current
employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may
encounter significant problems in protecting our proprietary rights in these countries. If these developments were to occur, they could have a material
adverse effect on our sales.
Our ability to enforce our patent rights depends on our ability to detect infringement. It is difficult to detect infringers who do not advertise the
components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or
potential competitor’s product. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming
and would divert the attention of our management and key personnel from our business operations. We may not prevail in any lawsuits that we initiate
and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.
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In addition, proceedings to enforce or defend our patents, if and when issued, could put our patents at risk of being invalidated, held unenforceable, or
interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or
more of our patents are invalid or otherwise unenforceable. If any of our patents, if and when issued, covering our product candidates are invalidated
or found unenforceable, our financial position and results of operations would be materially and adversely impacted. In addition, if a court found that
valid, enforceable patents held by third parties covered our product candidates, our financial position and results of operations would also be
materially and adversely impacted.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
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any of our AV-101 or other pending patent applications, if issued, will include claims having a scope sufficient to protect AV-101 or any other
products or product candidates;
any of our pending patent applications will issue as patents at all;
we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire;
we were the first to make the inventions covered by each of our patents and pending patent applications;
we were the first to file patent applications for these inventions;
others will not develop similar or alternative technologies that do not infringe our patents;
others will not use pre-existing technology to effectively compete against us;
any of our patents, if issued, will be found to ultimately be valid and enforceable;
any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any
competitive advantages or will not be challenged by third parties;
we will develop additional proprietary technologies or product candidates that are separately patentable; or
that our commercial activities or products will not infringe upon the patents or proprietary rights of others.
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We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive
position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that
technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the
employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies
for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise
become known or be independently discovered by our competitors.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from
commercializing or increase the costs of commercializing our product candidates, if approved.
Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. We cannot
assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.
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The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege
that our product candidates or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are
employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize our current product
candidates and future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business
strategies designed to impede our successful commercialization. There may be third-party patents or patent applications with claims to materials,
formulations, methods of manufacture or methods for treatment related to the use or manufacture of our product candidates. Because patent
applications can take many years to issue, third parties may have currently pending patent applications which may later result in issued patents that
our product candidates may infringe, or which such third parties claim are infringed by our technologies. The outcome of intellectual property
litigation is subject to uncertainties that cannot be adequately quantified in advance. The coverage of patents is subject to interpretation by the courts,
and the interpretation is not always uniform. If we are sued for patent infringement, we would need to demonstrate that our product candidates,
products or methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid, and we may not be able to do
this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific
personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient
resources to bring these actions to a successful conclusion.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim
relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble
damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and
royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim were successfully asserted against us
and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our
product candidates.
Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these
proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to
seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and
time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
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cease developing, selling or otherwise commercializing our product candidates;
pay substantial damages for past use of the asserted intellectual property;
obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
in the case of trademark claims, redesign, or rename, some or all of our product candidates to avoid infringing the intellectual property rights
of third parties, which may not be possible and, even if possible, could be costly and time-consuming.
Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators,
sponsored researchers and other advisors. These agreements generally provide that inventions conceived by the party in the course of rendering
services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property
rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is
required to assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such
inventions to us, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution.
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Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable
intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such
claims, litigation could result in substantial costs and be a distraction to management and other employees.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these
requirements.
The U.S. Patent and Trademark Office, or U.S. PTO, and various foreign governmental patent agencies require compliance with a number of
procedural, documentary, fee payment and other provisions during the patent process. There are situations in which noncompliance can result in
abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an
event, competitors might be able to enter the market earlier than would otherwise have been the case.
We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time-consuming and
unsuccessful.
Even if the patent applications we own or license are issued, competitors may infringe these patents. To counter infringement or unauthorized use, we
may be required to file infringement claims, which can be expensive and time-consuming. In addition, in an infringement proceeding, a court may
decide that a patent of ours or our licensors is not valid, is unenforceable and/or is not infringed, or may refuse to stop the other party from using the
technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation or defense proceedings
could put one or more of our patents at risk of being invalidated or interpreted narrowly and could put our patent applications at risk of not issuing.
Interference proceedings provoked by third parties or brought by us may be necessary to determine the priority of inventions with respect to our
patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or to attempt to
license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commercially
reasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract our
management and other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our intellectual property rights,
particularly in countries where the laws may not protect those rights as fully as in the United States.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the
results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it
could have a material adverse effect on the price of our common stock.
Issued patents covering our product candidates could be found invalid or unenforceable if challenged in court.
If we or one of our licensing partners initiated legal proceedings against a third party to enforce a patent, if and when issued, covering one of our
product candidates, the defendant could counterclaim that the patent covering our product candidate is invalid and/or unenforceable. In patent
litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge
include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for
unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the U.S.
PTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the United
States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post grant review and equivalent proceedings in
foreign jurisdictions, e.g., opposition proceedings. Such proceedings could result in revocation or amendment of our patents in such a way that they
no longer cover our product candidates or competitive products. The outcome following legal assertions of invalidity and unenforceability is
unpredictable. With respect to validity, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner
were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part,
and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our
business.
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We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce
our intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world would be prohibitively
expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those in the United States,
assuming that rights are obtained in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the
same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in
all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other
jurisdictions. The statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our
patent applications. For the patent applications AV-101, as well as for many of the patent families that we own or license, the relevant statutory
deadlines have not yet expired. Thus, for each of the patent families that we believe provide coverage for our lead product candidates or technologies,
we will need to decide whether and where to pursue protection outside the United States.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further,
may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States.
These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them
from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not
be effective or sufficient to prevent third parties from so competing.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies
have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of
some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those
relating to biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other
intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to
third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government
contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis,
which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain
countries, and we will not have the benefit of patent protection in such countries.
Furthermore, proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not
issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other
remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world
may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We are dependent, in part, on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to
continue developing or commercializing our product candidates, if approved. If we breach any of the agreements under which we license the use,
development and commercialization rights to our product candidates or technology from third parties or, in certain cases, we fail to meet certain
development or payment deadlines, we could lose license rights that are important to our business.
We are a party to a number of license agreements under which we are granted rights to intellectual property that are or could become important to our
business, and we expect that we may need to enter into additional license agreements in the future. Our existing license agreements impose, and we
expect that future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of fees,
milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy,
the licensor may have the right to terminate the license, in which event we would not be able to develop or market products which could be covered
by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the
license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on
acceptable terms. See “Business—Licenses” for a description of our license agreements, which includes a description of the termination provisions of
these agreements.
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As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product
candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current product candidates
or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we
are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we
may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable
to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual
property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other
forms of compensation.
Licensing of intellectual property is of critical importance to our business and involves complex legal, business and scientific issues. Disputes may
arise between us and our licensors regarding intellectual property subject to a license agreement, including:
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•
•
•
the scope of rights granted under the license agreement and other interpretation-related issues;
whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the
licensing agreement;
our right to sublicense patent and other rights to third parties under collaborative development relationships;
our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our
product candidates, and what activities satisfy those diligence obligations; and
•
the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our
partners.
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable
terms, we may be unable to successfully develop and commercialize the affected product candidates.
We have entered into several licenses to support our various programs. We may enter into additional license(s) to third-party intellectual property that
are necessary or useful to our business. Our current licenses and any future licenses that we may enter into impose various royalty payment,
milestone, and other obligations on us. For example, the licensor may retain control over patent prosecution and maintenance under a license
agreement, in which case, we may not be able to adequately influence patent prosecution or prevent inadvertent lapses of coverage due to failure to
pay maintenance fees. If we fail to comply with any of our obligations under a current or future license agreement, our licensor(s) may allege that we
have breached our license agreement and may accordingly seek to terminate our license with them. In addition, future licensor(s) may decide to
terminate our license at will. Termination of any of our current or future licenses could result in our loss of the right to use the licensed intellectual
property, which could materially adversely affect our ability to develop and commercialize a product candidate or product, if approved, as well as
harm our competitive business position and our business prospects.
In addition, if our licensors fail to abide by the terms of the license, if the licensors fail to prevent infringement by third parties, if the licensed patents
or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms our business could
suffer.
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Some intellectual property which we have licensed may have been discovered through government funded programs and thus may be subject to
federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such
regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to
contract with non-U.S. manufacturers.
Some of the intellectual property rights we have licensed or license in the future may have been generated through the use of U.S. government
funding and may therefore be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property
embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980, or Bayh-Dole Act. These U.S. government rights in
certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use
inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-
exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the
invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for
public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if
we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an application to register the intellectual property
within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not
filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements,
compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any
products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the United States.
The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts
have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that
under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract
with non-U.S. product manufacturers for products covered by such intellectual property.
In the event we apply for additional U.S. government funding, and we discover compounds or drug candidates as a result of such funding, intellectual
property rights to such discoveries may be subject to the applicable provisions of the Bayh-Dole Act.
If we do not obtain additional protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms
and obtaining data exclusivity for our product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of the U.S. patents we own or
license may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as
the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent
term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example,
failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable
requirements. For example, we may not be granted an extension if the active ingredient of AV-101 is used in another drug company’s product
candidate and that product candidate is the first to obtain FDA approval. Moreover, the applicable time period or the scope of patent protection
afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than
we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be
materially adversely affected.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and
enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and
inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation: the
Leahy-Smith America Invents Act, referred to as the America Invents Act. The America Invents Act includes a number of significant changes to U.S.
patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. It is not yet clear
what, if any, impact the America Invents Act will have on the operation of our business. However, the America Invents Act and its implementation
could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that
may issue from our patent applications, all of which could have a material adverse effect on our business and financial condition.
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In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the
rights of patent owners in certain situations. The full impact of these decisions is not yet known. For example, on March 20, 2012 in Mayo
Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to
measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to
impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to obtain
patent protection for certain inventions. Additionally, on June 13, 2013 in Association for Molecular Pathology v. Myriad Genetics, Inc., the Court
held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA molecules are patent eligible because they are not a
natural product. The effect of the decision on patents for other isolated natural products is uncertain. However, on March 4, 2014, the U.S. PTO
issued a memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or natural products
under the Myriad and Prometheus decisions. This guidance did not limit the application of Myriad to DNA but, rather, applied the decision to other
natural products.
In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect
to the value of patents, once obtained. Depending on these and other decisions by the U.S. Congress, the federal courts and the U.S. PTO, the laws
and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce any patents
that may issue in the future.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their
former employers.
Certain of our current employees have been, and certain of our future employees may have been, previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently
employed at universities or who perform services for other entities.
Although we are not aware of any claims currently pending against us, we may be subject to claims that we or our employees, advisors or consultants
have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer
or other third party. We have and may in the future also be subject to claims that an employee, advisor or consultant performed work for us that
conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual
property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending
against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to
paying monetary claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper
or prevent our ability to commercialize our product candidates, which would materially adversely affect our commercial development efforts.
Numerous factors may limit any potential competitive advantage provided by our intellectual property rights.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may
not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our
competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully
exercise or extract value from our intellectual property rights. The following examples are illustrative:
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others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered
by the claims of patents, should such patents issue from our patent applications;
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we might not have been the first to make the inventions covered by a pending patent application that we own;
we might not have been the first to file patent applications covering an invention;
others may independently develop similar or alternative technologies without infringing our intellectual property rights;
pending patent applications that we own or license may not lead to issued patents;
patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a
result of legal challenges by our competitors;
•
third parties may compete with us in jurisdictions where we do not pursue and obtain patent protection;
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•
•
•
we may not be able to obtain and/or maintain necessary or useful licenses on reasonable terms or at all;
third parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising
exclusive rights over that intellectual property;
we may not develop or in-license additional proprietary technologies that are patentable; and
the patents of others may have an adverse effect on our business.
Should any of these events occur, they could significantly harm our business and results of operations.
If we seek to leverage prior discovery and development of drug rescue candidates under in-license arrangements with academic laboratories,
biotechnology companies, the NIH, pharmaceutical companies or other third parties, it is uncertain what ownership rights, if any, we will obtain
over intellectual property we derive from such licenses to drug rescue NCEs we may produce or develop in connection with any such third-party
licenses.
If, instead of identifying drug rescue candidates based on information available to us in the public domain, we seek to in-license drug rescue
candidates from biotechnology, medicinal chemistry and pharmaceutical companies, academic, governmental and nonprofit research institutions,
including the NIH, or other third-parties, there can be no assurances that we will obtain material ownership or economic participation rights over
intellectual property we may derive from such licenses or similar rights to the drug rescue NCEs we may produce and develop. If we are unable to
obtain ownership or substantial economic participation rights over intellectual property related to drug rescue NCEs we produce and develop, our
business may be adversely affected.
Risks Related to our Common Stock
There is no assurance that an active, liquid and orderly trading market will develop for our common stock or what the market price of our
common stock will be and, as a result, it may be difficult for you to sell your shares of our common stock.
Since we became a publicly-traded company in May 2011, there has been a limited public market for shares of our common stock on the OTC
Markets (OTCQB). We do not yet meet the initial listing standards of the New York Stock Exchange, the NASDAQ Capital Market, or other similar
national securities exchanges. Until our common stock is listed on a broader exchange, we anticipate that it will remain quoted on the OTC Markets,
another over-the-counter quotation system, or in the “pink sheets.” In those venues, investors may find it difficult to obtain accurate quotations as to
the market value of our common stock. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be
imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such
regulations may deter broker-dealers from recommending or selling our common stock, which may further affect liquidity. This could also make it
more difficult to raise additional capital.
We cannot predict the extent to which investor interest in our company will lead to the development of a more active trading market on the OTC
Markets, whether we will meet the initial listing standards of the New York Stock Exchange, the NASDAQ Capital Market, or other similar
national securities exchanges, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling
any of the shares of our common stock that you buy.
Market volatility may affect our stock price and the value of your investment.
The market price for our common stock, similar to other biopharmaceutical companies, is likely to be volatile. The market price of our common
stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:
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•
•
•
plans for, progress of or results from non-clinical studies and clinical trials of our product candidates;
the failure of the FDA to approve our product candidates;
announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors;
the success or failure of other CNS therapies;
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regulatory or legal developments in the United States and other countries;
failure of our product candidates, if approved, to achieve commercial success;
fluctuations in stock market prices and trading volumes of similar companies;
general market conditions and overall fluctuations in U.S. equity markets;
variations in our quarterly operating results;
changes in our financial guidance or securities analysts’ estimates of our financial performance;
changes in accounting principles;
our ability to raise additional capital and the terms on which we can raise it;
sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;
additions or departures of key personnel;
discussion of us or our stock price by the press and by online investor communities; and
other risks and uncertainties described in these risk factors.
Future sales of our common stock may cause our stock price to decline.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could significantly
reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.
The stock market in general, and biotechnology-based companies like ours in particular, has from time to time experienced volatility in the market
prices for securities that often has been unrelated to the operating performance of the underlying companies. These broad market and industry
fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In certain recent situations in
which the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against such company that
issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert
the time and attention of our management and harm our operating results. Additionally, if the trading volume of our common stock remains low and
limited there will be an increased level of volatility and you may not be able to generate a return on your investment.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future.
Future sales of shares by existing stockholders could cause our stock price to decline, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Prior to this date of this
report, there has been a limited public market for shares of our common stock on the OTC Markets. Future sales of a substantial number of shares of
our common stock in the public market, including shares issued upon the exchange of our Series A Preferred Stock and Series B Preferred Stock,
and exercise of outstanding options and warrants for common stock, in the public market, or the perception that these sales might, occur, could
significantly reduce the market price for our common stock and impair our ability to raise adequate capital through the sale of equity securities.
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Our principal institutional stockholders may continue to have substantial control over us and could limit your ability to influence the outcome of
key transactions, including changes in control.
Certain of our current institutional stockholders and their respective affiliates own approximately 27% of our outstanding capital
stock. Accordingly, these stockholders may continue to exert significant influence over us and the outcome of any corporate actions requiring
approval of holders of our common stock, including the election of directors and amendments to our organizational documents, such as increases in
our authorized shares of common stock, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate
transactions. These stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other
stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’
perception that conflicts of interest may exist or arise. Furthermore, the interests of our principal institutional stockholders may not always coincide
with your interests or the interests of other stockholders may act in a manner that advances its best interests and not necessarily those of other
stockholders, including seeking a premium value for its common stock, which might affect the prevailing market price for our common stock.
If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our
common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business.
We do not control these analysts. The price of our common stock could decline if one or more equity research analysts downgrade our common
stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
There may be additional issuances of shares of preferred stock in the future.
Following approval by our stockholders in October 2011, our Articles of Incorporation permit us to issue up to 10.0 million shares of preferred
stock. In October 2011, our Board authorized the issuance of 500,000 shares of Series A Preferred, all of which shares are currently issued and
outstanding. In May 2015, our Board authorized the issuance of up to 4.0 million shares of Series B 10% Convertible Preferred stock, of which
approximately 2.8 million shares are issued and outstanding. Our Board of Directors could authorize the issuance of additional series of preferred
stock in the future and such preferred stock could grant holders preferred rights to our assets upon liquidation, the right to receive dividends before
dividends would be declared to holders of our common stock, and the right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. In the event and to the extent that we do issue additional preferred stock in the future, the rights of holders
of our common stock could be impaired thereby, including without limitation, with respect to liquidation.
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on
appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so in the foreseeable future. We currently
anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying
any cash dividends in the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future
appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which you
purchased them.
Item 1B. Unresolved Staff Comments
The disclosures in this section are not required since we qualify as a smaller reporting company.
Item 2. Properties
Our corporate headquarters and laboratories are located at 343 Allerton Avenue, South San Francisco, California 94080, where we occupy
approximately 10,900 square feet of office and lab space under a lease expiring on July 31, 2017. We believe that our facilities are suitable and
adequate for our current and foreseeable needs.
Item 3. Legal Proceedings
We are not a party to any legal proceedings and we are not aware of any claims or actions pending or threatened against us. In the future, we might
from time to time become involved in litigation relating to claims arising from our ordinary course of business.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On June 21, 2011, our common stock began trading on the OTC Marketplace (OTCQB), under the symbol “VSTA”. There was no established
trading market for our common stock prior to that date.
Shown below is the range of high and low sales prices for our common stock for the periods indicated as reported by the OTCQB. The market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual
transactions. Effective August 14, 2014, we consummated a 1-for-20 reverse split of our authorized, and issued and outstanding shares of common
stock (the Stock Consolidation). Each reference to the price per share of common stock in the table below is on a post-Stock Consolidation basis, and
reflects the 1-for-20 adjustment as a result of the Stock Consolidation.
Year Ending March 31, 2015
First quarter ending June 30, 2014
Second quarter ending September 30, 2014
Third quarter ending December 31, 2014
Fourth quarter ending March 31, 2015
Year Ending March 31, 2014
First quarter ending June 30, 2013
Second quarter ending September 30, 2013
Third quarter ending December 31, 2013
Fourth quarter ending March 31, 2014
High
$14.80
$15.00
$10.50
$12.00
$18.00
$17.80
$12.20
$10.00
Low
$5.60
$7.99
$8.00
$3.16
$12.00
$11.00
$5.20
$5.60
On June 25, 2015 the closing price of our common stock on the OTCQB was $16.00 per share.
As of June 25, 2015, we had 1,594,461 shares of common stock outstanding and approximately 300 stockholders of record. On the same date, one
stockholder held all 500,000 outstanding restricted shares of our Series A Preferred Stock, which shares are convertible into 750,000 shares of
common stock, and 47 stockholders held 2,840,578 outstanding shares of Series B 10% Convertible Preferred Stock, which shares are convertible
into 2,840,578 shares of common stock.
Dividend Policy
We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock
in the foreseeable future. Covenants in certain of our debt agreements prohibit us from paying dividends while the debt remains outstanding. Our
Series B Preferred accrues dividends at a rate of 10% per annum, which dividends are payable solely in unregistered shares of our common stock at
the time the Series B Preferred is converted into common stock.
Issuer Purchases of Equity Securities
We did not purchase any of our registered equity securities during the period covered by this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
During the three years preceding the date of this report, we issued the following securities in private placement transactions which were not registered
under the Securities Act of 1933, as amended ( Securities Act) and that have not been previously reported in a Quarterly Report on Form 10-Q or a
Current Report on Form 8-K:
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2014 Unit Private Placement
Between March 10, 2015 and May 14, 2015, we entered into securities purchase agreements with accredited investors pursuant to which we sold Units
consisting of an aggregate of (i) a 10% convertible note in the face amount of $530,000 maturing between March 31, 2015 and May 15, 2015 (2014
Unit Note); (ii) 59,250 shares of our restricted common stock; and (iii) warrants exercisable through December 31, 2016 to purchase 50,500 shares of
our restricted common stock at an exercise price of $10.00 per share (Unit Warrant). We received cash proceeds of $530,000 which we used for
general corporate purposes. The Unit Note and related accrued interest are convertible into shares of our restricted common stock at a conversion
price of $10.00 per share at or prior to maturity at the option of the investor. The Units were offered and sold in a transaction exempt from
registration under the Securities Act, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder.
Between May 26, 2015 and June 25, 2015, we sold to accredited investors and institutions an aggregate of $557,500 of units in our Series B
Preferred Unit offering, which units consist of Series B Preferred and Series B Warrants (together Series B Preferred Units), including $100,000
from Platinum. We issued 79,646 shares of Series B Preferred and Series B warrants to purchase 79,646 shares of our common stock. We have
received an aggregate of $557,500 in cash proceeds from the sale of the Series B Preferred Units. The Units were offered and sold in a transaction
exempt from registration under the Securities Act, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder.
Between June 18, 2015 and June 25, 2015, two professional service providers holding outstanding promissory notes and unpaid trade receivables
from us agreed to convert such debt obligations in the aggregate amount of approximately $564,600 into an aggregate of 80,659 shares of our Series
B Preferred. We entered into Securities Purchase Agreements in the form attached to our Current Report on Form 8-K filed on May 13, 2015
(Securities Purchase Agreement) with these providers. The shares of Series B Preferred issued pursuant to the Securities Purchase Agreement were
offered and sold in transactions exempt from registration under the Securities Act of 1933, as amended, in reliance on 3(a)(9) thereof and Rule 506
of Regulation D thereunder. Each recipient of shares of Series B Preferred represented that it is an "accredited investor" as defined in Regulation D.
Securities Issued for Professional Services
On March 4, 2015, we issued to an accredited investor 25,000 restricted shares of our common stock as compensation for consulting
services. Similarly, on March 31, 2015, we issued to an accredited investor 16,667 restricted shares of our common stock in payment of an
outstanding balance for professional services. On June 16, 2015, we issued 25,000 restricted shares of our common stock each to two accredited
investors as compensation for consulting services. The securities were issued in private placement transactions exempt from registration under the
Securities Act, in reliance on Section 4(2) thereof and Rule 506 of Regulation D thereunder.
Item 6. Selected Financial Data
The disclosures in this section are not required since we qualify as a smaller reporting company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements. All statements contained in this Annual Report on Form 10-K other than
statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans,
and our objectives for future operations, are forward- looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,”
“intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward- looking statements
largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of
operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions. Our business is subject to significant risks including, but not limited to, our ability to
obtain additional financing, the results of our research and development efforts, the results of non-clinical and clinical testing, the effect of regulation
by the United States Food and Drug Administration (FDA) and other agencies, the impact of competitive products, product development,
commercialization and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk
Factors” in this Annual Report on Form 10-K. Further, even if our product candidates appear promising at various stages of development, our
share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to
our management, Board of Directors and stockholders.
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Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our
management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks,
uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could
differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking
statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking
statements after the date of this Annual Report on Form 10-K 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 committed to developing and commercializing product candidates for patients with depression,
other diseases and disorders related to the central nervous system (CNS), and cancer.
Our lead product candidate, AV-101, is an orally-active small molecule prodrug in Phase 2 development for Major Depressive Disorder (MDD). AV-
101’s mechanism of action (MOA), as an N-methyl-D-aspartate receptor (NMDAR) antagonist binding selectively at the glycine-binding (GlyB) co-
agonist site of the NMDAR, is fundamentally different from all currently-approved antidepressants. In three preclinical studies utilizing well-
validated animal models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant
antidepressant-like responses, following a single treatment, which was equivalent to the response seen with a single sub-anesthetic does of
ketamine. In the same studies, fluoxetine did not induce rapid onset antidepressant-like responses. Preclinical studies also support the hypothesis that
AV-101 has potential to treat several additional CNS disorders, including chronic neuropathic pain, epilepsy and neurodegenerative diseases, such as
Parkinson’s disease and Huntington’s disease where modulation of the NMDAR may have therapeutic benefit.
Following our two successful randomized, double-blind, placebo-controlled Phase 1 safety studies funded by the U.S. National Institutes of Health
(NIH), AV-101 is the only small molecule product candidate known to management that is (A) in Phase 2 clinical development as a monotherapy
for MDD, (B) designed to modulate the NMDAR through antagonistic binding at the GlyB co-agonist site of the NMDAR and (C) orally-active in
human subjects.
In February 2015, we entered a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health
(NIMH), part of the NIH. Under this agreement, we will collaborate with the NIH on a Phase 2 clinical study of AV-101 in subjects with treatment
resistant Major Depressive Disorder. Pursuant to the CRADA, this study will be conducted and fully-funded by the NIMH. It is contemplated that this
clinical study will begin this year under the direction of Dr. Carlos Zarate, Jr., the NIMH’s Chief of Experimental Therapeutics & Pathophysiology
Branch and of the Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
In addition to developing AV-101 for MDD and other CNS indications, we are using our stem cell technology platform for drug rescue –to identify
and develop proprietary new chemical entities (NCEs) for our internal drug candidate pipeline by leveraging our in vitro bioassay systems, prior
investment by pharmaceutics companies and others to discover, optimize and test for efficacy NCEs terminated before FDA approval due to
unexpected toxicity and medicinal chemistry. Our CardioSafe 3D™ bioassay system uses our human pluripotent stem cell (hPSC)-derived
cardiomyocytes, or heart cells., Our LiverSafe 3D™bioassay system uses our stem cell-derived hepatocytes, or liver cells. We believe CardioSafe 3D
and LiverSafe 3D offer a new paradigm for evaluating and predicting potential heart and liver toxicity of NCEs, including potential drug rescue
NCEs, early in development, long before costly, high risk animal studies and human clinical trials. We intend to develop each optimized drug rescue
NCE internally to establish in vitro and in vivo preclinical proof-of-concept (POC), as to both efficacy and safety, using both established in vitro and
in vivo models, as well as in CardioSafe 3D and, when available, LiverSafe 3D.
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The Merger
VistaGen Therapeutics, Inc., a California corporation incorporated on May 26, 1998 (VistaGen California), is our wholly-owned subsidiary. Excaliber
Enterprises, Ltd. (Excaliber), a publicly-held company (formerly OTCBB: EXCA) was incorporated under the laws of the State of Nevada on
October 6, 2005. Pursuant to a strategic merger transaction on May 11, 2011, Excaliber acquired all outstanding shares of VistaGen California in
exchange for 341,823 shares of our common stock and assumed all of VistaGen California’s pre-Merger obligations (the Merger). Shortly after the
Merger, Excaliber’s name was changed to “VistaGen Therapeutics, Inc.” (a Nevada corporation).
VistaGen California, as the accounting acquirer in the Merger, recorded the Merger as the issuance of common stock for the net monetary assets of
Excaliber, accompanied by a recapitalization. The accounting treatment for the Merger was identical to that resulting from a reverse acquisition,
except that we recorded no goodwill or other intangible assets. A total of 78,450 shares of our common stock, representing the shares held by
stockholders of Excaliber immediately prior to the Merger and effected for a post-Merger two-for-one (2:1) stock split, have been reflected as
outstanding for all periods presented in the Consolidated Financial Statements of the Company included in Item 8 of this Annual Report on Form 10-
K. Additionally, the Consolidated Balance Sheets reflect the $0.001 par value of Excaliber’s common stock.
The Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K represent the activity of VistaGen California from
May 26, 1998, and the consolidated activity of VistaGen California and Excaliber (now VistaGen Therapeutics, Inc., a Nevada corporation), from
May 11, 2011 (the date of the Merger). The Consolidated Financial Statements also include the accounts of VistaGen California’s two inactive
wholly-owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation (Artemis), and VistaStem Canada, Inc., a corporation organized under
the laws of Ontario, Canada (VistaStem Canada).
Financial Operations Overview
Net Loss
We have not yet achieved revenue-generating status from any of our potential products. Since inception, we have devoted substantially all of our time
and efforts to development of AV-101 through its Phase I clinical trial and to hPSC research and bioassay development, small molecule drug
development, and creating, protecting and patenting intellectual property in support of our drug rescue model, with the corollary initiatives of
recruiting personnel and raising working capital. As of March 31, 2015, we had an accumulated deficit of approximately $84.5 million. Our net loss
for the years ended March 31, 2015 and 2014 was $13.9 million and $3.0 million, respectively. We expect such losses to continue for the foreseeable
future as we engage in Phase 2 clinical trials of AV-101 and its further development and expand our drug rescue activities and the capabilities of our
Human Clinical Trials in a Test Tube™ platform.
Summary of Fiscal Year 2015
Throughout our fiscal years ended March 31, 2015 and 2014, with very limited resources, our scientific personnel have successfully continued to
expand the drug rescue capabilities of our novel, customized bioassay systems, CardioSafe 3D™ and LiverSafe 3D™, and advance our internal
review and assessment in CardioSafe 3D of multiple prospective Drug Rescue Candidates. Additionally, as indicated previously, we have entered
into a Cooperative Research and Development Agreement with the NIH providing for an NIMH-sponsored Phase 2 clinical study of AV-101 in Major
Depressive Disorder that we expect to be launched shortly.
Throughout both fiscal 2015 and 2014, our executive management has been significantly focused on providing sufficient operating capital to continue
to advance our AV-101 initiatives, and drug development and research objectives while meeting our continuing operational needs.
To meet our working capital needs during fiscal 2015, between late-March 2014 and March 31, 2015, we entered into securities purchase agreements
with accredited investors and institutions pursuant to which we sold units to such accredited investors, in private placement transactions, for aggregate
cash proceeds of $3,113,500, consisting of (i) convertible promissory notes in the aggregate face amount of $3,113,500 which matured between
March 31, 2015 and April 30, 2015, or were automatically convertible into securities we might issue upon the consummation of a Qualified
Financing, as defined, (ii) an aggregate of 282,850 restricted shares of our common stock; and (iii) warrants exercisable through December 31, 2016
to purchase an aggregate of 282,850 restricted shares of our common stock at an exercise price of $10.00 per share. Through May 2015, we sold an
additional $280,000 of such units to accredited investors in private placement transactions.
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Given our working capital constraints during fiscal 2015 and the latter portion of fiscal 2014, we attempted to minimize cash commitments and
expenditures for both internal and external research and development and general and administrative services to the greatest extent possible. As a
consequence, during our fiscal year ended March 31, 2015, Shawn Singh, our CEO, voluntarily elected to receive cash compensation equal to only
24% of his contractual salary. In addition, during fiscal 2015 each of Ralph Snodgrass, PhD, our President and CSO, and Jerrold Dotson, our CFO,
voluntarily elected to receive only 52% and 62% of his contractual salary, respectively. Such unpaid compensation has been accrued for accounting
purposes, but remains unpaid at the date of this Annual Report.
The following table summarizes the results of our operations for the fiscal years ended March 31, 2015 and 2014 (amounts in $000):
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expenses, net:
Interest expense, net
Change in warrant liabilities
Loss on extinguishment of debt
Other expense
Loss before income taxes
Income taxes
Net loss
Revenue
Fiscal Years Ended March
31,
2015
2014
$
$
$
2,433
4,344
6,777
(6,777)
(4,549)
(35)
(2,388)
(135)
(13,884)
(2)
(13,886) $
2,481
2,548
5,029
(5,029)
(1,503)
3,567
-
-
(2,965)
(3)
(2,968)
We reported no revenue for the fiscal years ended March 31, 2015 or 2014. We have successfully completed our Phase I development of AV-101,
our orally-active, new generation prodrug candidate in clinical development for the treatment of Major Depressive Disorder (MDD), with additional
potential as a new therapy for neuropathic pain, epilepsy, and Parkinson’s disease. On February 10, 2015 we entered into a Cooperative Research
and Development Agreement with the NIMH, part of the NIH, to collaborate on a NIH-sponsored (funded and conducted by the NIH) Phase 2
clinical study of AV-101 in MDD. We presently have no revenue generating arrangements.
Research and Development Expense
Research and development expense represented approximately 36% and 49% of our operating expenses for the fiscal years ended March 31, 2015 and
2014, respectively. Research and development costs are expensed as incurred. Research and development expense consists of both internal and
external expenses incurred in drug development activities, costs associated with the development of AV-101, sponsored stem cell research and costs
related to the licensing, application and prosecution of our intellectual property. These expenses primarily consist of the following:
•
•
•
•
•
•
Salaries and benefits, including stock-based compensation costs, travel and related expense for personnel associated with internal
research and development activities;
fees to contract research organizations and other professional service providers for services related to the conduct and analysis of
clinical trials and other drug development activities;
fees to third parties for access to licensed technology and costs associated with securing and maintaining patents related to our
internally generated inventions:
laboratory supplies and materials;
leasing and depreciation of laboratory equipment; and
allocated costs of facilities and infrastructure.
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General and Administrative Expense
General and administrative expense consists primarily of salaries and benefits expense, including stock-based compensation expense, for personnel in
executive, finance and accounting, and other support functions. Other costs include professional fees for legal, investor relations and accounting
services and other strategic consulting and public company expenses as well as facility costs not otherwise included in research and development
expense.
Other Expenses, Net
In both fiscal 2015 and 2014, we incurred interest expense, including significant amounts of non-cash discount amortization attributable to certain
notes, on the outstanding balances of our Senior Secured Convertible Promissory Notes issued to Platinum between October 2012 and July 2013, on
the convertible promissory notes issued between March 2013 and March 2015 as components of our Unit Private Placements and on notes issued to
various contract research organizations, technology licensors and other professional service providers since fiscal 2011. In fiscal 2015 and 2014, we
recorded non-cash expense and income, respectively, related to changes in the fair values of the warrants issued or issuable to Platinum in connection
with the various Senior Secured Convertible Promissory Notes we issued to Platinum between October 2012 and July 2013. In fiscal 2015, we
incurred non-cash losses on extinguishment of debt resulting from settlements or modifications of indebtedness to Platinum, to various holders of
promissory notes issued in connection with our 2013 Unit Private Placement and scheduled to mature on July 30, 2014, and to a technology licensor
and a professional service provider. Additionally, in fiscal 2015 we incurred non-cash expense related to the settlement of a note receivable we
accepted in fiscal 2012.
Critical Accounting Policies and Estimates
We consider certain accounting policies related to revenue recognition, impairment of long-lived assets, research and development, stock-based
compensation, warrant liability and income taxes to be critical accounting policies that require the use of significant judgments and estimates
relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions. The
preparation of financial statements in conformity with United States generally accepted accounting principles (GAAP) requires us to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes to the consolidated financial statements. These
estimates include useful lives for property and equipment and related depreciation calculations, and assumptions for valuing options, warrants and
other stock-based compensation. Our actual results could differ from these estimates.
Revenue Recognition
Although we do not currently have any such arrangements, we have historically generated revenue principally from collaborative research and
development arrangements, technology access fees and government grants. We recognize revenue under the provisions of the SEC issued Staff
Accounting Bulletin 104, Topic 13, Revenue Recognition Revised and Updated (SAB 104) and Accounting Standards Codification (ASC) 605-25,
Revenue Arrangements-Multiple Element Arrangements (ASC 605-25). Revenue for arrangements not having multiple deliverables, as outlined in
ASC 605-25, is recognized once costs are incurred and collectability is reasonably assured.
Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the
delivered component has stand-alone value to the customer. Consideration received is allocated among the separate units of accounting based on their
respective selling prices. The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence if
VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available. The applicable revenue recognition criteria
are then applied to each of the units.
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We recognize revenue when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) the transfer of technology
has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. For each source
of revenue, we comply with the above revenue recognition criteria in the following manner:
·
·
·
Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements for specific
research and development spending, and various milestone and future product royalty payments. If the delivered technology does not have
stand-alone value, the amount of revenue allocable to the delivered technology is deferred. Non-refundable upfront fees with stand-alone
value that are not dependent on future performance under these agreements are recognized as revenue when received, and are deferred if
we have continuing performance obligations and have no objective and reliable evidence of the fair value of those obligations. We
recognize non-refundable upfront technology access fees under agreements in which we have a continuing performance obligation ratably,
on a straight-line basis, over the period in which we are obligated to provide services. Cost reimbursements for research and development
spending are recognized when the related costs are incurred and when collectability is reasonably assured. Payments received related to
substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the milestone event specified in the
underlying contracts, which represent the culmination of the earnings process. Amounts received in advance are recorded as deferred
revenue until the technology is transferred, costs are incurred, or a milestone is reached.
Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees and/or royalty
payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are recognized
when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of the
continuing research and development efforts. Otherwise, revenue is recognized over the period of our continuing involvement.
Government grant awards, which support our research efforts on specific projects, generally provide for reimbursement of approved costs
as defined in the terms of grant awards. We recognize grant revenue when associated project costs are incurred.
Impairment of Long-Lived Assets
In accordance with ASC 360-10, Property, Plant & Equipment—Overall , we review for impairment whenever events or changes in circumstances
indicate that the carrying amount of property and equipment may not be recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be
sufficient to recover the carrying amount of the assets, we write down the assets to their estimated fair values and recognize the loss in the
Consolidated Statements of Operations and Comprehensive Loss.
Research and Development Expenses
Research and development expenses are composed of both internal and external costs. Internal costs include salaries and employment-related
expenses of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with
clinical and non-clinical development of AV-101, our prodrug candidate entering late-stage clinical development for Major Depressive Disorder,
sponsored stem cell research and development costs, and costs related to the application and prosecution of patents related to our stem cell technology
platform and AV-101. All such costs are charged to expense as incurred.
Stock-Based Compensation
We recognize compensation cost for all stock-based awards to employees based on the grant date fair value of the award. We record non-cash, stock-
based compensation expense over the period during which the employee is required to perform services in exchange for the award, which generally
represents the scheduled vesting period. We have granted no restricted stock awards nor do we have any 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 value is recognized as an
expense during the period over which the services are performed.
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We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards as of the grant date. The Black-Scholes model is
complex and dependent upon key data input estimates. The primary data inputs with the greatest degree of judgment are the expected term of the
stock options and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two inputs. The expected
term of the options represents the period of time that options granted are expected to be outstanding. We use the simplified method to estimate the
expected term as an input into the Black-Scholes option pricing model. We determine expected volatility using the historical method, which, because
of the limited period during which our stock has been publicly traded, is based on the historical daily trading data of the common stock of a peer
group of public companies over the expected term of the option.
Warrant Liability
We have issued to Platinum Long Term Growth VII, LLC, our largest investor ( Platinum), warrants to purchase a substantial number of
unregistered shares of our common stock and, subject to Platinum’s exercise of its rights to exchange shares of our Series A Preferred Stock that it
holds, we are obligated to issue to Platinum an additional warrant to purchase unregistered shares of common stock (collectively, the Platinum
Warrants). The Platinum Warrants contain an exercise price adjustment feature that will reduce the exercise price of the warrants in the event we
subsequently issue equity instruments at a price lower than the exercise price of the Platinum Warrants. We account for the Platinum Warrants as
non-cash liabilities and estimate their fair value at the end of each financial reporting period and record the change in the fair value as non-cash
expense or non-cash income. The key component in determining the fair value of the Platinum Warrants and the related liability is the market
price of our common stock, which is subject to significant fluctuation and is not under our control. The resulting change in the fair value of the
warrant liability on our net income or loss is therefore also subject to significant fluctuation and will continue to be so until all of the Platinum
Warrants are issued and exercised, amended or expire. Assuming all other fair value inputs remain generally constant, we will record an increase
in the warrant liability and non-cash losses when our stock price increases and a decrease in the warrant liability and non-cash gains when our
stock price decreases. As described in Note 16, Subsequent Events, to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K, during May 2015, we entered into an agreement with Platinum pursuant to which Platinum agreed to amend the Platinum
Warrants to fix the exercise price thereof at $7.00 per share and eliminate the exercise price reset features and fix the number of shares of our
common stock issuable thereunder. This amendment will result in the elimination of the warrant liability with respect to these warrants during the
first quarter of our fiscal year ended March 31, 2016.
Income Taxes
We account for income taxes using the asset and liability approach for financial reporting purposes. We recognize deferred tax assets and liabilities
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established,
when necessary, to reduce the deferred tax assets to an amount expected to be realized. Recent Accounting Pronouncements
See Note 3 to the consolidated financial statements included in Item 8 in this Annual Report on Form 10-K for information on recent accounting
pronouncements.
Results of Operations
Comparison of Years Ended March 31, 2015 and 2014
Revenue
We reported no revenue for the fiscal years ended March 31, 2015 or 2014. We have successfully completed our Phase I development of AV-101,
our novel, orally-available, non-sedating prodrug candidate for the treatment of depression, epilepsy, pain Parkinson’s disease. On February 10,
2015 we entered into a Cooperative Research and Development Agreement with the NIMH, part of the NIH, to collaborate on a NIH-sponsored
Phase 2 clinical study of AV-101 in Major Depressive Disorder. We presently have no other revenue generating arrangements.
Research and Development Expense
Research and development expense decreased by 2% in fiscal 2015 compared to fiscal 2014. The following table compares the primary components
of research and development expense between the periods (in $000):
Salaries and benefits
Stock-based compensation
UHN research under SRCA
Consulting services
Technology licenses and royalties
Project-related third-party research and supplies:
AV-101
All other including CardioSafe and LiverSafe
Rent
Depreciation
All other
Fiscal Years Ended March 31,
2015
2014
$
$
889
849
-
109
217
51
54
105
220
44
-
902
453
160
53
484
51
145
196
185
44
4
Total Research and Development Expense
$
2,433
$
2,481
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To conserve cash resources, during fiscal 2015 and 2014, Ralph Snodgrass, PhD, our Chief Scientific Officer (CSO), has accepted a voluntary cash
pay reduction to substantially less than his contractual pay rate. For fiscal 2015, the CSO’s actual cash pay represented approximately 52% of his
contractual pay rate. In fiscal 2014, the CSO voluntarily agreed to accept a cash pay rate of approximately 82% of his contractual rate, not all of which
amount was paid. In fiscal 2015, we have accrued the difference between the CSO’s contractual pay rate and his actual cash pay, $147,700, for future
payment. In fiscal 2014, we accrued the difference between the CSO’s reduced pay rate and his actual cash pay, $100,400, for future payment. Such
accrued amounts for both fiscal 2014 and fiscal 2015 remain unpaid. Pay rates for other scientific personnel remained constant between years. One
member of our scientific staff voluntarily resigned at the end of September 2014 and another member has voluntarily reduced her work hours and pay
since September 2014.
In January 2015, we granted five-year fully vested warrants to purchase an aggregate of 115,000 restricted shares of our common stock at an exercise
price of $8.00 per share to our CSO and other scientific consultants and service providers, recognizing approximately $528,000 in stock-based
compensation expense. Stock based compensation expense for fiscal 2015 and fiscal 2014 also reflects approximately $176,000 and $297,000,
respectively, related to the ratable four-year amortization of option grants made to scientific staff and consultants in October 2013 and March 2014
and earlier. The ratable amortization of stock compensation expense related to certain options granted in October 2012 with a two-year vesting period
ceased when the options became fully-vested in October 2014. An additional component of stock compensation expense is the amortization
attributable to grants of warrants made to our CSO in March 2014 and March 2013, amounting to $145,000 in fiscal 2015 and $156,000 in fiscal
2014. The warrants are being amortized over a two-year vesting period, but are subject to certain vesting acceleration events. No further expense
will be recognized with respect to the warrants granted in March 2013.
Our most recent sponsored research project budget under the collaboration agreement with Dr. Gordon Keller’s laboratory at UHN ended on
September 30, 2013, and we have incurred no expense under the agreement since that date. We are engaged in discussions with Dr. Keller and UHN
regarding the scope of subsequent sponsored research projects and budget under the agreement, but have not yet finalized such project definitions and
budgets.
Consulting services reflects fees paid or accrued for scientific services rendered to us by third-parties, primarily by members of our scientific advisory
board.
Stem cell technology license expense reflects both recurring annual fees as well as costs for patent prosecution and protection that we are required to
fund under the terms of certain of our license agreements. We recognize the latter costs as they are invoiced to us by the licensors and they do not
occur ratably throughout the year or between years. Certain of our technology licensors invoiced us for significant legal fees for patent protection and
prosecution during fiscal 2014.
AV-101 expenses in both fiscal years 2015 and 2014 primarily reflect the costs associated with monitoring for and responding to potential feedback
related to the Phase 1 clinical trial and preparing other reports required under the terms of our prior NIH grant, primarily through our contract research
collaborator, Cato Research Ltd.
The increase in rent expense versus FY 2014 reflects the full-year impact of rental costs related to our relocation to our current facilities in late-July
2013.
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General and Administrative Expense
General and administrative expense increased by 70% in fiscal 2015 compared to fiscal 2014. The following table compares the primary components
of general and administrative expense between the periods (in $000):
Salaries and benefits
Stock-based compensation
Consulting Services
Legal, accounting and other professional fees
Investor relations
Insurance
Travel and entertainment
Rent and utilities
Warrant modification expense
All other expenses
Total General and Administrative Expense
Fiscal Years Ended March 31,
2015
2014
$
$
714
1,611
112
1,197
132
136
71
155
98
118
675
684
94
340
120
130
18
139
205
143
$
4,344
$
2,548
To conserve cash resources, during fiscal 2015 and 2014, both Shawn Singh, our Chief Executive Officer (CEO), and Jerrold Dotson, our Chief
Financial Officer (CFO), have accepted voluntary cash pay reductions to substantially less than their contractual pay rates. For fiscal 2015, the
CEO’s and CFO’s actual cash pay represented approximately 24% and 62%, respectively, of contractual rates. In fiscal 2014, the CEO and CFO
voluntarily agreed to accept cash pay rates of approximately 72% and 80%, respectively, of their contractual rates, not all of which amounts were
paid. In fiscal 2015, we have accrued the difference between the CEO’s and CFO’s contractual pay rate and his actual cash pay, $264,700 and
$96,100, respectively, for future payment. In fiscal 2014, we accrued the difference between the CEO’s and CFO’s reduced pay rates and his actual
cash pay, $125,000 and $56,700, respectively, for future payment. Such accrued amounts for both fiscal 2014 and fiscal 2015 remain
unpaid. Offsetting the impact of the accrual to contractual pay rates for the CEO and CFO for fiscal 2015 is the annual impact of the voluntary
resignations of two administrative employees in August and November 2013 who have not been replaced. Pay rates for other administrative
employees remained stable between the periods presented.
In January 2015, we granted five-year fully vested warrants to purchase an aggregate of 271,715 restricted shares of our common stock at an exercise
price of $8.00 per share to our CEO and CFO, independent members of our Board of Directors and other consultants and service providers,
recognizing approximately $1,229,000 in stock-based compensation expense. Stock based compensation expense for fiscal 2015 and fiscal 2014 also
reflects approximately $99,000 and $385,000, respectively, related to the ratable four-year amortization of option grants made to employees and
consultants in October 2013 and March 2014 and earlier. The ratable amortization of stock compensation expense related to certain options granted in
October 2012 with a two-year vesting period ceased when the options became fully-vested in October 2014. An additional component of stock
compensation expense is the amortization attributable to grants of warrants made to our CEO, CFO and independent members of our Board of
Directors in March 2014 and March 2013, amounting to $283,000 in fiscal 2015 and $299,000 in fiscal 2014. The warrants are being amortized over
a two-year vesting period, but are subject to certain vesting acceleration events. No further expense will be recognized with respect to the warrants
granted in March 2013.
Consulting services primarily reflects fees paid or accrued for the services of the independent members of our Board of Directors.
The increase in legal, accounting and other professional fees results primarily from the impact of (i) two consulting agreements for strategic advisory
and business development services pursuant to which we issued an aggregate of 55,000 restricted shares of our common stock valued at $469,000 at
the date of issuance and paid $100,000 as cash compensation for such professional services during fiscal 2015; (ii) direct legal fees aggregating
$150,000 related to services provided with respect to our prospective public offering of our equity securities and a proposed private offering of our
equity securities; (iii) the expensing of approximately $102,000 of investment banker, banker’s counsel, accounting and other fees related to the
December 2014 cancellation of the prospective public offering and withdrawal of our Registration Statement on Form S-1; (iv) legal and other costs
related to the 1:20 reverse split of our common stock in August 2014 and legal and filing fees for our private placement Unit financing offerings; and
(v) costs related to temporary employee fees for part-time administrative services.
Outsourced investor relations service expenses are essentially flat between periods; we have conducted no special awareness or other initiatives
during either fiscal 2015 or 2014. Travel expenses related to late summer and fall 2014 roadshow meetings with potential investors in our attempted
registered public offering account for the increase compared to fiscal 2014.
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The fiscal 2015 increase in rent and utilities expense reflects the full-year impact of increased costs related to our relocation to expanded facilities in
late-July 2013.
Warrant modification expense in fiscal 2015 reflects the extension by one year of the term of outstanding warrants otherwise scheduled to expire
during calendar 2015, as approved by our Board of Directors in January 2015. Warrant modification expense in fiscal 2014 reflects the impact of
October 2013 and December 2013 reductions in the exercise price of certain outstanding warrants, generally from $35.00 per share or $30.00 per
share, to $10.00 per share, and in limited cases, the extension of the term of certain outstanding warrants, and from which we used the proceeds of the
warrant exercises as a source of short-term working capital.
The fiscal 2015 decrease in other expenses is attributable to one-time relocation costs incurred in fiscal 2014 in connection with our relocation to
expanded facilities in late-July 2013.
Other Expenses, Net
In both fiscal 2015 and 2014, other expenses, net includes interest expense, including non-cash discount amortization, on our outstanding promissory
notes, as well as the non-cash impact of changes in the fair value of the warrant liabilities related to warrants issued or issuable to Platinum between
October 2012 and July 2013. In fiscal 2015, other expenses, net also includes the non-cash loss on extinguishment of debt resulting from the
modification of indebtedness to Platinum, holders of convertible promissory notes originally scheduled to mature on July 30, 2014, and to a
technology licensor and a professional service provider. Additionally, in fiscal 2015 we incurred non-cash expense related to the settlement of a note
receivable we accepted in fiscal 2012.
The following table compares the primary components of net interest expense between the periods (in $000):
Interest expense on promissory notes
Amortization of discount on promissory notes
Other interest expense, including on capital leases and premium financing
Effect of foreign currency fluctuations on notes payable
Interest income
Interest expense, net
Fiscal Years Ended March 31,
2015
2014
$
$
1,238
3,372
7
4,617
(63)
(5)
907
640
15
1,562
(49)
(10)
$
4,549
$
1,503
The increase in interest expense between the periods is primarily attributable to the accrued interest recorded for the issuances between August 2013
and March 2015 of an aggregate of approximately $4.1 million of 10% convertible promissory notes pursuant to the 2013 Unit Private Placement and
the 2014 Unit Private Placement. As a result of the significant inception-date discounts recorded in connection with the Unit Notes, approximately
$2.7 million in fiscal 2015; the relatively short period between issuance and maturity over which the discount on the Unit Notes must be amortized,
generally less than 12 months; and the accelerating amount of discount amortization recorded using the effective interest rate method as the notes
approach maturity, discount amortization expense increased by approximately $2.7 million between the periods shown in the preceding table.
Under the terms of the October 2012 Note Exchange and Purchase Agreement we entered with Platinum, we issued Senior Secured Convertible
Promissory Notes and a related Exchange Warrant and Investment Warrants between October 2012 and March 2013. We issued a similar senior
secured promissory note and related warrant to Platinum in July 2013. Upon Platinum’s exchange of the shares of our Series A preferred stock it
holds into shares of our common stock, we will also be required to issue a Series A Exchange Warrant to Platinum. We determined that certain
exercise price and share adjustment features contained in the various warrants require us to treat the warrants as liabilities. Accordingly, we recorded a
non-cash warrant liability at its estimated fair value as of the date the warrant was issued or the contract executed. During fiscal 2015, we recognized
a non-cash loss of $34,600 related to the net increase in the estimated fair value of these non-cash liabilities since March 31, 2014, which resulted
primarily from the change in the market price of our common stock in relation to the exercise price of the warrants and an additional year elapsed in
the remaining term for all but the Series A Exchange Warrant. During fiscal 2014, we recognized a non-cash gain of $3,556,900 related to the net
decrease in the estimated fair value of the warrant liabilities since March 31, 2013, which resulted primarily from the decrease in the market price of
our common stock in relation to the exercise price of the warrants.
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As described more fully in Note 8, Convertible Promissory Notes and Other Notes Payable, and Note 9, Capital Stock, in the Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K, effective May 31, 2014, we entered into agreements with substantially all holders
of our 2013 Unit Notes and 2013 Unit Warrants to amend certain terms of the notes and the warrants. We treated the amendments as an
extinguishment of debt for accounting purposes. Accordingly, since the fair value of the amended notes and warrants exceeded the carrying amount
of the original notes, we recognized non-cash losses on the extinguishment of debt in the aggregate amount of $526,200 attributable to the
amendments. We recognized an additional $241,800 as a non-cash loss on extinguishment of debt as a result of the promissory note, shares of our
common stock and warrants issued to Icahn School of Medicine at Mount Sinai in settlement of stem cell technology license maintenance fees and
reimbursable patent prosecution costs, as described more completely in Note 9, Capital Stock, to the Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K. We recognized a further $16,700 non-cash loss on extinguishment of debt as a result of the shares of our
unregistered common stock issued to a professional services provider in settlement of fees for prior services rendered, as also described more
completely in Note 9, Capital Stock, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
As described more completely in Note 8, Convertible Promissory Notes and Other Notes Payable, to the Consolidated Financial Statements included
in Item 8 of this Annual Report on Form 10-K, in July 2014, we entered into an agreement with Platinum, as further amended in September 2014,
pursuant to which Platinum agreed to convert into our unregistered equity securities all Senior Notes and accrued but unpaid interest thereon held by
Platinum upon our consummation prior to October 31, 2014 (Closing Date) of either (i) a Private Financing or a Public Offering, each as defined in
the agreement. Upon consummation of a Private Financing, the Senior Notes would have converted into that number of unregistered shares of our
common stock equal to the Outstanding Balance on the Closing Date, divided by $10.00 per share. Upon consummation of a Public Offering, the
Senior Notes would have converted into shares of a newly created Series B Convertible Preferred Stock with an aggregate liquidation preference
equal to the Outstanding Balance on the Closing Date. Prior to the agreement, the Senior Notes were convertible, at Platinum’s option, at any time
prior to maturity at a conversion price of $10.00 per share. The modification of the conversion feature in the Senior Notes was treated as an
extinguishment of the debt for accounting purposes. Accordingly, since the fair value of the amended Senior Notes substantially exceeded the
carrying amount of the original notes, we recognized a non-cash loss on the extinguishment of debt in the aggregate amount of $1,603,400
attributable to the amendment.
As described in Note 9, Capital Stock, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, in October
2014, we accepted a cash payment of $60,000 as settlement in full for a promissory note issued to us in May 2011 for the purchase of shares of our
common stock. At the time of the payment, the principal and accrued interest due to us under the note receivable was $194,900, resulting in a
recognized loss of $134,900 related to the settlement.
Liquidity and Capital Resources
Since our inception in May 1998 through March 31, 2015, we have financed our operations and technology acquisitions primarily through the
issuance and sale of equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of
approximately $29.0 million. In addition, we have obtained an aggregate of approximately $16.4 million in government research grant awards,
strategic collaboration payments and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $13.5
million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Between late-March 2014 and March 31, 2015, we entered into securities purchase agreements with accredited investors and institutions, including
Platinum, pursuant to which we sold units to such accredited investors, in private placement transactions (2014 Units or 2014 Unit Private Placement),
for aggregate cash proceeds of $3,113,500, consisting of (i) 2014 Unit Notes in the aggregate face amount of $3,113,500 which matured between
March 31, 2015 and April 30, 2015, or were automatically convertible into securities we might issue upon the consummation of a Qualified
Financing, as defined, (ii) an aggregate of 282,850 restricted shares of our common stock (2014 Unit Stock); and (iii) warrants exercisable through
December 31, 2016 to purchase an aggregate of 282,850 restricted shares of our common stock at an exercise price of $10.00 per share (2014 Unit
Warrants). We currently anticipate that we will need to obtain approximately $7.0 million in financing over the course of the next twelve months to
execute our business plan.
At March 31, 2015, we did not have sufficient cash and cash equivalents to enable us to fund our planned operations, including expected cash
expenditures of approximately $7.0 million through the next twelve months. To meet our operational needs and fund our working capital requirements
after March 31, 2015, we extended the 2014 Unit Private Placement and, through May 14, 2015, we entered into additional securities purchase
agreements with accredited investors pursuant to which we sold to such accredited investors 2014 Units, for aggregate cash proceeds of $280,000,
consisting of: (i) 10% convertible promissory notes maturing between April 30, 2015 and May 15, 2015, in the aggregate face amount of $280,000,
(ii) an aggregate of 33,000 shares of our restricted common stock, and (iii) warrants exercisable through December 31, 2016 to purchase an aggregate
of 24,250 restricted shares of our common stock at an exercise price of $10.00 per share.
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Effective May 12, 2015, we entered into an Agreement with Platinum (Platinum Agreement), pursuant to which Platinum:
· Converted the approximately $4.5 million outstanding balance (principal and accrued but unpaid interest) of the Senior Notes we issued to
Platinum into 641,335 shares of our newly-created Series B 10% Convertible Preferred Stock (Series B Preferred) , thereby cancelling
approximately $4.5 million of our outstanding indebtedness;
· Released all of its security interests in our assets and those of our subsidiaries by terminating the Amended and Restated Security Agreement, IP
Security Agreement and Negative Covenant, each dated October 11, 2012 between us and Platinum;
· Converted the approximately $1.3 million outstanding balance (principal and accrued but unpaid interest) of the convertible promissory Notes
we issued to Platinum in our 2014 Unit Private Placement (2014 Unit Notes) into 240,305 shares of Series B Preferred and five-year warrants to
purchase 240,305 shares of our common stock at a fixed exercise price of $7.00 per share (Series B Warrants), thereby cancelling approximately
$1.3 million of our outstanding indebtedness;
· Purchased approximately $1.5 million (including accrued but unpaid interest thereon) of outstanding 2014 Unit Notes we issued to various
investors from the respective holders thereof (Investor 2014 Unit Notes ) and converted the entire outstanding balance of the Investor 2014 Unit
Notes into 265,699 shares of Series B Preferred and Series B Warrants to purchase 265,699 shares of our common stock, thereby cancelling
approximately $1.5 million of our outstanding indebtedness;
· Signed and delivered a Securities Purchase Agreement (SPA) to purchase, for $1.0 million, a total of 142,857 shares of Series B Preferred and a
Series B Warrant to purchase 142,857 shares of our common stock, on or before June 11, 2015 (a portion of which purchase was consummated on
June 19, 2015);
· Amended the Platinum Warrants (all warrants previously issued by us to Platinum in connection with the Senior Notes) and the Series A
Exchange Warrant to:
o fix the exercise price of Platinum Warrants and the Series A Exchange Warrant at $7.00 per share;
o eliminate the exercise price reset features and fix the number of shares of our common stock issuable thereunder; and
o eliminate the cashless exercise provisions from the Platinum Warrants and the Series A Exchange Warrant; and
· Agreed to refrain from the sale of any shares of our common stock held by Platinum or its affiliates until the earlier to occur of an effective
registration statement relating to resale of certain specified shares of common stock under the Securities Act of 1933, as amended, or the closing
price of our common stock is at least $15.00 per share.
As additional consideration for the agreements of Platinum under the Platinum Agreement, we issued to Platinum 400,000 shares of Series B
Preferred and Warrants to purchase 1.2 million shares of our common stock and exchanged 30,000 shares of our common stock currently
beneficially owned or controlled by Platinum for 30,000 shares of Series B Preferred.
Effective May 20, 2015, holders of the remaining approximately $1.8 million outstanding balance (principal and accrued but unpaid interest) of 2014
Unit Notes converted such notes into 327,016 shares of Series B Preferred and Series B Warrants to purchase 327,016 shares of our common stock,
thereby cancelling an additional approximately $1.8 million of our outstanding indebtedness.
Between May 26, 2015 and June 25, 2015, we sold to accredited investors and institutions an aggregate of $557,500 of units in our Series B
Preferred Unit offering, which units consist of Series B Preferred and Series B Warrants (together Series B Preferred Units), including $100,000 to
Platinum. We issued 79,646 shares of Series B Preferred and Series B Warrants to purchase 79,646 shares of our common stock. We have received
an aggregate of $557,500 in cash proceeds from the sale of the Series B Preferred Units. As described more completely in Note 16, Subsequent
Events, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, each share of Series B Preferred is
convertible into one share of our common stock and the Series B Warrants are exercisable at a fixed price of $7.00 per share for a term of five years
following issuance.
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Additionally, holders of certain of our promissory notes outstanding at March 31, 2015 and thereafter, including Morrison & Foerster, University
Health Network, Cato Research Ltd., McCarthy Tetrault, and certain other service providers converted notes payable or accounts payable having an
aggregate balance of approximately $5.8 million (principal and accrued but unpaid interest and certain strategic adjustments) into 831,577 shares of
Series B Preferred.
Since March 31, 2015, we have eliminated approximately $14.9 million of promissory notes, other debt and certain adjustments thereto that was
either already due and payable or would have otherwise matured prior to March 31, 2016, through conversion into our Series B Preferred and, with
respect to a portion of the indebtedness converted, warrants to purchase common stock. Together with the cash proceeds from our Series B Preferred
Unit Offering, our working capital position has improved significantly since March 31, 2015. We will, however, need to raise additional capital to
fund our operations and execute our business plan over the next year and thereafter.
We believe that our participation in potential strategic collaborations, including potential transactions involving AV-101 such as our February 2015
Cooperative Research and Development Agreement with the U.S. National Institutes of Health (NIH) for an NIH-funded and sponsored Phase 2 study
of AV-101 in MDD, may provide resources to support a portion of our future cash needs and working capital requirements, however, no assurances
can be provided. When and as necessary, we will seek to raise a material amount of financing through a combination of additional private placements
and/or registered public offerings of our securities, which may include both debt and equity securities, stem cell technology-based research and
development collaborations, stem cell technology and drug candidate license fees, and government grant awards and collaborations. Our future
working capital requirements will depend on many factors, including, without limitation, the scope and nature of strategic opportunities related to our
success in clinical trials of and further developing AV-101 as a treatment for MDD and/or other conditions; our stem cell technology platform,
including drug rescue and cell therapy research and development efforts and the success of such programs, our ability to obtain government grant
awards and our ability to enter into strategic collaborations with institutions on terms acceptable to us. To further advance the clinical development of
AV-101 and potential drug rescue applications of our stem cell technology platform, as well as support our operating activities, we plan to continue to
carefully manage our routine operating costs, including salaries and benefits, regulatory consulting, contract research and development, legal,
accounting, 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 in the near term, 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.
The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Off-Balance Sheet Arrangements
Fiscal Years Ended
March 31,
2015
2014
$
(2,769) $
-
2,839
70
-
$
70
$
(2,126)
(10)
1,498
(638)
638
-
Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or
liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an
unconsolidated entity. VistaGen California has two inactive, wholly-owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and
VistaStem Canada, Inc., an Ontario corporation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The disclosures in this section are not required since we qualify as a smaller reporting company.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
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95
96
97
98
99
100
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
VistaGen Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of VistaGen Therapeutics, Inc. as of March 31, 2015 and 2014 and the related
consolidated statements of operations and comprehensive loss, cash flows, preferred stock, and stockholders’ deficit for the years then ended. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
VistaGen Therapeutics, Inc. at March 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has not yet generated sustainable revenues, has suffered recurring losses
and negative cash flows from operations and has a stockholders’ deficit, all of which raise substantial doubt about its ability to continue as a going
concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ OUM & Co. LLP
San Francisco, California
June 29, 2015
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VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in dollars, except share amounts)
VISTAGEN THERAPEUTICS
Consolidated Balance Sheets
Amounts in Dollars
ASSETS
Current assets:
Cash and cash equivalents
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Security deposits and other assets
Total assets
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Accounts payable
Accrued expenses
Advance from officer
Current maturities of senior secured convertible promissory notes and accrued interest
Current portion of notes payable, net of discount of $474,500 at March 31, 2014 and accrued interest
Current portion of notes payable to related parties, net of discount of $54,500 at March 31, 2015
and accrued interest
Convertible promissory notes and accrued interest, net of discount of $180,000 at March 31, 2015 and
$697,400 at March 31, 2014, respectively
Capital lease obligations
Total current liabilities
Non-current liabilities:
Senior secured convertible promissory notes, net of discount of $0 at March 31, 2015 and
$2,085,900 at March 31, 2014, respectively, and accrued interest
Notes payable, net of discount of $0 at March 31, 2015 and $848,100 at March 31, 2014, and
and accrued interest
Notes payable to related parties, net of discount of $103,200 at March 31, 2014 and accrued interest
Warrant liability
Deferred rent liability
Capital lease obligations
Total non-current liabilities
Total liabilities
Commitments and contingencies
March 31,
March 31,
2015
2014
$
$
$
70,000 $
35,700
105,700
117,100
46,900
$
269,700
-
40,500
40,500
176,300
46,900
263,700
2,251,100 $
1,206,500
-
4,146,100
4,117,000
2,443,900
625,600
3,600
-
1,442,300
1,508,800
290,400
4,157,600
1,000
17,388,100
396,000
3,900
5,205,700
296,200
1,929,800
35,600
-
3,008,500
83,000
1,100
3,424,400
20,812,500
1,797,600
1,057,100
2,973,900
97,400
2,100
7,857,900
13,063,600
Stockholders’ deficit:
Preferred stock, $0.001 par value; 10,000,000 shares, including 500,000 Series A shares, authorized
at March 31, 2015 and March 31, 2014, respectively; 500,000 Series A shares issued and
outstanding at March 31, 2015 and March 31, 2014, respectively
Common stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2015 and March 31, 2014,
respectively; 1,677,110 shares and 1,310,093 shares issued at March 31, 2015 and March 31,
2014, respectively
Additional paid-in capital
Treasury stock, at cost, 135,665 shares of common stock held at March 31, 2015 and March 31, 2014,
respectively
Note receivable from sale of common stock
Accumulated deficit
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
500
500
1,700
67,945,800
1,300
62,001,400
(3,968,100)
-
(84,522,700)
(20,542,800)
$
269,700
(3,968,100)
(198,100)
(70,636,900)
(12,799,900)
263,700
$
See accompanying notes to consolidated financial statements.
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VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in dollars, except share amounts)
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expenses, net:
Interest expense, net
Change in warrant liability
Loss on extinguishment of debt
Other expense
Loss before income taxes
Income taxes
Net loss and comprehensive loss
Basic net loss per common share
Diluted net loss per common share
Weighted average shares used in computing
Basic net loss per common share
Diluted net loss per common share
See accompanying notes to consolidated financial statements.
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Fiscal Years Ended
March 31,
2015
2014
$
2,432,700 $
4,344,400
6,777,100
(6,777,100)
2,480,600
2,548,300
5,028,900
(5,028,900)
(4,548,700)
(34,600)
(2,388,000)
(135,000)
(13,883,400)
(2,400)
(1,503,000)
3,566,900
-
-
(2,965,000)
(2,700)
$ (13,885,800) $
(2,967,700)
$
$
(10.53) $
(2.70)
(10.61) $
(3.81)
1,318,797
1,098,742
1,318,797
1,099,216
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VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in dollars)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Amortization of discounts on convertible and promissory notes
Change in warrant liability
Stock-based compensation
Expense related to modification of warrants
Non-cash rent and relocation expense
Interest income on note receivable for stock purchase
Loss on settlement of note receivable for stock purchase
Fair value of common stock granted for services
Fair value of warrants granted for services and interest
Gain on currency fluctuation
Loss on extinguishment of debt
Changes in operating assets and liabilities:
Prepaid expenses and other current assets
Security deposits and other assets
Accounts payable and accrued expenses, including accrued interest
Net cash used in operating activities
Cash flows from investing activities:
Purchases of equipment, net
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants, including Units
Proceeds from exercise of modified warrants
Proceeds from sale of note and warrant to Platinum
Advance from officer
Repayment of capital lease obligations
Repayment of notes
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow activities:
Cash paid for interest
Cash paid for income taxes
Supplemental disclosure of noncash activities:
Insurance premiums settled by issuing note payable
Accounts payable settled by issuance of stock or notes payable and stock
Recognition of warrant liability upon issuance to Platinum of July 2013
Senior Secured Convertible Note
See accompanying notes to consolidated financial statements.
-98-
Fiscal Years Ended March
31,
2015
2014
$ (13,885,800) $
(2,967,700)
59,100
3,372,000
34,600
2,460,100
98,400
(14,400)
2,800
134,900
469,000
44,500
(63,600)
2,388,000
54,600
640,000
(3,566,900)
1,137,300
204,300
56,800
(1,200)
-
-
60,700
(48,600)
-
107,400
-
2,024,100
(2,768,900)
92,700
(17,900)
2,229,900
(2,126,000)
-
-
(9,600)
(9,600)
3,146,600
-
-
-
(3,900)
(303,800)
2,838,900
70,000
-
70,000 $
1,075,500
264,200
250,000
64,000
(7,600)
(148,600)
1,497,500
(638,100)
638,100
-
35,700 $
2,400 $
21,000
2,700
105,300 $
438,400 $
98,300
-
- $
146,800
$
$
$
$
$
$
Table of Contents
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
Fiscal Years Ended march 31, 2015 and 2014
(Amounts in dollars, except share amounts)
Series A Preferred
Stock
Common Stock
Paid-in Treasury
Additional
Shares Amount Shares
Amount Capital
Stock
Note
Receivable
from Sale
of
Stock
Accumulated
Deficit
Total
Stockholders’
Deficit
Balances at March
31, 2013
500,000 $
500 1,174,092 $
1,200 $59,288,300 $(3,968,100) $ (209,100) $ (67,669,200) $ (12,556,400)
Share-based
compensation
expense
Proceeds from sale
of common stock
for cash, including
exercises of
warrants under
Discount Warrant
Exercise Program
Beneficial
conversion feature
on note issued to
Platinum in July
2013
Payment on note
receivable from sale
of stock
Allocated proceeds
from sale of Units
for cash under 2013
Unit Private
Placement,
including beneficial
conversion feature
Allocated proceeds
from sale of Units
for cash under 2014
Unit Private
Placement,
including beneficial
conversion feature
Incremental fair
value of warrant
modifications
Fair value of
warrants issued to
Morrison &
Foerster, Cato
Research Ltd. and
University Health
Network in
connection with
accrued interest on
underlying notes
Net loss for fiscal
year 2014
-
-
-
- 1,137,300
-
-
-
1,137,300
-
-
32,751
-
335,900
-
-
-
335,900
-
-
-
-
-
-
100,700
-
-
-
100,700
-
-
-
-
11,000
-
11,000
-
-
100,750
100
838,100
-
-
-
838,200
-
-
-
2,500
-
36,000
36,000
-
-
-
204,300
-
-
-
204,300
-
-
-
-
-
-
-
-
60,800
-
-
-
-
-
60,800
-
(2,967,700)
(2,967,700)
Balances at March
31, 2014
Allocated proceeds
from sale of Units
for cash under 2014
Unit Private
Placement,
including beneficial
conversion feature
500,000 $
500 1,310,093 $
1,300 $62,001,400 $(3,968,100) $ (198,100) $ (70,636,900) $ (12,799,900)
-
-
280,350
300 2,746,800
-
-
-
2,747,100
Share-based
compensation
expense
Payment on and
settlement of note
receivable from sale
of stock
Incremental fair
value of modified
warrants
Fair Value of
common stock
issued for services
Fair value of
common stock and
warrants issued in
settlement
of technology
license expenses
Fair value of
warrants issued to
Morrison &
Foerster, Cato
Research Ltd. and
University Health
Network in
connection with
accrued interest on
underlying notes
Effect of
amendments of
2013 Unit Notes and
warrants,
including repurchase
of beneficial
conversion feature
Effect of
amendments of
Platinum Senior
Secured Promissory
Notes, including
repurchase of
beneficial
conversion feature
Net loss for fiscal
year 2015
-
-
-
2,460,100
-
-
-
2,460,100
-
-
-
-
-
-
-
-
-
198,100
-
198,100
-
-
98,400
-
71,667
100
635,600
-
-
-
-
-
98,400
-
635,700
-
-
15,000
-
230,200
-
-
-
230,200
-
-
-
-
44,400
-
-
-
44,400
-
-
-
-
109,300
-
-
-
109,300
-
-
-
-
-
-
-
(380,400)
-
-
-
-
-
-
(380,400)
-
(13,885,800)
(13,885,800)
Balances at March
31, 2015
500,000 $
500 1,677,110 $
1,700 $67,945,800 $(3,968,100) $
- $ (84,522,700) $ (20,542,800)
See accompanying notes to consolidated financial statements.
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Table of Contents
1. Description of Business
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VistaGen Therapeutics, Inc., a Nevada corporation, is a clinical-stage biopharmaceutical company committed to developing and commercializing
product candidates for patients with depression, other diseases and disorders related to the central nervous system (CNS), and cancer. Our principal
executive offices are located at 343 Allerton Avenue, South San Francisco, California 94080, and our telephone number is (650) 577-3600. Our
website address is www.vistagen.com. 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.
VistaGen Therapeutics, Inc., a California corporation incorporated on May 26, 1998 (VistaGen California), is our wholly-owned subsidiary. Pursuant
to a strategic merger transaction on May 11, 2011, we acquired all outstanding shares of VistaGen California in exchange for 341,823 shares of our
common stock (Merger), and assumed all of VistaGen California’s pre-Merger obligations. The Consolidated Financial Statements in this report also
include the accounts of VistaGen California’s two wholly-owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem
Canada, Inc., a corporation organized under the laws of Ontario, Canada.
Our lead product candidate, AV-101, is an orally-active small molecule prodrug in Phase 2 development for Major Depressive Disorder (MDD). AV-
101’s mechanism of action (MOA), as an N-methyl-D-aspartate receptor (NMDAR) antagonist binding selectively at the glycine-binding (GlyB) co-
agonist site of the NMDAR, is fundamentally different from all currently-approved antidepressants. In three preclinical studies utilizing well-
validated animal models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant
antidepressant-like responses, following a single treatment, which were equivalent to response seen with a single sub-anesthetic dose of ketamine. In
the same studies, fluoxetine did not induce rapid onset antidepressant-like responses. Preclinical studies also support the hypothesis that AV-101 has
potential to treat several additional CNS disorders, including chronic neuropathic pain, epilepsy and neurodegenerative diseases, such as Parkinson’s
disease and Huntington’s disease where modulation of the NMDAR may have therapeutic benefit.
Following our two successful randomized, double-blind, placebo-controlled Phase 1 safety studies funded by the U.S. National Institutes of Health
(NIH), AV-101 is the only small molecule product candidate known to management that is (A) in Phase 2 clinical development as a monotherapy
for MDD, (B) designed to modulate the NMDAR through antagonistic binding at the GlyB co-agonist site of the NMDAR and (C) orally-active in
human subjects.
In February 2015, we entered a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health
(NIMH), part of the NIH. Under this agreement, we will collaborate with the NIH on a Phase 2 clinical study of AV-101 in subjects with treatment
resistant Major Depressive Disorder. Pursuant to the CRADA, this study will be conducted and fully-funded by the NIMH. It is contemplated that this
clinical study will begin this year under the direction of Dr. Carlos Zarate, Jr., the NIMH’s Chief of Experimental Therapeutics & Pathophysiology
Branch and of the Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
In addition to developing AV-101 for MDD and other CNS indications, we are using our stem cell technology platform for drug rescue –to identify
and develop proprietary new chemical entities (NCEs) for our internal drug candidate pipeline by leveraging our in vitro bioassay systems, prior
investment by pharmaceutical companies and others to discover, optimize and test for efficacy NCEs terminated before FDA approval due to
unexpected toxicity and medicinal chemistry. Our CardioSafe 3D™ bioassay system uses our human pluripotent stem cell (hPSC)-derived
cardiomyocytes, or heart cells. Our LiverSafe 3D™bioassay system uses our stem cell-derived hepatocytes, or liver cells. We believe CardioSafe
3D and LiverSafe 3D offer a new paradigm for evaluating and predicting potential heart and liver toxicity of NCEs, including potential drug rescue
NCEs, early in development, long before costly, high risk animal studies and human clinical trials. We intend to develop each optimized drug
rescue NCE internally to establish in vitro and in vivo preclinical proof-of-concept (POC), as to both efficacy and safety, using both established in
vitro and in vivo models, as well as in CardioSafe 3D and, when available, LiverSafe 3D.
Although we have previously generated approximately $16.4 million of revenue from grant awards and collaborations, we currently have no
commercially available, revenue-generating products and, since inception, we have devoted substantially all of our time and efforts to development of
AV-101 for CNS indications and our human pluripotent stem cell technology research and development programs, including, customized bioassay
system development, creating, protecting and patenting intellectual property, recruiting personnel and raising working capital.
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Table of Contents
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Basis of Presentation and Going Concern
Effective August 14, 2014, we consummated a 1-for-20 reverse split of our authorized, and issued and outstanding shares of common stock (the Stock
Consolidation) . Each reference to shares of common stock or the price per share of common stock in these financial statements is post-Stock
Consolidation, and reflects the 1-for-20 adjustment as a result of the Stock Consolidation. See Note 8, Capital Stock, for more information regarding
the Stock Consolidation.
The accompanying Consolidated Financial Statements have been prepared assuming that we will continue as a going concern. As a developing-
technology 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 $84.5 million accumulated from inception through March 31, 2015. We expect losses and
negative cash flows from operations to continue for the foreseeable future as we engage in further potential development of AV-101 and launch and
execute our drug rescue programs and pursue potential drug development and regenerative medicine opportunities.
Since our inception in May 1998 through March 31, 2015, we have financed our operations and technology acquisitions primarily through the
issuance and sale of equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of
approximately $29.0 million, as well as from an aggregate of approximately $16.4 million of government research grant awards, strategic
collaboration payments and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $13.5 million in
non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
Between late-March 2014 and March 31, 2015, we entered into securities purchase agreements with accredited investors and institutions, including
Platinum, pursuant to which we sold units to such accredited investors, in private placement transactions (2014 Units or 2014 Unit Private Placement),
for aggregate cash proceeds of approximately $3.1 million, consisting of (i) 2014 Unit Notes in the aggregate face amount of approximately $3.1
million which matured between March 31, 2015 and April 30, 2015, or were automatically convertible into securities we might issue upon the
consummation of a Qualified Financing, as defined, (ii) an aggregate of 282,850 restricted shares of our common stock (2014 Unit Stock); and (iii)
warrants exercisable through December 31, 2016 to purchase an aggregate of 282,850 restricted shares of our common stock at an exercise price of
$10.00 per share (2014 Unit Warrants). At March 31, 2015, we did not have sufficient cash and cash equivalents to enable us to fund our planned
operations, including expected cash expenditures of approximately $7 million over the next twelve months, including expenditures required to prepare
for further clinical trials of AV-101.
As described more completely in Note 16, Subsequent Events, between April 1 and May 14, 2015, we continued the 2014 Unit Private Placement,
pursuant to which we sold to accredited investors 2014 Units, for aggregate cash proceeds of $280,000, consisting of: (i) 10% convertible
promissory notes maturing between April 30, 2015 and May 15, 2015, in the aggregate face amount of $280,000, (ii) an aggregate of 33,000 shares
of our restricted common stock, and (iii) warrants exercisable through December 31, 2016 to purchase an aggregate of 24,250 restricted shares of
our common stock at an exercise price of $10.00 per share. As also described more completely in Note 16, Subsequent Events, during May 2015,
we entered into an agreement with Platinum (Platinum Agreement), pursuant to which, Platinum has, among other things:
· Converted the approximately $4.5 million outstanding balance (principal and accrued but unpaid interest) of the Senior Notes we issued to
Platinum into 641,335 shares of our newly-created Series B 10% Convertible Preferred Stock (Series B Preferred) , thereby cancelling
approximately $4.5 million of our outstanding indebtedness;
· Released all of its security interests in our assets and those of our subsidiaries by terminating the Amended and Restated Security Agreement, IP
Security Agreement and Negative Covenant, which we had entered into with Platinum in October 2012; and
· Converted the approximately $1.3 million outstanding balance (principal and accrued but unpaid interest) of the convertible promissory notes we
issued to Platinum in the 2014 Unit Private Placement (2014 Unit Notes) into 240,305 shares of Series B Preferred and five-year warrants to
purchase 240,305 shares of our common stock at a fixed exercise price of $7.00 per share (Series B Warrants), thereby cancelling approximately
$1.3 million of our outstanding indebtedness; and
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Table of Contents
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
· Purchased approximately $1.5 million (principal and accrued but unpaid interest) of outstanding 2014 Unit Notes we issued to various other
investors from the respective holders thereof (Investor 2014 Unit Notes ) and converted the entire outstanding balance of the Investor 2014 Unit
Notes into 265,699 shares of Series B Preferred and Series B Warrants to purchase 265,699 shares of our common stock, thereby cancelling
approximately $1.5 million of our outstanding indebtedness; and
· Entered into a Securities Purchase Agreement (SPA) to purchase, for $1.0 million, a total of 142,857 shares of Series B Preferred and a Series B
Warrant (Series B Preferred Unit) to purchase 142,857 shares of our common stock, on or before June 11, 2015 (a portion of which purchase was
consummated on June 19, 2015).
As further described in Note 16, Subsequent Events, effective May 20, 2015, holders of the remaining $1.8 million outstanding balance (principal
and accrued but unpaid interest) of 2014 Unit Notes converted such notes into 327,016 shares of Series B Preferred and Series B Warrants to
purchase 327,016 shares of our common stock,
thereby cancelling an additional approximately $1.8 million of our outstanding
indebtedness. Between May 26, 2015 and June 25, 2015, we sold to accredited investors and institutions an aggregate of $557,500 of units in our
Series B Preferred Unit offering, which units consist of Series B Preferred and Series B Warrants (together Series B Preferred Units), including
$100,000 to Platinum. We issued 79,646 shares of Series B Preferred and Series B Warrants to purchase 79,646 shares of our common stock. We
have received an aggregate of $557,500 in cash proceeds from the sale of the Series B Preferred Units.
Additionally, as further described in Note 16, Subsequent Events, holders of certain of our promissory notes outstanding at March 31, 2015 and
thereafter, including Morrison & Foerster, Cato Research Ltd., University Health Network, and McCarthy Tetrault, and certain other service
providers converted notes payable or accounts payable having an aggregate outstanding balance of approximately $5.8 million (principal and accrued
but unpaid interest and certain strategic adjustments) into 831,577 shares of Series B Preferred stock.
Since March 31, 2015, we have eliminated approximately $14.9 million of promissory notes, other debt and certain adjustments thereto that was
either already due and payable or would have otherwise matured prior to March 31, 2016, through conversion into our Series B Preferred stock and,
with respect to a portion of the indebtedness converted, warrants to purchase common stock. Together with the cash proceeds from our Series B
Preferred Unit Offering, our working capital position has improved significantly since March 31, 2015. We will, however, need to raise additional
capital to fund our operations and execute our business plan over the next year and thereafter.
We believe that our participation in potential strategic collaborations, including potential transactions involving AV-101 such as our February 2015
Cooperative Research and Development Agreement with the U.S. National Institutes of Health (NIH) for an NIH-funded and sponsored Phase 2 study
of AV-101 in major depressive disorder, may provide resources to support a portion of our future cash needs and working capital requirements. When
and as necessary, we will seek to raise a material amount of financing through a combination of additional private placements and/or registered public
offerings of our securities, which may include both debt and equity securities, stem cell technology-based research and development collaborations,
stem cell technology and drug candidate license fees, and government grant awards and collaborations. Our future working capital requirements will
depend on many factors, including, without limitation, the scope and nature of strategic opportunities related to our success in clinical trials of and
further developing AV-101 as a treatment for major depressive disorder and/or other conditions; our stem cell technology platform, including drug
rescue and cell therapy research and development efforts and the success of such programs, our ability to obtain government grant awards and our
ability to enter into strategic collaborations with institutions on terms acceptable to us. To further advance the clinical development of AV-101 and
potential drug rescue applications of our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully
manage our routine operating costs, including salaries and benefits, regulatory and public company consulting, contract research and development,
legal, accounting 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 in the near term, 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. These Consolidated Financial Statements do not include any adjustments that might result from
the outcome of this uncertainty.
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Table of Contents
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include, but are not limited to, those relating to stock-based compensation, revenue recognition, and the assumptions
used to value warrants, warrant modifications and warrant liabilities.
Principles of Consolidation
The accompanying consolidated financial statements include the Company’s accounts, and the accounts of VistaGen California’s wholly-owned
inactive subsidiaries, Artemis Neurosciences and VistaStem Canada.
Cash and Cash Equivalents
Cash and cash equivalents are considered to be highly liquid investments with maturities of three months or less at the date of purchase.
Property and Equipment
Property and equipment is stated at cost. Repairs and maintenance costs are expensed in the period incurred. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets. The estimated useful lives of property and equipment range from five to seven years.
Impairment or Disposal of Long-Lived Assets
We evaluate our long-lived assets, primarily property and equipment, for impairment whenever events or changes in circumstances indicate that their
carrying value may not be recoverable from the estimated future cash flows expected to result from their use or eventual disposition. If the estimates
of future undiscounted net cash flows are insufficient to recover the carrying value of the assets, we record an impairment loss in the amount by
which the carrying value of the assets exceeds their fair value. If the assets are determined to be recoverable, but the useful lives are shorter than
originally estimated, we depreciate or amortize the net book value of the assets over the newly determined remaining useful lives. We have not
recorded any impairment charges to date.
Revenue Recognition
Although we do not currently have any such arrangements, we have historically generated revenue principally from collaborative research and
development arrangements, technology transfer agreements, including strategic licenses, and government grants. Revenue arrangements with multiple
components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value
to the customer. Consideration received is allocated among the separate units of accounting based on their respective selling prices. The selling price
for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is not available, or estimated selling
price if neither VSOE nor third party evidence is available. The applicable revenue recognition criteria are then applied to each of the units.
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Table of Contents
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize revenue when the four basic criteria of revenue recognition are met: (i) a contractual agreement exists; (ii) the transfer of technology
has been completed or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. For each source
of revenue, we comply with the above revenue recognition criteria in the following manner:
• Collaborative arrangements typically consist of non-refundable and/or exclusive up front technology access fees, cost
reimbursements for specific research and development spending, and various milestone and future product royalty payments. If the
delivered technology does not have stand-alone value, the amount of revenue allocable to the delivered technology is deferred. Non-
refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are recognized as
revenue when received, and are deferred if we have continuing performance obligations and have no objective and reliable evidence of the
fair value of those obligations. We recognize non-refundable upfront technology access fees under agreements in which we have a
continuing performance obligation ratably, on a straight-line basis, over the period during which we are obligated to provide services. Cost
reimbursements for research and development spending are recognized when the related costs are incurred and when collectability is
reasonably assured. Payments received related to substantive, performance-based “at-risk” milestones are recognized as revenue upon
achievement of the milestone event specified in the underlying contracts, which represent the culmination of the earnings process. Amounts
received in advance are recorded as deferred revenue until the technology is transferred, costs are incurred, or a milestone is reached.
• Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees, development
and/or regulatory milestone payments and/or royalty payments. Non-refundable upfront license fees and annual minimum payments
received with separable stand-alone values are recognized when the technology is transferred or accessed, provided that the technology
transferred or accessed is not dependent on the outcome of the continuing research and development efforts. Otherwise, revenue is
recognized over the period of our continuing involvement, and, in the case of development and/or regulatory milestone payments, when the
applicable event triggering such a payment has occurred.
• Government grants, which support our research efforts on specific projects, generally provide for reimbursement of approved costs
as defined in the terms of grant awards. Grant revenue is recognized when associated project costs are incurred.
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 scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with
clinical and non-clinical development of AV-101, our prodrug candidate entering late-stage clinical development for Major Depressive Disorder,
sponsored stem cell research and development costs, and costs related to the application and prosecution of patents related to our stem cell technology
platform and AV-101. All such costs are charged to expense as incurred.
Stock-Based Compensation
We recognize compensation cost for all stock-based awards to employees based on the grant date fair value of the award. We record non-cash, stock-
based compensation expense over the period during which the employee is required to perform services in exchange for the award, which generally
represents the scheduled vesting period. We have granted no restricted stock awards nor do we have any 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 value is recognized as an
expense during the period over which the services are performed.
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Table of Contents
Income Taxes
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We account for income taxes using the asset and liability approach for financial reporting purposes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established,
when necessary, to reduce the deferred tax assets to an amount expected to be realized.
Concentrations of Credit Risk
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents. Our investment
policies limit any such investments to short-term, low-risk investments. We deposit cash and cash equivalents with quality financial institutions and
are insured to the maximum of federal limitations. Balances in these accounts may exceed federally insured limits at times.
Warrant Liability
We have issued to Platinum Long Term Growth VII, LLC, our largest investor ( Platinum), warrants to purchase a substantial number of
unregistered shares of our common stock and, subject to Platinum’s exercise of its rights to exchange shares of our Series A Preferred Stock that it
holds, we are obligated to issue to Platinum an additional warrant to purchase unregistered shares of common stock (collectively, the Platinum
Warrants). The Platinum Warrants contain an exercise price adjustment feature that will lower the exercise price of the warrants in the event we
subsequently issue equity instruments at a price lower than the exercise price of the Platinum Warrants. We account for the Platinum Warrants as
non-cash liabilities and estimate their fair value as described in Note 4, Fair Value Measurements, Note 8, Convertible Promissory Notes and
Other Notes Payable, and Note 9, Capital Stock. We compute the fair value of the warrant liability at each reporting period and record the change
in the fair value as non-cash expense or non-cash income. The key component in determining the fair value of the Platinum Warrants and the
related liability is the market price of our common stock, which is subject to significant fluctuation and is not under our control. The resulting
change in the fair value of the warrant liability on our net loss is therefore also subject to significant fluctuation and will continue to be so until all
of the Platinum Warrants are issued and exercised, amended or expire. Assuming all other fair value inputs remain generally constant, we will
record an increase in the warrant liability and non-cash losses when our stock price increases and a decrease in the warrant liability and non-cash
gains when our stock price decreases. As described in Note 16, Subsequent Events, during May 2015, we entered into an agreement with Platinum
pursuant to which Platinum agreed to amend the Platinum Warrants to fix the exercise price thereof at $7.00 per share and eliminate the exercise
price reset features and fix the number of shares of our common stock issuable thereunder. This amendment will result in the elimination of the
warrant liability with respect to the Platinum Warrants during the first quarter of our fiscal year ended March 31, 2016.
Comprehensive Loss
We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the
periods presented.
Loss per Common Share
Basic 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 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. In calculating
diluted net income (loss) per share, we adjust the numerator for the change in the fair value of the warrant liability attributable to the outstanding
Platinum Warrants, only if dilutive, and increase the denominator to include the number of potentially dilutive common shares assumed to be
outstanding during the period using the treasury stock method. As a result of our net loss for both periods presented, potentially dilutive securities
were excluded from the computation of diluted loss per share, as their effect would be antidilutive.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted net loss attributable to common stockholders per share was computed as follows:
Fiscal Years Ended March
31,
2015
2014
Numerator:
Net loss attributable to common stockholders for basic earnings per share
less: change in fair value of warrant liability attributable to Exchange, Investment and Bridge
Warrants issued to Platinum
$ (13,885,800) $
(2,967,700)
(105,200)
(1,219,500)
Net loss for diluted earnings per share attributable to common stockholders
$ (13,991,000) $
(4,187,200)
Denominator:
Weighted average basic common shares outstanding
Assumed conversion of dilutive securities:
Warrants to purchase common stock
Potentially dilutive common shares assumed converted
1,318,797
1,098,742
-
-
474
474
Denominator for diluted earnings per share - adjusted weighted average shares
1,318,797
1,099,216
Basic net loss attributable to common stockholders per common share
Diluted net loss attributable to common stockholders per common share
$
$
(10.53) $
(2.70)
(10.61) $
(3.81)
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Potentially dilutive securities excluded in determining diluted net loss per common share for the fiscal years ended March 31, 2015 and 2014 are as
follows:
Series A preferred stock issued and outstanding (1)
Warrant shares issuable to Platinum upon exercise of common stock warrants by Platinum
upon exchange of Series A Preferred under the terms of the October 11, 2012 Note
Exchange and Purchase Agreement
Outstanding options under the 2008 and 1999 Stock Incentive Plans
Outstanding warrants to purchase common stock
10% convertible Exchange Note and Investment Notes issued to Platinum in October 2012,
February 2013 and March 2013, including accrued interest through March 31, 2015
and 2014, respectively (2)
10% convertible note issued to Platinum on July 26, 2013, including accrued interest
through March 31, 2015 and 2014, respectively
10% convertible notes issued as a component of Unit Private Placements, including accrued interest through
March 31, 2014
accrued interest through March 31, 2015 and 2014, respectively (3)
Total
Fiscal Years Ended March
31,
2015
2014
750,000
750,000
375,000
375,000
207,638
212,486
1,544,474
854,782
414,615
374,798
29,620
26,776
433,758
109,341
3,755,105
2,703,183
____________
(1) Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum
(2) Assumes conversion under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum and the terms of the
individual notes
(3) Excludes effect of conversion premium upon conversion into securities which may be issued in a Qualified Financing, as defined in the notes
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Recent Accounting Pronouncements
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, the Financial Accounting Standards Board ( FASB) issued Accounting Standards Update ( ASU) No. 2014-09, Revenue from Contracts
with Customers (Topic 606).which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. , The amendment in this ASU
provides guidance on revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to
identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in
the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for
public entities for annual and interim periods beginning after December 15, 2016 (the first quarter of our fiscal year ending March 31, 2018). In April
2015, the FASB proposed to defer for one year the effective date of the new revenue standard, with an option that would permit companies to adopt
the standard as early as the original effective date. Early adoption prior to the original effective date is not permitted. We have not determined the
potential effects of adopting this ASU on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting
Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this ASU remove all
incremental financial reporting requirements for development stage entities. Among other changes, this ASU no longer requires development stage
entities to present inception-to-date information about income statement line items, cash flows, and equity transactions. The presentation and
disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014, with early adoption
permitted. We have adopted ASU 2014-10 effective with our fiscal year beginning April 1, 2014 and, accordingly, have eliminated inception-to-date
information in the accompanying Consolidated Statements of Operations and Comprehensive Loss and Consolidated Statements of Cash Flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this ASU define when and how an entity is required to
disclose going concern uncertainties, which must be evaluated each interim and annual period. Specifically, the ASU requires management to
determine whether substantial doubt exists regarding the entity’s going concern presumption. Substantial doubt about an entity’s ability to continue as
a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable (as defined under ASC 450,
Contingencies) that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are
issued or are available to be issued. If substantial doubt exists, certain disclosures are required, the extent of which depends on an evaluation of
management’s plans (if any) to mitigate the going concern uncertainty. This evaluation should include consideration of conditions and events that are
either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable
that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the
substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. Early
application is permitted. In their opinion on our audited financial statements for our fiscal year ended March 31, 2015, our auditors indicated that
there was substantial doubt about our ability to continue as a going concern. Although we have not yet adopted ASU 2014-15, we have indicated in
Note 2, Basis of Presentation and Going Concern, steps we have taken to eliminate certain of our indebtedness and raise additional financing that is
expected to permit us to continue our operations for at least one year. Upon our adoption of ASU 2014-15, assuming conditions at such time indicate
there is substantial doubt about our ability to continue as a going concern, or that such doubt has been alleviated, we will conform our disclosure to
comply with the guidance contained in ASU 2014-15.
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4. Fair Value Measurements
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We follow the principles of fair value accounting as they relate to its financial assets and financial liabilities. Fair value is defined as the estimated
exit price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, rather
than an entry price that represents the purchase price of an asset or liability. Where available, fair value is based on observable market prices or
parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These
valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on several factors, including the
instrument’s complexity. The required fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels is described as follows:
•
•
•
Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair
value hierarchy gives the highest priority to Level 1 inputs.
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs (i.e., inputs that reflect the reporting entity’s own assumptions about the assumptions that market
participants would use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair
value hierarchy gives the lowest priority to Level 3 inputs.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. If quoted market
prices are not available for the specific financial instrument, then the Company estimates fair value by using pricing models, quoted prices of
financial instruments with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around
inputs to valuation, financial assets or liabilities are classified as Level 3 within the valuation hierarchy.
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. In conjunction with the Senior Secured
Convertible Promissory Notes issued to Platinum between October 2012 and July 2013 and the related Platinum Warrants (see Note 8, Convertible
Promissory Notes and Other Notes Payable), and the contingently issuable Series A Exchange Warrant (see Note 9, Capital Stock), we determined
that the warrants included certain exercise price adjustment features requiring the warrants to be treated as liabilities, which were recorded at their
issuance-date estimated fair values. We determined the fair value of the warrant liabilities using a Monte Carlo simulation model with Level 3 inputs.
Inputs used to determine fair value include the remaining contractual term of the notes, risk-free interest rates, expected volatility of the price of the
underlying common stock, and the probability of a financing transaction that would trigger a reset in the warrant exercise price, and, in the case of the
Series A Exchange Warrant, the probability of Platinum’s exchange of the shares of Series A Preferred it holds into shares of common stock. Changes
in the fair value of these warrant liabilities have been recognized as non-cash income or expense in the Consolidated Statements of Operations and
Comprehensive Loss for the fiscal years ended March 31, 2015 and 2014.
The fair value hierarchy for liabilities measured at fair value on a recurring basis is as follows:
March 31, 2015:
Warrant liability
March 31, 2014:
Warrant liability
Fair Value Measurements at Reporting Date Using
Quoted
Prices in
Active Markets
for
Total
Carrying
Identical Assets
Value
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
3,008,500 $
$
2,973,900 $
- $
- $
- $
3,008,500
- $
2,973,900
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fiscal years ended March 31, 2015 and 2014, there were no significant changes to the valuation models used for purposes of determining
the fair value of the Level 3 warrant liability.
The changes in Level 3 liabilities measured at fair value on a recurring basis are as follows:
Balance at March 31, 2013
Recognition of warrant liability upon issuance of Senior Secured Convertible
Promissory Note and warrant to Platinum on July 26, 2013
Mark to market gain included in net loss
Balance at March 31, 2014
Mark to market loss included in net loss
Balance at March 31, 2015
Fair Value
Measurements
Using
Significant
Unobservable
Inputs
(Level 3)
Warrant
Liability
$
6,394,000
146,800
(3,566,900)
2,973,900
34,600
$
3,008,500
As described in Note 16, Subsequent Events, during May 2015, we entered into an agreement with Platinum pursuant to which Platinum agreed to
amend the Platinum Warrants and the Series A Exchange Warrant to fix the exercise price thereof at $7.00 per share and eliminate the exercise price
reset features and fix the number of shares of our common stock issuable thereunder. This amendment will result in the elimination of the warrant
liability with respect to these warrants during the first quarter of our fiscal year ended March 31, 2016.
No assets or other liabilities were measured on a recurring basis at fair value at March 31, 2015 or 2014.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
Insurance
Legal fees
Interest receivable on note receivable from sale
of common stock
Technology license fees and all other
-110-
March 31,
2015
2014
$
27,300 $
3,400
-
5,000
21,800
3,400
2,800
12,500
$
35,700 $
40,500
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property and Equipment
Property and equipment consists of the following:
Laboratory equipment
Tenant improvements
Computers and network equipment
Office furniture and equipment
Accumulated depreciation and amortization
Property and equipment, net
March 31,
2015
2014
$
653,600 $
26,900
32,200
69,500
782,200
653,600
26,900
32,200
69,500
782,200
(665,100)
(605,900)
$
117,100 $
176,300
In connection with the issuance of Senior Secured Convertible Promissory Notes to Platinum beginning in October 2012, we entered into a Security
Agreement with Platinum under which the repayment of all amounts due under the terms of the various Senior Secured Convertible Promissory Notes
is secured by all of our assets, including our tangible and intangible personal property, licenses, patent licenses, trademarks and trademark licenses
(see Note 8, Convertible Promissory Notes and Other Notes Payable). As described in Note 16, Subsequent Events, during May 2015, we entered into
an agreement with Platinum pursuant to which Platinum converted all of the Senior Secured Convertible Promissory Notes it held into shares of our
newly created Series B Preferred stock and terminated its security interests in our assets.
7. Accrued Expenses
Accrued expenses consist of:
Accrued professional services
Accrued compensation
All other
March 31,
2015
2014
$
213,800 $
990,700
2,000
135,700
489,900
-
$
1,206,500 $
625,600
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Convertible Promissory Notes and Other Notes Payable
The following table summarizes the components of the Company’s convertible promissory notes and other notes payable:
Senior Secured 10% Convertible
Promissory Notes issued to Platinum:
Exchange Note issued on October
11, 2012
Investment Note issued on
October 11, 2012
Investment Note issued on
October 19, 2012
Investment Note issued on
February 22, 2013
Investment Note issued on March
12, 2013
Convertible promissory note
issued on July 26, 2013
Total Senior notes
Aggregate note discount
Net Senior notes
less: current portion
Senior notes - non-current
Principal
Balance
March 31, 2015
Accrued
Interest
Total
Principal
Balance
March 31, 2014
Accrued
Interest
Total
$
1,272,600 $
360,200 $
1,632,800 $
1,272,600 $
203,400 $
1,476,000
500,000
141,500
641,500
500,000
79,900
579,900
500,000
140,100
640,100
500,000
78,600
578,600
250,000
59,100
309,100
250,000
29,400
279,400
750,000
3,272,600
172,600
873,500
922,600
4,146,100
750,000
3,272,600
84,100
475,400
834,100
3,748,000
250,000
3,522,600
46,200
919,700
296,200
4,442,300
250,000
3,522,600
17,700
493,100
267,700
4,015,700
-
3,522,600
(3,272,600)
-
919,700
(873,500)
-
4,442,300
(4,146,100)
(2,085,900)
1,436,700
-
-
493,100
-
(2,085,900)
1,929,800
-
portion and discount
$
250,000 $
46,200 $
296,200 $
1,436,700 $
493,100 $
1,929,800
10% Convertible Promissory Notes
(Unit Notes)
2013 Unit Notes, due 7/31/14
2014 Unit Notes, including
amended notes, due 3/31/15
Note discounts
Net convertible notes (all
$
- $
- $
- $
1,007,500 $
35,700 $
1,043,200
4,066,900
4,066,900
(180,000)
270,700
270,700
-
4,337,600
4,337,600
(180,000)
50,000
1,057,500
(697,400)
200
35,900
-
50,200
1,093,400
(697,400)
current)
$
3,886,900 $
270,700 $
4,157,600 $
360,100 $
35,900 $
396,000
Notes Payable to unrelated parties:
7.5% Notes payable to service
providers for
accounts payable converted to
notes payable:
Burr, Pilger, Mayer
Desjardins
McCarthy Tetrault
August 2012 Morrison &
$
90,400 $
156,300
319,700
13,100 $
24,100
46,000
103,500 $
180,400
365,700
90,400 $
178,600
360,900
6,800 $
14,100
24,800
97,200
192,700
385,700
Foerster Note A
918,200
193,200
1,111,400
918,200
87,900
1,006,100
August 2012 Morrison &
Foerster Note B (1)
University Health
Network (1)
Note discount
less: current portion
non-current portion and
1,379,400
333,100
1,712,500
1,379,400
195,200
1,574,600
549,500
3,413,500
(474,500)
2,939,000
(3,413,500)
101,800
711,300
-
711,300
(711,300)
651,300
4,124,800
(474,500)
3,650,300
(4,124,800)
549,500
3,477,000
(848,100)
2,628,900
(1,130,100)
60,600
389,400
-
389,400
(133,600)
610,100
3,866,400
(848,100)
3,018,300
(1,263,700)
discount
$
(474,500) $
- $
(474,500) $
1,498,800 $
255,800 $
1,754,600
5.75% and 10.25% Notes
payable to insurance
premium financing company
(current)
$
5,800 $
- $
5,800 $
4,900 $
- $
4,900
10% Notes payable to vendors
for accounts
payable converted to notes
payable
less: current portion
non-current portion
7.0% Note payable (August
2012)
less: current portion
7.0% Notes payable - non-current
$
$
$
378,300 $
(378,300)
- $
51,500 $
(51,500)
- $
429,800 $
(429,800)
- $
119,400 $
(119,400)
- $
34,700 $
(34,700)
- $
154,100
(154,100)
-
58,800 $
(23,200)
7,900 $
(7,900)
66,700 $
(31,100)
58,800 $
(15,800)
3,800 $
(3,800)
62,600
(19,600)
portion
$
35,600 $
- $
35,600 $
43,000 $
- $
43,000
Total notes payable to
unrelated parties
less: current portion
non-current portion
less: discount (current at
March 31, 2015)
Net non-current portion
$
Notes payable to related parties:
October 2012 7.5% Note to Cato
$
3,856,400 $
(3,820,800)
35,600
770,700 $
(770,700)
-
4,627,100 $
(4,591,500)
35,600
3,660,100 $
(1,270,200)
2,389,900
427,900 $
(172,100)
255,800
4,088,000
(1,442,300)
2,645,700
-
35,600 $
-
- $
-
35,600 $
(848,100)
1,541,800 $
-
255,800 $
(848,100)
1,797,600
Holding Co.
$
293,600 $
55,900 $
349,500 $
293,600 $
30,800 $
324,400
October 2012 7.5% Note to Cato
Research Ltd. (1)
Note discount
Total notes payable to related
parties
discount
less: current portion
non-current portion and
1,009,000
1,302,600
(54,500)
204,800
260,700
-
1,213,800
1,563,300
(54,500)
1,009,000
1,302,600
(103,200)
117,300
148,100
-
1,126,300
1,450,700
(103,200)
1,248,100
(1,248,100)
260,700
(260,700)
1,508,800
(1,508,800)
1,199,400
(259,600)
148,100
(30,800)
1,347,500
(290,400)
$
- $
- $
- $
939,800 $
117,300 $
1,057,100
____________
(1) Note and interest payable solely in restricted shares of the Company's common stock.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant changes in our convertible promissory notes and other promissory notes during the fiscal years ended March 31, 2015 and 2014 are
described below:
10% Convertible Notes Issued in Connection with 2014 Unit Private Placement
As described more completely in the section entitled 2014 Unit Private Placement in Note 9, Capital Stock, between late March 2014 and March 31,
2015, we issued to accredited investors 10% convertible notes (the 2014Unit Notes) in the aggregate face amount of $3,113,500, including an
aggregate face amount of $1,250,000 of such notes issued to Platinum and 2014 Unit Notes in the aggregate principal amount of $50,000 issued prior
to March 31, 2014, in connection with our private placement offering of Units. (See Note 16, Subsequent Events, for information regarding additional
notes issued in connection with the 2014 Unit Private Placement after March 31, 2015.) The 2014 Unit Notes mature on March 31, 2015 (Maturity)
and the outstanding principal of the 2014 Unit Notes and their related accrued interest (the Outstanding Balance) is convertible into shares of our
common stock at a conversion price of $10.00 per share at or prior to Maturity, at the option of the investor. In addition, upon our consummation of
either (i) an equity or equity-based public financing registered with the SEC, or (ii) an equity or equity-based private placement, or series of private
placements, not registered with the SEC, in either case resulting in gross cash proceeds to us of at least $10.0 million prior to Maturity (a Qualified
Financing), the Outstanding Balance of the 2014 Unit Notes will automatically convert into securities substantially similar to those sold in the
Qualified Financing, based on the following formula: (the Outstanding Balance as of the closing of the Qualified Financing) x 1.25 / (the per security
price of the securities sold in the Qualified Financing). Under certain circumstances, the holders of the 2014 Unit Notes may request payment in cash
in lieu of automatic conversion into the securities of the Qualified Financing. See Note 16, Subsequent Events, regarding the conversion of the
Outstanding Balance of all of the 2014 Unit Notes pursuant to a private placement financing in May 2015.
We allocated the proceeds from the sale of the units to the 2014 Unit Notes, the common stock and the warrants comprising the units based on the
relative fair value of the individual securities in the unit on the date of the unit sale. Based on the short-duration of the 2014 Unit Notes and their
other terms, we determined that the fair value of the 2014 Unit Notes at the date of issuance was equal to their face value. Accordingly, we recorded
an initial discount attributable to each 2014 Unit Note for an amount representing the difference between the face value of the 2014 Unit Note and its
allocated relative value. Additionally, the 2014 Unit Notes contain an embedded conversion feature, most of which had an intrinsic value at the
issuance date, which value we treated as an additional discount attributable to such 2014 Unit Notes, subject to limitations on the absolute amount of
discount attributable to each 2014 Unit Note. We recorded a corresponding credit to additional paid-in capital, an equity account, attributable to the
beneficial conversion feature. We amortize the aggregate discount attributable to the 2014 Unit Notes using the effective interest method over the
respective term of each 2014 Unit Note. Because the discount on a 2014 Unit Note may be as great as 99% of its initial face value, and because we
must amortize such discount over the period from issuance to maturity, which has generally been less than one year, or in the case of such notes
issued after December 31, 2014, less than one calendar quarter, the calculated effective interest rate may be very high. Based on the amounts of their
respective discounts and the term between issuance and maturity, the effective interest rates attributable to the 2014 Unit Notes range from
approximately 38% to over 10,000%, with the weighted average effective interest rate in excess of 3,000%. During November 2014, we repaid the
$10,000 face amount of a 2014 Unit Note issued in October 2014.
Senior Secured Convertible Promissory Notes issued to Platinum
In July and August 2012, we issued to Platinum senior secured convertible promissory notes in the aggregate principal amount of $1,250,000. Each
note accrued interest at the rate of 10% per annum and was due and payable on July 2, 2015. The notes were each mandatorily convertible into
securities that we might have issued in an equity, equity-based, or debt financing, or series of financings, subsequent to the issuance of the notes
resulting in gross proceeds to us of at least $3,000,000, excluding any additional investment by Platinum.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 11, 2012, we entered into a Note Exchange and Purchase Agreement (NEPA Agreement) with Platinum in which the senior secured notes
issued in July 2012 and August 2012 and the related accrued interest, were consolidated into and exchanged for a single senior secured convertible
note in the amount of $1,272,577 (the Exchange Note) and Platinum agreed to purchase four additional 10% senior secured convertible promissory
notes in the aggregate principal amount of $2.0 million (the Investment Notes), issuable over four separate $500,000 tranches between October 2012
and December 2012. The NEPA Agreement was subsequently amended as to timing of subsequent note purchases, but between October 2012 and
March 2013, we issued and Platinum purchased an aggregate of $2.0 million of Investment Notes. We also entered into a Security Agreement with
Platinum to secure repayment of all obligations due and payable under the terms of the Exchange Note and the Investment Notes.
The Exchange Note and each Investment Note (together, SeniorNotes) accrue interest at a rate of 10% per annum and, subject to certain limitations
and exceptions set forth in the Senior Notes, unless voluntarily converted earlier by Platinum, will be due and payable in restricted shares of our
common stock on October 11, 2015, or three years following the date of issuance, as determined by the terms of the Investment Notes. Subject to
certain terms and conditions, at maturity, all principal and accrued interest under the Senior Notes will be repaid through our issuance of restricted
shares of our common stock to Platinum. Subject to certain potential adjustments set forth in the Senior Notes, the number of restricted shares of
common stock issuable as payment in full for each of the Notes at maturity will be calculated by dividing the outstanding Senior Note balance plus
accrued interest by $10.00 per share. Prior to maturity, the outstanding principal and any accrued interest on the Exchange Note and each of the
Investment Notes is convertible, in whole or in part, at Platinum’s option into shares of our common stock at a conversion price of $10.00 per share,
subject to certain adjustments. Refer to Note 16, Subsequent Events, for information regarding the conversion of the Senior Notes and accrued interest
into shares of Series B Preferred stock during May 2015.
As additional consideration for the purchase of the Investment Notes, we issued to Platinum warrants to purchase an aggregate of 100,000 shares of
our common stock, issuable in separate tranches together with each Investment Note. We issued four warrants to Platinum between October 2012 and
March 2013 (each an Investment Warrant ) to purchase an aggregate of 100,000 shares of our restricted common stock. Additionally, we issued
Platinum a warrant to purchase 63,629 shares of our common stock in connection with the issuance of the Exchange Note (Exchange Warrant). At
issuance, the Exchange Warrant and each Investment Warrant had a term of five-years and an exercise price of $30.00 per share, subject to certain
adjustments. Effective on May 24, 2013, we entered into an Amendment and Waiver agreement with Platinum pursuant to which we agreed to reduce
the exercise price of the Exchange Warrant and the Investment Warrants from $30.00 per share to $10.00 per share in consideration for Platinum’s
agreement to waive its rights for any increase in the number of shares of common stock issuable under the adjustment provisions of the Exchange
Warrant and the Investment Warrants that would otherwise occur from certain issuances and prospective issuances of our securities, including
issuances pursuant to the prospective Autilion Financing and other private placement transactions, at a price of less than $30.00 per share.
On July 26, 2013, we issued an additional senior secured convertible promissory note in the principal amount of $250,000 to Platinum (July 2013
Note). The July 2013 Note matures on July 26, 2016 and is otherwise in the same form as the earlier Investment Notes, bearing interest at 10% per
annum and being payable in restricted shares of our common stock and convertible, in whole or in part, at Platinum’s option into shares of our
restricted common stock at a conversion price of $10.00 per share, subject to certain adjustments. The conversion feature in the July 2013 Note
constituted a beneficial conversion feature at the date of issuance. As additional consideration for the purchase of the July 2013 Note, we also issued
to Platinum a five-year warrant to purchase 12,500 shares of our restricted common stock at an exercise price of $10.00 per share (July 2013
Warrant). The fair value of the July 2013 Warrant was estimated to be $11.74 per share, or $146,800, at its issuance date using a Monte Carlo
simulation model and the following assumptions: market price of common stock: $15.00 per share; exercise price: $10.00 per share; risk-free interest
rate: 1.36%; volatility: 96.9%; term: 5.0 years; and dividend rate 0.0%. We recorded the fair value of the July 2013 Warrant at the date of issuance as
a liability and as a corresponding discount to the July 2013 Note.
The conversion option embedded in the July 2013 Note resulted in a beneficial conversion feature having intrinsic value of $100,700 at issuance. We
recorded the issuance-date intrinsic value of the beneficial conversion feature as an additional component of the discount attributable to the July 2013
Note. The aggregate discount attributable to the July 2013 Note was $247,500, resulting in an issuance date carrying value of $2,500. As with the
Investment Notes, we amortize the aggregate discount attributable to each note using the effective interest method over the respective term of each
note. Considering the amount of the discount and the term of the note, the effective interest rate of the July 2013 Note was determined to be 159%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Subject to limited exceptions, the Exchange Warrant, each of the Investment Warrants and the July 2013 Warrant include certain exercise price reset
and anti-dilution protection features in the event that we issue other securities during the five-year term of the warrants at a price less than $10.00 per
share, as amended for the Exchange Warrant and the Investment Warrants. As a result of these provisions, the Exchange Warrant, the Investment
Warrants and the July 2013 Warrant do not meet the criteria set forth in ASC 815, Derivatives and Hedging, to be treated as equity instruments.
Consequently, we initially recorded the Exchange Warrant, each of the Investment Warrants and the July 2013 Warrant as liabilities at their fair value
and adjust them at the end of each reporting period. (See Note 4, Fair Value Measurements.)
Note Conversion and Warrant Amendment Agreement with Platinum
On July 18, 2014, we entered into an Amended and Restated Note Conversion Agreement and Warrant Amendment with Platinum ( Amendment),
pursuant to which Platinum agreed to convert into our unregistered equity securities all Senior Secured Convertible Promissory Notes (Senior Notes)
held by Platinum, including accrued but unpaid interest thereon (Outstanding Balance), in the aggregate amount of approximately $4.2 million at the
date of the agreement, upon our consummation on or before August 31, 2014 (Closing Date), of either (i) a private equity financing resulting in
aggregate gross proceeds of at least $36.0 million (Private Financing), or (ii) a public offering of our equity securities registered with the SEC
resulting in gross proceeds of at least $10.0 million (Public Offering) (the Private Financing and Public Offering are referred to in this discussion as a
Platinum Qualified Financing). In August and September 2014, we amended the Amendment to extend the Closing Date until October 31, 2014.
Upon consummation of a Private Financing, the Senior Notes would have converted into that number of unregistered shares of our common stock
equal to the Outstanding Balance on the Closing Date, divided by $10.00 per share. Upon consummation of a Public Offering, the Senior Notes
would have converted into shares of a new class of Series B Convertible Preferred Stock (Series B Preferred) at the lower of $10.00 per share or the
lowest per-share price in the Public Offering.
Additionally, pursuant to the terms and conditions of the Amendment, in the event we had consummated a Platinum Qualified Financing on or before
the Closing Date, the exercise price of the Platinum Warrants we have issued to Platinum in connection with the Senior Notes, and warrants that we
may still issue pursuant to the Note Exchange and Purchase Agreement between us and Platinum, dated October 11, 2012 (NEPA), if any, would have
been fixed at the lower of $10.00 per share or the purchase price of common stock sold in the Platinum Qualified Financing. Finally, the anti-dilutive
provisions contained in the Platinum Warrants, other than typical adjustments for stock splits, combinations and dividends, would have been
terminated as of the Closing Date.
Through March 31, 2015, we did not request Platinum to extend the Closing Date of the Amendment or enter into any other agreement with Platinum
regarding the conversion of the Senior Notes, fixing the exercise price of the Platinum Warrants or terminating the anti-dilution provisions of the
Platinum Warrants. Refer to Note 16, Subsequent Events, regarding the conversion of the Senior Notes and accrued interest into shares of Series B
Preferred stock and modifications made to the exercise price and anti-dilution provisions of the Platinum Warrants in May 2015.
At the execution of the Amendment, we determined that the Amendment resulted in a modification of the Senior Notes that should be accounted for
as an extinguishment of debt. Considering, among other factors, the cash flows and conversion features of the Senior Notes as modified by the
Amendment, market interest rates for debt of similar quality and the relative probabilities of conversion of the Senior Notes into either shares of our
common stock or Series B Preferred upon consummation of a Qualified Financing, we determined that the fair values of the Senior Notes at July 18,
2014, aggregating $6,475,000, represented a substantial premium over their aggregate $4,138,700 face values plus accrued interest. In accordance
with the provisions of ASC 470-20, Debt with Conversion and Other Options, we recognized the premium in excess of the face value and accrued
interest, $2,336,300, as a non-cash component of loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive (Loss) Income with a credit to additional paid-in capital, an equity account. Consequently, we recorded the liability
for the Senior Notes at their face values plus accrued interest. We recognized the difference between the pre-modification carrying values of the notes
and their face values, an aggregate of $1,983,700, as an additional non-cash charge to loss on extinguishment of debt in the accompanying Condensed
Consolidated Statement of Operations and Comprehensive (Loss) Income. Certain of the Senior Notes contained a beneficial conversion feature at the
time they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time of the modification, an
aggregate of $2,716,600, as a reduction to the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations
and Comprehensive (Loss) Income, with a corresponding reduction to additional paid-in capital. The net amount of the loss on extinguishment of debt
related to the amendment of the Senior Notes recognized in the accompanying Condensed Consolidated Statements of Operations and Comprehensive
(Loss) Income for the nine months ended December 31, 2014 is $1,603,400.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At the date of its issuance, we recorded the fair value of the Exchange Warrant as a liability and as a corresponding charge to loss on early
extinguishment of debt. We recorded the fair value of each Investment Warrant and the July 2013 Warrant at the date of issuance as a liability and as
a corresponding discount to the related note. Subject to limitations of the absolute amount of discount attributable to each Investment Note and the
July 2013 Note, we treated the issuance-date intrinsic value of the beneficial conversion feature embedded in each Investment Note and the July 2013
Note as an additional component of the discount attributable to such note and recorded a corresponding discount attributable to the beneficial
conversion feature for each note. Prior to the Amendment, at which time the remaining unamortized discount was written off in our determination of
the loss on extinguishment of debt, we had amortized the aggregate discount attributable to each of the Investment Notes and the July 2013 Note
using the effective interest method over the respective term of each note. The effective interest rate of the Exchange Note was 10.0% at inception and
the effective interest rate at inception for each of the Investment Notes and the July 2013 Note was 159.1% .
We re-measure the fair value of the Exchange Warrant, the Investment Warrants and the July 2013 Warrant (collectively, the Platinum Warrants) at
each quarterly reporting period. As of March 31, 2015 and 2014, we measured the fair value of such warrants at an aggregate of $810,100 and
$915,300, respectively. The aggregate decrease in fair value between March 31, 2014 and March 31, 2015 of $105,200 and the aggregate decrease in
fair value between March 31, 2013 and March 31, 2014 of $1,219,500 is reflected in the Change in Warrant Liability in the accompanying
Consolidated Statement of Operations and Comprehensive Income for the years ended March 31, 2015 and 2014, respectively.
10% Convertible Notes Issued in Connection with 2013 Unit Private Placement
As described more completely in the section entitled 2013 Unit Private Placement in Note 9, Capital Stock, between August 2013 and March 2014,
we issued to accredited investors 10% convertible promissory notes (the “2013Unit Notes”) in an aggregate face amount of $1,007,500 in connection
with our private placement of Units. The maturity date of the 2013 Unit Notes was July 30, 2014 and each 2013 Unit Note and its related accrued
interest was convertible into shares of our common stock at a fixed conversion price of $10.00 per share at or prior to maturity, at the option of the
accredited investor.
We allocated the proceeds from the sale of the units to the 2013 Unit Notes, the common stock and the warrants comprising the Units based on the
relative fair value of the individual securities in each Unit on the dates of the Unit sales. Based on the short-duration of the 2013 Unit Notes and their
other terms, we determined that the fair value of the 2013 Unit Notes at the date of issuance was equal to their face value. Accordingly, we recorded
an initial discount attributable to each 2013 Unit Note for an amount representing the difference between the face value of the 2013 Unit Note and its
relative value. Additionally, the 2013 Unit Notes contain an embedded conversion feature, certain of which had an intrinsic value at the issuance date,
which value we treated as an additional discount attributable to such 2013 Unit Notes, subject to limitations on the absolute amount of discount
attributable to each 2013 Unit Note. We recorded a corresponding credit to additional paid-in capital, an equity account in the Consolidated Balance
Sheet, attributable to the beneficial conversion feature. We amortized the aggregate discount attributable to each of the 2013 Unit Notes using the
effective interest method over the respective term of each 2013 Unit Note. Based on their respective discounts, the weighted average effective
interest rate attributable to the 2013 Unit Notes at issuance was 464.1%.
Amendment of 2013 Unit Notes and Warrants
Effective May 31, 2014, we entered into note and warrant amendment agreements with substantially all holders of our 2013 Unit Notes and 2013 Unit
Warrants, each of whom agreed to (i) modify certain terms of their 2013 Unit Note to conform to the corresponding terms of the 2014 Unit Notes,
including an extension of the maturity date of their 2013 Unit Note from July 30, 2014 to March 31, 2015, as well as adoption of the automatic
conversion and 25% conversion premium features related to consummation of a Qualified Financing, as described previously (Amended 2013 Unit
Notes), and (ii) modify certain terms of their 2013 Unit Warrants, including the exercise price and expiration date, to conform to the corresponding
terms of the 2014 Unit Warrants (Amended 2013 Unit Warrants). Holders of 2013 Unit Notes having an aggregate initial face amount of $895,000
agreed to such amendments. The maturity date of 2013 Unit Notes payable to holders who did not agree to amend their 2013 Unit Note and 2013 Unit
Warrant remained July 30, 2014 and the $20.00 per share exercise price and July 30, 2016 expiration date of the 2013 Unit Warrants held by such
holders remains unchanged. Between April 1, 2014 and August 15, 2014, we repaid 2013 Unit Notes having an initial face value of $ 112,500 and
since the later date, no un-amended 2013 Unit Notes remain outstanding.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We determined that the modification of the 2013 Unit Notes and the 2013 Unit Warrants should be accounted for as an extinguishment of debt.
Considering the cash flows and the non-contingent and contingent beneficial conversion features of the Amended 2013 Notes and other factors,
including market interest rates for unsecured debt of similar quality and the probability of their conversion to securities in a Qualified Financing, we
determined that the fair values of the Amended 2013 Unit Notes, aggregating $1,394,000, represented a substantial premium over their aggregate
$943,400 face values. In accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options, we recognized the premium in
excess of the face value, $450,600, as a credit to additional paid-in capital, an equity account. Consequently, we recorded the liability for the
Amended 2013 Unit Notes at their face values. We recognized the difference between the pre-modification carrying values of the notes and their fair
values, an aggregate of $867,500, as a non-cash charge to loss on extinguishment of debt in the accompanying Condensed Consolidated Statement of
Operations and Comprehensive Loss. As described in greater detail in Note 9, Capital Stock, we determined the incremental fair value of the
Amended 2013 Unit Warrants, which are treated as equity instruments, to be $272,900. We recognized this incremental fair value as an additional
component of loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss and
as a credit to additional paid-in capital. Certain of the 2013 Unit Notes contained a beneficial conversion feature when they were originally issued.
We have accounted for the repurchase of the beneficial conversion feature at the time of the modification, an aggregate of $614,200, as a reduction to
the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a
corresponding reduction to additional paid-in capital. The net amount of the loss on extinguishment of debt related to the Amended 2013 Unit Notes
and Amended 2013 Unit Warrants recognized in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss is
$526,200. Since the Amended 2013 Unit Notes have the same features and maturity as the 2014 Unit Notes, the two sets of notes are aggregated in
the summary table above.
Issuance of Securities in Satisfaction of Technology License and Maintenance Fees and Patent Expenses
In April 2014, we entered into an agreement with Icahn School of Medicine at Mount Sinai (Icahn School), one of our long-term stem cell technology
licensors, pursuant to which we issued (i) a 10% promissory note in the face amount of $300,000 due on the earlier of December 31, 2014, or the
completion of a qualified financing, as defined, (ii) 15,000 restricted shares of our common stock and (iii) a warrant exercisable through March 31,
2019 to purchase 15,000 restricted shares of our common stock at an exercise price of $10.00 per share to Icahn School in satisfaction of $288,400 of
stem cell technology license maintenance fees and reimbursable patent prosecution costs (the Agreement). Based on the short-duration of the note, its
interest rate and other terms, we determined that the fair value of the note at the date of issuance was equal to its face value. We determined the fair
value of stock to be $141,000, based on the $9.40 per share quoted market price of our common stock on the date of the agreement. We calculated the
fair value of the warrant to be $5.95 per share, or $89,200, using the Black Scholes Option Pricing Model and the following assumptions: market
price per share: $9.40; exercise price per share: $10.00; risk-free interest rate: 1.59%; contractual term: 5.0 years; volatility: 80.3%; expected dividend
rate: 0%. We recognized a loss on extinguishment of debt in the amount of $241,800 related to this settlement in the accompanying Statement of
Operations and Comprehensive Loss. Under the terms of the Agreement, an additional $35,800 of license maintenance fees and reimbursable patent
prosecution costs was added to the principal amount of the promissory note through December 31, 2014. We made a payment of $10,000 on the note
in January 2015 and it remained outstanding at March 31, 2015.
Notes Payable to Morrison & Foerster
On May 5, 2011, we amended a previously outstanding note (the Original Note) issued to Morrison & Foerster LLP (Morrison & Foerster), then our
general corporate and intellectual property counsel, in payment of legal services (the Amended Note). Under the terms of Amended Note, the
principal balance of the Original Note was increased to $2,200,000, interest accrued at the rate of 7.5% per annum, and we were required to make
certain payments to Morrison & Foerster.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 31, 2012, we restructured the Amended Note (the Restructuring Agreement). Pursuant to the Restructuring Agreement, we issued to
Morrison & Foerster two new unsecured promissory notes to replace the Amended Note, one in the principal amount of $1,000,000 (Replacement
Note A) and the other in the principal amount of $1,379,400 (Replacement Note B) (together, the Replacement Notes); amended an outstanding
warrant to purchase restricted shares of our common stock (the Amended M&F Warrant) ; and issued a new warrant exercisable at $20.00 per share
through September 15, 2017 to purchase restricted shares of our common stock (the New M&F Warrant). Under the terms of the Restructuring
Agreement, the Amended Note was cancelled and all of our past due payment obligations under the Amended Note were satisfied. Pursuant to the
terms of the Amended Note, we made a payment of $155,000 to Morrison & Foerster on August 31, 2012 and issued the Replacement Notes, each
dated as of August 31, 2012. Both Replacement Notes accrue interest at the rate of 7.5% per annum and are due and payable on March 31,
2016. Replacement Note A required monthly payments of $15,000 per month through March 31, 2013, and requires $25,000 per month thereafter
until maturity. Between May 2013 and March 31, 2015, we have made no payments on Replacement Note A. In accordance with the terms of the
Replacement Notes, the applicable penalty interest rate of 10.0% per annum has become effective and we have accrued interest on the Replacement
Notes at that rate since May 2013. Payment of the principal and interest on Replacement Note B will be made solely in restricted shares of our
common stock pursuant to Morrison & Foerster’s cancellation from time to time of all or a portion of the principal and interest balance due on
Replacement Note B in connection with its concurrent exercise of the New M&F Warrant, at an exercise price of $20.00 per share; provided,
however, that Morrison & Foerster shall have the option to require payment of Replacement Note B in cash upon the occurrence of a change in
control of the Company or an event of default, and only in such circumstances. As indicated in Note 16, Subsequent Events, in May 2015,
Replacement Note B in the aggregate amount (principal and accrued but unpaid interest) of approximately $1.8 million was converted into 257,143
shares of our newly created Series B Preferred, eliminating approximately $1.8 million of our indebtedness. Additionally, Morrison & Foerster
agreed to standstill and forbear until December 31, 2016 with respect to further payment requirements on Replacement Note A and accounts payable
outstanding at the time of the agreement.
The New M&F Warrant is exercisable for the number of restricted shares of our common stock equal to the principal and accrued interest due under
the terms of Replacement Note B divided by the warrant exercise price of $20.00 per share. At the August 31, 2012 date of grant, the New M&F
Warrant was exercisable to purchase 68,969 restricted shares of our common stock. The New M&F Warrant effectively permits exercise only by the
cancellation in whole or in part of our indebtedness under either of the Replacement Notes. Through March 31, 2015, we have adjusted the New
M&F Warrant to increase the number of restricted shares available for purchase by 16,658 shares, based on interest accrued on Replacement Note B
through that date. We have recorded the fair value of the additional warrant shares as a charge to interest expense and a corresponding credit to
additional paid-in capital.
Note Payable to Cato Research Ltd.
On October 10, 2012, we issued to Cato Research Ltd ( CRL) a contract research and development partner and a related party: (i) an unsecured
promissory note in the initial principal amount of $1,009,000, which is payable solely in restricted shares of our common stock and which accrues
interest at the rate of 7.5% per annum, compounded monthly (the CRL Note), as payment in full for all contract research and development services
and regulatory advice (CRO Services) rendered by CRL to us and our affiliates through December 31, 2012 with respect to the non-clinical and
clinical development of AV-101, and (ii) a five-year warrant to purchase, at a price of $20.00 per share, 50,450 restricted shares of our common stock,
the amount equal to the sum of the principal amount of the CRL Note, plus all accrued interest thereon, divided by $20.00 per share (the CRL
Warrant). The CRL Note is due and payable on March 31, 2016 and is payable solely by CRL's cancellation from time to time of all or a portion of
the principal and interest balance due on the CRL Note in connection with its concurrent exercise of the CRL Warrant, provided, however, that CRL
will have the option to require payment of the CRL Note in cash upon the occurrence of a change in control of the Company or an event of default,
and only in such circumstances. Through March 31, 2015, we have adjusted the CRL Warrant to increase the number of restricted shares available for
purchase by 10,241 shares, based on interest accrued on the CRL Note through that date. We have recorded the fair value of the additional shares as a
charge to interest expense and a corresponding credit to additional paid-in capital.
As disclosed in Note 16, Subsequent Events, in May 2015, the CRL Note and certain accounts payable to CRL for CRO Services related to AV-101 in
the aggregate amount (principal and accrued but unpaid interest, plus certain strategic adjustments) of approximately $1.9 million were converted into
278,006 shares of our Series B Preferred, eliminating approximately $1.9 million of our indebtedness.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Payable to Cato Holding Company
On October 10, 2012, we exchanged a previously outstanding note issued to Cato Holding Company (CHC) for a new unsecured promissory note in
the principal amount of $310,400 (the 2012 CHC Note) and a five-year warrant to purchase 12,500 restricted shares of the Company’s common stock
at a price of $30.00 per share (the CHC Warrant ). The 2012 CHC Note accrues interest at a rate of 7.5% per annum and is due and payable in
monthly installments of $10,000, beginning November 1, 2012 and continuing until the outstanding balance is paid in full. Between December 2012
and March 31, 2015, we have made no payments on the 2012 CHC Note.
As disclosed in Note 16, Subsequent Events, in May 2015, the 2012 CHC Note in the aggregate amount (principal and accrued but unpaid interest) of
approximately $354,000 was converted into 50,565 shares of our Series B Preferred, eliminating approximately $354,000 of our indebtedness.
Note Payable to University Health Network
On October 10, 2012, we issued to the University Health Network ( UHN): (i) an unsecured promissory note in the principal amount of $549,500,
which is payable solely in restricted shares of our common stock and which accrues interest at the rate of 7.5% per annum, as payment in full for all
sponsored stem cell research and development activities by UHN and Gordon Keller, Ph.D. under the SCRA through September 30, 2012 (the UHN
Note), and (ii) a five-year warrant to purchase, at a price of $20.00 per share, 27,475 restricted shares of our common stock, the amount equal to the
sum of the principal amount of the UHN Note, plus all accrued interest thereon, divided by $20.00 per share (the UHN Warrant). The UHN Note is
due and payable on March 31, 2016 and is payable solely by UHN's cancellation from time to time of all or a portion of the principal and interest
balance due on the UHN Note in connection with its concurrent exercise of the UHN Warrant, provided, however, that UHN will have the option to
require payment of the UHN Note in cash upon the occurrence of a change in control of the Company or an event of default, and only in such
circumstances. Through March 31, 2015, we have adjusted the UHN Warrant to increase the number of restricted shares available for purchase by
5,095 shares, based on interest accrued on the UHN Note through that date. We have recorded the fair value of the additional shares as a charge to
interest expense and a corresponding credit to additional paid-in capital.
As disclosed in Note 16, Subsequent Events, in May 2015, the UHN Note in the aggregate amount (principal and accrued but unpaid interest) of
approximately $656,400 was converted into 93,775 shares of our Series B Preferred, eliminating approximately $656,400 of our indebtedness.
Notes Payable for Cancellation of Amounts Payable for Services and Royalties
On February 25, 2011, we issued to Burr, Pilger, and Mayer, LLC (BPM) an unsecured promissory note in the principal amount of $98,674 for
amounts payable in connection with valuation services provided to us by BPM. The BPM note bears interest at the rate of 7.5% per annum and has
payment terms of $1,000 per month, beginning March 1, 2011 and continuing until all principal and interest is paid in full. In addition, a payment of
$25,000 shall be due upon the sale of the Company or upon our completing a financing transaction of at least $5.0 million during any three-month
period, with the payment increasing to $50,000 (or the amount then owed under the note, if less) upon the Company completing a financing of over
$10.0 million. We made no payments on the BPM note during the fiscal year ended March 31, 2015.
On April 29, 2011, we issued to Desjardins Securities, Inc. (Desjardins) an unsecured promissory note in the principal amount of CDN $236,000 for
amounts payable for legal fees incurred by Desjardins in connection with investment banking services provided to us by Desjardins. The Desjardins
note bears interest at 7.5% and was due, along with all accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a
Change of Control, as defined in the Desjardins note, and (iii) any failure to pay principal or interest when due. We were required to make payments
of CDN $4,000 per month beginning May 31, 2011, increasing to CDN $6,000 per month beginning on January 31, 2012. Beginning on January 1,
2012, we are also required to make payments equal to one-half of one percent (0.5%) of the net proceeds of all private or public equity financings
closed during the term of the note. The note payable to Desjardins was due on June 30, 2014. We made no payments on the Desjardins note during
the fiscal year ended March 31, 2015.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 5, 2011, we issued to McCarthy Tetrault LLP ( McCarthy) an unsecured promissory note in the principal amount of CDN $502,797 for
amounts payable in connection with Canadian legal services provided to us. The McCarthy note bears interest at 7.5% and was due, along with all
accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a Change of Control, as defined in the McCarthy note, and
(iii) any failure to pay principal or interest when due. We were required to make payments of CDN $10,000 per month beginning May 31, 2011,
which payment amounts increased to CDN $15,000 per month on January 31, 2012. Beginning on January 1, 2012, we are also required to make
payments equal to one percent (1%) of the net proceeds of all private or public equity financings closed during the term of the note. The note payable
to McCarthy was due on June 14, 2014. On June 11, 2014, we and McCarthy agreed to extend the maturity date of the McCarthy note from June 14,
2014 to the earlier of (i) September 30, 2014, (ii) consummation of a financing in which we received gross cash proceeds of at least $15.0 million, or
(iii) consummation of a change of control of the Company, as defined in the McCarthy note. McCarthy also agreed to forbear with respect to the
requirement that we make monthly payments on the note from the date of the agreement until maturity and granted us a waiver with respect to
previously missed monthly payments. We made no payments on the McCarthy note during the fiscal year ended March 31, 2015. As disclosed in
Note 16, Subsequent Events, in May 2015, the McCarthy note in the aggregate amount (principal and accrued but unpaid interest) of approximately
$414,600 was converted into 59.230 shares of our Series B Preferred, eliminating approximately $414,600 of our indebtedness.
On August 30, 2012, we issued a promissory note in the principal amount of $60,000 and 750 restricted shares of our common stock valued at a
market price of $18.80 per share to Progressive Medical Research in settlement of past due obligations for clinical research services in the amount of
$79,900. Under the terms of the settlement, we also agreed to make monthly cash payments of $5,000 in August 2012 through December 2012. The
promissory note bears interest at 7% per annum and requires payments of $1,000 per month beginning January 15, 2013 until all principal and interest
is paid in full. The note requires payment in full upon the sale of all or substantially all of our assets or upon our completion of a financing
transaction, or series of transactions, resulting in gross proceeds to us of at least $4.0 million in any three-month period, excluding proceeds from
stock option or warrant exercises. We made no payments on this note during the fiscal year ended March 31, 2015.
On October 12, 2009, VistaGen California issued a promissory note payable to the Regents of the University of California (“ UC”) with a principal
balance of $90,000 in exchange for the cancellation of certain amounts payable under a research collaboration agreement (the UC Note 1).. On
February 25, 2010, VistaGen California issued a promissory note payable to UC having a principal balance of $170,000 in exchange for the
cancellation of the remaining $60,000 principal balance of UC Note 1 and certain amounts payable under a research collaboration agreement (UC
Note 2). UC Note 2 was payable in monthly principal installments of $15,000 through May 31, 2010, with the remaining $125,000 plus all accrued
and unpaid interest due on or before June 30, 2010. Between June 2010 and December 2010, VistaGen California amended UC Note 2 multiple times,
ultimately resulting in a decrease in the monthly payment amount to $5,000, with payments continuing until the outstanding balance of principal and
interest is paid in full. We made no payments on UC Note 2 during the fiscal year ended March 31, 2015.
On March 1, 2010, VistaGen California issued a 10% promissory note with a principal balance of $75,000 to National Jewish Health in exchange for
the cancellation of certain amounts payable for accrued royalties. The principal balance plus all accrued and unpaid interest was initially due on or
before December 31, 2010 (March 2010 Note). On December 28, 2010, VistaGen California amended the March 2010 Note and extended its maturity
date to the first to occur of April 30, 2011 or 30 days following the closing of a financing with gross proceeds of $5,000,000 or more. We made no
payments on this note during the fiscal year ended March 31, 2015.
On August 13, 2010, VistaGen California issued a 10% promissory note with a principal balance of $41,000 to MicroConstants, Inc. in exchange for
the cancellation of certain amounts payable for services rendered. Under the terms of this note, VistaGen California is to make payments of $1,000
per month with any unpaid principal or accrued interest due and payable upon the first to occur of (i) August 1, 2013, (ii) the issuance and sale of
equity securities whereby the Company raises at least $5,000,000 or (iii) the sale or acquisition of all or substantially all of our stock or assets. We
made no payments on this note during the fiscal year ended March 31, 2015.
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9. Capital Stock
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reverse Split (Stock Consolidation) of our Common Stock
As indicated in Note 2, Basis of Presentation and Going Concern, we consummated the Stock Consolidation, a 1-for-20 reverse split of our
authorized, and issued and outstanding shares of common stock, effective on August 14, 2014. The par value of our common stock remained
unchanged at $0.001 per share following the Stock Consolidation. The Stock Consolidation was approved by the Financial Industry Regulatory
Authority (FINRA) on August 13, 2014, and became effective on the OTCQB at the opening of trading on August 14, 2014 . Each reference to shares
of common stock or the price per share of common stock in these financial statements is post-Stock Consolidation, and reflects the 1-for-20
adjustment as a result of the Stock Consolidation.
Series A Preferred Stock
In December 2011, our Board of Directors authorized the creation of a series of up to 500,000 shares of Series A Preferred, par value $0.001 (Series A
Preferred). Each restricted share of Series A Preferred was initially convertible at the option of the holder into one-half of one restricted share of our
common stock. The Series A Preferred ranks prior to the common stock for purposes of liquidation preference.
The Series A Preferred has no separate dividend rights, however, whenever the Board of Directors declares a dividend on the common stock, each
holder of record of a share of Series A Preferred shall be entitled to receive an amount equal to such dividend declared on one share of common stock
multiplied by the number of shares of common stock into which such share of Series A Preferred could be converted on the Record Date.
Except with respect to transactions upon which the Series A Preferred shall be entitled to vote separately as a class, the Series A Preferred has no
voting rights. The restricted common stock into which the Series A Preferred is convertible shall, upon issuance, have all of the same voting rights as
other issued and outstanding shares of our common stock.
In the event of the liquidation, dissolution or winding up of the affairs of the Company, after payment or provision for payment of our debts and other
liabilities, the holders of Series A Preferred then outstanding shall be entitled to receive an amount per share of Series A Preferred calculated by
taking the total amount available for distribution to holders of all of our outstanding common stock before deduction of any preference payments for
the Series A Preferred, divided by the total of (x), all of the then outstanding shares of our common stock, plus (y) all of the shares of our common
stock into which all of the outstanding shares of the Series A Preferred can be converted before any payment shall be made or any assets distributed to
the holders of the common stock or any other junior stock.
At March 31, 2015 and 2014, there were 500,000 restricted shares of Series A Preferred outstanding, all issued to Platinum or its affiliates. Platinum
acquired the Series A Preferred pursuant to the transactions described below. In October 2012, Platinum’s exchange rights with respect to the Series
A Preferred were modified as described in the section entitled Modification of Series A Preferred Exchange Rights and Deemed Dividend, below.
·
December 2011 Common Stock Exchange Agreement with Platinum
On December 22, 2011, we entered into a Common Stock Exchange Agreement (the Exchange Agreement") with Platinum, pursuant
to which Platinum converted 24,200 restricted shares of our common stock into 45,980 restricted shares of Series A Preferred (the
Exchange). Each restricted share of Series A Preferred issued to Platinum was initially convertible into ten restricted shares of our
common stock. At the time of the Exchange, we determined the fair value of the common stock subject to the Exchange to be $31.00
per share and have reflected the 24,200 restricted common shares as treasury stock on that basis in the accompanying Consolidated
Balance Sheet at March 31, 2015 and 2014.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
·
December 2011 Note and Warrant Exchange Agreement with Platinum
On December 29, 2011, we entered into a Note and Warrant Exchange Agreement with Platinum pursuant to which a promissory note
in the face amount of $4,000,000 plus accrued interest and all outstanding warrants issued to Platinum to purchase an aggregate of
79,993 restricted shares of our common stock were cancelled in exchange for 391,075 restricted shares of Series A Preferred. Each
share of Series A Preferred was initially convertible into one-half of one share of our common stock. We issued 231,090 restricted
shares of Series A Preferred to Platinum in connection with the note cancellation based on the sum of the $4,000,000 principal
balance of the note plus accrued but unpaid interest through May 11, 2011 adjusted for a 125% conversion premium, net of the
$1,719,800 aggregate exercise price of the 79,993 outstanding warrants held by Platinum, and a contractual conversion basis of
$35.00 per common share, all adjusted for the initial 1:10 Series A Preferred to common exchange ratio. An additional 159,985
restricted shares of Series A Preferred were issued to Platinum in connection with the warrant exercise and exchange to acquire the
common shares issued upon the warrant exercise.
·
2012 Exchange Agreement with Platinum
On June 29, 2012, we entered into an Exchange Agreement (the 2012 Platinum Exchange Agreement) with Platinum pursuant to
which we issued Platinum 62,945 restricted shares of Series A Preferred in exchange for 31,473 restricted shares of our common
stock then owned by Platinum, in consideration for Platinum’s agreement to purchase from us a senior secured convertible
promissory note in the face amount of $500,000. We estimated the fair value of the Series A Preferred shares tendered to Platinum
under the terms of the 2012 Platinum Exchange Agreement at $736,400 ($23.40 per share on a common share equivalent basis). The
common shares exchanged for shares of Series A Preferred are treated as treasury stock on that basis in the accompanying
Consolidated Balance Sheet at March 31, 2015 and 2014.
Modification of Series A Preferred Exchange Right
Pursuant to the October 2012 Agreement described more completely in Note 8, Convertible Promissory Notes and Other Notes Payable, Platinum’s
exchange rights in the Series A Preferred were modified such that Platinum now has the right and option to exchange the 500,000 restricted shares of
our Series A Preferred that it holds for (i) a total of 750,000 restricted shares of our common stock, and (ii) a five-year warrant to purchase 350,000
restricted shares of our common stock, originally at an exercise price of $30.00 per share (Series A Exchange Warrant). The Series A Exchange
Warrant, when issued, will have the same features, including exercise price and anti-dilution provisions as the Exchange Warrant and the Investment
Warrants issued to Platinum between October 2012 and July 2013 (collectively, the Platinum Warrants) and accordingly, has been treated as a
component of Warrant Liability in our Consolidated Balance Sheets since the effective date of the October 2012 Agreement. Effective on May 24,
2013, we entered into an Amendment and Waiver Agreement (the Amendment and Waiver) with Platinum pursuant to which we agreed to reduce the
exercise price of the Platinum Warrants and the Series A Exchange Warrant from $30.00 per share to $10.00 per share in consideration for Platinum’s
agreement to waive certain of its rights under the anti-dilution provisions of the Platinum Warrants and the Series A Exchange Warrant. See the
section entitled Modification of Platinum Warrants, later in this note, for a more complete description of the Amendment and Waiver.
Similarly to the Platinum Warrants, we remeasure the fair value of the Series A Exchange Warrant at each quarterly reporting period and reflect the
change in its fair value as a component of the Change in Warrant Liability in the Consolidated Statement of Operations. The fair value of the Series A
Exchange Warrant was determined to be $2,198,400 and $2,058,600 as of March 31, 2015 and 2014, respectively, and the $139,800 increase in fair
value since March 31, 2014 is reflected as a component of the Change in Warrant Liability in the accompanying Consolidated Statement of
Operations and Comprehensive Loss for the fiscal year ended March 31, 2015.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As described in Note 16, Subsequent Events, during May 2015, we entered into an agreement with Platinum pursuant to which Platinum agreed to
amend the Platinum Warrants and the Series A Exchange Warrant to fix the exercise price thereof at $7.00 per share and eliminate the exercise price
reset features and fix the number of shares of our common stock issuable thereunder. This amendment will result in the elimination of the warrant
liability with respect to these warrants during the first quarter of our fiscal year ended March 31, 2016.
Creation of Series B Preferred Stock
On July 17, 2014, our Board of Directors authorized the creation of a class of Series B Preferred Stock (Series B Preferred) to provide for the
potential conversion of the Senior Secured Convertible Promissory Notes held by Platinum totaling approximately $4.3 million in principal and
accrued interest at December 31, 2014 (Outstanding Balance) into Series B Preferred. At March 31, 2015, we had not yet filed a certificate of
designation with the Nevada Secretary of State to amend our Articles of Incorporation to formally establish the Series B Preferred. Refer to Note 16,
Subsequent Events, for information regarding the filing of a Certificate of Designation for the Series B Preferred with the Nevada Secretary of State
and the issuance of Series B Preferred in May and June 2015.
2014 Unit Private Placement
Between late-March 2014 and March 31, 2015, we entered into securities purchase agreements with accredited investors, including Platinum, pursuant
to which we sold units to such accredited investors in private placement transactions (2014 Units), for aggregate cash proceeds of $3,113,500,
consisting of (i) 2014 Unit Notes in the aggregate face amount of $3,113,500 which are due on March 31, 2015 or automatically convertible into
securities we may issue upon the consummation of a Qualified Financing, defined as (a) an equity-based public financing registered with the SEC, or
(b) a private equity-based financing or series of private equity-based financings, in either case in which we receive at least $10 million in gross cash
proceeds prior to March 31, 2015; (ii) an aggregate of 282,850 restricted shares of our common stock (2014 Unit Stock); and (iii) warrants exercisable
through December 31, 2016 to purchase an aggregate of 282,850 restricted shares of our common stock at an exercise price of $10.00 per share (2014
Unit Warrants). We sold $1,250,000 of such Units to Platinum, issuing 2014 Unit Notes in the face amount of $1,250,000; 125,000 restricted shares
of 2014 Unit Stock and 2014 Unit Warrants to purchase 125,000 shares of our common stock to Platinum. The Outstanding Balance of each 2014
Unit Notes is convertible into shares of our common stock at a conversion price of $10.00 per share at or prior to maturity, at the option of each
investor. In addition, however, the Outstanding Balance is automatically convertible into securities substantially similar to those we may issue in a
Qualified Financing at an amount determined by multiplying the Outstanding Balance by 1.25, and dividing the resulting number by the price per
share of securities offered in the Qualified Financing. Under certain circumstances, the holders of the 2014 Unit Notes may request payment in cash in
lieu of automatic conversion into the securities of the Qualified Financing. We sold $50,000 of 2014 Units prior to March 31, 2014, which Units are
reflected in the figures above. See Note 16, Subsequent Events, for information regarding additional sales of 2014 Unit Notes in April and May 2015
and the conversion of the 2014 Unit Notes pursuant to a private placement financing in May 2015.
We allocated the proceeds from the sale of the 2014 Units to the various securities based on their relative fair values on the dates of the sales. As
described in Note 8, Convertible PromissoryNotes and Other Notes Payable, based on the short-term nature of the Unit Notes, we determined that fair
value of the 2014 Unit Notes was equal to their face value. We determined the fair value of the 2014 Unit Stock based on the quoted market price of
our common stock on the date of the 2014 Unit sale. We calculated the fair value of the 2014 Unit Warrants using the Black Scholes Option Pricing
Model and the weighted average assumptions indicated in the table below. The table below also presents the aggregate allocation of the 2014 Unit
sales proceeds based on the relative fair values of the 2014 Unit Stock, 2014 Unit Warrants and 2014 Unit Notes as of their respective 2014 Unit sales
dates.
Unit Warrants
Weighted Average Issuance Date Valuation Assumptions
Warrant
Shares Market Exercise
Price
Issued
Price
Term
(Years)
Risk free
Interest
Rate
Volatility
Per Share
Fair
Aggregate
Fair Value
of Unit
Rate Warrant Warrants
Dividend Value of
Aggregate
Proceeds
of Unit
Sales
Aggregate Allocation of Proceeds
Based on Relative Fair Value of:
Unit
Unit Stock Warrant Unit Note
282,850 $9.28 $10.00 2.17
0.62% 72.36%
0.0%
$3.63 $1,027,000 $3,133,500 $1,122,400 $454,200 $1,556,900
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2013 Unit Private Placement
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Between August 2013 and March 2014, we entered into securities purchase agreements with accredited investors pursuant to which we sold units to
such accredited investors in private placement transactions (2013 Units), for aggregate cash proceeds of $1,007,500, including $50,000 in lieu of
repayment of previous advances to us made by one of our executive officers. The 2013 Units consisted of (i) 10% convertible promissory notes in the
aggregate face amount of $1,007,500 maturing on July 30, 2014 (2013 Unit Notes) (ii) an aggregate 100,750 restricted shares of our common stock
(2013 Unit Stock); and (iii) warrants exercisable through July 30, 2016 to purchase an aggregate of 100,750 restricted shares of our common stock at
an exercise price of $20.00 per share (2013 Unit Warrants). The 2013 Unit Notes and related accrued interest were convertible into restricted shares of
our common stock at a conversion price of $10.00 per share at or prior to maturity, at the option of each investor.
We allocated the proceeds from the sale of the 2013 Units to the various securities in each 2013 Unit based on their relative fair value on the dates of
the sales. As described in Note 8, Convertible PromissoryNotes and Other Notes Payable, based on the short-term nature of the 2013 Unit Notes, we
determined that fair value of the 2013 Unit Notes was equal to their face value. We determined the fair value of the 2013 Unit Stock based on the
quoted market price of our common stock on the date of the 2013 Unit sale. We calculated the fair value of the 2013 Unit Warrants using the Black
Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. The table below also presents the aggregate
allocation of the 2013 Unit sales proceeds based on the relative fair values of the 2013 Unit Stock, 2013 Unit Warrants and 2013 Unit Notes at the
respective 2013 Unit sales date.
2013Unit Warrants
Weighted Average Issuance Date Valuation Assumptions
Warrant
Shares Market Exercise
Price
Issued
Price
Term
(Years)
Risk free
Interest
Rate
Volatility
Per Share
Fair
Aggregate
Fair Value
of Unit
Rate Warrant Warrants
Dividend Value of
Aggregate
Proceeds
of Unit
Sales
Aggregate Allocation of Proceeds
Based on Relative Fair Value of:
Unit
Unit Stock Warrant Unit Note
100,750
$9.01
$20.00 2.68
0.58% 76.29%
0.0%
$2.53 $254,700 $1,007,500
$415,000 $111,400
$481,100
Amendment of 2013 Unit Notes and 2013 Unit Warrants
As indicated in Note 8, Convertible Promissory Notes and Other Notes Payable, effective May 31, 2014, we entered into note and warrant
amendment agreements with substantially all holders of 2013 Unit Notes and 2013 Unit Warrants to (i) modify certain terms of their 2013 Unit Notes,
including the maturity date and certain conversion features, to conform to the corresponding terms of the 2014 Unit Notes and (ii) to modify certain
terms of the 2013 Unit Warrants, including the exercise price and expiration date, to conform to the corresponding terms of the 2014 Unit Warrants.
Holders of 2013 Unit Notes having an aggregate initial face amount of $895,000 and warrants to purchase an aggregate of 93,250 restricted shares of
our common stock agreed to the amendments.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We calculated the fair value of the modified 2013 Unit Warrants immediately before and after the modifications and determined that the fair value of
the warrants increased by an aggregate of $272,900, which we treated as a component of loss on extinguishment of debt in the accompanying
Condensed Consolidated Statements of Operations and Comprehensive Loss with a corresponding credit to additional paid-in capital, an equity
account. The warrants subject to the exercise price modifications were valued using the Black-Scholes Option Pricing Model and the following
assumptions:
Assumption:
Market price per share
Exercise price per share
Risk-free interest rate
Remaining contractual term in years
Volatility
Dividend rate
Fair Value per share
$
$
Pre-
modification
Post-
modification
12.60
10.00
0.62%
2.59
76.6%
0.0%
12.60 $
20.00 $
0.44%
2.17
75.6%
0.0%
$
3.73 $
6.65
Issuance of Securities in Satisfaction of Technology License and Maintenance Fees and Patent Expenses
In April 2014, we entered into an agreement with Icahn School of Medicine at Mount Sinai (Icahn School), one of our long-term stem cell technology
licensors, pursuant to which we issued (i) a 10% promissory note in the face amount of $300,000 due on the earlier of December 31, 2014, or the
completion of a qualified financing, as defined, (ii) 15,000 restricted shares of our common stock and (iii) a warrant exercisable through March 31,
2019 to purchase 15,000 restricted shares of our common stock at an exercise price of $10.00 per share to Icahn School in satisfaction of $288,400 of
stem cell technology license maintenance fees and reimbursable patent prosecution costs (the Icahn School Agreement). Based on the short-duration
of the note, its interest rate and other terms, we determined that the fair value of the note at the date of issuance was equal to its face value. We
determined the fair value of stock to be $141,000, based on the $9.40 per share quoted market price of our common stock on the date of the
agreement. We calculated the fair value of the warrant to be $5.95 per share, or $89,200, using the Black Scholes Option Pricing Model and the
following assumptions: market price per share: $9.40; exercise price per share: $10.00; risk-free interest rate: 1.59%; contractual term: 5.0 years;
volatility: 80.3%; expected dividend rate: 0%. We recognized a loss on extinguishment of debt in the amount of $241,800 related to this settlement in
the accompanying Statement of Operations and Comprehensive Loss. Under the terms of the Icahn School Agreement, an additional $35,800 of
license maintenance fees and reimbursable patent prosecution costs were added to the principal amount of the promissory note through March 31,
2015. The note remains outstanding at March 31, 2015.
Issuance of Common Stock to Consultants
In May 2014, we entered into a consulting agreement for strategic advisory and business development services pursuant to which we issued 10,000
restricted shares of our common stock as partial compensation for such professional services. We determined the fair value of stock to be $134,000,
based on the $13.40 per share quoted market price of our common stock on the date of the agreement. Additionally, under the terms of the agreement,
we paid an aggregate of $80,000 between May 2014 and December 31, 2014 as additional compensation for professional services rendered by the
consultant. Effective January 12, 2015, we entered into a new consulting agreement with this consultant for similar services through December 31,
2015 pursuant to which we have issued 20,000 restricted shares of our common stock valued at $160,000, based on the $8.00 per share quoted market
price of our common stock on the date of the agreement, and made cash payments of $20,000 as compensation for such professional services.
In March 2015, we entered into a consulting agreement with another consultant for additional advisory and business development services pursuant to
which we issued 25,000 restricted shares of our common stock as compensation for such professional services. We determined the fair value of stock
to be $175,000, based on the $7.50 per share quoted market price of our common stock on the date of the agreement.
In March 2015, we issued 16,667 shares of our common stock valued at $166,700 to our legal counsel in settlement of direct legal fees related to
services provided with respect to our prospective public offering of our equity securities in the fall of 2014 and the Autilion Financing. We
recognized a loss of $16,700 with respect to this settlement, which is included in Loss on Extinguishment of Debt in the accompanying Statement of
Operations and Comprehensive Loss for the year ended March 31, 2015.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants to Purchase Common Stock
Warrant Grants and Exercises
In January 2015, when the market price of our common stock was $8.00 per share, our Board of Directors (Board) authorized the grant of fully-
vested five-year warrants to purchase an aggregate of 381,000 restricted shares of our common stock at an exercise price of $10.00 per share,
including an aggregate of 340,000 such shares to company officers and independent members of the Board. The Board also granted one-year warrants
to purchase 5,715 restricted shares of our common stock at an exercise price of $10.00 per share to consultants whose warrants had expired at
December 31, 2014. Additionally, the Board extended by one year the expiration date of outstanding warrants to purchase 90,675 shares of our
restricted common stock otherwise expiring during calendar 2015 and reduced the exercise price to $15.00 per share for such of those extended term
warrants having exercise prices in excess of that amount.
We valued the new warrant grants at $1,756,900 using the Black Scholes Option Pricing Model and the following assumptions: market price per
share: $8.00; exercise price per share: $10.00; risk-free interest rate: 1.45% for five-year warrants and 0.24% for one-year warrants; contractual term:
5 years or 1 year; volatility: 75.86% for five-year warrants and 69.74% for one-year warrants; expected dividend rate: 0%..
We calculated the fair value of the modified warrants immediately before and after the modifications and determined that the fair value of the
warrants increased by $98,400, which is reflected in general and administrative expense in the accompanying Consolidated Statements of Operations
and Comprehensive Loss for the fiscal year ended March 31, 2015. The warrants subject to the exercise price modifications and term extensions were
valued using the Black-Scholes Option Pricing Model and the following assumptions:
Assumption:
Market price per share at modification date
Exercise price per share (weighted average)
Risk-free interest rate (weighted average)
Contractual term in years (weighted average)
Volatility (weighted average)
Dividend rate
Weighted Average Fair Value per share
$
$
Pre-
modification
Post-
modification
8.00
13.00
0.31%
1.24
69.8%
0.0%
8.00 $
23.13 $
0.04%
0.24
69.7%
0.0%
$
0.22 $
1.31
On March 19, 2014, we granted five-year warrants to purchase an aggregate of 20,750 restricted shares of our unregistered common stock at an
exercise price of $10.00 per share to the independent members of our Board and certain of our officers. The warrants became exercisable for 50% of
the shares on April 1, 2014, and become exercisable for an additional 25% of the shares on April 1, 2015 and 25% of the shares on April 1, 2016,
provided that the warrant will become fully vested upon a change in control of the Company, as defined, or the consummation between us and a third
party of a license or sale transaction involving at least one new drug rescue variant. We valued the warrants at $120,800 using the Black Scholes
Option Pricing Model and the following assumptions: market price per share: $9.20; exercise price per share: $10.00; risk-free interest rate: 1.75%;
contractual term: 5 years; volatility: 80.57%; expected dividend rate: 0%. We recognized stock compensation expense of $54,100 related to the
grants in the fourth quarter of the fiscal year ended March 31, 2014 and $27,000 during the fiscal year ended March 31, 2015..
In October 2013, we issued new warrants to purchase an aggregate of 11,875 shares of our restricted common stock to certain former warrant holders
whose warrants to purchase an equivalent number of shares of our restricted common stock at an exercise price of $30.00 per share had recently
expired. We calculated the fair value of the new warrants as $0.63 per share, using the Black-Scholes Option Pricing Model and the following
assumptions. market price per share: $10.00; exercise price per share: $30.00; risk-free interest rate: 0.20%; contractual term: 1.32 years; volatility:
73.5%; and expected dividend rate: 0%. We recorded the aggregate fair value of $7,400 for the new warrants in general and administrative expense
in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the fiscal year ended March 31, 2014.
In June 2013 and October 2013, our Chief Executive Officer partially exercised an outstanding warrant to purchase 2,500 and 500 restricted shares of
the Company’s common stock, respectively, at an exercise price of $12.80 per share, and we received cash proceeds of $32,000 and $6,400,
respectively, from the exercises.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Modification of Warrants Held by Platinum
As indicated earlier in this note, effective on May 24, 2013, we entered into an Amendment and Waiver Agreement ( Amendment and Waiver ) with
Platinum pursuant to which we agreed to reduce the exercise price of the Exchange Warrant and the Investment Warrants issued to Platinum between
October 2012 and March 2013 (collectively, the “Warrants”) from $30.00 per share to $10.00 per share in consideration for Platinum’s agreement to
waive its rights for any increase in the number of shares of common stock issuable under the adjustment provisions of the Exchange Warrant and the
Investment Warrants that would otherwise occur from (i) our sale of shares of our common stock at a price of $10.00 per share in connection with the
Autilion Financing; (ii) the March 2013 grant of warrants to certain of our officers and independent directors to purchase an aggregate of 150,000
restricted shares of common stock at an exercise price of $12.80 per share; and (iii) our issuance of restricted shares of our common stock resulting in
gross proceeds not to exceed $1.5 million in connection with the exercise by warrant holders, by no later than June 30, 2013, subsequently extended to
July 30, 2013, of previously outstanding warrants for which we may reduce the exercise price to not less than $10.00 per share. (See “Other Warrant
Modifications and Exercises” below.)
As described in Note 4, Fair Value Measurements and in Note 8, Convertible Promissory Notes and Other Notes Payable, we re-measure the fair
value of the Platinum Warrants at the end of each quarterly reporting period. The fair value re-measurement at June 30, 2013 incorporated the
modification of the exercise price resulting from the Amendment and Waiver and the corresponding adjustment was reflected as a component of the
Warrant Liability at that date. We also re-measure at the end of each reporting period the fair value of the Series A Exchange Warrant which is
contingently issuable to Platinum upon the exchange of its shares of our Series A Preferred Stock into shares of our restricted common stock. At
March 31, 2015 and 2014, we determined the fair values of the Platinum Warrants and the Series A Preferred Exchange Warrant to be a weighted
average of $ 5.09.and $5.40 per share, respectively, or an aggregate of $3,008,500 and 2,973,900, which amounts are reflected as Warrant Liability in
the accompanying Consolidated Balance Sheets at March 31, 2015 and 2014, respectively. We determined the fair value of the warrants at March 31,
2015 and 2014 using the assumptions indicated in the table below.
Market price of common stock
Exercise price per share
Risk-free interest rate
Volatility
Term (years)
Dividend rate
Probability of Series A Preferred exchange
Fair value per share
Other Warrant Modifications and Exercises
March 31,
2015
2014
$
$
10.00 $
10.00
$
0.74% to 1.37%
73.3% to 75.9%
2.5 to 5.0
0%
95%
9.20
9.80 to $10.00
1.73%
75%
3.5 to 5.0
0%
95%
$
4.45 to $6.17
$
5.20 to $5.80
During the months of June and July 2013, we offered certain long-term warrant holders the opportunity to exercise warrants having an exercise price
of $30.00 per share to purchase shares of our restricted common stock at a reduced exercise price of $10.00 per share through July 30, 2013. Warrant
holders exercised warrants to purchase an aggregate of 26,419 restricted shares of our common stock and we received cash proceeds of $264,200. In
addition, certain warrant holders exercised modified warrants to purchase 832 restricted shares of our common stock in lieu of our payment in
satisfaction of amounts due for professional services in the aggregate amount of $8,300. We calculated the fair value of the warrants exercised
immediately before and after the modifications and determined that the fair value of the warrants exercised decreased.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2013, we modified certain outstanding warrants held by our long-term investors and consultants to purchase an aggregate of 64,639
restricted shares of our common stock to reduce the exercise price of the warrants to $10.00 per share and, for warrants scheduled to expire on
December 31, 2013, extend the exercise term of the warrants until January 31, 2015, generally without modifying the exercise price. We calculated
the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $77,800,
which is reflected in general and administrative expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the
fiscal year ended March 31, 2014. The warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes
Option Pricing Model and the following assumptions:
Assumption:
Market price per share at modification date
Exercise price per share (weighted average)
Risk-free interest rate (weighted average)
Contractual term in years (weighted average)
Volatility (weighted average)
Dividend rate
Weighted Average Fair Value per share
$
$
Pre-
modification
Post-
modification
10.00
24.68
0.44%
2.10
75.8%
0.0%
10.00 $
31.97 $
0.33%
1.40
74.4%
0.0%
$
1.08 $
2.29
In December 2013, we modified additional outstanding warrants held by certain of our long-term investors, consultants, and members of management
and our Board of Directors to purchase an aggregate of 63,013 restricted shares of our common stock to reduce the exercise price of the warrants to
$10.00 per share and, in limited cases, extend the exercise term of the warrants. We calculated the fair value of the warrants immediately before and
after the modifications and determined that the fair value of the warrants increased by $344,000, which is reflected in general and administrative
expense in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the fiscal year ended March 31, 2014. The
warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes Option Pricing Model and the following
assumptions:
Assumption:
Market price per share at modification date
Exercise price per share (weighted average)
Risk-free interest rate (weighted average)
Contractual term in years (weighted average)
Volatility (weighted average)
Dividend rate
Weighted Average Fair Value per share
$
$
Pre-
modification
Post-
modification
8.00
10.00
0.57%
2.34
74.4%
0.0%
8.00 $
33.49 $
0.51%
2.06
73.6%
0.0%
$
0.91 $
2.85
In making its fair value determinations for both warrant modifications and new grants using the Black Scholes Option Pricing Model, we utilize the
following principles in selecting its input assumptions. The market price per share is based on the quoted market price of our common stock on the
OTC Markets on the date of the modification or grant. Because of our relatively short history as a public company, we estimate stock price volatility
based on the historical volatilities of a peer group of public companies over the contractual or remaining contractual term of the warrant. The
contractual term of the warrant is determined based on the grant or modification date and the latest date on which the warrant can be exercised under
its terms or under the terms of the discounted exercise price offer. The risk-free rate of interest is based on the quoted constant maturity rate for U.S.
Treasury Bills on the date of the grant or modification for the term most closely corresponding with the contractual term or remaining term of the
warrant. The dividend rate is zero as we have not paid and do not expect to pay dividends in the near future.
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Warrants Outstanding
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes outstanding warrants to purchase restricted shares of our common stock as of March 31, 2015. The weighted average
exercise price of outstanding warrants at March 31, 2015 was $13.00 per share.
Exercise Price per Share
Expiration Date
$
$
$
$
$
$
$
10.00
12.80
15.00
20.00
30.00
40.00
60.00
1/31/2016 to 1/1/2020
3/3/2023
1/31/2016 to 6/11/2016
7/30/2016 to 9/30/2017
2/13/2016 to 3/4/2018
9/15/2017
2/13/2016
Shares Subject
to Purchase at
March 31,
2015
1,064,683
147,000
54,477
186,388
69,426
21,250
1,250
1,544,474
Note Receivable from Sale of Common Stock
In May 2011, the Company accepted a $500,000 short-term note from an investor in payment for shares of the Company’s common stock sold to the
investor in a private placement transaction. On October 2, 2014 we received a cash payment of $60,000 from the maker of the note. We have
considered that payment to be in full satisfaction of the outstanding principal balance of the note and related accrued interest, aggregating $194,900,
at the date of the payment and recognized a loss of $134,900 on the settlement of the note, which is reflected as a component of Other expenses, net in
the accompanying Statement of Operations and Comprehensive Loss.
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Reserved Shares
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2015, the Company has reserved shares of its common stock for future issuance as follows:
Upon exchange of all shares of Series A Preferred Stock currently issued and outstanding (1)
Warrant shares issuable to Platinum upon exercise of common stock warrant upon exchange of Series A preferred stock under the
terms of the October 11, 2012 Note Purchase and Exchange Agreement
110% of shares issuable upon conversion of 10% senior secured convertible notes issued to Platinum in October 2012, February
2013, March 2013 and July 2013, including interest accrued through maturity (2)
Pursuant to warrants to purchase common stock:
Subject to outstanding warrants
Issuable pursuant to accrued interest through maturity on outstanding promissory notes issued to Morrison & Foerster, Cato
Research Ltd., and University Health Network
Pursuant to stock incentive plans:
Subject to outstanding options under the 2008 and 1999 Stock Incentive Plans
Available for future grants under the 2008 Stock Incentive Plan
For additional issuances under the 2014 Private Placement of Units and upon conversion of notes and accrued interest pursuant to
the 2013 Private Placement of Units and 2014 Private Placement of Units
750,000
375,000
563,871
1,544,474
33,612
1,578,086
207,638
40,491
248,129
807,800
Total
____________
(1) assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum
(2) assumes conversion under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum and the terms of the
individual notes
4,322,886
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Research and Development Expenses
The Company recorded research and development expenses of approximately $4.3 million and $2.5 million in the fiscal years ended March 31, 2015
and 2014, respectively. Research and development expense is composed primarily of employee compensation expenses, including stock–based
compensation, and direct project expenses, including costs incurred by third-party research collaborators, some of which may be reimbursed under the
terms of grant or collaboration agreements.
11. Income Taxes
The provision for income taxes for the periods presented in the Consolidated Statements of Operations and Comprehensive Income represents
minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34%
to pretax losses as a result of the following:
Computed expected tax benefit
Tax effect of Warrant Liability mark to market
Other losses not benefitted
Other
Income tax expense
Fiscal Years Ended March 31,
2015
2014
(34.0) %
(0.1) %
34.0%
0.1%
(34.0) %
41.5%
(7.5) %
0.1%
0.0%
0.1%
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
Deferred tax assets:
Net operating loss carryovers
Basis differences in fixed assets
Accruals and reserves
Total deferred tax assets
Valuation allowance
Net deferred tax assets
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March 31,
2015
2014
$
23,054 $
24
2,694
19,733
37
1,383
25,772
21,153
(25,772)
(21,153)
$
- $
-
Table of Contents
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the deferred
tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $4,619,000 and $2,126,000 during the fiscal years
ended March 31, 2015 and 2014, respectively. When realized, deferred tax assets related to employee stock options will be credited to additional
paid-in capital.
As of March 31, 2015, we had U.S. federal net operating loss carryforwards of $58.7 million, which will expire in fiscal years 2020 through 2035. As
of March 31, 2015, we had state net operating loss carryforwards of $53.1 million, which will expire in fiscal years 2016 through 2035.
U.S. federal and state tax laws include substantial restrictions on the utilization of net operating loss carryforwards in the event of an ownership
change of a corporation. We have not performed a change in ownership analysis since our inception in 1998 and accordingly some or all of our net
operating loss carryforwards may not be available to offset future taxable income, if any.
The Company files income tax returns in the U.S. federal and Canadian jurisdictions and California and Maryland state jurisdictions. The Company is
subject to U.S. federal and state income tax examinations by tax authorities for tax years 2000 through 2015 due to net operating losses that are being
carried forward for tax purposes.
The Company does not have any uncertain tax positions or unrecognized tax benefits at March 31, 2015 and 2014. The Company’s policy is to
recognize interest and penalties related to income taxes as components of interest expense and other expense, respectively.
12. Licensing and Collaborative Agreements
University Health Network
On September 17, 2007, we entered into a Sponsored Research Collaboration Agreement ( SRCA) with University Health Network (UHN) to develop
certain stem cell technologies for drug discovery, development and rescue technologies. The SRCA was amended on April 19, 2010 to extend the
term to five years and give us various options to extend the term for an additional three years. On December 15, 2010, we entered into a second
amendment with UHN to expand the scope of work to include induced pluripotent stem cell technology and to further expand the scope of research
and term extension options. On April 25, 2011, we and UHN amended the SRCA a third time to expand the scope to include therapeutic and stem cell
therapy applications of induced pluripotent cells and to extend the date during which we may elect to fund additional projects to April 30, 2012. On
October 24, 2011, we and UHN amended the SRCA a fourth time to identify five key programs to further support our core drug rescue initiatives and
potential cell therapy applications. In October 2012, we issued a promissory note in the principal amount of $549,500 and a warrant to UHN as
payment in full for services rendered under the fourth amendment. We also entered into Amendment No. 5 to the SRCA establishing the sponsored
research projects and the sponsored research budgets under the SRCA from October 1, 2012 to September 30, 2013. During our fiscal year ended
March 31, 2015, our financial condition precluded further sponsored research activities with UHN.
Concurrent with the execution of the fourth amendment to the SRCA, we also entered into a License Agreement with UHN under the terms of which
UHN granted us exclusive rights to the use of a novel molecule that can be employed in the identification and isolation of mature and immature
human cardiomyocytes from pluripotent stem cells, as well as methods for the production of cardiomyocytes from pluripotent stem cells that express
this marker. In consideration for the grant of the license, we have agreed to make payments to UHN totaling $3.9 million, if, and when, we achieves
certain commercial milestones set forth in the License Agreement, and to pay UHN royalties based on our receipt of revenue attributable to the
licensed patents.
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U.S. National Institutes of Health
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal years 2006 through 2008, the U.S. National Institutes of Health ("NIH") awarded VistaGen California a $4.2 million grant to support
preclinical development of AV-101, our lead drug candidate for treatment of neuropathic pain and other neurodegenerative diseases such as
Huntington’s and Parkinson’s diseases. In June 2009, the NIH awarded VistaGen California a $4.2 million grant to support the Phase I clinical
development of AV-101, which amount was subsequently increased to a total of $4.6 million in July 2010. The grant expired in the ordinary course
on June 30, 2012 and all funds had been expended. In February 2015, we entered into a Cooperative Research and Development Agreement with the
National Institute of Mental Health to collaborate on an NIH-sponsored Phase 2 clinical study of the efficacy and safety of AV-101 in subjects with
MDD. The study is expected to commence late in the third quarter of 2015 and be completed in 2016.
Cato Research Ltd.
We have built a strategic development relationship with Cato Research Ltd. (“ CRL”), a global contract research and development organization, or
CRO, and an affiliate of one of the Company’s largest institutional stockholders. CRL has provided us with access to essential CRO services and
regulatory expertise supporting our AV-101 preclinical and clinical development programs and other projects. We recorded research and
development expenses for CRO services provided by CRL in the amounts of $38,100 and $52,500 for the fiscal years ended March 31, 2015 and
2014, respectively. In October 2012, we issued an unsecured promissory note in the principal amount of $1,009,000, and a warrant exercisable for
50,450 shares of our common stock, as payment in full of all amounts owed to CRL for CRO services rendered to us through December 31, 2012.
13. Stock Option Plans and 401(k) Plan
We have the following share-based compensation plans.
2008 Stock Incentive Plan
Our 2008 Stock Incentive Plan (the “2008 Plan”) was adopted by the shareholders of VistaGen California on December 19, 2008 and assumed by the
Company in connection with the Merger. The maximum number of shares of our common stock that may be granted pursuant to the 2008 Plan is
250,000 shares, subject to adjustments for stock splits, stock dividends or other similar changes in the common stock or capital structure.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan (the “1999 Plan”) was adopted by the shareholders of VistaGen California on December 6, 1999 and assumed by the
Company in connection with the Merger. We initially reserved 45,000 shares for the issuance of awards under the 1999 Plan. The 1999 Plan has
terminated under its own terms and, as a result, no awards may currently be granted under the 1999 Plan. The unexpired options and awards that have
already been granted pursuant to the 1999 Plan remain operative.
Description of the 2008 Plan
Under the terms of the 2008 Plan, the Compensation Committee of our Board of Directors may grant shares, options or similar rights having either a
fixed or variable price related to the fair market value of the shares and with an exercise or conversion privilege related to the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or other conditions, or any other security with the value derived from the
value of the shares. Such awards include stock options, restricted stock, restricted stock units, stock appreciation rights and dividend equivalent rights.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Compensation Committee may grant nonstatutory stock options under the 2008 Plan at a price of not less than 100% of the fair market value of
our common stock on the date the option is granted. Incentive stock options under the 2008 Plan may be granted at a price of not less than 100% of
the fair market value of our common stock on the date the option is granted. Incentive stock options granted to employees who, on the date of grant,
own stock representing more than 10% of the voting power of all of our classes of stock are granted at an exercise price of not less than 110% of the
fair market value of our common stock and the maximum term of such incentive stock options may not exceed five years. The maximum term of an
incentive stock option granted to any other participant may not exceed ten years. The Compensation Committee determines the term and exercise or
purchase price of all other awards granted under the 2008 Plan. The Compensation Committee also determines the terms and conditions of awards,
including the vesting schedule and any forfeiture provisions. Awards under the 2008 Plan may vest upon the passage of time or upon the attainment of
certain performance criteria established by the Compensation Committee. We currently have no performance-based awards outstanding.
Unless terminated sooner, the 2008 Plan will automatically terminate in 2017. The Board of Directors may at any time amend, suspend or terminate
our 2008 Plan.
We did not grant any stock options during fiscal 2015. During the third quarter of fiscal 2014, when the quoted market price of our common stock
was $8.00 per share, we reduced the exercise price of an aggregate of 196,213 outstanding options to purchase shares of its common stock at exercise
prices between $15.00 per share and $59.80 per share held by certain employees, including the Company’s officers and directors, and by certain
consultants to $8.00 per share or $10.00 per share. These reductions in exercise price were accounted for as a modification of the options and resulted
in a charge of $252,000.
The following table summarizes share-based compensation expense, including share-based expense related to the March 2015 and March 2014 grants
of warrants to certain of our officers and to our independent directors as described in Note 9, Capital Stock, included in the accompanying
Consolidated Statement of Operations and Comprehensive Loss for the years ended March 31, 2015 and 2014.
Research and development expense:
Stock option grants
Fully-vested warrants granted to officer and
consultants in January 2015
Warrants granted to officer in March 2014 and 2013
General and administrative expense:
Stock option grants
Fully-vested warrants granted to officers, directors
and consultants in January 2015
Warrants granted to officers and directors in March
2014 and 2013
Fiscal Years Ended
March 31,
2015
2014
$
176,200 $
296,900
527,500
145,100
-
156,500
848,800
453,400
98,800
385,100
1,229,400
-
283,100
298,800
1,611,300
683,900
Total stock-based compensation expense
$
2,460,100 $
1,137,300
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We used the Black-Scholes option valuation model with the following assumptions to determine share-based compensation expense related to option
grants during the fiscal years ended March 31, 2015 and 2014:
Exercise price
Market price on date of grant
Risk-free interest rate
Expected term (years)
Volatility
Expected dividend yield
Fair value per share at grant date
Fiscal Years Ended March 31,
2015
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
not applicable
2014
$8.00 to $16.40
$8.00 to $16.40
1.08% to 2.53%
6.25 to 10.0
87.9% to 103.2%
0%
$6.38 to $13.63
The expected term of options represents the period that our share-based compensation awards are expected to be outstanding. We have calculated the
weighted-average expected term of the options using the simplified method as prescribed by Securities and Exchange Commission Staff Accounting
Bulletins No. 107 and No. 110 (“SAB No. 107 and 110”). The utilization of SAB No. 107 and 110 was based on the lack of relevant historical data
due to our limited historical experience as a publicly traded company as well as the lack of liquidity resulting from the limited number of freely-
tradable shares of our common stock. Limited historical experience and lack of liquidity in our stock also resulted in our decision to utilize the
historical volatilities of a peer group of public companies’ stock over the expected term of the option in determining our expected volatility
assumptions. The risk-free interest rate for periods related to the expected life of the options is based on the U.S. Treasury yield curve in effect at the
time of grant. The expected dividend yield is zero, as we have not paid any dividends and do not anticipate paying dividends in the near future. We
calculated the forfeiture rate based on an analysis of historical data, as it reasonably approximates the currently anticipated rate of forfeitures for
granted and outstanding options that have not vested.
The following table summarizes activity for the fiscal years ended March 31, 2015 and 2014 under our stock option plans:
Options outstanding at beginning of period
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at end of period
Options exercisable at end of period
Weighted average grant-date fair value of
options granted during the period
Fiscal Years Ended March 31,
2015
Weighted
Average
Exercise
Price
Number of
Shares
2014
Weighted
Average
Exercise
Price
Number of
Shares
212,486 $
- $
- $
(2,001) $
(2,847) $
207,638 $
199,013 $
10.09
-
-
9.25
10.56
10.09
10.09
245,653 $
19,050 $
- $
(3,954) $
(48,263) $
212,486 $
182,775 $
26.43
10.89
-
27.22
23.94
10.09
10.06
$
-
$
8.36
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information on stock options outstanding and exercisable under our stock option plans as of March 31, 2015:
Exercise
Price
Number
Outstanding
Options Outstanding
Weighted
Average
Remaining
Years until
Expiration
Options Exercisable
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$
$
$
8.00
10.00
14.40 to $36.00
49,590
147,939
10,109
207,638
7.53
4.88
4.64
$
$
$
5.51
$
8.00
10.00
21.69
10.09
46,466
142,751
9,796
$
$
$
199,013
$
8.00
10.00
21.23
10.09
At March 31, 2015, there were 40,491 shares of our common stock remaining available for grant under the 2008 Plan. There were no option exercises
during the years ended March 31, 2015 or 2014.
Aggregate intrinsic value is the sum of the amounts by which the fair value of the underlying common stock exceeded the exercise price of the option
(in-the-money-options). Based on the $10.00 per share quoted market price of our common stock on March 31, 2015, the aggregate intrinsic value of
outstanding options at that date was $99,200, of which $92,900 related to exercisable options.
As of March 31, 2015, there was approximately $71,700 of unrecognized compensation cost related to non-vested share-based compensation awards
from the 2008 Plan, which is expected to be recognized through May 2016. Additionally, at March 31, 2015 there was approximately $27,000 of
unrecognized compensation cost related to unvested warrant grants to independent directors and officers, which is expected to be recognized through
March 2016 absent any conditions which would accelerate the vesting of the awards and corresponding expense recognition.
401(k) Plan
Through a third-party agent, we maintain a retirement and deferred savings plan for our employees. This plan is intended to qualify as a tax-qualified
plan under Section 401(k) of the Internal Revenue Code. The retirement and deferred savings plan provides that each participant may contribute a
portion of his or her pre-tax compensation, subject to statutory limits. Under the plan, each employee is fully vested in his or her deferred salary
contributions. Employee contributions are held and invested by the plan’s trustee. The retirement and deferred savings plan also permits us to make
discretionary contributions, subject to established limits and a vesting schedule. To date, we have not made any discretionary contributions to the
retirement and deferred savings plan on behalf of participating employees.
14. Related Party Transactions
Cato Holding Company (CHC), doing business as Cato BioVentures ( CBV), the parent of CRL, is one of our largest institutional stockholders at
March 31, 2015, holding common stock and warrants to purchase our common stock. Shawn Singh, our Chief Executive Officer and member of our
Board of Directors, served as Managing Principal of CBV and as an officer of CRL until August 2009. On October 10, 2012, we issued to CHC an
unsecured promissory note in the principal amount of $310,400 (the 2012 CHC Note) and a five-year warrant to purchase 12,500 restricted shares of
our common stock at a price of $30.00 per share (the CHC Warrant ). Additionally, on October 10, 2012, we issued to CRL: (i) an unsecured
promissory note in the initial principal amount of $1,009,000, which is payable solely in restricted shares of our common stock and which accrues
interest at the rate of 7.5% per annum, compounded monthly (the CRL Note), as payment in full for all contract research and development services
and regulatory advice rendered to us by CRL through December 31, 2012 with respect to the preclinical and clinical development of AV-101, and
(ii) a five-year warrant to purchase, at a price of $20.00 per share, 50,450 restricted shares of our common stock. The 2012 CHC Note and the CRL
Note mature on March 31, 2016.
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal year 2007, VistaGen California entered into a contract research organization arrangement with CRL related to the development of AV-
101, under which we incurred expenses of $38,100 and $52,500 for the fiscal years ended March 31, 2015 and 2014, respectively. Total interest
expense on notes payable to CHC and CRL was $174,800 and $167,900 for the fiscal years ended March 31, 2015 and 2014, respectively.
Upon the approval of its Board of Directors, in December 2006, VistaGen California accepted a full-recourse promissory note in the amount of
$103,400 from Mr. Shawn Singh in payment of the exercise price for options and warrants to purchase an aggregate of 6,320 restricted shares of
VistaGen California’s common stock. The note accrued interest at a rate of 4.90% per annum and was due and payable no later than the earlier of
(i) December 1, 2016 or (ii) ten days prior to VistaGen California becoming subject to the requirements of the Securities Exchange Act of 1934, as
amended (Exchange Act). On May 11, 2011, in connection with the Merger, the $128,200 outstanding balance of principal and accrued interest on
this note was cancelled in accordance with Mr. Singh's employment agreement and recorded as additional compensation. In accordance with his
employment agreement, Mr. Singh is also entitled to receive an income tax gross-up on the compensation related to the note cancellation. At March
31, 2015 and 2014, we had accrued $101,900 as an estimate of the gross-up amount, but we had not yet paid any of that amount to Mr. Singh.
Between September and December 2013, Mr. Singh provided short-term cash advances aggregating $64,000 to meet our short-term working capital
requirements. In lieu of cash repayment of the advances, in December 2013, Mr. Singh elected to invest $50,000 of the balance due him in the 2013
Unit Private Placement. At March 31, 2015, we have completely repaid the balance of the advances and the $50,000 promissory note issued in
connection with his investment in the 2013 Unit Private Placement to Mr. Singh.
15. Commitments, Contingencies, Guarantees and Indemnifications
From time to time, we may become involved in claims and other legal matters arising in the ordinary course of business. Management is not currently
aware of any claims made or other legal matters that will have a material adverse effect on our consolidated financial position, results of operations or
its cash flows.
We indemnify our officers and directors for certain events or occurrences while the officer or director is or was serving at our request in such
capacity. The term of the indemnification period is for the officer’s or director’s lifetime. We will indemnify the officers or directors against any and
all expenses incurred by the officers or directors because of their status as one of our directors or executive officers to the fullest extent permitted by
Nevada law. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. We have a director and
officer insurance policy which limits our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of
these indemnification agreements is minimal. Accordingly, there are no liabilities recorded for these agreements at March 31, 2015 or 2014.
In the normal course of business, we provide indemnifications of varying scopes under agreements with other companies, typically clinical research
organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, we generally indemnify, hold harmless, and agree to
reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with the use or testing of our product
candidates or with any U.S. patents or any copyright or other intellectual property infringement claims by any third party with respect to our product
candidates. The terms of these indemnification agreements are generally perpetual. The potential future payments we could be required to make
under these indemnification agreements is unlimited. We maintain liability insurance coverage that limits our exposure. We believe the fair value of
these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of March 31, 2015 or 2014.
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Leases
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2015 and 2014, the following assets are under capital lease obligations and included in property and equipment:
Laboratory equipment
Office equipment
Accumulated depreciation
Net book value
March 31,
2015
2014
$
- $
4,500
4,500
(2,500)
19,000
4,500
23,500
(11,100)
$
2,000 $
12,400
Amortization expense for assets recorded under capital leases is included in depreciation expense. Future minimum payments, by year and in the
aggregate, required under capital leases are as follows:
Fiscal Years Ending March 31,
2016
2017
2018
Future minimum lease payments
Less imputed interest included in minimum lease payments
Present value of minimum lease payments
Less current portion
Non-current capital lease obligation
$
Capital
Leases
1,200
1,200
100
2,500
(400)
2,100
(1,000)
$
1,100
At March 31, 2015, future minimum payments under operating leases relate to our facility lease in South San Francisco, California through
July 31, 2017 and are as follows:
Fiscal Years Ending March 31,
2016
2017
2018
Amount
264,000
277,100
93,800
634,900
$
We incurred total facility rent expense for the fiscal years ended March 31, 2015 and 2014 of $337,000 and $284,100 , respectively.
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Long-Term Debt Repayment
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2015, assuming that all outstanding convertible notes are converted into shares of common stock in accordance with their respective
conversion provisions and that Replacement Note B issued to Morrison & Foerster, the CRL Note and the UHN Note, each as described further in
Note 8, Convertible Promissory Notes and Other Notes Payable, are repaid through the issuance of restricted common stock upon the exercise of the
warrants associated with such notes, future minimum principal payments related to long-term debt were as follows:
Fiscal Years Ending March 31,
2016
2017
2018
2019
Thereafter through June 2019
16. Subsequent Events
$
Amount
2,185,700
9,800
10,500
11,300
4,000
$
2,221,300
We have evaluated subsequent events through the date of this report and have identified the following material events and transactions that occurred
after March 31, 2015.
2014 Unit Private Placement
From April 1, 2015 through May 14, 2015, we entered into securities purchase agreements with accredited investors pursuant to which we sold to
such accredited investors Units, for aggregate cash proceeds of $280,000, consisting of (i) 10% convertible notes in the aggregate face amount of
$280,000 due between April 30, 2015 and May 15, 2015 or automatically convertible into securities we may issue upon the consummation of a
Qualified Financing, as defined in the note (ii) an aggregate of 33,000 restricted shares of our common stock; and (iii) warrants exercisable through
December 31, 2016 to purchase an aggregate of 24,250 restricted shares of our common stock at an exercise price of $10.00 per share.
Creation of Series B Preferred Stock
On May 7, 2015, we filed a Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Preferred Stock of VistaGen
Therapeutics, Inc. (Certificate of Designation) with the Nevada Secretary of State to designate 4.0 million shares of our authorized preferred stock
as Series B 10% Convertible Preferred Stock (Series B Preferred).
Each share of Series B Preferred is convertible, at the option of the holder ( Voluntary Conversion), into one (1) share of our common stock at a
fixed conversion price of $7.00 per share (Conversion Price). The Conversion Price is subject to adjustment only for customary stock dividends,
reclassifications, splits and similar transactions set forth in the Certificate of Designation. All outstanding shares of Series B Preferred are also
convertible automatically into shares of our common stock (“Automatic Conversion”) upon the closing or effective date of any of the following
transactions or events: (i) a strategic transaction involving AV-101 with an initial up-front cash payment to us of at least $10.0 million; (ii) a
registered public offering of our common stock with aggregate gross proceeds to us of at least $10.0 million; or (iii) for 20 consecutive trading days,
our common stock trades at least 20,000 shares per day with a daily closing price of at least $12.00 per share; provided, however, that Automatic
Conversion and Voluntary Conversion (collectively, Conversion) are subject to certain beneficial ownership blockers as set forth in the Certificate
of Designation.
Prior to Conversion, shares of Series B Preferred will accrue dividends, payable only in shares of our common stock, at a rate of 10% per annum
(Accrued Dividend). The Accrued Dividend will be payable on the date of either a Voluntary Conversion or Automatic Conversion solely in that
number of shares of common stock equal to the Accrued Dividend, divided by the Conversion Price.
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Agreement with Platinum
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 5, 2015, we entered into an Agreement with Platinum, which, as modified by an Acknowledgement and Agreement, became effective on
May 12, 2015 (Platinum Agreement). Under the Platinum Agreement, Platinum:
· Converted all of the approximately $4.5 million outstanding balance (principal and accrued but unpaid interest) of the Senior Notes we issued to
Platinum into 641,335 shares of Series B Preferred, thereby cancelling approximately $4.5 million of our outstanding indebtedness;
· Released all of its security interests in our assets and those of our subsidiaries by terminating the Amended and Restated Security Agreement, IP
Security Agreement and Negative Covenant, each dated October 11, 2012 between us and Platinum; and
· Converted all of the approximately $1.3 million outstanding balance (principal and accrued but unpaid interest) of the 2014 Unit Notes that we
issued to Platinum into 240,305 shares of Series B Preferred and five-year warrants to purchase 240,305 shares of our common stock at a fixed
exercise price of $7.00 per share (Series B Warrants), thereby cancelling approximately $1.3 million of our outstanding indebtedness; and
· Purchased approximately $1.5 million (including accrued but unpaid interest thereon) of outstanding 2014 Unit Notes we issued to various
investors from the respective holders thereof (Investor 2014 Unit Notes ) and converted the entire outstanding balance of the Investor 2014 Unit
Notes into 265,699 shares of Series B Preferred and Series B Warrants to purchase 265,699 shares of our common stock, thereby cancelling
approximately $1.5 million of our outstanding indebtedness; and
· Entered into a Securities Purchase Agreement (SPA) to purchase, for $1.0 million, a total of 142,857 shares of Series B Preferred and a Series B
Warrant to purchase 142,857 shares of our common stock, on or before June 11, 2015 (a portion of which purchase was completed on June 19,
2015); and
· Amended the Platinum Warrants (all warrants previously issued by us to Platinum in connection with the Senior Notes) and the Series A
Exchange Warrant to:
o fix the exercise price thereof at $7.00 per share;
o eliminate the exercise price reset features and fix the number of shares of our common stock issuable thereunder; and
o eliminate the cashless exercise provisions from the Platinum Warrants and the Series A Exchange Warrant; and
· Agreed to refrain from the sale of any shares of our common stock held by Platinum or its affiliates until the earlier to occur of an effective
registration statement relating to resale of certain specified shares of common stock under the Securities Act of 1933, as amended, or the closing
price of our common stock is at least $15.00 per share.
As additional consideration for the agreements of Platinum under the Platinum Agreement, we issued to Platinum 400,000 shares of Series B
Preferred and Series B Warrants to purchase 1.2 million shares of our common stock, and exchanged 30,000 shares of our common stock currently
beneficially owned or controlled by Platinum for 30,000 shares of Series B Preferred.
Conversion of 2014 Unit Notes
Effective May 20, 2015, holders of the remaining approximately $1.8 million outstanding balance (principal and accrued but unpaid interest) of 2014
Unit Notes converted such notes into 327,016 shares of Series B Preferred and Series B Warrants to purchase 327,016 shares of our common stock,
thereby cancelling an additional approximately $1.8 million of our outstanding indebtedness.
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Sale of Series B Preferred Units
VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Between May 26, 2015 and June 25, 2015, we sold to accredited investors and institutions an aggregate of $557,500 of units in our Series B
Preferred Unit offering, which units consist of Series B Preferred and Series B Warrants (together Series B Preferred Units), including $100,000 to
Platinum. We issued 79,646 shares of Series B Preferred and Series B Warrants to purchase 79,646 shares of our common stock. We have received
an aggregate of $557,500 in cash proceeds from the sale of the Series B Preferred Units.
Conversion of Notes and Accounts Payable
During May and June 2015, holders of certain of our promissory notes outstanding at March 31, 2015 and thereafter, including Morrison &
Foerster, Cato Research Ltd., University Health Network, and McCarthy Tetrault, and certain other service providers converted notes payable or
accounts payable having an aggregate outstanding balance of approximately $5.8 million (principal and accrued but unpaid interest and certain
adjustments thereto) into 831,577 shares of Series B Preferred, thereby cancelling an additional approximately $5.8 million of our outstanding debt.
17. Supplemental Financial Information
The following table presents the unaudited statements of operations data for each of the eight quarters in the period ended March 31, 2015. The
information has been presented on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the
audited financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for
any future period.
Quarterly Results of Operations (Unaudited)
(in thousands, except share and per share amounts)
Three Months Ended
June 30, 2014
September
30, 2014
December 31,
2014
March 31,
2015
Total
Fiscal Year
2015
Revenues:
$
- $
- $
- $
- $
-
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expenses, net:
Interest expense, net
Change in warrant liabilities
Loss on extinguishment of debt
Other expense, net
Loss before income taxes
Income taxes
Net loss
Basic net (loss) per common share
Diluted net loss per common share
Weighted average shares used in computing:
Basic net (loss) per common share
474
797
1,271
(1,271)
(785)
(1,727)
(768)
-
(4,551)
(2)
(4,553) $
558
556
1,114
(1,114)
(606)
1,302
(1,603)
-
(2,021)
-
(2,021) $
445
671
1,116
(1,116)
(792)
953
-
(135)
(1,090)
-
(1,090) $
956
2,320
3,276
(3,276)
(2,366)
(563)
(17)
-
(6,222)
-
(6,222) $
2,433
4,344
6,777
(6,777)
(4,549)
(35)
(2,388)
(135)
(13,884)
(2)
(13,886)
(3.70) $
(1.58) $
(0.84) $
(4.24) $
(10.53)
(3.70) $
(1.90) $
(1.08) $
(4.24) $
(10.61)
$
$
$
1,229,488
1,279,251
1,302,300
1,466,386
1,318,797
Diluted net loss per common share
1,229,488
1,299,099
1,302,300
1,466,386
1,318,797
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VISTAGEN THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
Three Months Ended
June 30, 2013
September
30, 2013
December 31,
2013
March 31,
2014
Total
Fiscal Year
2014
Revenues:
$
- $
- $
- $
- $
-
Operating expenses:
Research and development
General and administrative
Total operating expenses
Loss from operations
Other expenses, net:
Interest expense, net
Change in warrant liabilities
Income (loss) before income taxes
Income taxes
Net income (loss)
695
605
1,300
(1,300)
669
546
1,215
(1,215)
551
897
1,448
(1,448)
(316)
1,805
(323)
79
(361)
1,940
189
(3)
186 $
(1,459)
-
(1,459) $
131
-
131 $
566
500
1,066
(1,066)
(503)
(257)
(1,826)
-
(1,826) $
2,481
2,548
5,029
(5,029)
(1,503)
3,567
(2,965)
(3)
(2,968)
Basic net income (loss) per common share
Diluted net loss per common share
$
$
0.18 $
(1.35) $
0.12 $
(1.57) $
(2.70)
(0.44) $
(1.37) $
(0.44) $
(1.57) $
(3.81)
Weighted average shares used in computing:
Basic net income (loss) per common share
1,042,081
1,081,529
1,110,529
1,162,636
1,098,742
Diluted net loss per common share
1,061,544
1,128,152
1,110,529
1,162,636
1,099,216
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of the end of the
period covered by this report to ensure that information that we are required to disclose in reports that management files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and
acting chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a
control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. GAAP.
There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or
overriding of controls. Accordingly, even effective internal controls can provide only reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2015. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control—
Integrated Framework (1992). Based on its assessment using the COSO criteria, management concluded that our internal control over financial
reporting was effective as of March 31, 2015.
As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the resulting amendment of Section
404 of the Sarbanes-Oxley Act of 2002, as a non-accelerated filer, we are not required to provide an attestation report by our independent registered
public accounting firm regarding internal control over financial reporting for the fiscal year ended March 31, 2015 or thereafter, until such time as we
are no longer eligible for the exemption for smaller issuers set forth within the Sarbanes-Oxley Act.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Item 10. Directors Officers and Corporate Governance.
PART III
Our senior management is composed of individuals with significant management experience. Our directors and executive officers as of June 26, 2015
are as follows:
Name
Shawn K. Singh, J.D.
H. Ralph Snodgrass, Ph.D.
Jerrold D. Dotson
Jon S. Saxe (1)
Brian J. Underdown, PhD. (2)
Age
52
65
61
78
74
Position
Chief Executive Officer and Director
Founder, President, Chief Scientific Officer and Director
Vice President, Chief Financial Officer and Secretary
Director
Director
(1) Chairman of the audit committee and member of the compensation committee and corporate governance and nominating committee
(2) Member of the audit committee and chairman of the compensation committee and corporate governance and nominating committee
Executive Officers
Shawn K. Singh, J.D. has served as our Chief Executive Officer since August 2009; he joined our Board of Directors in 2000 and served on our
management team (part-time) from late-2003, following our acquisition of Artemis Neuroscience, of which he was President, to August 2009.
Mr. Singh has over 20 years of experience working with biotechnology, medical device and pharmaceutical companies, both private and public. From
February 2001 to August 2009, Mr. Singh served as Managing Principal of Cato BioVentures, a life science venture capital firm, and as Chief
Business Officer and General Counsel of Cato Research Ltd, a profitable global contract research organization (CRO) affiliated with Cato
BioVentures. Mr. Singh served as President (part-time) of Echo Therapeutics (NASDAQ: ECTE), a medical device company, from September 2007
to June 2009, and as a member of its Board of Directors from September 2007 through December 2011. He also served as Chief Executive Officer
(part-time) of Hemodynamic Therapeutics, a private biopharmaceutical company affiliated with Cato BioVentures, from November 2004 to August
2009. From late-2000 to February 2001, Mr. Singh served as Managing Director of Start-Up Law, a management consulting firm serving
biotechnology companies. Mr. Singh also served as Chief Business Officer of SciClone Pharmaceuticals (NASDAQ: SCLN), a US-based, China-
focused specialty pharmaceutical company with a substantial revenue-generating and profitable commercial business and a marketed product
portfolio of differentiated therapies for oncology, infectious diseases and cardiovascular disorders, from late-1993 to late-2000, and as a corporate
finance associate of Morrison & Foerster LLP, an international law firm, from 1991 to late-1993. Mr. Singh currently serves as a member of the Board
of Directors of Armour Therapeutics, a private biotechnology company focused on prostate cancer. Mr. Singh earned a B.A. degree, with honors,
from the University of California, Berkeley, and a J.D. degree from the University of Maryland School of Law. Mr. Singh is a member of the State
Bar of California.
We selected Mr. Singh to serve on our Board of Directors due to his substantial practical experience and expertise in senior leadership roles with
multiple private and public biotechnology, pharmaceutical and medical device companies, and his extensive experience in corporate finance, venture
capital, corporate governance and strategic partnering.
H. Ralph Snodgrass, Ph.D. co-founded VistaGen with Dr. Gordon Keller in 1998 and served as our Chief Executive Officer until August 2009. Dr.
Snodgrass has served as our President and Chief Scientific Officer since August 2009. He has served as a member of our Board of Directors since
1998. Prior to founding VistaGen, Dr. Snodgrass served as a key member of the executive management team which lead Progenitor, Inc., a
biotechnology company focused on developmental biology, through its initial public offering, and was its Chief Scientific Officer from June 1994 to
May 1998, and its Executive Director from July 1993 to May 1994. He received his Ph.D. in immunology from the University of Pennsylvania, and
has 20 years of experience in senior biotechnology management and over 10 years research experience as a professor at the Lineberger
Comprehensive Cancer Center, University of North Carolina Chapel Hill School of Medicine, and as a member of the Institute for Immunology,
Basel, Switzerland. Dr. Snodgrass is a past Board Member of the Emerging Company Section of the Biotechnology Industry Organization (BIO), and
past member of the International Society Stem Cell Research Industry Committee. Dr. Snodgrass has published more than 50 scientific papers, is the
inventor on more than 17 patents and a number of patent applications, is, or has been, the principal investigator on U.S. federal and private foundation
sponsored research grants with budgets totaling more than $14.5 million and is recognized as an expert in stem cell biology with more than 28 years’
experience in the uses of stem cells as biological tools for research, drug discovery and development.
We selected Dr. Snodgrass to serve on our Board of Directors due to his expertise in biotechnology focused on developmental biology, including stem
cell biology, his extensive senior management experience leading biotechnology companies at all stages of development, as well as his reputation and
standing in the fields of biotechnology and stem cell research, allow him to bring to us and the Board of Directors a unique understanding of the
challenges and opportunities associated with pluripotent stem cell biology, as well as credibility in the markets in which we operate.
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Jerrold D. Dotson, CPA has served as our Chief Financial Officer since September 2011, as our Corporate Secretary since October 2013 and as a
Vice President since February 2014. Mr. Dotson served as Corporate Controller for Discovery Foods Company, a privately held Asian frozen foods
company from January 2009 to September 2011. From February 2007 through September 2008, Mr. Dotson served as Vice President, Finance and
Administration (principal financial and accounting officer) for Calypte Biomedical Corporation (OTCBB: CBMC), a publicly held biotechnology
company. Mr. Dotson served as Calypte’s Corporate Secretary from 2001 through September 2008. He also served as Calypte’s Director of Finance
from January 2000 through July 2005 and was a financial consultant to Calypte from August 2005 through January 2007. Prior to joining Calypte,
from 1988 through 1999, Mr. Dotson worked in various financial management positions, including Chief Financial Officer, for California &
Hawaiian Sugar Company, a privately held company. Mr. Dotson is licensed as a CPA in California and received his BS degree in Business
Administration with a concentration in accounting from Abilene Christian College.
Directors
Jon S. Saxe, J.D. has served as Chairman of our Board of Directors since 2000. He also serves as the Chairman of our Audit Committee. Mr. Saxe is
the retired President and was a director of PDL BioPharma from 1989 to 2008. From 1989 to 1993, he was President, Chief Executive Officer and a
director of Synergen, Inc. (acquired by Amgen). Mr. Saxe served as Vice President, Licensing & Corporate Development for Hoffmann-Roche from
1984 through 1989, and Head of Patent Law for Hoffmann-Roche from 1978 through 1989. Mr. Saxe currently is a director of SciClone
Pharmaceuticals, Inc. (NASDAQ: SCLN) and Durect Corporation (NASDAQ: DRRX), and five private life science companies, Arbor Vita
Corporation, Arcuo Medical, LLC, Armetheon, Inc., Lumos Pharma, Inc. and Trellis Bioscience. Mr. Saxe also has served as a director of other
biotechnology and pharmaceutical companies, including ID Biomedical (acquired by GlaxoSmithKline), Sciele Pharmaceuticals, Inc. (acquired by
Shionogi), Amalyte (acquired by Kemin Industries), Cell Pathways (acquired by OSI Pharmaceuticals), and other companies, both public and private.
Mr. Saxe has a B.S.Ch.E. from Carnegie-Mellon University, a J.D. degree from George Washington University and an LL.M. degree from New York
University.
We selected Mr. Saxe to serve as Chairman of our Board of Directors due to numerous years of experience as a senior executive with major
biopharmaceutical and biotechnology companies, including Protein Design Labs, Inc., Synergen, Inc. and Hoffmann-Roche, Inc., as well as his
extensive experience serving as a director of numerous private and public biotechnology and pharmaceutical companies, serving as Chairman, and
Chair and member of audit, compensation and governance committees of both private and public companies. Mr. Saxe provides us and our Board of
Directors with highly valuable insight and perspective into the biotechnology and pharmaceutical industries, as well as the strategic opportunities and
challenges that we face.
Brian J. Underdown, Ph.D. has served as a member of our Board of Directors since November 2009. Dr. Underdown has served as Managing
Director of Lumira Capital Corp. since September 1997, having started in the venture capital industry in 1997 with MDS Capital Corporation
(MDSCC). His investment focus has been on therapeutics in both new and established companies in both Canada and the United States. Prior to
joining MDSCC, Dr. Underdown held a number of senior management positions in the biopharmaceutical industry and at universities.
Dr. Underdown’s past and current board positions include: ID Biomedical, Trillium Therapeutics, Cytochroma Inc., Argos Therapeutics, Locus
Therapeutics, Nysa Membrane Technologies, Ception Therapeutics and Transmolecular Therapeutics. He has served on a number of Boards and
advisory bodies of government sponsored research organizations including CANVAC, the Canadian National Centre of Excellence in Vaccines,
Ontario Genomics Institute, Allergen, the Canadian National Centre of Excellence in Allergy and Asthma. Dr. Underdown obtained his Ph.D. in
immunology from McGill University and undertook post-doctoral studies at Washington University School of Medicine.
We selected Dr. Underdown to serve on our Board of Directors due to his extensive background working in the biotechnology and pharmaceutical
industries, as a director of numerous private and public companies, as well as his venture capital experience funding and advising start-up and
established companies focused on therapeutics.
Election of Executive Officers
Our executive officers are elected by, and serve at the discretion of, our Board of Directors. Each of our executive officers devotes his full time to
our affairs. There are no family relationships among any of our directors or executive officers.
Board Composition
Our amended and restated bylaws provide that the authorized number of directors of the Company shall be not less than one nor more than seven,
with the exact number of directors currently fixed at seven. The exact number may be amended only by the vote or written consent of a majority of
the outstanding shares of our voting stock. Our Board of Directors currently consists of four members. Accordingly, there are currently three
vacancies on our Board of Directors. Our Board of Directors anticipates filling each of such vacancies as soon as practicable. All actions of the
Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
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Board Committees
Our Board of Directors has established an audit committee, a compensation committee and a corporate governance and nominating committee. The
composition and responsibilities of each committee are described below. Members serve on these committees until their resignation or until
otherwise determined by our Board of Directors. Our independent directors, Mr. Saxe and Dr. Underdown, are each members of the audit committee.
Mr. Saxe and Dr. Underdown also currently serve as members of the compensation committee and the corporate governance and nominating
committee.
Audit Committee
Our audit committee is comprised of Mr. Saxe and Dr. Underdown. Mr. Saxe is the chairman of our audit committee and is our audit committee
financial expert, as that term is defined under SEC rules implementing Section 407 of the Sarbanes Oxley Act of 2002, and possesses the requisite
financial sophistication, as defined under applicable rules. The audit committee operates under a written charter. Our audit committee charter is
available on our website. Under its charter, our audit committee is primarily responsible for, among other things,
·
·
·
·
·
·
·
·
·
overseeing our accounting and financial reporting process;
selecting, retaining and replacing our independent auditors and evaluating their qualifications, independence and performance;
reviewing and approving scope of the annual audit and audit fees;
monitoring rotation of partners of independent auditors on engagement team as required by law;
discussing with management and independent auditors the results of annual audit and review of quarterly financial statements;
reviewing adequacy and effectiveness of internal control policies and procedures;
approving retention of independent auditors to perform any proposed permissible non-audit services;
overseeing internal audit functions and annually reviewing audit committee charter and committee performance; and
preparing the audit committee report that the SEC requires in our annual proxy statement.
Compensation Committee
Our compensation committee is comprised of Mr. Saxe and Dr. Underdown, who serves as the committee chairman. Our compensation committee
charter is available on our website. Under its charter, the compensation committee is primarily responsible for, among other things,
·
·
·
·
·
·
·
Reviewing and approving our compensation programs and arrangements applicable to our executive officers (as defined in Rule I 6a-I (f) of
the Exchange Act), including all employment-related agreements or arrangements under which compensatory benefits are awarded or paid
to, or earned or received by, our executive officers, including, without limitation, employment, severance, change of control and similar
agreements or arrangements;
Determining the objectives of our executive officer compensation programs;
Ensuring corporate performance measures and goals regarding executive officer compensation are set and determining the extent to which
they are achieved and any related compensation earned;
Establishing goals and objectives relevant to CEO compensation, evaluating CEO performance in light of such goals and objectives, and
determining CEO compensation based on the evaluation; and
Endeavoring to ensure that our executive compensation programs are effective in attracting and retaining key employees and reinforcing
business strategies and objectives for enhancing stockholder value, monitoring the administration of incentive-compensation plans and
equity-based incentive plans as in effect and as adopted from time to time by the board.
Reviewing and approving any new equity compensation plan or any material change to an existing plan.
Reviewing and approving any stock option award or any other type of award as may be required for complying with any tax, securities, or
other regulatory requirement, or otherwise determined to be appropriate or desirable by the committee or board.
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Corporate Governance and Nominating Committee
Our corporate governance and nominating committee is comprised of Mr. Saxe and Dr. Underdown, who serves as the committee chairman. Our
corporate governance and nominating committee charter is available on our website. Under its charter, the corporate governance and nominating
committee is primarily responsible for, among other things:
· Monitoring the size and composition of the board;
· Making recommendations to the board with respect to the nominations or elections of our directors;
·
·
Reviewing the adequacy of our corporate governance policies and procedures and our Code of Business Conduct and Ethics, and
recommending any proposed changes to the board for approval; and
Considering any requests for waivers from our Code of Business Conduct and Ethics and ensure that we disclose such waivers as may be
required by the exchange on which we are listed, if any, and rules and regulations of the SEC.
All potential candidates for director nominees, including candidates recommended by our stockholders, are reviewed in the context of the current
composition of the Board, our operating requirements and the long-term interests of our stockholders. In conducting this assessment, the Committee
considers such factors as it deems appropriate given our current needs and those of our Board, to maintain a balance of expertise, experience and
capability. The Corporate Governance and Nominating Committee reviews directors’ overall service during their term, including the number of
meetings attended, their level of participation and quality of performance. The Committee also determines whether the nominee would be
independent, which determination is based upon applicable Nasdaq or other exchange listing standards, applicable SEC rules and regulations and the
advice of counsel, if necessary.
The Corporate Governance and Nominating Committee will consider director candidates recommended by stockholders in the same manner as it
considers recommendations from current directors or other sources. Stockholders who wish to recommend individuals for consideration by the
Corporate Governance and Nominating Committee to become nominees for election to the Board may do so by delivering a written recommendation
to the Company Secretary at the following address: 343 Allerton Avenue, South San Francisco, CA 94080 at least 60 days prior, but no more than 90
days prior, to the anniversary date of the last annual meeting of stockholders. Submissions should include the full name, address and age of the
proposed nominee, a description of the proposed nominee’s business experience for at least the previous five years, complete biographical
information, a description of the proposed nominee’s qualifications as a director, and the number of shares of our stock beneficially owned by the
proposed nominee. The nominating stockholder must also provide his or her name and address of record and the number of shares of our stock that
he or she owns beneficially or of record.
The Corporate Governance and Nominating Committee has not established specific minimum qualifications for recommended nominees or specific
qualities or skills for one or more of our directors to possess, other than as are necessary to meet any requirements under rules and regulations
(including any stock exchange rules) applicable to the Company. The Corporate Governance and Nominating Committee uses a subjective process for
identifying and evaluating nominees for director, based on the information available to, and the subjective judgments of, the members of the
Committee and our then current needs for the Board as a whole. Although it does not have a formal policy regarding the consideration of diversity,
the Corporate Governance and Nominating Committee considers the needs for the Board as a whole when identifying and evaluating nominees and,
among other things, considers diversity in background, age, experience, qualifications, attributes and skills in identifying nominees.
The Corporate Governance and Nominating Committee’s process for identification and evaluation of director candidates is generally as follows:
(a) In the event of a vacancy or the establishment of a new directorship on the Board, candidate(s) for director nominee(s) shall be presented to
the full Board for consideration and approval upon the recommendation of no less than a majority of the independent members of the Board
(as independence is defined under any stock exchange rules that may be applicable to the Company at such time).
(b) We believe that the continuing service of qualified incumbents promotes stability and continuity in the boardroom, contributing to the
Board's ability to work as a collective body, while giving us the benefit of the familiarity and insight into our affairs that our directors have
accumulated during their tenure. Accordingly, the process for identifying nominees reflects our practice of re-nominating incumbent directors
who continue to satisfy the criteria for membership on the Board, whom the independent members of the Board believe continue to make
important contributions to the Board and who consent to continue their service on the Board. Consistent with this policy, in considering
candidates for election at annual meetings of stockholders, the independent members of the Board will first determine the incumbent directors
whose terms expire at the upcoming meeting and who wish to continue their service on the Board.
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(c) The independent members of the Board will evaluate the qualifications and performance of the incumbent directors that desire to continue
their service. In particular, as to each such incumbent director, the independent members of the Board will (i) consider if the director continues
to satisfy the minimum qualifications for director candidates adopted by the independent members of the Board, (ii) review any assessments of
the performance of the director during the preceding term made by the Board, and (iii) determine whether there exist any special,
countervailing considerations against re-nomination of the director.
(d) If the independent members of the Board determine that an incumbent director consenting to re-nomination continues to be qualified and
has satisfactorily performed his or her duties as director during the preceding term, and there exist no reasons, including considerations relating
to the composition and functional needs of the Board as a whole, why in the view of the independent members of the Board the incumbent
should not be re-nominated, the independent members of the Board will, absent special circumstances, propose the incumbent director for
reelection.
(e) The process by the independent members of the Board for identifying and evaluating nominees for director, including nominees
recommended by a stockholder, involves (with or without the assistance of a retained search firm):
·
·
·
·
·
compiling names of potentially eligible candidates;
conducting background and reference checks;
conducting interviews with candidates and/or others;
meeting to consider and approve final candidates; and, as appropriate,
preparing and presenting to the full Board an analysis with regard to particular recommended candidates.
During the search process, the independent directors shall endeavor to identify director nominees who have the highest personal and
professional integrity, have demonstrated exceptional ability and judgment, and, together with other director nominees and current Board
members, shall effectively serve the long-term interests of our stockholders and contribute to our overall corporate goals.
(f) In considering potential new directors, the independent members of the Board will review individuals from various disciplines and
backgrounds. Among the qualifications to be considered in the selection of candidates are:
·
·
·
·
personal and professional integrity;
broad experience in business, finance or administration;
familiarity with our industry; and
prominence and reputation.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics applicable to our employees, officers and directors. Our Code of Business Conduct and
Ethics is available on our website at www.vistagen.com . We intend to disclose any future amendments to certain provisions of our Code of Business
Conduct and Ethics, or waivers of these provisions, on our website or in filings with the SEC under the Exchange Act.
Board Attendance at Board of Directors, Committee and Stockholder Meetings
Our Board of Directors met two times and acted by unanimous written consent six times during the fiscal year ended March 31, 2015. Our Audit
Committee met four times and our Compensation Committee requested action by the entire Board of Directors for grants of warrants and the
modification of certain warrants during the same period. Each director serving during fiscal 2015 attended all of the meetings of the Board and the
committees of the Board upon which such director served.
We do not have a formal policy regarding attendance by members of the Board at our annual meeting of stockholders, but directors are encouraged to
attend. We did not hold an annual meeting of stockholders during our fiscal year ended March 31, 2015.
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee consists of Dr. Underdown and Mr. Saxe, each of whom is a non-employee director. Neither member of the
Compensation Committee has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.
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Section 16 Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors and persons who beneficially own more than ten percent of our common stock
(collectively, Reporting Persons) to file reports of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the Commission. The
Reporting Persons are also required by SEC rules to furnish us with copies of all reports that they file pursuant to Section 16(a). We believe that
during our fiscal year ended March 31, 2015, all of the Reporting Persons complied with all applicable reporting requirements.
Item 11. Executive Compensation
Our Compensation Objectives
Our compensation practices are designed to attract key employees and to retain, motivate and reward our executive officers for their performance and
contribution to our long-term success. Our Board of Directors, through the Compensation Committee, seeks to compensate our executive officers by
combining short and long-term cash and equity incentives. It also seeks to reward the achievement of corporate and individual performance
objectives, and to align executive officers’ incentives with shareholder value creation. When possible, the Compensation Committee seeks to tie
individual goals to the area of the executive officer’s primary responsibility. These goals may include the achievement of specific financial or
business development goals. Also, when possible and appropriate taking into account the Company’s financial condition and other related facts and
circumstances, the Compensation Committee seeks to set performance goals that reach across all business areas and include achievements in
finance/business development and corporate development.
The Compensation Committee makes decisions regarding salaries, annual bonuses, if any, and equity incentive compensation for our executive
officers, approves corporate goals and objectives relevant to the compensation of the Chief Executive Officer and our other executive officers. The
Compensation Committee solicits input from our Chief Executive Officer regarding the performance of our other executive officers. Finally, the
Compensation Committee also administers our incentive compensation and benefit plans.
Although we have no formal policy for a specific allocation between current and long-term compensation, or cash and non-cash compensation, when
possible and appropriate taking into account the Company’s financial condition and other related facts and circumstances, we seek to implement a pay
mix for our officers with a relatively equal balance of both, providing a competitive salary with a significant portion of compensation awarded on
both corporate and personal performance.
Compensation Components
As a general rule, and when possible and appropriate taking into account the Company’s financial condition and other related facts and circumstances,
our compensation consists primarily of three elements: base salary, annual bonus and long-term equity incentives. We describe each element of
compensation in more detail below.
Base Salary
Base salaries for our executive officers are established based on the scope of their responsibilities and their prior relevant experience, taking into
account competitive market compensation paid by other companies in our industry for similar positions and the overall market demand for such
executives at the time of hire. An executive officer’s base salary is also determined by reviewing the executive officer’s other compensation to ensure
that the executive officer’s total compensation is in line with our overall compensation philosophy.
Base salaries are reviewed annually and increased for merit reasons, based on the executive officers’ success in meeting or exceeding individual
objectives. Additionally, we adjust base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an
executive officer’s role or responsibilities. As indicated in the Summary Compensation Table following, to conserve our cash resources during fiscal
2015 and 2014 the cash amounts of annual base salary that we paid to our executives was significantly less than their stated annual base salary rates.
Annual Bonus
The Compensation Committee assesses the level of the executive officer’s achievement of meeting individual goals, as well as that executive
officer’s contribution towards our corporate-wide goals. The amount of the cash bonus depends on the level of achievement of the individual
performance goals, with a target bonus generally set as a percentage of base salary and based on the achievement of pre-determined milestones. To
conserve our cash resources, our management team did not seek, and our Compensation Committee did not award, cash bonuses to executive officers
during fiscal 2014 or 2015.
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Long-Term Equity Incentives
The Compensation Committee believes that to attract and retain management, key employees and non-management directors the compensation paid to
these persons should include, in addition to base salary and potential annual cash incentives, equity based compensation that is competitive with peer
companies. The Compensation Committee determines the amount and terms of equity based compensation granted under our stock option plans or
pursuant to other awards made to our executives and key employees.
Summary Compensation Table
The following table shows information regarding the compensation of our Named Executive Officers ( NEO’s) for services performed in the fiscal
years ended March 31, 2015 and 2014.
Name and Principal Position
Shawn K. Singh, J.D. (1)
Chief Executive Officer
H. Ralph Snodgrass, Ph.D. (2)
President, Chief Scientific
Officer
Jerrold D. Dotson (3)
Vice President, Chief Financial
Officer, Secretary
Fiscal
Year
2015
2014
2015
2014
2015
2013
Salary
($)
Bonus
($)
Option and
Warrant
Awards (10)
($)
All Other
Compensation
($)
347,500(4)
250,000(5)
305,000(6)
250,000(7)
250,000(8)
200,000(9)
-
-
-
-
-
-
688,050(11)
159,802(12)
458,700(11)
102,353(12)
229,350(11)
36,846(12)
Total
($)
1,035,550
409,802
763,700
352,353
479,350
236,846
-
-
-
-
-
-
(1) Mr. Singh became VistaGen California’s Chief Executive Officer on August 20, 2009 and our Chief Executive Officer in May 2011, in
connection with the Merger. In our fiscal years ended March 31, 2015 and 2014, Mr. Singh’s annual base cash salary, pursuant to his January
2010 employment agreement, was contractually set at $347,500. However, to conserve cash for our operations during those years, Mr. Singh
voluntarily agreed to receive cash payments of less than his contractual base cash salary. Further, in fiscal 2014 Mr. Singh voluntarily
reduced his base cash salary to the amount indicated. The figures reported above reflect the amount of Mr. Singh’s salary that we expensed
for accounting purposes in our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for the respective fiscal
years. See notes (4) and (5) for amounts actually paid in cash to Mr. Singh. The difference between the amounts expensed for accounting
purposes and the amounts actually paid to Mr. Singh has been accrued for payment in the future. Additionally, pursuant to his employment
agreement, Mr. Singh is eligible to receive an annual cash incentive bonus of up to fifty percent (50%) of his base cash salary. Again, to
conserve cash for our operations during our fiscal years ended March 31, 2015 and 2014, Mr. Singh voluntarily refrained from receiving any
cash bonus.
(2)
Through August 20, 2009, Dr. Snodgrass served as VistaGen California’s President and Chief Executive Officer, at which time he became its
President and Chief Scientific Officer. He became our President and Chief Scientific Officer in May 2011, in connection with the Merger. In
our fiscal years ended March 31, 2015 and 2014, Dr. Snodgrass’ annual base cash salary, pursuant to his January 2010 employment
agreement, was contractually set at $305,000. However, to conserve cash for our operations during those years, Dr. Snodgrass voluntarily
agreed to receive cash payments of less than his contractual base cash salary. Further, in fiscal 2014 Dr. Snodgrass voluntarily reduced his
base cash salary to the amount indicated. The figures reported above reflect the amount of Dr. Snodgrass’ salary that we expensed for
accounting purposes in our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for the respective fiscal
years. See notes (6) and (7) for amounts actually paid in cash to Dr. Snodgrass. The difference between the amounts expensed for
accounting purposes and the amounts actually paid to Dr. Snodgrass has been accrued for payment in the future. Additionally, pursuant to his
employment agreement, Dr. Snodgrass is eligible to receive an annual cash incentive bonus of up to fifty percent (50%) of his base cash
salary. Again, to conserve cash for our operations during our fiscal years ended March 31, 2015 and 2014, Dr. Snodgrass voluntarily
refrained from receiving any cash bonus.
(3) Mr. Dotson served as Chief Financial Officer on a part-time contract basis from September 19, 2011 through August 2012, at which time he
became our full-time employee. In our fiscal years ended March 31, 2015 and 2014, Mr. Dotson’s annual base cash salary was $250,000 and
$200,000, respectively. However, to conserve cash for our operations during those years, Mr. Dotson voluntarily agreed to receive cash
payments of less than his base cash salary. The figures reported above reflect the amount of Mr. Dotson’s salary that we expensed for
accounting purposes in our financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for the respective fiscal
years. See notes (8) and (9) for amounts actually paid in cash to Mr. Dotson. The difference between the amounts expensed for accounting
purposes and the amounts actually paid to Mr. Dotson has been accrued for payment in the future. Mr. Dotson did not receive a cash bonus in
either of our fiscal years ended March 31, 2015 or 2014.
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(4) Mr. Singh received only $82,813 in cash compensation in our fiscal year ended March 31, 2015 and the remaining balance has been
accrued for future payment and remains unpaid at the date of this report.
(5) Mr. Singh received only $125,000 in cash compensation in our fiscal year ended March 31, 2014. At March 31, 2014, the remaining
balance was accrued for future payment and remained outstanding at March 31, 2015 and through the date of this report.
(6)
(7)
Dr. Snodgrass received only $157,292 in cash compensation in our fiscal year ended March 31, 2015 and the remaining balance has been
accrued for future payment and remains unpaid at the date of this report.
Dr. Snodgrass received only $149,606 in cash compensation in our fiscal year ended March 31, 2014. At March 31, 2014, the remaining
balance was accrued for future payment and remained outstanding at March 31, 2015 and through the date of this report.
(8) Mr. Dotson received only $153,917 in cash compensation in our fiscal year ended March 31, 2015 and the remaining balance has been
accrued for future payment and remains unpaid at the date of this report.
(9) Mr. Dotson received only $143,333 in cash compensation in our fiscal year ended March 31, 2014. At March 31, 2014, the remaining
balance was accrued for future payment and remained outstanding at March 31, 2015 and through the date of this report.
(10) The amounts in the Option and Warrant Awards column represent the aggregate grant date fair value of options or warrants to purchase
restricted shares of our common stock awarded to Mr. Singh, Dr. Snodgrass and Mr. Dotson, or the effect of modifications to prior grants
of options or warrants occurring during the fiscal year presented, computed in accordance with the Financial Accounting Standards
Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation ("ASC 718”). The amounts in this column do
not represent any cash payments actually received by Mr. Singh, Dr. Snodgrass or Mr. Dotson with respect to any of such options or
warrants to purchase restricted shares of our common stock awarded to them or modified during the periods presented. To date, Mr. Singh,
Dr. Snodgrass and Mr. Dotson have not exercised any of such options or warrants to purchase common stock, and there can be no
assurance that any of them will ever realize any of the ASC 718 grant date fair value amounts presented in the Option and Warrant
Awards column.
(11) We used the Black Scholes Option Pricing Model and the following assumptions for determining the grant date fair value of the warrants to
purchase shares of our common stock granted in January 2015.
Market price per share
Exercise price per share
Risk-free interest rate
Expected Term (years)
Volatility
Dividend rate
Grant date fair value per share
$
$
8.00
10.00
1.45%
5.0
75.86%
0.0%
$
4.59
Mr. Singh, Dr. Snodgrass and Mr. Dotson were granted warrants to purchase 150,000, 100,000 and 50,000 restricted shares of our common
stock, respectively
(12) The table below provides information regarding the option and warrant awards and modifications we granted to Mr. Singh, Dr. Snodgrass
and Mr. Dotson during fiscal 2014 and the assumptions used in the Black Scholes Option Pricing Model to determine the grant date fair
values of the respective awards and modifications.
NEO and Board Stock Compensation
Summary for FY 2014
Restated for Reverse split
Option
Grant
10/27/2013
Warrant
Grant
3/19/2014
Option Modification
12/20/2013
Warrant Modification
12/20/2013
Option/Warrant
Exchange (a)
3/19/2014
Total
$
Singh
Snodgrass
Dotson
$
-
-
6,380
-
14,560
29,120
$ 134,436
56,835
1,346
$
25,366
-
-
$
-
30,958
-
$ 159,802
102,353
36,846
$
6,380
$
43,680
$ 192,617
$
25,366
$
30,958
$ 299,001
Market price
per share
Exercise
price per
share
Risk-free
interest rate
$
$
Volatility
Expected
term (years)
Dividend rate
Fair value per
Before
After
Before
After
Before
After
8.00
$
9.20
$
8.00
$
8.00
$
8.00
$
8.00
$
9.20
$
9.20
8.00
$
10.00
$
1.675%
1.750%
99.53%
80.57%
6.25
0%
5.00
0%
15.00 to
$42.00
0.7% to
2.68%
68.8% to
97.6%
0.25 to
8.86
$
0.50
0.12% to
2.68%
68.8% to
97.6%
0.87 to
8.86
$
30.00 to
$35.00
0.07% to
1.18%
68.76% to
78.21%
0.03 to
3.96
$
0.50
0.75% to
1.18%
76.51% to
78.21%
3.03 to
3.96
0%
0%
0%
0%
0.00 to
1.40 to
0.00 to
3.55 to
$
10.00
$
10.00
0.106%
1.750%
68.96%
80.57%
0.63
0%
5.00
0%
share
$
6.38
$
5.82
$
$6.49
$
$6.76
$
$2.29
$
$4.20
$
1.70
$
5.82
Aggregate
shares
1,000
7,500
116,125
116,125
8,303
8,303
7,500
7,500
(a) On March 19, 2014, the Board and Dr. Snodgrass agreed to cancel a fully-vested option to purchase 7,500 shares of our restricted common
stock at a price of $10.00 per share and expiring on November 4, 2014 in exchange for the grant of a five-year warrant to purchase 7,500 shares
of our restricted common stock at a price of $10.00 per share. Shares subject to the cancelled option grant were returned to the 2008 Stock
Incentive Plan for potential future grants. The cancellation of the option and grant of the warrant was accounted for as a modification of an
award under ASC 718 and, accordingly, the difference in the fair value of the two instruments at the modification date was recorded in stock
compensation expense and is the amount reported in the table above.
None of the NEOs is entitled to perquisites or other personal benefits which, in the aggregate, are worth over $50,000 or over 10% of their
base salary.
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Benefit Plans
401(k) Plan
We maintain, through a registered agent, a retirement and deferred savings plan for our officers and employees. This plan is intended to qualify as a
tax-qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. The retirement and deferred savings plan provides that
each participant may contribute a portion of his or her pre-tax compensation, subject to statutory limits. Under the plan, each employee is fully vested
in his or her deferred salary contributions. Employee contributions are held and invested by the plan’s trustee. The retirement and deferred savings
plan also permits us to make discretionary contributions subject to established limits and a vesting schedule. To date, we have not made any
discretionary contributions to the retirement and deferred savings plan on behalf of participating employees.
Options and Warrants Granted to NEOs
The following table provides information regarding each unexercised stock option and warrant to purchase restricted shares of our common stock
held by each of the named executive officers as of March 31, 2015.
Name
Shawn K. Singh, J.D.
Total:
H. Ralph Snodgrass, Ph.D.
Total:
Jerrold D. Dotson
Total:
Stock Options
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
Option
Exercise
Price
($)
1,000
2,000
1,000
1,000
3,000
1,125
50,000
21,250
4,896
4,017
1,786
2,500
5,000
53,250
150,000
301,824
2,500
1,250
319
12,500
4,896
37,500
1,250
3,750
100,000
163,965
5,001
708
7,500
2,500
50,000
65,709
-
-
-
-
-
-
-
-
104
-
-
-
-
18,750 (1)
- (3)
18,854
-
-
-
-
104
12,500 (1)
1,250 (2)
3,750 (2)
- (3)
17,604
-
292
2,500 (1)
2,500 (2)
- (3)
5,292
16.00
14.40
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
20.00
12.80
10.00
10.00
10.00
17.60
10.00
10.00
12.80
10.00
10.00
10.00
10.00
8.00
12.80
10.00
10.00
Option
Expiration
Date
12/21/2016
5/17/2017
1/17/2018
1/17/2018
3/24/2019
6/17/2019
11/4/2019
12/30/2019
4/26/2021
12/31/2016
12/31/2016
12/6/2017
7/30/2016
3/3/2023
1/11/2020
3/24/2019
6/17/2014
12/20/2016
12/30/2019
4/25/2021
3/3/2023
3/19/2024
3/19/2024
1/11/2020
10/30/2022
10/27/2023
3/3/2023
3/19/2024
1/11/2020
(1) Represents warrant to purchase restricted shares of our common stock granted on March 3, 2013 at the market price of our common stock on
the grant date. At March 31, 2015, the warrant is exercisable for 75% of the shares and became exercisable for the remaining 25% of the
shares on April 1, 2015.
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(2) Represents warrant to purchase restricted shares of our common stock granted on March 19, 2014 when the market price of our common stock
was $9.20 per share. The warrant became exercisable for 50% of the shares on April 1, 2014, and became exercisable for an additional 25% of
the shares on April 1, 2015. It becomes exercisable for the remaining 25% of the shares on April 1, 2016, provided that the warrant will
become fully vested upon a change in control of the Company, as defined, or upon the consummation by the Company and a third party of a
license or sale transaction involving at least one new Drug Rescue Variant.
(3) Represents warrant to purchase restricted shares of our common stock granted as fully-exercisable on January 11, 2015 when the market price
of our common stock was $8.00 per share.
Employment or Severance Agreements
We have employment agreements with Mr. Singh and Dr. Snodgrass.
Singh Agreement
We entered into an employment agreement with Mr. Singh on April 28, 2010. Under the agreement, as amended on May 9, 2011, Mr. Singh’s base
salary is $347,500 per year. However, to conserve cash for our operations, Mr. Singh has not received his full base salary in any fiscal year since he
entered into his agreement in 2010. In our fiscal year ended March 31, 2015, Mr. Singh received only $82,813 in cash. In our fiscal year ended
March 31, 2014, Mr. Singh voluntarily reduced his base salary to $250,000, but only received $125,000 in cash. Although, under his agreement,
Mr. Singh is eligible to receive an annual incentive cash bonus of up to 50% of his base salary, he has foregone any such cash bonus payment to
conserve cash for our operations. Payment of his annual incentive bonus is at the discretion of our Board of Directors. In the event we terminate
Mr. Singh’s employment without cause, he is entitled to receive severance in an amount equal to:
•
•
•
twelve months of his then-current base salary payable in the form of salary continuation;
a pro-rated portion of the incentive cash bonus that the Board of Directors determines in good faith that Mr. Singh earned prior to
his termination; and
such amounts required to reimburse him for Consolidated Omnibus Budget Reconciliation Act ( COBRA) payments for
continuation of his medical health benefits for such twelve-month period.
In addition, in the event Mr. Singh terminates his employment with good reason following a change of control, he is entitled to twelve months of his
then-current base salary payable in the form of salary continuation.
In December 2006, we accepted a full-recourse promissory note in the amount of $103,411 from Mr. Singh in payment of the exercise price for
options and warrants to purchase an aggregate of 6,320 shares of our common stock. On May 11, 2011, in connection with the Merger, the $128,168
outstanding balance of the principal and accrued interest on this note was cancelled in accordance with Mr. Singh's employment agreement and was
treated as additional compensation. In accordance with his employment agreement, Mr. Singh is entitled to an income tax gross-up payment on the
compensation related to the note cancellation. At March 31, 2015 and 2014, we had accrued $101,936 as an estimate of the gross-up
amount. However, as a result of Mr. Singh’s forbearance, we have not yet paid such amount to Mr. Singh to conserve capital for our operations. See
Note 14 to our audited consolidated financial statements which are included in Item 8 of this Annual Report on Form 10-K.
Snodgrass Agreement
We entered into an employment agreement with Dr. Snodgrass on April 28, 2010. Under the agreement, as amended on May 9, 2011,
Dr. Snodgrass’s base salary is $305,000 per year. However, to conserve cash for our operations, Dr. Snodgrass has not received his full base salary in
any year since he entered into his agreement in 2010. In our fiscal year ended March 31, 2015, Dr. Snodgrass received only $157,292 in cash . In our
fiscal year ended March 31, 2014, Dr. Snodgrass voluntarily reduced his annual salary to $250,000, but received only $149,606 in cash.
Dr. Snodgrass is eligible to receive an annual incentive cash bonus of up to 50% of his base salary, but he has foregone any such cash bonus payment
to conserve cash for our operations. Payment of his annual incentive bonus is at the discretion of the Board of Directors. In the event we terminate
Dr. Snodgrass’s employment without cause, he is entitled to receive severance in an amount equal to
•
•
•
twelve months of his then-current base salary payable in the form of salary continuation;
a pro-rated portion of the incentive bonus that the Board of Directors determines in good faith that Dr. Snodgrass earned prior to
his termination; and
such amounts required to reimburse him for COBRA payments for continuation of his medical health benefits for such twelve-
month period.
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In addition, in the event Dr. Snodgrass terminates his employment with good reason, he is entitled to twelve months of his then-current base salary
payable in the form of salary continuation.
Change of Control Provisions
Pursuant to each of their respective employment agreements, Dr. Snodgrass is entitled to severance if he terminates his employment at any time for
“good reason” (as defined below), while Mr. Singh is entitled to severance if he terminates his employment for good reason after a change of control.
Under their respective agreements, “good reason” means any of the following events, if the event is effected by us without the executive’s consent
(subject to our right to cure):
•
•
a material reduction in the executive’s responsibility; or
a material reduction in the executive’s base salary except for reductions that are comparable to reductions generally applicable to
similarly situated executives of VistaGen.
Furthermore, pursuant to their respective employment agreements and their stock option award agreements as amended, in the event we terminate the
executive without cause within twelve months of a change of control, the executive’s remaining unvested option shares become fully vested and
exercisable. Upon a change of control in which the successor corporation does not assume the executive’s stock options, the stock options granted to
the executive become fully vested and exercisable.
Pursuant to their respective employment agreements, a change of control occurs when: (i) any “person” as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than VistaGen, a subsidiary, an affiliate, or a VistaGen employee benefit plan, including any trustee of such plan
acting as trustee) becoming the “beneficial owner” (as defined in Rule 13d-3 under the Exchange), directly or indirectly, of securities of VistaGen
representing 50% or more of the combined voting power of VistaGen’s then outstanding securities; (ii) a sale of substantially all of VistaGen’s assets;
or (iii) any merger or reorganization of VistaGen whether or not another entity is the survivor, pursuant to which the holders of all the shares of capital
stock of VistaGen outstanding prior to the transaction hold, as a group, fewer than 50% of the shares of capital stock of VistaGen outstanding after the
transaction.
In the event that following termination of employment amounts are payable to an executive pursuant to his employment agreement, the executive’s
eligibility for severance is conditioned on executive having first signed a release agreement.
Pursuant to their respective employment agreements, the estimated amount that could be paid by us assuming that a change of control occurred on the
last business day of our current fiscal year, is $347,500 for Mr. Singh and $305,000 for Dr. Snodgrass, excluding the imputed value of accelerated
vesting of incentive stock options, if any.
DIRECTOR COMPENSATION
We do not have a formal compensation plan for our non-employee directors. We adopted a director compensation policy for our independent
directors, as independence is defined by the Nasdaq Stock Market, which became effective for our fiscal year beginning April 1, 2014. Under the
independent director compensation policy, our independent directors are entitled to receive a $25,000 annual cash retainer. For service on a
committee of the board, an independent director is entitled to receive an additional annual cash retainer as follows: $7,500 for audit and compensation
committee members and $5,000 for nominating and governance committee members. In lieu of the annual cash retainer for committee participation,
each independent director serving as a chair of a board committee shall receive the following annual cash retainer: $15,000 for audit and
compensation committee chairs and $10,000 for the nominating and governance committee chairs. We did not pay our independent directors any cash
compensation during our fiscal year ended March 31, 2015.
Under our director compensation policy, each independent director will also receive an annual grant of an option or warrant to purchase a minimum
of 1,250 shares of our common stock, which will vest monthly over a one-year period from the date of grant. In January 2015, we granted fully-
vested warrants to purchase 20,000 shares of our restricted stock at an exercise price of $10.00 per share to each of our independent directors. We
expect to make future grants on the same date as our annual meeting. Prorated grants will be made for partial years of service.
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The following table sets forth a summary of the compensation earned by our non-employee directors in our fiscal year ended March 31, 2015.
Name
Jon S. Saxe (3)
Brian J. Underdown, Ph.D . (4)
Fees Earned
or
Paid in Cash
(1)
($)
Option and
Warrant
Awards(2)
($)
Other
Compensation
($)
Total
($)
$
$
55,000 $
57,500 $
91,734(5)
91,734(5)
-
-
$
$
146,734
149,234
(1)
(2)
(3)
(4)
The amounts shown represent fees earned for service on our Board of Directors, and Audit Committee, Compensation Committee and
Corporate Governance and Nominating Committee during the fiscal year ended March 31, 2015 which we have accrued but have not paid to
the director during that period or through the date of this report.
The amounts in this column represent the aggregate grant date fair value of warrants to purchase restricted shares of our common stock
awarded to Mr. Saxe and Dr. Underdown occurring during the fiscal year ended March 31, 2015, computed in accordance with the Financial
Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation – Stock Compensation (" ASC 718”). The
amounts in this column do not represent any cash payment actually received by Mr. Saxe or Dr. Underdown with respect to any of such
warrants to purchase restricted shares of our common stock awarded to them during the fiscal year ended March 31, 2015. To date, Mr. Saxe
and Dr. Underdown have not exercised such warrants to purchase common stock, and there can be no assurance that either of them will ever
realize any of the ASC 718 grant date fair value amounts presented in the Option and Warrant Awards column.
Mr. Saxe has served as the Chairman of our Board of Directors, the Chairman of our Audit Committee and a member of our Compensation
Committee and Corporate Governance and Nominating Committee throughout our fiscal year ended March 31, 2015. At March 31, 2015,
Mr. Saxe holds: (i) 1,875 restricted shares of our common stock; (ii) options to purchase 12,500 restricted shares of our common stock, of
which options to purchase 12,448 restricted shares are vested; and (iii) warrants to purchase 33,250 restricted shares of our common stock, of
which 29,750 are exercisable and of which an additional 2,687 shares became exercisable on April 1, 2015.
Dr. Underdown has served as a member of our Board of Directors, as the Chairman of our Compensation Committee and Corporate
Governance and Nominating Committee and as a member of our Audit Committee throughout our fiscal year ended March 31, 2015. At
March 31, 2015, Dr. Underdown holds: (i) options to purchase 9,250 restricted shares of our common stock, of which options to purchase
9,198 restricted shares are vested; and (ii) warrants to purchase 32,500 restricted shares of our common stock, of which 29,375 are
exercisable and of which an additional 2,500 shares became exercisable on April 1, 2015.
(5)
The table below provides information regarding the warrant awards we granted to Mr. Saxe and Dr. Underdown during fiscal 2015 and the
assumptions used in the Black Scholes Option Pricing Model to determine the grant date fair values of the awards as reported in the table
above.
Market price per share
Exercise price per share
Risk-free interest rate
Volatility
Expected term (years)
Dividend rate
Fair value per share
Aggregate shares
Director Independence
$
$
8.00
10.00
1.450%
75.86%
5.00
0%
$
4.59
40,000
Our securities are not currently listed on a national securities exchange or on any inter-dealer quotation system that has a requirement that directors be
independent, or that a majority of our directors be independent. However, we evaluate independence by the standards for director independence
established by applicable laws, rules, and listing standards, including, without limitation, the standards for independent directors established by the
SEC, the New York Stock Exchange, Inc. and the NASDAQ Stock Market.
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Subject to some exceptions, these standards generally provide that a director will not be independent if (a) the director is, or in the past three years has
been, an employee of ours; (b) a member of the director’s immediate family is, or in the past three years has been, an executive officer of ours; (c) the
director or a member of the director’s immediate family has received more than $120,000 per year in direct compensation from us other than for
service as a director (or for a family member, as a non-executive employee); (d) the director or a member of the director’s immediate family is, or in
the past three years has been, employed in a professional capacity by our independent public accountants, or has worked for such firm in any capacity
on our audit; (e) the director or a member of the director’s immediate family is, or in the past three years has been, employed as an executive officer of
a company where one of our executive officers serves on the compensation committee; or (f) the director or a member of the director’s immediate
family is an executive officer of a company that makes payments to, or receives payments from, us in an amount which, in any twelve-month period
during the past three years, exceeds the greater of $1,000,000 or two percent of that other company’s consolidated gross revenues.
Our Board of Directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based
upon information requested from and provided by each director concerning his background, employment and affiliations, including family
relationships, our Board of Directors has determined that Mr. Saxe and Dr. Underdown are “independent” as that term is defined under the applicable
rules and regulations of the SEC. Our Board of Directors has also determined that Mr. Saxe and Dr. Underdown, who comprise our audit committee,
compensation committee, corporate governance and nominating committee, satisfy the independence standards for those committees established by
applicable SEC rules. In making these determinations, our Board of Directors considered the current and prior relationships that each non-employee
director has with the Company and all other facts and circumstances that our Board of Directors deemed relevant.
Item 12. Security Ownership of C ertain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of June 26, 2015 for:
●
●
●
●
each stockholder known by us to be the beneficial owner of more than 5% of our common stock;
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.
Applicable percentage ownership is based on 1,594,461 shares of capital stock outstanding at June 26, 2015. In computing the number of shares of
common stock beneficially owned by a person, we deemed to be outstanding all shares of common stock subject to options or warrants held by that
person or entity that are currently exercisable or that will become exercisable within 60 days of June 26, 2015 and all shares of common stock
issuable pursuant to promissory notes and related accrued interest convertible into shares of common stock at June 26, 2015. In computing the
percentage of shares beneficially owned, we deemed to be outstanding all shares of common stock subject to options or warrants held by that person
or entity that are currently exercisable or that will become exercisable within 60 days of June 26, 2015 and all shares of common stock issuable
pursuant to promissory notes and related accrued interest convertible into shares of common stock at June 26, 2015. Unless otherwise noted below,
the address of each beneficial owner listed in the table is c/o VistaGen Therapeutics, Inc., 343 Allerton Avenue, South San Francisco, California
94080.
Name and address of beneficial owner
Executive officers and directors:
Shawn K. Singh, JD (2)
H. Ralph Snodgrass, PhD (3)
Jerrold D. Dotson (4)
Jon S. Saxe (5)
Brian J. Underdown, PhD (6)
5% Stockholders:
Cato BioVentures (7)
Platinum Long Term Growth Fund VII/Montsant Partners, LLC (8)
University Health Network (9)
Brio Capital Master Fund Ltd. (10)
Lincoln Park Capital Fund LLC (11)
Morrison & Foerster LLP (12)
Number of
shares
beneficially
owned
Percent of
shares
beneficially
owned (1)
341,287
239,293
70,302
46,563
41,125
238,734
120,250
150,678
128,594
153,053
120,448
17.82 %
13.49 %
4.22 %
2.84 %
2.51 %
14.32 %
7.54 %
8.93 %
7.64 %
8.97 %
7.06 %
All executive officers and directors as a group (5 persons) (13)
738,570
32.82 %
(1) Assumes 1,594,461 shares of common stock are issued and outstanding as of June 26, 2015.
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(2)
Includes options to purchase 85,375 restricted shares of common stock exercisable within 60 days of June 26, 2015 and warrants to purchase
235,303 restricted shares of common stock exercisable within 60 days of June 26, 2015.
(3)
Includes options to purchase 21,569 restricted shares of common stock exercisable within 60 days of June 26, 2015 and warrants to purchase
157,500 restricted shares of common stock exercisable within 60 days of June 26, 2015.
(4)
Includes options to purchase 6,552 restricted shares of common stock exercisable within 60 days of June 26, 2015, including options to
purchase 676 shares of common stock held by Mr. Dotson’s wife, and warrants to purchase 63,750 restricted shares of common stock
exercisable within 60 days of June 26, 2015.
(5)
Includes options to purchase 12,250 restricted shares of common stock exercisable within 60 days of June 26, 2015 and warrants to purchase
32,438 restricted shares of common stock exercisable within 60 days of June 26, 2015.
(6)
Includes options to purchase 9,250 restricted shares of common stock exercisable within 60 days of June 26, 2015 and warrants to purchase
31,875 restricted shares of common stock exercisable within 60 days of June 26, 2015.
(7) Based upon information contained in Form 4 filed on January 9, 2012, as updated to give effect to transactions through June 26, 2015 as
recorded on our books. Includes currently exercisable warrants to purchase 73,191 shares of restricted common stock. The reported number
of shares beneficially owned excludes 328,571 restricted shares of our Series B Preferred stock currently exchangeable for 328,571 restricted
shares of our common stock. Pursuant to the terms of the Certificate of Designation of Rights and Preferences of the Series B Preferred,
there is a limitation on conversion of the Series B Preferred such that the number of shares of common stock that Cato may beneficially
acquire upon such conversion is limited to the extent necessary to ensure that, following such conversion, the total number of shares of
common stock then beneficially owned by Cato does not exceed 9.99% of the total number of issued and outstanding shares of our common
stock without providing us with 61 days’ prior notice thereof. Including the shares otherwise excluded due to the beneficial ownership
restrictions noted above, Cato beneficially owns 567,305 shares or 28.42% of our common stock. Dr. Allen E. Cato, Ph.D., M.D. is deemed
to have voting and investment authority over the shares held by Cato Holding Company. The primary business address of Cato BioVentures
is 4364 South Alston Avenue, Durham, North Carolina 27713.
(8) Based upon information contained in Schedule 13G/A filed on February 18, 2015 by Platinum Long Term Growth Fund VII ( Platinum) and
adjusted to give effect to the transactions consummated between Platinum, Montsant Partners, LLC (Montsant), a Platinum affiliate, and us
pursuant to the Agreement between the Company and Platinum effective May 12, 2015 (Agreement) including Montsant’s investment of
$100,000 in our Series B Preferred Unit offering pursuant to the Agreement on June 19, 2015. The number of beneficially owned shares
reported includes 134,536 restricted shares of common stock owned by Montsant.
The reported number of shares beneficially owned excludes 637,500 restricted shares of common stock and a warrant to purchase 455,357
restricted shares of common stock that may currently be acquired by Montsant upon exchange of 425,000 restricted shares of our Series A
Preferred Stock (Series A Preferred). Pursuant to the October 11, 2012 Note Exchange and Purchase Agreement by and between us and
Platinum, there is a limitation on exchange such that the number of shares of our common stock that may be acquired by Platinum or its
affiliates upon exchange of the Series A Preferred is limited to the extent necessary to ensure that, following such exchange, the total number
of shares of our common stock then beneficially owned by Platinum or its affiliates does not exceed 9.99% of the total number of our issued
and outstanding shares of common stock without providing us with 61 days’ prior notice thereof.
Further, the reported number of shares beneficially owned also excludes 1,454,878 shares of our Series B 10% Convertible Preferred Stock
(Series B Preferred), immediately convertible into a like number of shares of our restricted common stock, and currently exercisable
warrants to purchase 2,459,723 shares of our restricted common stock owned by Montsant. Pursuant to the terms of the Certificate of
Designation of Rights and Preferences of the Series B Preferred and of the respective common stock purchase warrant agreements, there is a
limitation on conversion of the Series B Preferred and exercise of the warrants such that the number of shares of common stock that
Platinum or Montsant may beneficially acquire upon such conversion or exercise is limited to the extent necessary to ensure that, following
such conversion or exercise, the total number of shares of common stock then beneficially owned by Platinum or Montsant does not exceed
9.99% of the total number of issued and outstanding shares of our common stock without providing us with 61 days’ prior notice thereof.
Including the shares otherwise excluded due to the beneficial ownership restrictions noted above, Platinum and Montsant beneficially own
4,672,351 shares or 76.02% of our common stock. The primary business address of Platinum Long Term Growth Fund VII and Montsant
Partners, LLC is c/o Platinum Partners, 250 West 55th Street, 14th Floor, New York, NY 10019. Mark Nordlicht has voting and investment
control over the shares held by Platinum and Montsant.
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(9)
(10)
(11)
(12)
Includes 93,775 restricted shares of our Series B Preferred currently exchangeable for 93,775 restricted shares of our common stock. The
primary business address of University Health Network is 101 College Street, Suite 150, Toronto, Ontario Canada M5G 1L7..
Includes currently exercisable warrants to purchase 61,378 restricted shares of common stock and 27,107 restricted shares of our Series B
Preferred currently exchangeable for 27,107 restricted shares of our common stock. The primary business address of Brio Capital Master
Fund Ltd. is 100 Merrick Road, Suite 401W, Rockville Centre, NY 11570. Shaye Hirsch has voting and investment control over the shares
held by Brio Capital Master Fund Ltd.
Includes currently exercisable warrants to purchase 72,740 restricted shares of common stock and 38,347 restricted shares of our Series B
Preferred currently exchangeable for 38,347 restricted shares of our common stock. The primary business address of Lincoln Park Capital
Fund LLC is 440 N. Wells Street, Chicago, IL 60654. Joshua Scheinfeld has voting and investment control over the shares held by Lincoln
Park Capital Fund LLC.
Includes currently exercisable warrants to purchase 110,448 restricted shares of common stock. The reported number of shares beneficially
owned excludes 257,143 restricted shares of our Series B Preferred stock currently exchangeable for 257,143 restricted shares of our
common stock. Pursuant to the terms of the Certificate of Designation of Rights and Preferences of the Series B Preferred, there is a
limitation on conversion of the Series B Preferred such that the number of shares of common stock that Morrison & Foerster may
beneficially acquire upon such conversion is limited to the extent necessary to ensure that, following such conversion, the total number of
shares of common stock then beneficially owned by Morrison & Foerster does not exceed 9.99% of the total number of issued and
outstanding shares of our common stock without providing us with 61 days’ prior notice thereof. Effective on June 12, 2015, Morison &
Foerster provided us with such 61 day advance notice. Including the shares otherwise excluded due to the beneficial ownership restrictions
noted above, Morrison & Foerster beneficially owns 377,591 shares or 19.24% of our common stock. The primary business address of
Morrison & Foerster is 555 Market Street, San Francisco, California 94105. Mark Blumenthal has voting and investment control over the
shares held by Morrison & Foerster.
(13)
Includes options to purchase an aggregate of 134,996 restricted shares of common stock exercisable within 60 days of June 26, 2015 and
warrants to purchase an aggregate of 520,866 restricted shares of common stock exercisable within 60 days of June 26, 2015.
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Grants
As of March 31, 2015, options to purchase a total of 207,638 restricted shares of our common stock are outstanding at a weighted average exercise
price of $10.09 per share, of which 199,013 options are vested and exercisable at a weighted average exercise price of $10.09 per share and 8,625 are
unvested and not exercisable at a weighted average exercise price of $10.22 per share. These options were issued under our 2008 Plan and our 1999
Plan, each as described below. At March 31, 2015, an additional 40,491 shares remain available for future equity grants under our 2008 Plan.
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
(c)
194,509 $
13,129
207,638 $
9.99
11.67
10.09
40,491
--
40,491
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2008 Stock Incentive Plan
Shareholders of VistaGen California adopted our 2008 Plan on December 19, 2008 and we assumed the plan in connection with the Merger. The
maximum number of shares of common stock that may be granted pursuant to the 2008 Plan is 250,000. In all cases, the maximum number of shares
of common stock under the 2008 Plan will be subject to adjustments for stock splits, stock dividends or other similar changes in our common stock or
our capital structure. Notwithstanding the foregoing, the maximum number of shares of common stock available for grant of options intended to
qualify as “incentive stock options” under the provisions of Section 422 of the Internal Revenue Code of 1986 (the Code), is 250,000.
Our 2008 Plan provides for the grant of stock options, restricted shares of common stock, stock appreciation rights and dividend equivalent rights,
collectively referred to as “awards”. Stock options granted under the 2008 Plan may be either incentive stock options under the provisions of
Section 422 of the Code, or non-qualified stock options. We may grant incentive stock options only to employees of VistaGen or any parent or
subsidiary of VistaGen. Awards other than incentive stock options may be granted to employees, directors and consultants.
Our Board of Directors or the Compensation Committee of the Board of Directors, referred to as the “Administrator”, administers our 2008 Plan,
including selecting the award recipients, determining the number of shares to be subject to each award, the exercise or purchase price of each award
and the vesting and exercise periods of each award.
The exercise price of all incentive stock options granted under our 2008 Plan must be at least equal to 100% of the fair market value of the shares on
the date of grant. If, however, incentive stock options are granted to an employee who owns stock possessing more than 10% of the voting power of
all classes of our stock or the stock of any of our subsidiaries, the exercise price of any incentive stock option granted may not be less than 110% of
the fair market value on the grant date. The maximum term of incentive stock options granted to employees who own stock possessing more than
10% of the voting power of all classes of our stock or the stock of any of our subsidiaries may not exceed five years. The maximum term of an
incentive stock option granted to any other participant may not exceed ten years. The Administrator determines the term and exercise or purchase
price of all other awards granted under our 2008 Plan.
Under the 2008 Plan, incentive stock options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant. Other awards shall
be transferable:
• by will and by the laws of descent and distribution; and
• during the lifetime of the participant, to the extent and in the manner authorized by the Administrator by gift or pursuant to a domestic relations
order to members of the participant’s immediate family.
The 2008 Plan permits the designation of beneficiaries by holders of awards, including incentive stock options.
In the event of termination of a participant’s service for any reason other than disability or death, such participant may, but only during the period
specified in the award agreement of not less than 30 days (generally 90 days) commencing on the date of termination (but in no event later than the
expiration date of the term of such award as set forth in the award agreement), exercise the portion of the participant’s award that was vested at the
date of such termination or such other portion of the participant’s award as may be determined by the Administrator. The participant’s award
agreement may provide that upon the termination of the participant’s service for cause, the participant’s right to exercise the award shall terminate
concurrently with the termination of the participant’s service. In the event of a participant’s change of status from employee to consultant, an
employee’s incentive stock option shall convert automatically into a non-qualified stock option on the day three months and one day following such
change in status. To the extent that the participant’s award was unvested at the date of termination, or if the participant does not exercise the vested
portion of the participant’s award within the period specified in the award agreement of not less than 30 days commencing on the date of termination,
the award shall terminate. If termination was caused by death or disability, any options which have become exercisable prior to the time of
termination, will remain exercisable for twelve months from the date of termination (unless a shorter or longer period of time is determined by the
Administrator).
Following the date that the exemption from application of Section 162(m) of the Code ceases to apply to awards, the maximum number of shares with
respect to which options and stock appreciation rights may be granted to any participant in any calendar year will be 125,000 shares of common stock.
In connection with a participant’s commencement of service with us, a participant may be granted options and stock appreciation rights for up to an
additional 25,000 shares that will not count against the foregoing limitation. In addition, following the date that the exemption from application of
Section 162(m) of the Code ceases to apply to awards, for awards of restricted stock and restricted shares of common stock that are intended to be
“performance-based compensation” (within the meaning of Section 162(m)), the maximum number of shares with respect to which such awards may
be granted to any participant in any calendar year will be 125,000 shares of common stock. The limits described in this paragraph are subject to
adjustment in the event of any change in our capital structure as described below.
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The terms and conditions of awards are determined by the Administrator, including the vesting schedule and any forfeiture provisions. Awards under
the plan may vest upon the passage of time or upon the attainment of certain performance criteria. Although we do not currently have any awards
outstanding that vest upon the attainment of performance criteria, the Administrator may establish criteria based on any one of, or combination of, the
following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
increase in share price;
earnings per share;
total shareholder return;
operating margin;
gross margin;
return on equity;
return on assets;
return on investment;
operating income;
net operating income;
pre-tax profit;
cash flow;
revenue;
expenses;
earnings before interest, taxes and depreciation;
economic value added; and
market share.
Subject to any required action by our stockholders, the number of shares of common stock covered by outstanding awards, the number of shares of
common stock that have been authorized for issuance under the 2008 Plan, the exercise or purchase price of each outstanding award, the maximum
number of shares of common stock that may be granted subject to awards to any participant in a calendar year, and the like, shall be proportionally
adjusted by the Administrator in the event of any increase or decrease in the number of issued shares of common stock resulting from certain changes
in our capital structure as described in the 2008 Plan.
Effective upon the consummation of a Corporate Transaction (as defined below), all outstanding awards under the 2008 Plan will terminate unless the
acquirer assumes or replaces such awards. The Administrator has the authority, exercisable either in advance of any actual or anticipated Corporate
Transaction or Change in Control (as defined below) or at the time of an actual Corporate Transaction or Change in Control and exercisable at the
time of the grant of an award under the 2008 Plan or any time while an award remains outstanding, to provide for the full or partial automatic vesting
and exercisability of one or more outstanding unvested awards under the 2008 Plan and the release from restrictions on transfer and repurchase or
forfeiture rights of such awards in connection with a Corporate Transaction or Change in Control, on such terms and conditions as the Administrator
may specify. The Administrator also has the authority to condition any such award vesting and exercisability or release from such limitations upon the
subsequent termination of the service of the grantee within a specified period following the effective date of the Corporate Transaction or Change in
Control. The Administrator may provide that any awards so vested or released from such limitations in connection with a Change in Control, shall
remain fully exercisable until the expiration or sooner termination of the award.
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Under our 2008 Plan, a Corporate Transaction is generally defined as:
•
•
•
•
•
an acquisition of securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities but
excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction;
a reverse merger in which we remain the surviving entity but: (i) the shares of common stock outstanding immediately prior to such merger
are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise; or (ii) in which
securities possessing more than fifty percent (50%) of the total combined voting power of our outstanding securities are transferred to a
person or persons different from those who held such securities immediately prior to such merger;
a sale, transfer or other disposition of all or substantially all of the assets of our Corporation;
a merger or consolidation in which our Corporation is not the surviving entity; or
a complete liquidation or dissolution.
Under our 2008 Plan, a Change in Control is generally defined as: (i) the acquisition of more than 50% of the total combined voting power of our
stock by any individual or entity which a majority of our Board of Directors (who have served on our board for at least 12 months) do not recommend
our shareholders accept; (ii) or a change in the composition of our Board of Directors over a period of 12 months or less.
Unless terminated sooner, our 2008 Plan will automatically terminate in 2017. Our Board of Directors may at any time amend, suspend or terminate
our 2008 Plan. To the extent necessary to comply with applicable provisions of U.S. federal securities laws, state corporate and securities laws, the
Internal Revenue Code, the rules of any applicable stock exchange or national market system, and the rules of any non-U.S. jurisdiction applicable to
awards granted to residents therein, we shall obtain shareholder approval of any such amendment to the 2008 Stock Plan in such a manner and to such
a degree as required.
As of March 31, 2015, we have options to purchase an aggregate of 194,509 restricted shares of our common stock outstanding under our 2008 Plan.
1999 Stock Incentive Plan
VistaGen California’s Board of Directors adopted the 1999 Plan on December 6, 1999. The 1999 Plan terminated under its own terms in December
2009, and as a result, no awards may currently be granted under the 1999 Plan. However, the options and awards that have been granted pursuant to
the 1999 Plan prior to its expiration remain operative.
The 1999 Plan permitted VistaGen California to make grants of incentive stock options, non-qualified stock options and restricted stock awards.
VistaGen California initially reserved 22,500 restricted shares of its common stock for the issuance of awards under the 1999 Plan, which number
was subject to adjustment in the event of a stock split, stock dividend or other change in capitalization. Prior to the 1999 Plan’s expiration, shares that
were forfeited or cancelled from awards under the 1999 Plan were generally available for future awards.
The 1999 Plan could be administered by either VistaGen California’s Board of Directors or a committee designated by its Board of Directors.
VistaGen California’s Board of Directors designated its Compensation Committee as the committee with full power and authority to select the
participants to whom awards were granted, to make any combination of awards to participants, to accelerate the exercisability or vesting of any award
and to determine the specific terms and conditions of each award, subject to the provisions of the 1999 Plan. All directors, executive officers, and
certain other key persons (including employees, consultants and advisors) of VistaGen California were eligible to participate in the 1999 Plan.
The exercise price of incentive stock options awarded under the 1999 Plan could not be less than the fair market value of the common stock on the
date of the option grant and could not be less than 110% of the fair market value of the common stock to persons owning stock representing more
than 10% of the voting power of all classes of our stock. The exercise price of non-qualified stock options could not be less than 85% of the fair
market value of the common stock. The term of each option granted under the 1999 Plan could not exceed ten years (or five years, in the case of an
incentive stock option granted to a 10% shareholder) from the date of grant. VistaGen California’s Compensation Committee determined at what time
or times each option might be exercised (provided that in no event could it exceed ten years from the date of grant) and, subject to the provisions of
the 1999 Plan, the period of time, if any, after retirement, death, disability or other termination of employment during which options could be
exercised.
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The 1999 Plan also permitted the issuance of restricted stock awards. Restricted stock awards issued by VistaGen California were shares of common
stock that vest in accordance with terms and conditions established by VistaGen California’s Compensation Committee. The Compensation
Committee could impose conditions to vesting that it determined to be appropriate. Shares of restricted stock that did not vest were subject to our right
of repurchase or forfeiture. VistaGen California’s Compensation Committee determined the number of shares of restricted stock granted to any
employee. Our 1999 Plan also gave VistaGen California’s Compensation Committee discretion to grant stock awards free of any restrictions.
Unless the Compensation Committee provided otherwise, the 1999 Plan did not generally allow for the transfer of incentive stock options and other
awards and only the recipient of an award could exercise an award during his or her lifetime. Non-qualified stock options were transferable only to the
extent provided in the award agreement, in a manner consistent with the applicable law, and by will and by the laws of descent and distribution. In the
event of a change in control of the Company, as defined in the 1999 Plan, the outstanding options will automatically vest unless our Board of
Directors and the Board of Directors of the surviving or acquiring entity make appropriate provisions for the continuation or assumption of any
outstanding awards under the 1999 Plan.
As of March 31, 2015, we have options outstanding under the 1999 Plan to purchase an aggregate of 13,129 restricted shares of our common stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Sales of Securities to Cato Holding Company
Cato Holding Company (CHC), doing business as Cato BioVentures (" CBV"), the parent of Cato Research Ltd. ( CRL), is one of our largest
institutional stockholders at March 31, 2015, holding common stock and warrants to purchase our common stock. Shawn Singh, our Chief Executive
Officer and member of our Board of Directors, served as Managing Principal of CBV and as an officer of CRL until August 2009. On October 10,
2012, we issued to CHC an unsecured promissory note in the principal amount of $310,443 (the 2012 CHC Note) and a five-year warrant to purchase
12,500 restricted shares of the Company’s common stock at a price of $30.00 per share (the CHC Warrant). Additionally, on October 10, 2012, we
issued to CRL: (i) an unsecured promissory note in the initial principal amount of $1,009,000, which is payable solely in restricted shares of our
common stock and which accrues interest at the rate of 7.5% per annum, compounded monthly (the CRL Note), as payment in full for all contract
research and development services and regulatory advice rendered to us by CRL through December 31, 2012 with respect to the preclinical and
clinical development of AV-101, and (ii) a five-year warrant to purchase, at a price of $20.00 per share, 50,450 restricted shares of our common stock.
The 2012 CHC Note and the CRL Note mature on March 31, 2016. Total interest expense on notes payable to CHC and CRL was $174,800 and
$167,900 for the fiscal years ended March 31, 2015 and 2014, respectively..
Contract Research and Development Agreement with Cato Research Ltd.
During fiscal year 2007, we entered into a contract research organization arrangement with CRL related to the development of AV-101, under which
we incurred expenses of $38,100 and $52,500 for the fiscal years ended March 31, 2015 and 2014, respectively.
Note Receivable from Shawn K. Singh, JD and Advances to us by Mr. Singh
Upon the approval of its Board of Directors, in December 2006, VistaGen California accepted a full-recourse promissory note in the amount of
$103,400 from Mr. Shawn Singh in payment of the exercise price for options and warrants to purchase an aggregate of 6,320 restricted shares of
VistaGen California’s common stock. The note accrued interest at a rate of 4.90% per annum and was due and payable no later than the earlier of
(i) December 1, 2016 or (ii) ten days prior to our becoming subject to the requirements of the Exchange Act. On May 11, 2011, in connection with
the Merger, the $128,200 outstanding balance of principal and accrued interest on this note was cancelled in accordance with Mr. Singh's employment
agreement and recorded as additional compensation. In accordance with his employment agreement, Mr. Singh is also entitled to receive an income
tax gross-up on the compensation related to the note cancellation. At March 31, 2015 and 2014, we had accrued $101,900 as an estimate of the gross-
up amount, but we had not yet paid any of that amount to Mr. Singh. As a result of Mr. Singh’s forbearance, it remains unpaid through the date of
this report.
Between September 2013 and December 2013, Mr. Singh provided short-term cash advances aggregating $64,000 to meet our short-term working
capital requirements. In lieu of cash repayment of the entire amount of the advances, in December 2013, Mr. Singh elected to invest $50,000 of the
balance due him in the 2013 Unit Private Placement. At March 31, 2015, we have completely repaid the remaining balance of the advances and the
$50,000 promissory note issued in connection with his investment in the 2013 Unit Private Placement to Mr. Singh.
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Item 14. Principal Accounting Fees and Services.
Fees and Services
OUM & Co. LLP (OUM) served as our independent registered public accounting firm for the fiscal years ended March 31, 2015 and March 31,
2014. Information provided below includes fees for professional services provided to us by OUM for the fiscal years ended March 31, 2015 and
2014.
Audit fees
Audit-related fees
Tax fees
All other fees
Total fees
Audit Fees:
Fiscal Years Ended March 31,
2015
2014
$
$
182,500
53,952
10,960
-
172,500
4,600
12,643
-
$
247,412
$
189,743
Audit fees include fees billed for the annual audit of the Company’s financial statements and quarterly reviews for the fiscal years ended March 31,
2015 and 2014, and for services normally provided by OUM in connection with routine statutory and regulatory filings or engagements.
Audit-Related Fees:
Audit-related fees includes fees billed for assurance and related services that are reasonably related to the performance of the annual audit or reviews
of the Company’s financial statements and are not reported under “Audit Fees.” During the fiscal year ended March 31, 2015, OUM billed the
Company for services related to consents for the use of its audit opinion in the Company’s filings of Registration Statements on Form S-1 that
included the Company’s audited financial statements for the fiscal year ended March 31, 2014. During the fiscal year ended March 31, 2014,such
fees related to accounting research projects regarding certain prospective transactions.
Tax Fees:
Tax fees include fees for professional services for tax compliance, tax advice and tax planning for the tax years ended March 31, 2015 and 2014.
All Other Fees:
All other fees include fees for products and services other than those described above. During the fiscal years ended March 31, 2015 and 2014, no
such fees were billed by OUM.
Pre-Approval of Audit and Non-Audit Services
All auditing services and non-audit services provided to us by our independent registered public accounting firm are required to be pre-approved by
the Audit Committee. OUM did not provide any audit-related or other services in fiscal 2015 and 2014. The pre-approval of non-audit services to be
provided by OUM includes making a determination that the provision of the services is compatible with maintaining OUM’s independence as an
independent registered public accounting firm and would be approved in accordance with SEC rules for maintaining auditor independence. None of
the fees outlined above were approved using the “de minimis exception” under SEC rules.
Report of the Audit Committee of the Board of Directors
The Audit Committee has reviewed and discussed with management and OUM & Co. LLP (OUM), our independent registered public accounting
firm, the audited consolidated financial statements in the VistaGen Therapeutics, Inc. Annual Report on Form 10-K for the year ended March 31,
2015. The Audit Committee has also discussed with OUM those matters required to be discussed by Public Company Accounting Oversight Board
Auditing Standard No. 16.
OUM also provided the Audit Committee with the written disclosures and the letter required by the applicable requirements of the PCAOB regarding
the independent auditor’s communication with the Audit Committee concerning independence. The Audit Committee has discussed with the
registered public accounting firm their independence from our company.
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Based on its discussions with management and the registered public accounting firm, and its review of the representations and information provided
by management and the registered public accounting firm, including as set forth above, the Audit Committee recommended to our Board of Directors
that the audited financial statements be included in our Annual Report on Form 10-K for the year ended March 31, 2015.
Respectfully Submitted by:
MEMBERS OF THE AUDIT COMMITTEE
Jon S. Saxe, Audit Committee Chairman
Brian J. Underdown
Dated: June 29, 2015
The information contained above under the caption “Report of the Audit Committee of the Board of Directors” shall not be deemed to be soliciting
material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the
Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
See Index to Financial Statements under Item 8 on page 86.
(a)(2) Consolidated Financial Statement Schedules
Consolidated financial statement schedules are omitted because they are not applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
(a)(3) Exhibits
The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this report.
Exhibit Index
Exhibit No.
2.1 *
Description*
Agreement and Plan of Merger by and among Excaliber Enterprises, Ltd., VistaGen Therapeutics, Inc. and Excaliber Merger
3.1 *
3.2
3.3
3.4
3.5
3.6
3.7
10.1 *
10.2 *
10.5 *
10.6 *
10.20 *
10.21 *
Subsidiary, Inc.
Articles of Incorporation, dated October 6, 2005.
Certificate of Amendment filed with the Nevada Secretary of State on December 6, 2011, incorporated by reference from
Exhibit 3.3 to the Company's Annual Report on Form 10-K, filed July 2, 2012.
Amended and Restated Bylaws as of February 5, 2014, incorporated by reference from the Company’s Report on Form 8-K
filed on February 7, 2014.
Articles of Merger filed with the Nevada Secretary of State on May 24, 2011, incorporated by reference from Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on May 31, 2011.
Certificate of Designations Series A Preferred, incorporated by reference from Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed on December 23, 2011.
Certificate of Change filed with the Nevada Secretary of State on August 11, 2014 incorporated by reference from Exhibit 3.1
to the Company’s Current Report on Form 8-K filed on August 14, 2014.
Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock of VistaGen
Therapeutics, Inc., filed with the Nevada Secretary of State on May 7, 2015, incorporated by reference from Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed on May 13, 2015.
VistaGen’s 1999 Stock Incentive Plan.
Form of Option Agreement under VistaGen’s 1999 Stock Incentive Plan.
VistaGen’s 2008 Stock Incentive Plan.
Form of Option Agreement under VistaGen’s 2008 Stock Incentive Plan.
Strategic Development Services Agreement, dated February 26, 2007, by and between VistaGen and Cato Research Ltd.
License Agreement by and between National Jewish Medical and Research Center and VistaGen, dated July 12, 1999, as
amended by that certain Amendment to License Agreement dated January 25, 2001, as amended by that certain Second
Amendment to License Agreement dated November 6, 2002, as amended by that certain Third Amendment to License
Agreement dated March 1, 2003, and as amended by that certain Fourth Amendment to License Agreement dated April 15,
2010.
10.22 *
License Agreement by and between Mount Sinai School of Medicine of New York University and the Company, dated October
1, 2004.
10.23 *
Non-Exclusive License Agreement, dated December 5, 2008, by and between VistaGen and Wisconsin Alumni Research
10.24 *
10.26 *
10.27 *
10.31 *
10.32 *
10.34 *
Foundation, as amended by that certain Wisconsin Materials Addendum, dated February 2, 2009.
Sponsored Research Collaboration Agreement, dated September 18, 2007, between VistaGen and University Health Network, as
amended by that certain Amendment No. 1 and Amendment No. 2, dated April 19, 2010 and December 15, 2010, respectively.
License Agreement, dated October 24, 2001, by and between the University of Maryland, Baltimore, Cornell Research
Foundation and Artemis Neuroscience, Inc.
Non-exclusive License Agreement, dated September 1, 2010, by and between VistaGen and TET Systems GmbH & Co. KG.
Unsecured Promissory Note dated April 28, 2011 issued by VistaGen to Desjardins Securities.
Unsecured Promissory Note dated April 28, 2011 issued by VistaGen to McCarthy Tetrault LLP.
Promissory Note dated February 25, 2010 issued by VistaGen to The Regents of the University of California.
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10.40 *
10.41 *
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.55
10.57
10.58
10.63
10.64
10.65
10.66
10.67
10.68
10.69
Employment Agreement, by and between, VistaGen and Shawn K. Singh, dated April 28, 2010, as amended May 9, 2011.
Employment Agreement, by and between, VistaGen and H. Ralph Snodgrass, PhD, dated April 28, 2010, as amended May 9,
2011.
Notice of Award by National Institutes of Health, Small Business Innovation Research Program, to VistaGen Therapeutics, Inc.
for project, Clinical Development of 4-CI-KYN to Treat Pain dated June 22, 2009, with revisions dated July 19, 2010 and
August 9, 2011, incorporated by reference from Exhibit 10.46 to the Company’s Current Report on Form 8-K/A filed on
December 20, 2011.
Notice of Grant Award by California Institute of Regenerative Medicine and VistaGen Therapeutics, Inc.
for
Project: Development of an hES Cell-Based Assay System for Hepatocyte Differentiation Studies and Predictive Toxicology
Drug Screening, dated April 1, 2009, incorporated by reference from Exhibit 10.47 to the Company’s Current Report on Form
8-K/A filed on December 20, 2011.
Amendment No. 4, dated October 24, 2011, to Sponsored Research Collaboration Agreement between VistaGen and University
Health Network, incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
November 30, 2011.
License Agreement No. 1, dated as of October 24, 2011 between University Health Network and VistaGen Therapeutics, Inc.,
incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 30, 2011.
Strategic Medicinal Chemistry Services Agreement, dated as of December 6, 2011, between Synterys, Inc. and VistaGen
Therapeutics, Inc., incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
December 7, 2011.
Common Stock Exchange Agreement, dated as of December 22, 2011 between Platinum Long Term Growth VII, LLC and
VistaGen Therapeutics, Inc., incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on December 23, 2011.
Note and Warrant Exchange Agreement, dated as of December 28, 2011 between Platinum Long Term Growth VII, LLC and
VistaGen Therapeutics, Inc., incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K filed on January 4,
2012.
Form of Warrant to Purchase Common Stock, dated as of February 28, 2012, incorporated by reference from Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed on March 2, 2012.
License Agreement No. 2, dated as of March 19, 2012 between University Health Network and VistaGen Therapeutics, Inc.,
incorporated by reference from Exhibit 10.57 to the Company’s Annual Report on Form 10-K filed on July 2, 2012.
Exchange Agreement dated as of June 29, 2012 between Platinum Long Term Growth VII, LLC and VistaGen Therapeutics.
Inc., incorporated by reference from Exhibit 10.58 to the Company’s Annual Report on Form 10-K filed on July 2, 2012.
Unsecured Promissory Note in the face amount of $1,000,000 issued to Morrison & Foerster LLP on August 31, 2012
(Replacement Note A), incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
September 6, 2012.
Unsecured Promissory Note in the face amount of $1,379,376 issued to Morrison & Foerster LLP on August 31, 2012
(Replacement Note B), incorporated by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on
September 6, 2012.
Stock Purchase Warrant issued to Morrison & Foerster LLP on August 31, 2012 to purchase 1,379,376 shares of the Company’s
common stock (New Morrison & Foerster Warrant), incorporated by reference from Exhibit 10.5 to the Company’s Current
Report on Form 8-K filed on September 6, 2012.
Warrant to Purchase Common Stock issued to Morrison & Foerster LLP on August 31, 2012 to purchase 425,000 shares of the
Company’s common stock (Amended Morrison & Foerster Warrant), incorporated by reference from Exhibit 10.6 to the
Company’s Current Report on Form 8-K filed on September 6, 2012.
Note Exchange and Purchase Agreement dated as of October 11, 2012 by and between VistaGen Therapeutics, Inc. and Platinum
Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on October 16, 2012.
Form of Senior Secured Convertible Promissory Note issued to Platinum Long Term Growth VII, LLP under the Note Exchange
and Purchase Agreement, incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
October 16, 2012.
Form of Warrant to Purchase Shares of Common Stock issued to Platinum Long Term Growth VII, LLP under the Note
Exchange and Purchase Agreement, incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on October 16, 2012.
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10.70
10.71
10.72
10.73
10.75
10.76
10.77
10.78
10.79
10.80
10.81
10.82
10.83
10.84
10.85
10.86
10.87
10.88
10.89
10.90
10.91
10.92
Amended and Restated Security Agreement as of October 11, 2012 between VistaGen Therapeutics, Inc. and Platinum Long
Term Growth VII, LLP, incorporated by reference from Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on
October 16, 2012.
Intellectual Property Security and Stock Pledge Agreement as of October 11, 2012 between VistaGen California and Platinum
Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.5 to the Company’s Current Report on Form 8-K filed
on October 16, 2012.
Negative Covenant Agreement dated October 11, 2012 between VistaGen California, Artemis Neuroscience, Inc. and Platinum
Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.6 to the Company’s Current Report on Form 8-K filed
on October 16, 2012.
Amendment to Note Exchange and Purchase Agreement as of November 14, 2012 between VistaGen Therapeutics Inc. and
Platinum Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on November 20, 2012.
Amendment No. 2 to Note Exchange and Purchase Agreement as of January 31, 2013 between VistaGen Therapeutics Inc. and
Platinum Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed on February 14, 2013.
Amendment No. 3 to Note Exchange and Purchase Agreement as of February 22, 2013 between VistaGen Therapeutics Inc. and
Platinum Long Term Growth VII, LLP, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form
8-K filed on February 28, 2013.
Form of Warrant to Purchase Common Stock issued to independent members of the Company’s Board of Directors and its
executive officers on March 3, 2013, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-
K filed on March 6, 2013.
Securities Purchase Agreement between VistaGen Therapeutics, Inc., and Autilion AG dated April 8, 2013, incorporated by
reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 10, 2013.
Voting Agreement between VistaGen Therapeutics, Inc., and Autilion AG dated April 8, 2013, incorporated by reference from
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 10, 2013.
Note Conversion Agreement as of April 4, 2013 between VistaGen Therapeutics Inc. and Platinum Long Term Growth VII,
LLP, incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 10, 2013.
Assignment and Assumption Agreement between Autilion AG and Bergamo Acquisition Corp. PTE LTD dated April 12, 2013,
incorporated by reference from Exhibit 10.81 to the Company’s Annual Report on Form 10-K filed July 18, 2013.
Amendment No. 1 to Securities Purchase Agreement dated April 30, 2013 between VistaGen Therapeutics, Inc. and Bergamo
Acquisition Corp. PTE LTD, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on May 1, 2013.
Lease between Bayside Area Development, LLC and VistaGen Therapeutics, Inc. (California) dated April 24, 2013,
incorporated by reference from Exhibit 10.83 to the Company’s Annual Report on Form 10-K filed July 18, 2013.
Indemnification Agreement effective May 20, 2013 between the Company and Jon S. Saxe, incorporated by reference
from Exhibit 10.84 to the Company's Annual Report on Form 10-K filed on July 18, 2013.
Indemnification Agreement effective May 20, 2013 between the Company and Shawn K. Singh, incorporated by reference from
Exhibit 10.85 to the Company’s Annual Report on Form 10-K filed on July 18, 2013.
Indemnification Agreement effective May 20, 2013 between the Company and H. Ralph Snodgrass, incorporated by reference
from Exhibit 10.86 to the Company’s Annual Report on Form 10-K filed on July 18, 2013.
Indemnification Agreement effective May 20, 2013 between the Company and Brian J. Underdown, incorporated by reference
from Exhibit 10.87 to the Company’s Annual Report on Form 10-K filed on July 18, 2013.
Indemnification Agreement effective May 20, 2013 between the Company and Jerrold D. Dotson, incorporated by reference
from Exhibit 10.88 to the Company’s Annual Report on Form 10-K filed on July 18, 2013.
Amendment and Waiver effective May 24, 2013 between the Company and Platinum Long Term Growth VII, LLC,
incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 3, 2013.
Amendment No 2 to Securities Purchase Agreement dated June 27, 2013 between the Company, Autilion AG and Bergamo
Acquisition Corp. PTE LTD, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
on June 28, 2013.
Senior Secured Convertible Promissory Note, dated July 26, 2013 issued to Platinum Long Term Growth VII, LLP,
incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 2, 2013.
Common Stock Warrant, dated July 26, 2013 issued to Platinum Long Term Growth VII, LLP, incorporated by reference from
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 2, 2013.
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10.93
10.94
10.95
10.96
10.97
10.98
10.99
10.100
10.101
10.102
10.103
10.104
10.105
10.106
10.107
10.108
10.109
10.110
21.1*
24.1
31.1
31.2
32.1
Form of Subscription Agreement between the Company and investors in the Fall 2013 Unit Private Placement, incorporated by
reference from Exhibit 10.93 to the Company’s Annual Report on Form 10-K filed on June 24, 2014.
Form of Convertible Promissory Note between the Company and investors in the Fall 2013 Unit Private Placement,
incorporated by reference from Exhibit 10.94 to the Company’s Annual Report on Form 10-K filed on June 24, 2014.
Form of Common Stock Purchase Warrant between the Company and investors in the Fall 2013 Unit Private Placement,
incorporated by reference from Exhibit 10.95 to the Company’s Annual Report on Form 10-K filed on June 24, 2014.
Form of Amendment to Convertible Promissory Note and Warrant between the Company and investors in the Fall 2013 Unit
Private Placement, effective May 31, 2014, incorporated by reference from Exhibit 10.96 to the Company’s Annual Report on
Form 10-K filed on June 24, 2014.
Form of Unit Subscription Agreement between the Company and investors in the Spring 2014 Unit Private Placement dated
April 1, 2014, incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 8,
2014.
Form of Subordinate Convertible Promissory Note between the Company and investors in the Spring 2014 Unit Private
Placement dated April 1, 2014, incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on April 8, 2014.
Form of Common Stock Purchase Warrant between the Company and investors in the Spring 2014 Unit Private Placement dated
April 1, 2014, incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 8,
2014.
Common Stock Purchase Warrant between the Company and Platinum Long Term Growth Fund VII dated May 14, 2014,
incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2014.
Subordinate Convertible Promissory Note between the Company and Platinum Long Term Growth Fund VII dated May 14,
2014, incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 19, 2014.
Form of Promissory Note and Form of Warrant issued by the Company to Icahn School of Business at Mount Sinai effective
April 10, 2014 in satisfaction of technology license maintenance fees and reimbursable patent costs, incorporated by reference
from Exhibit 10.102 to the Company’s Annual Report on Form 10-K filed on June 24, 2014.
Amendment No. 3 to Sponsored Research Collaboration Agreement, dated April 25, 2011, by and between VistaGen and
University Health Network, incorporated by reference from Exhibit 10.103 to the Company’s Annual Report on Form 10-K
filed on June 24, 2014.
Amendment No. 5 to Sponsored Research Collaboration Agreement, dated October 10, 2012, by and between VistaGen and
University Health Network, incorporated by reference from Exhibit 10.104 to the Company’s Annual Report on Form 10-K
filed on June 24, 2014.
Amended and Restated Note Conversion Agreement and Warrant Amendment, by and between VistaGen Therapeutics, Inc. and
Platinum Long Term Growth VII, LLC, dated July 18, 2014, incorporated by reference from Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on July 22, 2014.
Amendment No. 1 to Amended and Restated Note Conversion Agreement and Warrant Amendment, by and between VistaGen
Therapeutics, Inc. and Platinum Long Term Growth VII, LLC, dated September 2, 2014, incorporated by reference from Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on September 4, 2014.
Amendment No. 2 to Amended and Restated Note Conversion Agreement and Warrant Amendment, by and between VistaGen
Therapeutics, Inc. and Platinum Long Term Growth VII, LLC, dated September 30, 2014, incorporated by reference from
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 3, 2014.
Agreement, by and between VistaGen Therapeutics, Inc. and Platinum Long Term Growth VII, LLC, dated May 5, 2015,
incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 13, 2015.
Acknowledgement and Agreement, by and between VistaGen Therapeutics, Inc. and Platinum Long Term Growth VII, LLC,
dated May 12, 2015, incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May
13, 2015.
Form of Securities Purchase Agreement by and between VistaGen Therapeutics, Inc. and Platinum Long Term Growth VII,
LLC, dated May 12, 2015, incorporated by reference from Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
May 13, 2015.
List of Subsidiaries.
Power of Attorney
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS
101.SCH
101.CAL
101.DEF
XBRL Instance Document
XBRL Taxonomy Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
* Incorporated by reference from the like-numbered exhibit filed with our Current Report on Form 8-K on May 16, 2011.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, State of California, on the 29th day of June,
2015.
VistaGen Therapeutics, Inc.
By:
/s/ Shawn K. Singh
Shawn K. Singh, J.D.
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS , that each person whose signature appears below constitutes and appoints each of Shawn
K. Singh, J.D. and Jerrold D. Dotson his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Shawn K. Singh
Shawn K. Singh, JD
/s/ Jerrold D. Dotson
Jerrold D. Dotson
/s/ H. Ralph Snodgrass
H. Ralph Snodgrass, Ph.D
/s/ Jon S. Saxe
Jon S. Saxe
/s/ Brian J. Underdown
Brian J. Underdown, Ph. D
Chief Executive Officer, and Director
(Principal Executive Officer)
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date
June 29, 2015
June 29, 2015
President, Chief Scientific Officer and Director
June 29, 2015
Chairman of the Board of Directors
June 29, 2015
Director
June 29 2015
-169-
EXHIBIT 31.1
I, Shawn K. Singh, certify that;
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of VistaGen Therapeutics, Inc., a Nevada corporation;
2. Based on my knowledge, this report, does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
June 29, 2015
/s/ Shawn K. Singh
Shawn K. Singh, JD
Principal Executive Officer
EXHIBIT 31.2
I, Jerrold D. Dotson, certify that:
CERTIFICATION
1. I have reviewed this Annual Report on Form 10-K of VistaGen Therapeutics, Inc., a Nevada corporation;
2. Based on my knowledge, this report, does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
June 29, 2015
/s/ Jerrold D. Dotson
Jerrold D. Dotson
Principal Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of VistaGen
Therapeutics, Inc. (the “ Company ”) hereby certifies, to such officer’s knowledge, that:
(i) the accompanying Annual Report on Form 10-K of the Company for the annual period ended March 31, 2015 (the “ Report ”)
fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
June 29, 2015
/s/ Shawn K. Singh
Shawn K. Singh, JD
Principal Executive Officer
/s/ Jerrold D. Dotson
Jerrold D. Dotson
Principal Financial Officer