academic research institutions, such as University Health Network (“UHN”), for stem cell research collaborations; | | academic and non-profit research institutions, such as the University Health Network, the McEwen Centre for Regenerative Medicine and the Centre for the Commercialization of Regenerative Medicine for stem cell technology research, development and cell production; |
CROs, such as Cato Research Ltd., for regulatory and drug development expertise and to identify and assess potential drug rescue candidates; and | | contract manufacturing and manufacturing service, medicinal chemistry and process development companies, such as Norac Pharma, Pharmatek and Synterys, Inc., to design, produce and analyze AV-101 clinical trial materials and potential drug rescue NCEs; and |
medicinal chemistry companies, such as Synterys, Inc., to analyze drug rescue candidates and generate drug rescue variants.
Dr. Gordon Keller, UHN and McEwen Centre for Regenerative Medicine | | contract clinical development and regulatory organizations (CROs), such as Pharmaceutical Product Development, LLC, Cato Research, Ltd. and Massachusetts General Hospital Clinical Trials Network and Institute for regulatory expertise and clinical development support. |
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. Providing care to the community for more than two centuries, UHN brings together the talent and resources needed to achieve global impact and provide exemplary patient care, research and education.
The McEwen Centre for Regenerative Medicine (“McEwen Centre”) is a world-renowned center for stem cell biology and regenerative medicine and a world-class stem cell research facility affiliated with UHN. Our co-founder, Dr. Gordon Keller, is Director of the McEwen Centre. Dr. Keller’s lab is one of the world 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 Mount Sinai School of Medicine to certain stem cell technologies developed by Dr. Keller, and is directed to multiple stem cell-based research projects, including advancing use of human pluripotent stem cell-derived heart and liver to screen new drugs for potential heart and liver toxicity and for potential regenerative cell therapy applications involving blood, cartilage, heart, liver and pancreas cells. In April 2011, we further expanded the scope of the collaboration to include potential regenerative cell therapy applications of iPS Cells and cells derived from iPS Cells, to create additional options to fund research and development with respect to future research projects relating to therapeutic applications of iPS Cells and certain cells derived from iPS Cells and to extend the period that we have to exercise our options under the agreement. In October 2011, we amended the collaboration agreement to identify five key programs that will further support our core drug rescue initiatives and potential regenerative cell therapy applications. In October 2012, we amended the collaboration agreement to direct our focus on heart, liver and blood cell programs supporting our primary bioassay system development and drug rescue activities and three key potential regenerative cell therapy programs. Under the terms of October 2012 amendment, we are committed to make quarterly payments of $75,000 from October 2012 through September 2013 to fund these programs. 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 – Mount Sinai School of Medicine Exclusive Licenses.”
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 one of our CROs for development of AV-101, currently focused on all chemistry, manufacturing and controls (CMC) aspects of our Phase 2 development program in MDD. Cato Research’s senior management team, including co-founders Allen Cato, M.D., Ph.D. and Lynda Sutton, have over 25 years of experience interacting with the FDA and international regulatory agencies and a successful track record of product approvals.
Cato BioVentures
Cato Holding Company, doing business as 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 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.
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 internally rather than out-license them to strategic partners.
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.
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 inWe are a member of the CCRM’s Industry Consortium. Other members of CCRM’s Industry Consortium include such leading global companies as Pfizer and GE Healthcare and Lonza.Healthcare. 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 for Regenerative Medicine offers a solid foundation and unique opportunities for expanding the commercial applications of our Human Clinical Trials in a Test Tube™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.
Duke UniversityMassachusetts General Hospital Clinical Trials Network and Institute
In November 2011, we entered into a strategic collaboration with Duke University, oneMassachusetts General Hospital (MGH) Clinical Trials Network and Institute (CTNI) is an academic CRO, part of the premier academic research institutions in the U.S., aimed at combining our complementary expertise in cardiac stem cell technology, electrophysiology and tissue engineering. The initial goalDepartment of Psychiatry of the collaboration is to exploreMassachusetts General Hospital (MGH), a leader in academic scientific and clinical research in psychiatry. By exploring the potentialbrain science, genetics, and neurobiology of psychiatric disorders, the MGH CTNI has been instrumental in the development of novel engineered, stem cell-derived cardiac tissues to expandtreatments and surrogate markers of illness and therapeutic response. Its scientific and clinical research has been instrumental in defining the scopestandards for the state-of-the-art practice of psychiatry. We are working with MGH CTNI, including its principals, Dr. Maurizio Fava and Dr. Thomas Laughren, in connection with the planning and execution of our drug rescue capabilities focused on heart toxicity. We expect that this collaboration, employingPhase 2b clinical study of AV-101 for treatment of MDD. Dr. Fava is acknowledged as a world renowned expert in depressive disorders and psychopharmacology. He is Director of the Division of Clinical Research of the MGH Research Institute, Executive Vice Chair, Department of Psychiatry, at MGH, and Executive Director of MGH CTNI. He will serve as Principal Investigator of our human stem cell-derived heart cells combined with Duke’s technology relating to cardiac electrophysiology and cardiac tissue engineering, will permit us to use micro-patterned cardiac tissue to expand the approaches available to usPhase 2b study of AV-101 in our drug rescue programs to quantify drug effects on functional human cardiac tissue.
In May 2013, we announced that researchers at Duke University combined our human stem cell-derived heart cells with innovative tissue engineering and cardiac electrophysiology technologies to grow what is being called a “heart patch,” which mimics the natural functions of native human heart tissue. We believe thisMDD. Dr. Laughren is the closest man-made approximationformer FDA Division Director, Division of natural human heart muscle to date. This heart patch technology is being developed to aid in a better understanding of the biology critical to cardiac tissue engineering,Psychiatry Products, Center for applications in regenerative cell therapy for heart disease,Drug Evaluation and as predictive Research (in vitroCDER assays for drug rescue and development. We believe the developed contractile forces and other functional properties of these cardiac tissues are remarkable and are significantly higher than any previous reports. The achievement of successfully growing a human heart muscle from cardiomyocytes derived from human pluripotent stem cells expands the scope of our drug rescue capabilities and reflects the advanced nature and potential of our collaboration with Duke University.).
Achieving this capability represents a potentially significant breakthrough in heart cell-based therapies and in testing new medicines for potential heart toxicity and potential therapeutic benefits impacting heart disease.
The following are among several key development points from the study:
· | The optimized 3D environment of a cardiac tissue patch yields advanced levels of structural and functional maturation of human cardiomyocytes that produce expected responses to drugs; |
· | Human cardiomyocyte maturation in an optimized 3D patch environment is enhanced relative to that found in industry standard 2D cultures; |
· | No genetic modifications were used to produce, purify, or mature cardiomyocytes, suggesting potential for future therapeutic applications; |
· | Cardiac tissue patches generated using VistaGen’s cardiomyocytes exhibited 2.2-180 fold higher contractile force generation compared to previous studies; |
· | Based on a force per cardiomyocyte metric, cardiac tissue engineering methodology that used VistaGen’s cardiomyocytes exhibited 4-700-fold higher efficiency than previously reported; and |
· | Cardiac tissue patches generated using VistaGen’s cardiomyocytes exhibited velocities of electrical signal propagation 5-fold higher compared to previous reports in human engineered cardiac tissues. |
Cato Research and Cato BioVenturesPharmaceutical Product Development, LLC
Cato ResearchPharmaceutical Product Development, LLC (PPD) is a leading global CRO providing comprehensive, integrated drug development, laboratory and lifecycle management services. With offices in 46 countries and more than 15,000 professionals worldwide, PPD applies innovative technologies, therapeutic expertise and a firm commitment to quality to help its clients and partners bend the cost and time curve of drug development to deliver life-changing therapies that improve health. We are currently working with PPD as our full-service CRO in connection with the planning and execution of our Phase 2b clinical study of AV-101 for treatment of MDD.
Cato Research is a contract research and development organization (“CRO”), with international resources dedicated to helping a network of 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 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 20 years of experience interacting with the FDA and international regulatory agencies and a successful track record of product approvals.
Cato BioVenturesSynterys, Inc.
Cato Holding Company, doing business as Cato BioVentures (“Cato BioVentures”)We have entered into a strategic medicinal chemistry collaboration agreement with Synterys, Inc., is the venture capital affiliate of Cato Research. Through strategic CRO service agreements with Cato Research, Cato BioVentures invests in therapeuticsa medicinal chemistry and medical devices, as well as platform technologies such as our Human Clinical Trials in a Test TubeTM platform, which its principalscollaborative drug discovery company. We believe are capable of improving the drug development process and the research and development productivity of a pharmaceutical company.
Our Relationship with Cato Research and Cato BioVentures
Cato Research currently serves as the primary CRO providing strategic development and regulatory expertise and services with respect to our development of AV-101. See “Business – AV-101.” Cato BioVentures is among our largest institutional investors.
As a result of the access Cato Research has to drug rescue candidates from its biotechnology and pharmaceutical industry network, as well as Cato BioVentures’ equity interest in VistaGen, we believe that our long-term strategic relationship with Cato BioVentures and Cato Research may provide us with unique opportunities relating tothis important collaboration will further our drug rescue activities that will permit usinitiatives with the support of Synterys’ medicinal chemistry expertise. In addition to leverage the CRO resourcesproviding flexible, real-time contract medicinal chemistry services in support of Cato Research to assist our efforts todrug rescue programs, we anticipate potential collaborative opportunities with Synterys wherein we may jointly identify and develop lead Drug Rescue Variants internally, should we elect to do so.drug rescue NCEs.
United States National Institutes of Health
Since our inception in 1998, the U.S. National Institutes of Health ("NIH") has awarded us a total of $11.3 million in non-dilutive research and development grants, including $2.3 million to support research and development of our Human Clinical Trials in a Test Tube™ platformstem cell technology and a total of $8.8 million for nonclinical and Phase 1 clinical development of AV-101 (also referred to inAV-101.
United States National Institute of Mental Health
The U.S. National Institute of Mental Health, part of the NIH, is the largest scientific literature as “4-Cl-KYN”). AV-101, our lead small molecule drug candidate, has completed Phase 1 clinical developmentorganization in the U.S.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 CRADA with the NIH providing for our ongoing AV-101 Phase 2a efficacy and safety study in MDD. This Phase 2a study is being fully funded by the NIH and is being conducted at the NIMH by Dr. Carlos Zarate, the NIMH’s Chief of Experimental Therapeutics & Pathophysiology Branch and Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
California InstituteUniversity Health Network, McEwen Centre for Regenerative Medicine — Stem Cell Initiative (Proposition 71)
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 California InstituteMcEwen Centre for Regenerative Medicine (“(CIRMMcEwen Centre”) fundsis a world-renowned center for stem cell biology and regenerative medicine and a stem cell research at academic research institutionsfacility affiliated with UHN. Dr. Gordon Keller, our co-founder and companies throughout California. CIRM was establishedChairman of our Scientific Advisory Board, is Director of the McEwen Centre. Dr. Keller’s lab is considered one of the leaders in 2004 withsuccessfully applying principles from the passagestudy of Stem Cell Initiative (Proposition 71) by California voters. As adevelopmental biology of many animal systems to the differentiation of pluripotent stem cell company basedsystems, resulting in California since 1998,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 are eligible to apply for and receive grant funding under the Stem Cell Initiative. To date we have been awarded approximately $1.0 million of non-dilutive grant funding from CIRM forentered 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 liver cells. This researchdrug rescue and development focused on the improvement of techniques and the production of engineered human ES Cell lines used to develop mature functional liver cells as a biological system for testing drugs.regenerative medicine.
Celsis In Vitro Technologies, Inc.
In March 2013, we entered into a strategic collaboration with Celsis In Vitro Technologies (“Celsis IVT”), the premier global provider of specialized in vitro products for drug metabolism, drug-drug interaction and toxicity screening, focused on characterizing and functionally benchmarking our human liver cell platform, LiverSafe 3D™ with Celsis IVT products for studying and predicting human liver drug metabolism. We intend to utilize Celsis IVT’s experience and expertise in in vitro drug metabolism to help validate our stem cell-derived human liver cell platform. We anticipate that Celsis IVT will not only validate our stem cell-derived liver cells in traditional pharmaceutical metabolism assays, but will also determine genetic variations in our pluripotent stem cell lines that are important to drug development. In addition, we plan to utilize Celsis IVT’s large inventory of cryopreserved primary human liver cells, currently used throughout the pharmaceutical industry for traditional and high-throughput liver toxicology and other bioassays, as reference controls with which to monitor and benchmark the functional properties of our LiverSafe 3D™ platform.
Collaborating with Celsis IVT scientists, we aim to achieve four key objectives:
· | Optimize techniques to handle and maintain primary human cryopreserved primary liver cells as reference controls for various drug development assays; |
· | Develop a stable supply of characterized and validated human cryopreserved primary liver cells to serve as internal controls and provide benchmark comparisons for the characterization of our pluripotent stem cell-derived liver cells; |
· | Characterize our stem cell derived liver cells using many of the same industry-standardized assays used to characterize primary human liver cells; and |
· | Produce a joint publication of the characterization of our stem cell-derived human liver cells. |
As an industry leader in the development of in vitro primary hepatocyte technology, we believe Celsis IVT has extensive resources to aid us in the benchmarking LiverSafe 3D™ to industry standards. We anticipate this collaboration will lead to the further validation of our LiverSafe 3D™ system for predicting liver toxicity and drug metabolism issues long before costly human clinical trials.
Synterys, Inc.
In December 2011, we 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 stem cell technology-based drug rescue initiatives with the support of Synterys’ leading-edge medicinal chemistry expertise. In addition to providing flexible, real-time medicinal chemistry services in support of our projected drug rescue programs, we anticipate potential collaborative opportunities with Synterys wherein we jointly identify and develop novel drug rescue opportunities and advance them in preclinical development.
In October 2011, we entered into an exploratory drug screening collaboration with Vala Sciences, Inc. (“Vala”), a biotechnology company developing and selling next-generation cell image-based instruments, reagents and analysis software tools. The goal of the collaboration is to advance drug safety screening methodologies in the most clinically relevant human in vitro bioassay systems currently available to researchers. Through the collaboration, Vala will use its Kinetic Image Cytometer platform to demonstrate both the suitability and utility of our human pluripotent stem cell derived-cardiomyocytes for screening new drug candidates for potential cardiotoxicity over conventional in vitro screening systems and animal models. Cardiomyocytes are the muscle cells of the heart that provide the force necessary to pump blood throughout the body, and, as such, are the targets of most of the drug toxicities that directly affect the heart. Many of these drug toxicities result in either arrhythmia (irregular, often fatal, beating of the heart) or reduced ability of the heart to pump the blood necessary to maintain normal health and vigor. Accurate, sensitive and reproducible measurement of electrophysiological responses of stem cell-derived cardiomyocytes to new drug candidates is a key element of our CardioSafe 3D™ drug rescue programs.
AV-101
We have successfully completed our Phase I development of AV-101, also known as “L-4-chlorokynurenine” and “4-Cl-KYN”. AV-101 is a prodrug candidate for the treatment of neuropathic pain. Our AV-101 IND application on file at the FDA covers our initial Phase I clinical development of the drug candidate for neuropathic pain. Neuropathic pain is a serious and chronic condition causing pain after an injury or disease of the peripheral or central nervous system. The neuropathic pain market is large, including approximately 1.8 million people in the U.S. alone.
We believe the safety studies done in the initial Phase I clinical study of AV-101 will support development of AV-101 for other indications, including epilepsy and neurodegenerative diseases, such as Huntington’s and Parkinson’s. To date, the NIH has provided us with grant funding for substantially all of our AV-101 development expenses, including $8.2 million for preclinical and clinical development. We plan to seek a strategic partner for development and commercialization of AV-101 for neuropathic pain, depression and potentially other neurodegenerative diseases related to aging.
AV-101 is an orally available prodrug that is converted in the brain into an active metabolite, 7-chlorokynurenic acid (“7-Cl-KYNA”), which regulates the N-methyl-D-aspartate (“NMDA”) receptors. 7-Cl-KYNA is a synthetic analogue of kynurenic acid, a naturally occurring neural regulatory compound, and is one of the most potent and selective blockers of the regulatory GlyB-site of the NMDA receptor. In preclinical studies, AV-101 has very good oral bioavailability, is rapidly and efficiently transported across the blood-brain barrier, and is converted into 7-Cl-KYNA in the brain and spinal cord, preferentially, at the site of seizures and potential neural damage.
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 and MK-801, or gabapentin (NeurontinTM) as positive controls. Similarly to the therapeutic effects seen in the acute formalin and thermal pain models, AV-101 had a positive effect on chronic neuropathic pain in the Chung model that were greater than two (2) standard deviations of the control, with no adverse behavioral observations. As expected, MK-801 and gabapentin also demonstrated reduced pain readouts in the Chung model. The effects observed by AV-101 in both the acute and chronic neuropathic pain model systems was dose dependent, and was not associated with any side effects at the range of doses administered. Preclinical AV-101 data demonstrated the potential clinical utility of AV-101 as an analgesic.
Intellectual Property
Intellectual Property Rights Underlying our Human Clinical Trials inWe rely upon patents as a Test TubeTMPlatform
We have establishedmajor component of our intellectual property portfolio, as is typical for development-stage, biopharmaceutical companies. In addition, from time to time, we enter into patent license agreements to acquire rights to the technology underlying our Human Clinical Trials in a Test TubeTM platform through a combination of exclusive and non-exclusive licenses, patent, and trade secret laws. To our knowledge, we are the first stem cell company focused primarily on stem cell technology-based drug rescue.intellectual property. 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);
modified developmental genes; and
precise selection of immature cell populations for further growth and development.
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 have licensed 43 issued U.S. patents and 12 U.S. patent applications and certain foreign counterparts relating to the stem cell technologies that underlie our Human Clinical Trials in a Test TubeTM platform. Our material rights and obligations with respect to these patents and patent applications are summarized below:
Licenses
National Jewish Health Exclusive Licenses
We have exclusive licenses to seven issued U.S. patents held by NJH. 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.
Under this license agreement, we must pay to 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, we are obligated under the agreement to make certain royalty payments on sales of products based on NJH’s patents or the sublicensing of such technology. The royalty payments are subject to anti-stacking provisions which reduce our payments 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.
Mount Sinai School of Medicine Exclusive Licenses
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 human ES Cells;
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 human ES Cells; 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 maintenance fees, a patent issue fee and royalty payments 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 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.
Wisconsin Alumni Research Foundation (“WARF”) Non-Exclusive License
We have non-exclusive licenses to 28 issued stem cell-related U.S. patents, 14 stem cell-related U.S. patent applications, of which two have been allowed, and certain foreign counterparts held by WARF, for applications in the field of in vitro drug discovery and development. Foreign counterparts have been filed in Australia, Canada, Europe, China, India, Hong Kong, Israel, Brazil, South Korea, India, Mexico, and New Zealand. The subject matter of these patents includes specific human ES Cell lines and composition of matter and use claims relating to human ES Cells important to drug discovery, and drug rescue screening. We have rights to:
use the technology for internal research and drug development;
provide discovery and screening services to third parties; and
market and sell research products (that is, cellular assays incorporating the licensed technology).
This license agreement requires us to make royalty payments based on product sales and services that incorporate the licensed technology. We do not believe that any drug rescue candidates to be developed by us will incorporate the licensed technology and, therefore, no royalty payments will be payable. Nevertheless, there is a minimum royalty of $20,000 per calendar year. There are also milestone fees related to the discovery of therapeutic molecules, though no royalties are owed on such molecules. The royalty payments are 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. The agreement remains in force for the life of the patents so long as we pay all monies due and do not breach any covenants, and such breach or default is uncured for 90 days. We may also terminate the agreement at any time upon 60 days’ notice. There are no reach through royalties on customer-owned small molecule or biologic drug products developed using the licensed technologies.
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 validated 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 | | Patent No. | | General Subject Matter | | Expiration |
US | | | 7,763,466 | | Method to produce endoderm cells | | May 2025 |
US | | | 7,955,849 | | Method of enriching population of mesoderm cells | | May 2023 |
US | | | 8,143,009 | | Toxicity typing using liver stem cells | | June 2023 |
With respect to AV-101, we recently filed three new U.S. patent applications.
Trade Secrets
We rely, in part, on trade secrets for protection of some of our intellectual property.discoveries. We attempt to protect our trade secrets by entering into confidentiality agreements with employees, consultants, collaborators and third parties, employeesparties. We also own several registered and consultants. Ourcommon-law trademarks.
To help protect our intellectual property rights, our employees and consultants also sign agreements requiring thatin which they assign to us, for example, their interests in patents, trade secrets and copyrights arising from their work for us.
From time to time, we sponsor research with key scientists in academic institutions to advance or supplement our internal research and development activities and objectives. These sponsored research agreements generally provide us with an opportunity to negotiate a new license, or acquire a substantially prescribed license, to acquire intellectual property rights in the results of the sponsored research.
AV-101
As discussed elsewhere in this Annual Report, AV-101 (4-Cl-KYN) is a development-stage prodrug candidate presently being studied in an NIH-sponsored Phase 2a clinical trial for the treatment of MDD. We have developed a broad and diverse portfolio of intellectual property assets around AV-101, which involves both patent applications and trade secrets. In addition, we will seek regulatory exclusivity to supplement our intellectual property rights.
AV-101 itself is not patented. We obtained a patent license from the University of Maryland to certain pharmaceutical formulations and associated methods of using AV-101 when we acquired the original licensee, Artemis Neuroscience, Inc. Patent rights included in that license that were relevant to AV-101, however, have expired. Although the license agreement contains royalty obligations that nominally remain in force until 10 years after the first commercial sale of the first product even after relevant patent rights have expired, the U.S. Supreme Court’s decision in Kimble v. Marvel Entertainment, LLC (2015) determined that patent license royalties that extend beyond a patent’s expiration are not enforceable.
Even though the compound 4-Cl-KYN per se and certain of its formulations are in the public domain and thus are no longer protectable, we have filed several of our own patent applications on certain other formulations and novel therapeutic methods of use of AV-101 as part of our strategy to seek and secure market exclusivity.
Presently, we are prosecuting a family of patent applications in the USPTO, European Patent Office and selected major markets related to specific dosage formulations of AV-101, as well as to methods of treating depression, hyperalgesia pain and several other neurological conditions. For reference, these are based on PCT patent application WO2014/116739. We have recently filed a continuation application in this family in the U.S., focused on the treatment of depression, that is undergoing accelerated examination. There is no guarantee, however, that the USPTO will allow any of the pending claims.
We are also prosecuting a second patent family related to novel methods of synthesizing AV-101, based on extensive research involving a range of synthetic routes that was conducted on our behalf by a separate contract research organization. For reference, this is based on PCT patent application WO2014/152835, which is presently being pursued at the national phase in the U.S. and selected other countries. This patent application also includes pharmaceutical composition claims to certain compounds related to AV-101, which may be useful and patentable as synthesis intermediates.
Another patent application related to additional and expanded clinical uses of AV-101 to treat depression and other medical conditions was filed in the U.S. as a provisional application in 2015. A PCT patent application corresponding to the provisional was filed in May 2016, and we plan to seek patent protection at the national phase in appropriate global markets.
Additionally, we are presently developing potentially improved synthesis routes through another contract research organization. If we determine that these routes may be patentable, then we intend to file patent applications relating to this R&D activity in the second half of 2016.
As noted, we are involved with an ongoing Phase 2a study of AV-101 in MDD being conducted by the NIMH. As part of our analysis of the study results, we will be evaluating the possibility of seeking additional patent protection based on the clinical data and on clinical observations.
As another major component of our plans to obtain market exclusivity for approved therapeutic indications for AV-101, we intend to utilize 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 NCEs such as AV-101, which are innovative and have not been previously approved by the FDA, either alone or in combination with other drugs. The FDA’s New Drug Product Exclusivity protection provides the holder of an FDA-approved NDA with up to five years of protection from 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 as 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. We will pursue similar types of regulatory exclusivity in other regions, such as Europe, and in certain other countries.
There is no guarantee that we will be successful in obtaining patents in the U.S. or other countries related to AV-101, or that if we are successful in obtaining such patents that we would also be successful in protecting those patents against challengers or in enforcing them to stop infringement. We are pursuing patent rights in a limited number of countries that we believe are the few major markets where having patent rights will substantially facilitate commercialization of AV-101. There are many other countries in which we are not pursuing such patent rights. And there is no guarantee that we will successfully obtain patents in the countries in which we are pursuing patent rights.
Stem Cell Technology
We have obtained and are pursuing intellectual property rights to several stem cell technologies through a combination of our own patent properties, exclusive and non-exclusive patent and technology licenses, and participation in sponsored research relationships. Generally, our stem cell IP portfolio relates to drug development, drug rescue/toxicity testing, drug discovery and cell therapy. It also relates to novel production systems and the use of various cell types that have been differentiated from pluripotent stem cells for those and other purposes. Additionally, the IP includes enriched populations of certain cell types, such as cardiomyocytes and hepatocytes, and some related aspects of cell-based therapy. We also maintain certain trade secrets regarding stem cell technology.
Overall, our stem cell patent portfolio includes nine patent families, which collectively include 11 issued U.S. patents that remain in force and eight pending U.S. patent applications, as well as several foreign counterpart patents and patent applications in countries of commercial interest to VistaGen. The portfolio also includes several patent applications pending in the U.S. and in various foreign countries. For convenience of reference, our stem cell patent portfolio is based on published PCT patent applications WO 1997/021802, WO2000/034525, WO2004/098490, WO2001/096866, WO2012/024782, WO2013/075222, WO2014/124527, WO2014/161075 and WO2015035506, several of which are discussed below.
The patent properties in these families are based on discoveries from our internal research and development activities, research that we have sponsored at various academic institutions, as well as from patent license agreements signed with the National Jewish Medical and Research Center, University Health Network and the Mount Sinai School of Medicine.
These license agreements generally require us to pay annual license fees, patent prosecution and maintenance fees, and royalty payments that vary based on product sales and services that are covered by the licensed patent rights, as well fees for sublicensing. As noted above in the context of AV-101 intellectual property, there is no guarantee that we will successfully obtain or maintain patents in the countries in which we are pursuing patent rights or that we would be successful in enforcing granted patent rights against infringers.
Trademarks
We have a U.S. federal trademark registration for the trademark “VISTAGEN”. Corresponding trademarks have been registered in the European Union and in Switzerland. We also use certain other trademarks in connection with our customized in vitro bioassay systems, such as CardioSafe 3D™, LiverSafe 3D™ and “Better Cells Lead to Better Medicine™.”
Sponsored Research Collaborations and Intellectual Property Rights
University Health Network (UHN), McEwen Centre for Regenerative Medicine, Toronto, Ontario
We are currently sponsoring stem cell research byOur strategic relationship with our co-founder, Dr. Gordon Keller, Director of the UHN’s McEwen Centre, is focused on, among other things, developing improved methods for differentiation of cardiomyocytes (heart cells) from pluripotent stem cells,hPSCs, and their uses as biologicalin bioassay systems for drug discovery and drug development, including drug rescue, as well as cell therapy.therapy and regenerative medicine. Pursuant to our sponsored research collaboration agreement with UHN, we have the right to acquireacquired exclusive worldwide rights to anypatent applications in the U.S. and foreign countries on multiple inventions arising from these studies we have sponsored, under pre-negotiated license terms. Such pre-negotiated terms provide for royalty payments based on product sales that incorporate the licensed technology and milestone payments based on the achievement of certain events. Any Drug Rescue Variantsdrug rescue compounds 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
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 potential new sponsored research projects under the SRCA. 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.
UHN LicenseLicenses for Stem Cell Culture Technology
In October 2011, we licensed stem cell culture technology from UHN’s McEwen Centre pursuant to Sponsored Research Collaboration Agreement (SCRA). This exclusive license conveyed rights to a patent application published as a PCT application WO/2012/024782, entitled “Methods for Enriching Pluripotent Stem Cell Derived Cardiomyocyte Progenitor Cells and Cardiomyocyte Cells Based on SIRPA Expression,”, and any related patent application or patent claiming priority from it. This technology involves a cell surface protein, SIRPA (signal-regulatory protein alpha), that heretofore was not known to be expressed by early immature precursors for cardiomyocytes. Antibodies and other binding moieties 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 3Däin 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 breakthroughadditional stem cell culture technology from theUHN’s McEwen Centre for Regenerative Medicine (“McEwen Centre”) located atpursuant to the University Health Network (“UHN”) in Toronto, Canada. We are utilizing theSCRA. 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 cell therapyregenerative medicine applications for human blood system disorders. The breakthrough technology is included inThis exclusive license conveyed rights to a new United States patent application.application published as PCT patent application WO/2013/075222, entitled “Populations of Hematopoietic Progenitiors and Methods of Enriching Stem Cells Therefor,” and any related patent application or patent claiming priority from it. We believe this stem cell technology dramaticallysubstantially advances our ability to produce and purify this important blood stem cell precursor for both in vitro drug discovery screening and in vivo cell therapypotential 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 for the first time, we are now 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, isolated through our licensed technology, have the potential to be the precursors of the ultimate adult, bone marrow-repopulating hematopoietic stem cells potentially useful to repopulate the blood and immune system when transplanted into patients prepared for bone marrow transplantation.transplantation patients. 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 additional stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed rights to a patent application published as PCT patent application WO/2014/124527, entitled “Methods for Generating Hepatocytes and Cholangiocytes from Pluripotent Stem Cells,” and any related patent application or patent claiming priority from it. 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 and disorders, 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. We believe the licensed technology will enable us to more efficiently produce, human hepatocytes and cholangiocytes with more adult-like functions for potential drug discovery, drug rescue and regenerative medicine applications.
In December 2014, we also licensed another stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed rights to a patent application entitled “Methods and Compositions for Generating Epicardium Cells,” published as PCT patent application WO/2015/035506, and any patent application or patent claiming priority from it. 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 patent application also relates to the differentiation of cardiomyocytes, fibroblast-like cells and smooth muscle-like cells. This technology will be important to developing the next generation of engineered cardiac tissue and their use in cell therapy approaches.
AV-101-Related Intellectual PropertyAlso in December 2014, we licensed an additional stem cell culture technology from UHN’s McEwen Centre pursuant to the SCRA. This exclusive license conveyed rights to a patent application entitled “Methods and Compositions for Generating Chondrocyte Lineage Cells and/or Cartilage Like Tissue” published as PCT patent application WO/2014/161075, and any related patent application or patent claiming priority from it. There are two types 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 the first kind, articular cartilage, leading to inappropriate bone development (spurs) in the joint. This technology will allow us to develop in vitro assays to study the process of the degeneration of articular cartilage, and it provides novel tools for testing drugs that have the potential to reduce this degeneration. It also provides the necessary cells for developing cell therapy approaches for treating osteoarthritis.
U.S. Government Rights
We have exclusive licensesreceived federal funding from both the NIH and the NIMH to issued U.S. patents related to the usesupport research and functiondevelopment of AV-101, and various CNS-active molecules related to AV-101. These patents are held by the Universityinventions disclosed in certain of Maryland, Baltimore, the Cornell Research Foundation, Inc. and Aventis, Inc. The principle U.S. method of use patent related to AV-101 expired in February 2011. Foreign counterparts to that U.S. patent expired in February 2012. However, through the date of this report, in 2013, we have filed three new U.S.our patent applications relating to AV-101. In addition, among the key componentsAV-101 and certain of our commercial protection strategypatent applications relating to stem cell technology. Under the Bayh-Dole Act of 1980, if we do not take adequate steps to commercialize certain intellectual property rights, or certain other exigent circumstances relating to public health and safety prescribed under federal law become applicable, the U.S. government may exercise certain rights reserved by statute 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”) five years of protection from new competitioninventions made in the U.S. marketplace for the innovation representedcourse of programs funded 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 five year exclusivity period, except that such applications may be submitted after four years if they contain a certification of patent invalidityNIH, NIMH or non-infringement.
Under the terms of our license agreement, we may be obligated to make royalty payments on 2% of net sales of products using the unexpired patent rights, if any, including products containing compounds covered by the patent rights. Additionally, we may be required to pay a 1% royalty on net sales of combination products that use unexpired patent rights, if any, or contain compounds covered by the patent rights. Consequently, future sales of AV-101 may be subject to a 2% royalty obligation. There are no license, milestone or maintenance fees under the agreement. The agreement remains in force until the later of: (i) the expiration or invalidation of the last patent right; and (ii) 10 years after the first commercial sale of the first product that uses the patent rights or contains a compound covered by the patent rights. 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.federal grants.
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, low doses of the anesthetic ketamine, are being or may be increasingly used off-label for treatment-resistant MDD, as well as other CNS indications for which AV-101 may have therapeutic potential. Additionally, other treatment options, such psychotherapy and electroconvulsive therapy, are sometimes used instead of and before antidepressant medications to treat patients with MDD.
In the field of new generation antidepressants focused on modulation of the NMDAR at its GlyB site, our principal competitor is Allergan plc, which is developing rapastinel (formerly GLYX-13) and NRX-1074 for treatment-resistant MDD. On August 28, 2015, Allergan acquired rapastinel and NRX-1074 from Naurex, Inc. (Naurex) in an all-cash transaction of $571.7 million, plus future contingent payments up to $1.15 billion. Although each of these drug candidates is a peptide and may not be orally active (rapastinel is only administered intravenously and, we believe, NRX-1074 has not yet been administered orally to patients), both are new generation NMDAR modulators focused on the GlyB site of the NMDAR.
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 companies have programs to develop small molecule drug candidates for the treatment of depression, including MDD, epilepsy, neuropathic pain, Parkinson’s disease and other neurological conditions and diseases, including, but not limited to, Abbott Laboratories, Acadia, Alkermes, Allergan, AstraZeneca, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Lundbeck, Merck, Novartis, Ono, Otsuka, Pfizer, Roche, Sanofi, Shire, Sumitomo, Takeda and Teva. 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, Human Clinical Trials in a Test TubeTM, isthe 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 markets for pluripotent stem cell technology-based drug discovery, development and rescue, as well as regenerative cell therapy and other commercial applications in the rapidly growingglobal stem cell and regenerative medicine sector. We have electedmarkets, including markets involving the sale of hPSC-derived cells to focus a substantial portion of our resources on stem cell technology-based drug rescue.
We believe that the stem cell technologies underlying our Human Clinical Trials in a Test TubeTM platform and our primary focus on drug rescue opportunities provide us substantial competitive advantages associated with application of human biology at the front end of the drug development process, long before animal and human testing. Although we believe that our modelthird-parties for the application of pluripotent stem cell technology for drug rescue is novel, competition may arise or otherwise increase considerably as the use of stem cell technology for drug discovery, development and rescue, as well as cell therapy or regenerative medicine continues to become more widespread throughout the academic research community and pharmaceutical and biotechnology industries.
Competition may arise from academic research institutions, contract research organizations, pharmaceutical companies and biotechnology companies that seek to apply stem cell technology, including hPSC trechnology, to produce, sell and/or use human heart cells, liver cells, other cell populations, andtheir in vitro cellular assaysdrug 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 such cells, for internal or third-partyin vivo cell therapy research and development purposes, predictive toxicology screening, assessment of adverse drug-drug interactions, and regenerative cell therapy.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,Astellas, Athersys, BioCardia, BioTime, Cellectis Bioresearch, Cellular Dynamics, California Stem Cell, Cellerant Therapeutics, Cytori Therapeutics, Fujifilm Holdings, HemoGenix, International Stem Cell, iPierian,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, Thermo Fischer Scientific and others have been and are expected to continue developingpursuing internally various stem cell-basedcell-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 including our Human Clinical Trials in a Test TubeTM platform,for drug development and regenerative medicine will continue to occur and increase at pharmaceutical and biotechnology companies in the future.
With respect to AV-101, we believe that a range of pharmaceutical and biotechnology companies have programs to develop small molecule drug candidates for the treatment of neuropathic pain, depression, epilepsy, Parkinson’s disease and other neurological conditions and diseases, including Abbott Laboratories, GlaxoSmithKline, Johnson & Johnson, Novartis, and Pfizer. We expect that AV-101 will have to compete with a variety of therapeutic products and procedures.
Government Regulation
Government authorities in the U.S. 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 U.S., the FDA regulates drugs under the 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.
Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the U.S.. The process required by the FDA before a drug may be marketed in the U.S. generally involves the following:
| ● | 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 (cGLP), 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 (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 (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.
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 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. |
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 (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 (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.
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 (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 U.S., or more than 200,000 individuals in the U.S. and for which there is no reasonable expectation that the cost of developing and making a drug product available in the U.S. 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.
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:
| ● | distributionrestricted 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 include 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.
Pediatric Trials
The Food and Drug Administration Safety and Innovation Act (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 (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 (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.
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 U.S., the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services, the U.S. 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 U.S., 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 (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.
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 U.S. 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 USPTO, 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 (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 (EU), 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 U.S., 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 (NCA) and one or more Ethics Committees (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.
European Union Drug Review and Approval
In the European Economic Area (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, (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 (CHMP) of the European Medicines Agency (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 (RMS). The competent authority of the RMS prepares a draft assessment report, a draft summary of the product characteristics (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 EU, 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 EU 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 EU, 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 EU, 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.
Rest of the World Regulation
For other countries outside of the EU and the U.S., 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 (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 U.S. Department of Health and Human Services, the Agency for Healthcare Research and Quality and the NIH, 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.
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 (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 EU 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 EU do not follow price structures of the U.S. 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 and are approved for use by regulatory bodies associated with the CIRM.
With respect to drug development, government authorities at the federal, state and local levels in the U.S. and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing, pricing and export and import of pharmaceutical products such as those we are developing. In the U.S., pharmaceuticals, biologics and medical devices are subject to rigorous FDA regulation. Federal and state statutes and regulations in the United States govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, export, record keeping, approval, marketing, advertising and promotion of our potential drug rescue variants. The information that must be submitted to the FDA in order to obtain approval to market a new drug varies depending on whether the drug is a new product whose safety and effectiveness has not previously been demonstrated in humans, or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug. Product development and approval within this regulatory framework takes a number of years and involves significant uncertainty combined with the expenditure of substantial resources.
Canadarequirements.
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 (the “TCPS”); and the Assisted Human Reproduction Act (the “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 ES Cell 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 ES Cell derivation were not in force
We are not currently conducting stem cell research in Canada. We are, however, sponsoring stem cell research by Dr. Gordon Keller at UHN’s McEwen Centre. We anticipate conducting stem cell research (with both ES Cells and iPS Cells), in collaboration with Dr. Keller and is research team, at UHN during 2013 and beyond pursuant to our long term sponsored research collaboration with Dr. Keller and UHN. Should the provisions of the Act come into force, we may have to apply for a license for all ES Cell research we may sponsor or conduct in Canada and ensure compliance of such research with the provisions of the Act.
Foreign
In addition to regulations in the U.S., we may be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our products outside of the U.S. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.
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 Ontario, Canada including our collaboration with Dr. Keller and UHN 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 and focused on development of AV-101. 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.
Risks Related to Our Financial Position and Need for Additional Capital
We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
We have incurred significant operating losses in each fiscal year since our inception, including net losses of $12.9 million and $12.2 million for the fiscal years ending March 31, 2013 and 2012, respectively. Our accumulated deficit was $67.7 million and $54.8 million, and our stockholders’ deficit was $12.6 million and $5.7 million as of March 31, 2013 and 2012, respectively. These losses have resulted principally from costs incurred in our research and development programs and general and administrative expenses.
To date, we have generated approximately $16.4 million of revenue from grant awards and strategic collaborations. We have financed our operations primarily through grant awards and private placements of our securities. We have devoted substantially all of our efforts to research and development. We expect to continue to incur significant expenses, operating and net losses and negative cash flow from operations, which may increase, for the foreseeable future due primarily to anticipated increases in expenses for research and product development and increases in general and administrative expenses related to operating and reporting as a public company, particularly in the event we are able to achieve our goal of listing on the NASDAQ Global Market or a similar national exchange. The net losses we incur may fluctuate from quarter to quarter. We anticipate that our business will generate operating losses until we successfully implement our commercial development strategy relating to drug rescue and generate significant revenue to support our level of operating expenses related to:
· | Research and development of our hPSC technology platform; |
· | Acquisition and/or in-license of products and technologies; |
· | Maintainence, expasion and protection of our intellectual property portfolio; |
· | Hiring additional scientific and technical personnel; and |
· | Adding operational, financial and management information systems and personnel to support our drug rescue activities and regulatory compliance requirements relating to being a reporting company. |
To become and remain profitable we must develop and commercialize, either directly or, more likely, through collaborative arrangements with pharmaceutical and biotechnology companies, a product or products with significant market potential. This will require us or our partners to be successful in a range of challenging activities, including nonclinical testing and clinical trials of our Drug Rescue Variants, obtaining marketing approval for these product candidates and manufacturing, marketing and selling those products for which we or our prospective partners may obtain marketing approval. We and our collaborators may never succeed in these activities and, even if we do, may never generate revenues that are significant or large enough to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become or remain profitable would decrease the value of the company and could impair our ability to raise capital, maintain our research, development and drug rescue efforts, expand our business or continue our operations. A decline in the value of the company could also cause you to lose all or part of your investment.
We need to raise substantial additional capital to continue our research and drug rescue programs, and continue as a going concern
To fund our current and proposed hPSC technology research and development and drug rescue programs, and continue as a going concern, we will need to raise substantial additional capital. The amount of additional capital we will need will depend on many factors, including:
• | revenues, if any, generated from collaborations with pharmaceutical and biotechnology companies involving the discovery, development or licensing of customized cellular bioassays and new chemical entities, including Drug Rescue Variants, AV-101 or other drug or biologic candidates or regenerative cell therapy product candidates; |
• | expenses we incur in discovering, developing and licensing Drug Rescue Variants or other drug or biologic candidates; |
• | the commercial success of our hPSC technology-based research and development efforts and AV-101; and |
• | the emergence of competing scientific and technological developments and the extent to which we acquire or in-license other products and technologies. |
Other than the Autilion Financing, as defined below, we do not currently have any contractually committed sources of additional capital. As of the date of this report, we have completed a nominal initial closing of the Autilion Financing. In the event the remaining portion of the Autilion Financing is not completed as provided for in our financing agreement with Autilion, we will require substantial additional financing through strategic collaborations, public or private equity financings, capital lease transactions or other financing sources and such additional financing may not be available to us on a timely basis or on acceptable terms, or at all. If we are unable to complete the Autilion Financing in full, or secure additional funding, or adequate funds are not available on a timely basis, we may be required to delay, reduce or eliminate research and development programs, including drug rescue programs, license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize, or any combination of these activities. Any of these results would materially harm our business, financial condition, and results of operations, and may cause our stock price to decline and result in our inability to continue as a going concern.
We have entered into a strategic financing agreement to provide us with $36.0 million in working capital. An initial closing under the agreement resulting in nominal proceeds has occurred. However, the second closing under the agreement, in the amount of $475,000 and scheduled for July 11, 2013, has not yet occurred. In the event the second closing, or any subsequently scheduled closing, does not occur in a timely manner, we will need to secure alternative sources of capital, which may not be available on acceptable terms, or at all, potentially resulting in our inability to continue as a going concern.
In April 2013, we entered into a Securities Purchase Agreement (as amended, the “Purchase Agreement”) providing for the issuance to Autilion AG, a corporation organized and existing under the laws of Switzerland (“Autilion), of 72 million shares of our common stock for total gross proceeds of $36 million (the “AutilionFinancing”). As amended, the Purchase Agreement provides for a series of closings between June 27, 2013 and September 30, 2013. As of the date of this report, a closing resulting in nominal proceeds from the Autilion Financing has occurred. However, the second closing under the agreement, in the amount of $475,000 and scheduled for July 11, 2013, has not yet occurred. This, we are informed by Autilion, is due to administrative delays involving Autilion and its international affiliates and investment partners. Because the closing did not occur, the Purchase Agreement is currently in default. We have been informed by Autilion that we will receive the total $36 million of proceeds contemplated by the Purchase Agreement. However, we can give no assurances as to whether we will receive any additional funding in connection with the Autilion Financing. In the event we are not able to close with respect to at least a significant portion of the proceeds anticipated from the Autilion Financing, we will need to obtain substantial additional financing. Substantial additional financing may not be available on a timely basis, on terms acceptable to us, or at all. In the event we are unable to obtain additional financing, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, and we may not be able to continue as a going concern.
In the event the Autilion Financing is completed in an amount exceeding $11.0 million, and we issue over 22 million shares of our restricted common stock in connection with such funding, Autilion will control in excess of 50% of our issued and outstanding common stock, resulting in a change in control of the Company. In addition, substantial dilution to existing stockholders will occur upon completion of the Autilion Financing in part or in full.
Some of our programs have been supported by government grants, which may not be available in the future. If we cannot continue to obtain grant funding from government entities or private research foundations or research, drug rescue and development funding from pharmaceutical or biotechnology companies, or if we fail to replace these sources of funding, our ability to continue operations will be harmed.
We have received, and in the future, may receive, funds under research and economic development grant programs funded by state and federal governmental agencies. and private grant funding and funding from pharmaceutical companies with which we have collaborative relationships. In order to fund a substantial portion of future operations, particularly future operations related to our proposed drug rescue activities, we may need to apply for and receive additional grant funding from governments and governmental organizations such as NIH, the NIH’s National Institute of Neurological Disease and Stroke, and the California Institute for Regenerative Medicine. However, we may not secure any additional funding from any governmental organization or private research foundation or otherwise. We cannot assure you that we will receive grant funding in the future. If grant funds are required and are no longer available, or if the funds no longer meet our needs, some of our current and future operations may be delayed or terminated. In addition, our business, financial condition and results of operations may be adversely affected if we are unable to obtain future grants or alternative sources of funding.
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, 2013 included in Item 8 of this Report on Form 10-K, have been prepared assuming that we will continue to operate as a going concern. The report of our independent registered public accounting firm on our consolidated financial statements includes an explanatory paragraph discussing conditions that raise a substantial doubt about our ability to continue as a going concern.
Risks Related to Identification, Access, and Development of Our Drug Rescue Variants
We have not yet developed a Drug Rescue Variant and we cannot be certain that we will be able to do so in the future. Our prospective customers, the pharmaceutical and biotechnology companies of the world, may not perceive value in our drug rescue efforts or otherwise may choose not to collaborate with us.
Our ability to develop a Drug Rescue Variant is highly dependent upon the accuracy and efficiency of our Human Clinical Trials in a Test TubeTM platform, particularly our CardioSafe 3D™ bioassay system. We have no operating history with respect to the development of Drug Rescue Variants and we cannot be certain we will be able to develop and license one or more Drug Rescue Variants in the future. There are a number of factors that may impact our ability to develop a Drug Rescue Variant, including:
Our ability to identify and access the potential for drug rescue of once-promising small molecule drug candidates that pharmaceutical or biotechnology companies have discontinued in development due to unexpected safety concerns relating to the heart or liver. If we cannot identify once-promising drug candidates that can be rescued in an efficient and cost-effective manner, our business will be adversely affected. And, we may choose to focus our resources on a potential drug rescue candidate the rescue of which ultimately proves to be unsuccessful. If we are unable to identify and access suitable drug candidates for our drug rescue programs, we will not be able to generate product revenues in future periods, which likely will result in significant harm to our financial position and adversely impact our stock price.
To the extent we seek to rescue once-promising but discontinued drug candidates that are not otherwise available for research and development based on information available in the public domain, our ability to license from third-parties drug candidates that have been discontinued in development due to unexpected heart or liver safety concerns. Because we may seek to leverage prior third-party investment in drug discovery and development of a small molecule compounds with proprietary rights held by third parties, the success of our business may depend, in significant part, on our ability to acquire or license such discontinued compounds from third-parties. However, such third parties might be reluctant to enter into product acquisition or license agreements with us on commercially reasonable terms, if at all. The licensing and acquisition of proprietary small molecule compounds, even compounds that have failed in development due to heart or liver safety concerns, is a highly competitive area, and a number of more established companies are also pursuing strategies to license or acquire compounds that we may consider attractive as drug rescue candidates. These established companies have a competitive advantage over us due to their size, cash resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to sell or license drug candidate rights to us. We have no experience in negotiating these licenses and there can be no assurances that we will be able to acquire or obtain licenses to discontinued drug rescue candidates on commercially reasonable terms, if at all. If we are unable to acquire or obtain licenses to drug candidates we seek to rescue, our business may be adversely affected.
Our medicinal chemistry collaborator’s ability to design and produce Drug Rescue Variants that are structurally related to the drug candidate that was discontinued in development due to heart or liver safety concerns. If our medicinal chemistry collaborator is unsuccessful for any reason in designing and producing Drug Rescue Variants, our business will be adversely affected.
Our ability to execute our drug rescue programs in a timely and cost-effective manner. If our drug rescue programs are less efficient and more expensive than we expect, our business will be adversely affected.
Our ability to develop Drug Rescue Variants and license them to pharmaceutical and biotechnology companies. The time necessary to rescue any individual pharmaceutical product is long and can be uncertain. Only a small number of research and development programs ultimately result in commercially successful drugs. We cannot assure you that toxicity results indicated by our drug rescue testing models are indicative of results that would be achieved in future animal studies, in in vitro testing, or in clinical studies, all or some of which will be required in order to obtain regulatory approval of our Drug Rescue Variants.
Our internal validation studies of CardioSafe 3DTMhave not been subject to peer review or third party validation.
Our internal validation studies, conducted to validate the ability of our CardioSafe 3DTM bioassay system to predict the cardiac effects of prospective drug rescue candidates referred to under “Business – Application of Stem Cell Technology to Drug Rescue – CardioSafe 3D TM”, have not been subject to peer review or third party validation. It is possible that the results we obtained from our internal validation studies may not be able to be replicated by third parties. If we elect to license drug rescue candidates from pharmaceutical or biotechnology companies rather than accessing information available in the public domain, and such companies cannot replicate our results, it will be difficult to negotiate and obtain licenses from such companies to drug candidates we may seek to rescue. Even if such results can be replicated, pharmaceutical and biotechnology companies may nevertheless conclude that their current drug testing models are better than our human heart cell-based bioassay system, CardioSafe 3DTM, and that it does not merit a license to the drug candidate we seek to rescue. Our business model is predicated on our ability to identify and, if information is not otherwise available in the public domain, obtain licenses from pharmaceutical and biotechnology companies to promising drug rescue candidates. If licenses are required, and if we cannot obtain licenses to suitable drug rescue candidates, our business will be adversely affected.
We cannot say with certainty that our in vitro toxicological testing systems, including CardioSafe 3DTM, and, when developed and validated, LiverSafe 3DTM, will be more efficient or accurate at predicting the toxicity adverse drug-drug interactions of new drug candidates and Drug Rescue Variants than the nonclinical testing models currently used by pharmaceutical companies.
The success of our drug rescue model is dependent upon the human heart and liver cell-based bioassay systems we develop being more accurate, efficient and clinically predictive than animal and cellular testing models currently used in the pharmaceutical and biotechnology industries. The accuracy and efficiency of our human heart and liver cell-based bioassay systems is central to our ability to generate Drug Rescue Variants. If our bioassay systems are less accurate and less efficient than currently-used animal and cellular testing models, our business will be adversely affected.
If we cannot enter into and successfully manage a sufficient number of strategic collaborations with pharmaceutical and biotechnology companies, our ability to generate Drug Rescue Variants and fund our future operations will be harmed.
A future element of our drug rescue business model is to enter into strategic development and marketing collaborations with established pharmaceutical and biotechnology companies to finance or otherwise assist in the development, marketing and manufacture of Drug Rescue Variants utilizing our hPSC technology-based bioassay systems for screening heart toxicity, liver toxicity and adverse drug-drug interactions. Our goal in such collaborations will be to generate a recurring stream of revenues from upfront license fees, research and development milestone payments and royalties on commercial sales of Drug Rescue Variants. Our prospects, therefore, will depend in large part upon our ability to attract and retain pharmaceutical and biotechnology collaborators and to generate Drug Rescue Variants that meet the requirements of our prospective collaborators. In addition, our collaborators will generally have the right to abandon research and development projects and terminate applicable agreements, including funding obligations, prior to or upon the expiration of the agreed-upon research and development terms. There can be no assurance that we will be successful in establishing multiple future collaborations with pharmaceutical and biotechnology companies on acceptable terms or at all, that current or future collaborations will not terminate funding before completion of projects, that our existing or future collaborative arrangements will result in successful development and commercialization of Drug Rescue Variants or that we will derive any revenues from such arrangements. To the extent that we are unable to maintain existing or establish new strategic collaborations with pharmaceutical and biotechnology companies, it would require substantial additional capital for us to undertake research, development and commercialization activities on our own.
In varying degrees for each of the drug candidates we may seek to include in our drug rescue programs , following internal studies to establish in vitro proof of concept of the safety and efficacy of each lead Drug Rescue Variant, we expect to rely on our pharmaceutical or biotechnology company collaborators to develop, conduct Investigational New Drug-enabling studies and human clinical trials on, obtain regulatory approvals for, manufacture, market and/or commercialize the Drug Rescue Variant(s) we license to them. Such collaborators’ diligence and dedication of resources in conducting these activities will depend on, among other things, their own competitive, marketing and strategic considerations, including the relative advantages of competitive products. The failure of our collaborators to conduct, successfully and diligently, their collaborative activities relating to Drug Rescue Variants we license to them would have a material adverse effect on us.
Some of our competitors or pharmaceutical or biotechnology companies may develop technologies that are superior to or more cost-effective than ours, which may impact the commercial viability of our technologies and which may significantly damage our ability to sustain operations.
The pharmaceutical and biotechnology industries are intensely competitive. Other hPSC biology-based bioassay systems and drug candidates that could compete directly with the bioassay technologies and product candidates that we seek to discover, develop and commercialize currently exist and are being developed by pharmaceutical and biotechnology companies and by academic and other research-oriented organizations.
Many of the pharmaceutical and biotechnology companies developing and marketing these competing products and technologies have significantly greater financial resources and expertise than we do in research and development, manufacturing, preclinical and clinical testing, obtaining regulatory approvals and marketing and distribution of new drug candidates. Pharmaceutical and biotechnology companies with whom we seek to collaborate also have or may develop their own competing internal programs.
Small companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. Academic institutions, government agencies and other public and private research organizations are conducting research, seeking patent protection and establishing collaborative arrangements for research, clinical development and marketing of products similar to ours. These companies and institutions compete with us in recruiting and retaining qualified scientific and management personnel, obtaining collaborators and licensees, as well as in acquiring technologies complementary to our programs.
In addition to the above factors, we expect to face competition in the areas of evaluation of product efficacy and safety, the timing and scope of regulatory consents, availability of resources, reimbursement coverage, price and patent position, including potentially dominant patent positions of others.
As a result of the foregoing, our competitors may develop more effective or more affordable products, or achieve earlier patent protection or product commercialization than we do. Most significantly, competitive products may render any technologies and product candidates that we develop obsolete, which would negatively impact our business and ability to sustain operations.
Restrictions on the use of Embryonic Stem Cells (“ES Cells”), political commentary and the ethical and social implications of research involving ES Cells could prevent us from developing or gaining acceptance for commercially viable products based upon such stem cells and adversely affect the market price of our Common Stock.
Some of our most important programs involve the use of ES Cells. Some believe the use of ES Cells gives rise to ethical and social issues regarding the appropriate use of these cells. Our research related to ES Cells may become the subject of adverse commentary or publicity, which could significantly harm the market price of our Common Stock.
Although substantially less than in years past, certain political and religious groups in the United States voice opposition to ES Cell technology and practices. All procedures we use to obtain clinical samples, and the procedures we use to isolate ES Cells,hESCs, are consistent with the informed consent and ethical guidelines promulgated by the U.S. National Academy of Science, the International Society of Stem Cell Research (“(ISSCR”), andor 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. We use stem cells 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. Many research institutions, including some of our scientific collaborators, have adopted policies regarding the ethical use of human embryonic tissue. These policies may have the effect of limiting the scope of research conducted using ES Cells, thereby impairing our ability to conduct research in this field.
The U.S. government and its agencies on July 7, 2009 published guidelines for the ethical derivation of human ES CellshESCs required for receiving federal funding for ES CellhESC research. AllShould we seek further NIH funding for our stem cell research and development, our request would involve the use of hESC lines that meet the ES Cell lines we use meet theseNIH 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 Annual 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 hPSC 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 24, 2016, we employed nine full-time employees, four 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 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. We intend to renew the lease at our current location in the ordinary course of business, prior to the end of July 2017.
Legal Proceedings
Environmental Regulation
Our business does not require us to comply with any particular unique environmental regulations.
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 before investing in our securities. The risks described below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected.
Risks Related to Product Development, Regulatory Approval and Commercialization
We depend heavily on the success of AV-101. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize AV-101, or any product candidate.
We currently have no drug products for sale and may never be able to develop and commercialize marketable drug products. Our business depends heavily on the successful development, regulatory approval and commercialization of AV-101 for depression, including for MDD, and various other diseases and disorders involving the CNS, as well as, but to a more limited extent, our ability to produce, develop and commercialize NCEs from our drug rescue programs. AV-101 will require substantial additional Phase 2 and Phase 3 clinical development, testing and regulatory approval before we are permitted to commence its commercialization and is unlikely to achieve regulatory approval until at least 2021, if at all. Each drug rescue NCE will require substantial non-clinical development, all phases of clinical development, 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 non-clinical studies or clinical trials. This process can take many years and may also include post-marketing studies and surveillance, which will require the expenditure of substantial resources beyond the proceeds we have raised to date. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the FDA regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our non-clinical studies and clinical trials, we cannot assure you that AV-101, any drug rescue NCE, or any other product candidate will be successfully developed or commercialized.
We are not permitted to market our product candidates in the United States until we receive approval of a New Drug Application (NDA) from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In late 2015, in collaboration with the NIMH under our CRADA, we began a Phase 2a clinical trial involving AV-101, to study its safety, tolerability and efficacy in patients with MDD. If our Phase 2a clinical trial of AV-101 is successful, we expect the FDA to require us to complete at least one pivotal Phase 2B clinical trial and at least one pivotal Phase 3 clinical trial in order to submit an NDA for AV-101 as an adjunctive treatment for MDD. However, the FDA may require that we conduct more than one Phase 2B clinical study and more than one Phase 3 pivotal trial of AV-101 before we can submit an NDA. Also, we anticipate that the FDA will require that we conduct additional toxicity studies and additional non-clinical studies before submitting an NDA for AV-101.
Obtaining FDA approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of AV-101 or any of our product candidates for many reasons, including, among others:
| ● | if 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 (REMS) as a condition of approval or post-approval; |
| ● | the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or |
| ● | the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations. |
Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully commercialize AV-101 or any other product candidate we may develop, including drug rescue NCEs. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.
We intend to seek a Fast Track designation from the FDA for AV-101 for treatment of MDD. Even if the FDA approves Fast Track designation for AV-101 for treatment of MDD, it may not actually lead to a faster development or regulatory review or approval process.
The Fast Track designation is a program offered by the FDA pursuant to certain mandates under the FDA Modernization Act of 1997, designed to facilitate drug development and to expedite the review of new drugs that are intended to treat serious or life threatening conditions. Compounds selected must demonstrate the potential to address unmet medical needs. The Fast Track designation allows for close and frequent interaction with the FDA. A designated Fast Track drug may also be considered for priority review with a shortened review time, rolling submission, and accelerated approval if applicable. The designation does not, however, guarantee approval or expedited approval of any application for the product.
We intend to seek FDA Fast Track designation for AV-101 for adjunctive treatment of MDD, and we may do so for other product candidates as well. 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 or our collaborators may encounter difficulties in enrolling patients in AV-101 clinical trials, including our NIH-funded Phase 2a clinical study of AV-101 in MDD, thereby delaying or preventing clinical development. Further, if AV-101 is approved for adjunctive 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 and 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.
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 clinical trials, it may adversely effect our development of AV-101 for MDD and other CNS indications.
AV-101 is currently being tested in an NIH-investigator sponsored Phase 2a clinical trial for the treatment of MDD and may be subjected to testing in the future for other CNS indications in additional investigator sponsored clinical trials. If serious adverse events or other undesirable side effects, or unexpected characteristics of AV-101 are observed in investigator sponsored clinical trials of AV-101 or our clinical trials, it may adversely affect or delay our clinical development of AV-101, and the occurrence of these events would have a material adverse effect on our business.
Positive results from early preclinical studies and clinical trials of AV-101 or other product candidates are not necessarily predictive of the results of later preclinical studies and clinical trials of such product candidates. If we cannot replicate the positive results from our earlier preclinical studies and clinical trials of AV-101 or other product candidates in our later preclinical studies and clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize our product candidates.
Positive results from preclinical 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 preclinical studies and clinical trials. Similarly, even if we are able to complete our planned preclinical studies or clinical trials of our product candidates according to our current development timeline, the positive results from our preclinical studies and clinical trials of our product candidates may not be replicated in subsequent preclinical 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, preclinical findings made while clinical trials were underway or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA approval. We have not yet completed a Phase 2a clinical trial for AV-101, and if we fail to produce positive results in our NIH-sponsored Phase 2a 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, could 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.
Under our CRADA, we and the NIH have commenced an NIH-funded Phase 2a clinical trial of AV-101 as a treatment for MDD. We will need to complete at least two additional large 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-funded Phase 2a study of AV-101 or any of our future-planned clinical trials will 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:
| ● | 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; |
| ● | negative results from our ongoing pre-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 (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 pre-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 (DSMB), overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:
| ● | failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols; |
| ● | inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold; |
| ● | unforeseen safety issues, including any that could be identified in our ongoing non-clinical carcinogenicity studies, adverse side effects or lack of effectiveness; |
| ● | changes in government regulations or administrative actions; |
| ● | problems with clinical supply materials; and |
| ● | lack of adequate funding to continue clinical trials. |
Changes in regulatory requirements, FDA guidance or unanticipated events during our preclinical studies and clinical trials of our product candidates may occur, which may result in changes to preclinical studies and clinical trial protocols or additional preclinical 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 preclinical studies and clinical trials may force us to amend preclinical studies and clinical trial protocols or the FDA may impose additional preclinical 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 pre-clinical studies may adversely impact the cost, timing, or successful completion of those pre-clinical studies. If we experience delays completing, or if we terminate, any of our pre-clinical studies or clinical trials, or if we are required to conduct additional pre-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 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:
| ● | 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 NIMH are required to comply with regulations and guidelines, including current cGCPs for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
Although we design our clinical trials for our product candidates, we plan to have CROs, and in the case of our initial AV-101 Phase 2a study in MDD, the NIH, conduct the AV-101 Phase 2 and Phase 3 clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs or the 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 NIH or CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of AV-101 and other product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs or the 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 that 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 AV-101 or any other product candidates for use in the conduct of our nonclinical 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 are individually contracted under a quality and supply agreement. If we engage new contract manufacturers, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners, to manufacture commercial quantities of AV-101 and other product candidates, if approved. Our current scale of manufacturing for AV-101 is adequate to support our currently planned needs for additional pre-clinical studies and clinical trial supplies.
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, nor do we intend to create such capabilities. Therefore, in order to market our product candidates globally, if approved by the FDA or any other regulatory body, we must make contractual arrangements with third parties to perform services related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates. If we are unable to establish adequate contractual arrangements for such sales, marketing and distribution capabilities, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.
Even if we receive marketing approval for our product candidates, our product candidates may not achieve broad market acceptance, which would limit the revenue that we generate from their sales.
The commercial success of our product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients and healthcare payors. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:
| ● | the efficacy of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other available therapies; |
| ● | limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities; |
| ● | the clinical indications for which our product candidates are approved; |
| ● | availability of alternative treatments already approved or expected to be commercially launched in the near future; |
| ● | the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future alternative treatments; |
| ● | the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies; |
| ● | the strength of marketing and distribution support and timing of market introduction of competitive products; |
| ● | publicity concerning our products or competing products and treatments; |
| ● | pricing and cost effectiveness; |
| ● | the effectiveness of our sales and marketing strategies; |
| ● | our ability to increase awareness of our product candidates through marketing efforts; |
| ● | our ability to obtain sufficient third-party coverage or reimbursement; or |
| ● | the willingness of patients to pay out-of-pocket in the absence of third-party coverage. |
If our product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from our product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant resources and may never be successful.
Our product candidates may cause undesirable 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 nonclinical studies and clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.
Further, clinical trials by their nature utilize a sample of 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 “black box” warning or a contraindication; |
| ● | we may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change the labeling of the product candidates; |
| ● | we may be subject to regulatory investigations and government enforcement actions; |
| ● | we may decide to remove such product candidates from the marketplace; |
| ● | we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and |
| ● | our reputation may suffer. |
We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates and 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:
| ● | issue warning letters or untitled letters; |
| ● | seek an injunction or impose civil or criminal penalties or monetary fines; |
| ● | suspend or withdraw marketing approval; |
| ● | suspend any ongoing clinical trials; |
| ● | refuse to approve pending applications or supplements to applications submitted by us; |
| ● | suspend or impose restrictions on operations, including costly new manufacturing requirements; or |
| ● | seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall. |
Competing therapies could emerge adversely affecting our opportunity to generate revenue from the sale of our product candidates.
The pharmaceuticals industry is highly competitive. There are many public and private pharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of 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, management is unaware of any FDA-approved adjunctive therapy for treatment-resistant MDD with the same mechanism of action and safety profile as AV-101. However, new antidepressant products with other mechanisms of action or products approved for other indications, including the anesthetic ketamine, are being or may be used off-label for treatment of MDD, as well as other CNS indications for which AV-101 may have therapeutic potential. Additionally, other non-pharmaceutical treatment options, such psychotherapy and electroconvulsive therapy (ECT) are sometimes used before or instead of standard antidepressants to treat patients with MDD.
In the field of new generation antidepressants focused on modulation of the NMDA receptor at the glycine binding co-agonist site, we believe our principal competitor is Allergan, which recently acquired from and is now developing both the intravenously-administered peptide, rapastinel (formerly GLYX-13), and NRX-1074, which may be or may become orally-available, for treatment-resistant MDD.
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery and development of product candidates, obtaining FDA and other regulatory approvals of treatments and the commercialization of those treatments. We believe that a range of pharmaceutical and biotechnology companies have programs to develop small molecule drug candidates for the treatment of depression, including MDD, epilepsy, neuropathic pain, Parkinson’s disease and other neurological conditions and diseases, including, but not limited to, Abbott Laboratories, Acadia, Allergan, Alkermes, Astra Zeneca, Eli Lilly, GlaxoSmithKline, IntraCellular, Johnson & Johnson, Lundbeck, Merck, Novartis, Ono, Otsuka, Pfizer, Roche, Sumitomo Dainippon, Teva 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 may seek to establish collaborations, and, if we are not able to establish them on commercially reasonable terms, we may have to alter our development and commercialization plans.
Our drug development programs and the potential commercialization of our product candidates will require substantial additional cash to fund expenses. For some of our product candidates, we may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.
We face significant competition in seeking appropriate collaborators. Whether we reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential 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 collaboration that we enter into may not be successful. The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Collaborators generally have significant discretion in determining the efforts and resources that they will apply to these collaborations. Disagreements between parties to a collaboration arrangement regarding clinical development and commercialization matters can lead to delays in the development process or commercializing the applicable product candidate and, in some cases, termination of the collaboration arrangement. These disagreements can be difficult to resolve if neither of the parties has final decision-making authority. Collaborations with pharmaceutical or biotechnology companies and other third parties often are terminated or allowed to expire by the other party. Any such termination or expiration would adversely affect us financially and could harm our business reputation.
We may not be successful in our efforts to identify or discover additional product candidates or we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
The success of our business depends primarily upon our ability to identify, develop and commercialize product candidates with commercial and therapeutic potential. Although AV-101 is in Phase 2 clinical development for treatment of depression, we may fail to pursue additional CNS-related Phase 2 development opportunities for AV-101, or identify additional product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying new product candidates or our product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.
Because we have limited financial and management resources, we focus on a limited number of research programs and product candidates and are currently focused primarily on development of AV-101, with additional limited focus on NCE drug rescue and RM. As a result, we may forego or delay pursuit of opportunities with other product candidates or for other potential CNS-related indications for AV-101 that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research 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:
| ● | The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid. |
| ● | The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government. |
| ● | The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information. |
| ● | The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services. |
| ● | The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests. |
| ● | Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance. |
| ● | Guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing. |
Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations, including anticipated activities to be conducted by our sales team, were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business is found not to be in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.
The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as AV-101, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive marketing approval for AV-101 as an augmentation therapy 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 FDA 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.
Our future growth may depend, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.
Our future profitability may depend, in part, on our ability to commercialize our product candidates in foreign markets for which we may rely on collaboration with third parties. If we commercialize our product candidates in foreign markets, we would be subject to additional risks and uncertainties, including:
| ● | our customers’ ability to obtain reimbursement for our product candidates in foreign markets; |
| ● | our inability to directly control commercial activities because we are relying on third parties; |
| ● | the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements; |
| ● | different medical practices and customs in foreign countries affecting acceptance in the marketplace; |
| ● | import or export licensing requirements; |
| ● | longer accounts receivable collection times; |
| ● | longer lead times for shipping; |
| ● | language barriers for technical training; |
| ● | reduced protection of intellectual property rights in some foreign countries; |
| ● | the existence of additional potentially relevant third party intellectual property rights; |
| ● | foreign currency exchange rate fluctuations; and |
| ● | the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute. |
Foreign sales of our product candidates could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions and changes in tariffs.
We are a development stage biopharmaceutical company with no current revenues or approved products, and limited experience developing new drug, biological and/or regenerative medicine candidates, including conducting clinical trials and other areas required for the successful development and commercialization of therapeutic products, which makes it difficult to assess our future viability.
We are a development stage biopharmaceutical company. Although our lead drug candidate is in Phase 2 development, we currently have no approved products and currently generate no revenues, and we have not yet fully demonstrated an ability to overcome many of the fundamental risks and uncertainties frequently encountered by development stage companies in new and rapidly evolving fields of technology, particularly biotechnology. To execute our business plan successfully, we will need to accomplish the following fundamental objectives, either on our own or with strategic collaborators:
| ● | produce product candidates; |
| ● | develop and obtain required regulatory approvals for commercialization of products we produce; |
| ● | maintain, leverage and expand our intellectual property portfolio; |
| ● | establish and maintain sales, distribution and marketing capabilities, and/or enter into strategic partnering arrangements to access such capabilities; |
| ● | gain market acceptance for our products; and |
| ● | obtain adequate capital resources and manage our spending as costs and expenses increase due to research, production, development, regulatory approval and commercialization of product candidates. |
Our future success is highly dependent upon our ability to successfully develop and commercialize AV-101 and discover, as well as produce, develop and commercialize proprietary drug rescue NCEs using our stem cell technology, and we cannot provide any assurance that we will successfully develop and commercialize AV-101 or drug rescue NCEs, or that, if produced, AV-101 or any drug rescue NCE will be successfully commercialized.
Research programs designed to identify and produce drug rescue NCEs require substantial technical, financial and human resources, whether or not any NCEs are ultimately identified and produced. In particular, our drug rescue programs may initially show promise in identifying potential NCEs, yet fail to yield a lead NCE suitable for preclinical, clinical development or commercialization for many reasons, including the following:
| ● | our drug rescue research 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 pharmaceutical sales, marketing or distribution experience. We may seek to collaborate with others to develop and commercialize AV-101, drug rescue NCEs and/or other product candidates if and when they are developed. If we enter into arrangements with third parties to perform sales, marketing and distribution services for our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell, market and distribute AV-101, any drug rescue NCEs or other product candidates or may be unable to do so on terms that are favorable to us. We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our products effectively. If we do not establish sales, marketing and distribution capabilities successfully, in collaboration with third parties, we will not be successful in commercializing our product candidates.
We have limited operating history with respect to drug development, including our anticipated focus on the identification and assessment of potential drug rescue NCEs and no operating history with respect to the production of drug rescue NCEs, and we may never be able to produce a drug rescue NCE.
If we are unable to develop and commercialize AV-101 or produce suitable drug rescue NCEs, we may not be able to generate sufficient revenues to execute our business plan, which likely would result in significant harm to our financial position and results of operations, which could adversely impact our stock price.
There are a number of factors, in addition to the utility of CardioSafe 3D, that may impact our ability to identify and produce, develop or out-license and commercialize drug rescue NCEs, independently or with strategic partners, including:
| ● | our ability to identify potential drug rescue candidates in the public domain, obtain sufficient quantities of them, and assess them using our bioassay systems; |
| ● | if we seek to rescue drug rescue candidates that are not available to us in the public domain, the extent to which third parties may be willing to out-license or sell certain drug rescue candidates to us on commercially reasonable terms; |
| ● | our medicinal chemistry collaborator’s ability to design and produce proprietary drug rescue NCEs based on the novel biology and structure-function insight we provide using CardioSafe 3D; and |
| ● | financial resources available to us to develop and commercialize lead drug rescue NCEs internally, or, if we out-license them to strategic partners, the resources such partners choose to dedicate to development and commercialization of any drug rescue NCEs they license from us. |
Even if we do produce proprietary drug rescue NCEs, we can give no assurance that we will be able to develop and commercialize them as a marketable drug, on our own or in collaboration with others. Before we generate any revenues from AV-101 and/or additional drug rescue NCEs we or our potential collaborators must complete preclinical and clinical developments, submit clinical and manufacturing data to the FDA, qualify a third party contract manufacturer, receive regulatory approval in one or more jurisdictions, satisfy the FDA that our contract manufacturer is capable of manufacturing the product in compliance with cGMP, build a commercial organization, make substantial investments and undertake significant marketing efforts ourselves or in partnership with others. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from the FDA or comparable foreign regulatory authorities, and we may never receive such regulatory approval for any of our product candidates.
If CardioSafe 3D fails to predict accurately and efficiently the cardiac effects, both toxic and nontoxic, of drug rescue candidates and drug rescue NCEs, then our drug rescue programs will be adversely affected.
Our success is partly dependent on our ability to use CardioSafe 3D to identify and predict, accurately and efficiently, the potential toxic and nontoxic cardiac effects of drug rescue candidates and drug rescue NCEs. If CardioSafe 3D is not capable of providing physiologically relevant and clinically predictive information regarding human cardiac biology, our drug rescue business will be adversely affected.
CardioSafe 3D may not be meaningfully more predictive of the behavior of human cells than existing methods.
The success of our drug rescue programs is highly dependent upon CardioSafe 3D being more accurate, efficient and clinically predictive than long-established surrogate safety models, including animal cells and live animals, and immortalized, primary and transformed cells, currently used by pharmaceutical companies and others. We cannot give assurance that CardioSafe 3D will be more efficient or accurate at predicting the heart safety of new drug candidates than the testing models currently used. If CardioSafe 3D fails to provide a meaningful difference compared to existing or new models in predicting the behavior of human heart, respectively, their utility for drug rescue will be limited and our drug rescue business will be adversely affected.
We may invest in producing drug rescue NCEs for which there proves to be no demand.
To generate revenue from our drug rescue activities, we must produce proprietary drug rescue NCEs for which there proves to be demand within the healthcare marketplace, and, if we intend to out-license a particular drug rescue NCE for development and commercialization prior to market approval, then also among pharmaceutical companies and other potential collaborators. However, we may produce drug rescue NCEs for which there proves to be no or limited demand in the healthcare market and/or among pharmaceutical companies and others. If we misinterpret market conditions, underestimate development costs and/or seek to rescue the wrong drug rescue candidates, we may fail to generate sufficient revenue or other value, on our own or in collaboration with others, to justify our investments, and our drug rescue business may be adversely affected.
We may experience difficulty in producing human cells and our future stem cell technology research and development efforts may not be successful within the timeline anticipated, if at all.
Our human pluripotent stem cell technology is technically complex, and the time and resources necessary to develop various human cell types and customized bioassay systems are difficult to predict in advance. We might decide to devote significant personnel and financial resources to research and development activities designed to expand, in the case of drug rescue, and explore, in the case of drug discovery and regenerative medicine, potential applications of our stem cell technology platform. In particular, we may conduct exploratory nonclinical RM programs involving blood, bone, cartilage, heart, and/or liver cells. Although we and our collaborators have developed proprietary protocols for the production of multiple differentiated cell types, we could encounter difficulties in differentiating and producing sufficient quantities of particular cell types, even when following these proprietary protocols. These difficulties could result in delays in production of certain cells, assessment of certain drug rescue candidates and drug rescue NCEs, design and development of certain human cellular assays and performance of certain exploratory 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 research and development programs may involve the use of human cells derived from our controlled differentiation of human embryonic stem cells (hESCs). Some believe the use of hESCs gives rise to ethical and social issues regarding the appropriate use of these cells. Our research related to differentiation of hESCs may become the subject of adverse commentary or publicity, which could significantly harm the market price of our common stock. Although now substantially less than in years past, certain political and religious groups in the United States and elsewhere voice opposition to hESC technology and practices. We may use hESCs derived from excess fertilized eggs that have been created for clinical use in in vitro fertilization (IVF) procedures and have been donated for research purposes with the informed consent of the donors after a successful IVF procedure because they are no longer desired or suitable for IVF. Certain academic research institutions have adopted policies regarding the ethical use of human embryonic tissue. These policies may have the effect of limiting the scope of future collaborative research opportunities with such institutions, thereby potentially impairing our ability to conduct certain research and development in this field that we believe is necessary to expand the drug rescue capabilities of our technology, which would have a material adverse effect on our business.
The use of embryonic or fetal tissue in research (including the derivation of ES Cells)hESCs) in other countries is regulated by the government, and varies widely from country to country. These regulations may affect our ability to commercialize ES Cell-based bioassay systems.
Government-imposed restrictions with respect to use of ES CellshESCs 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
The foregoing potential ethical concerns do not apply to iPS Cellsour use of induced pluripotent stem cells (iPSCs) because their derivation does not involve the use of embryonic tissues.
We have assumed that the biological capabilities of Induced Pluripotent Stem Cells (“iPS Cells”)iPSCs and ES Cells for in vitro bioassay systemshESCs are likely to be comparable. If it is discovered that this assumption is incorrect, our ability to developexploratory research and development activities focused on potential regenerative medicine applications of our Human Clinical Trials in a Test TubeTMstem cell technology platform could be harmed.
We may use both ES CellshESCs and iPS Cells as the basisiPSCs to produce human cells for the continuingour customized in vitro assays for drug discovery and drug rescue purposes. However, we anticipate that our future exploratory research and development, if any, focused on potential regenerative medicine applications of our Human Clinical Trials in a Test TubeTM platform.stem cell technology platform primarily will involve iPSCs. With respect to iPS Cells,iPSCs, we believe scientists are still unsuresomewhat uncertain about the clinical utility, life span, and safety of such cells, and whether such cells differ in any clinically significant ways from ES Cells.hESCs. If we discover that iPS CellsiPSCs will not be useful for whatever reason for our Human Clinical Trials in a Test TubeTM platform, we could be limited to using only ES Cells. This couldpotential regenerative medicine programs, this would negatively affect our ability to developexplore expansion of our Human Clinical Trialsplatform in a Test TubeTM platform, particularlythat manner, including, in circumstancesparticular, where it would be preferable to produce iPS Cellsuse iPSCs to reflectreproduce rather than approximate the effects of desiredcertain specific genetic variations.
Risks RelatedIf 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 Regulationsuccess of Biological Productsour business.
SomeWe 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 products, includinguse 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 prospective collaborators’employees resulting from the use of hazardous materials, this insurance may not provide adequate coverage against potential regenerative cell therapy products,liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials.
In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions, which could have a material adverse effect on our operations.
To the extent our research and development activities involve using iPSCs, we will be subject to biological product regulations. During their clinicalcomplex 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 biological products are regulated pursuant to Investigational New Drug (“IND”) requirements. Productprograms and objectives, increased cost of operations or otherwise harm the Company.
To the extent that we pursue research and development and approval takes a number of years, involves the expenditure of substantial resources and is uncertain. Many biological products that appear promising ultimately do not reach the market because they cannot meet FDA or other regulatory requirements. In addition, there can be no assurance that the current regulatory framework will not change through regulatory, legislative or judicial actions or that additional regulation will not arise during our product development that may affect approval, delay the submission or review of an application, if required, or require additional expenditures by us.
The activities required before a new biological product may be approved for marketing in the U.S. primarily begin with preclinical testing, which includes laboratory evaluation and animal studies to assess the potential safety and efficacy of the product as formulated. Results of preclinical studies are summarized in an IND application to the FDA. Human clinical trials may begin 30 days following submission of an IND application, unless the FDA requires additional time to review the application or raise questions.
Clinical testing involves the administration of the drug or biological product to healthy human volunteers or to patients under the supervision of a qualified principal investigator, usually a physician, pursuant to an FDA-reviewed protocol. Each clinical study is conducted under the auspices of an institutional review board (“IRB”) at each of the institutions at which the studyinvolving iPSCs, we will be conducted. A clinical plan, or “protocol,” accompanied by the approval of an IRB, must be submittedsubject to the FDA as part of the IND application prior to commencement of each clinical trial. Human clinical trials are conducted typically in three sequential phases. Phase I trials consist of, primarily, testing the product’s safety in a small number of patients or healthy volunteers. In Phase II, the safety and efficacy of the product candidate is evaluated in a specific patient population. Phase III trials typically involve additional testing for safety and clinical efficacy in an expanded patient population at geographically dispersed sites. The FDA may order the temporary or permanent discontinuance of a preclinical or clinical trial at any time for a variety of reasons,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 if safety concerns exist.
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.
A company seeking FDA approval to market a biological product must file a Biologics License Application (“BLA”). In addition to reports of the preclinicalLegal, social and human clinical trials conducted under the IND application, the BLA includes evidence of the product’s safety, purity, potency and efficacy, as well as manufacturing, product identification and other information. Submission of a BLA does not assure FDA approval for marketing. The application review process generally takes one to three years to complete, although reviews of drugs and biological products for life-threatening diseases may be accelerated or expedited. However, the process may take substantially longer.
The FDA requires at least one and often two properly conducted, adequate and well-controlled clinical studies demonstrating efficacy with sufficient levels of statistical assurance. However, additional information may be required. Notwithstanding the submission of such data, the FDA ultimately may decide that the BLA does not satisfy the regulatory criteria for approval and not approve the application. The FDA may impose post-approval obligations, such as additional clinical tests following BLA approval to confirm safety and efficacy (Phase IV human clinical trials). The FDA may, in some circumstances, also impose restrictions onethical concerns surrounding the use of theiPSCs, biological product that may be difficultmaterials and expensive to administer. Further, the FDA requires reporting of certain safety and othergenetic information that becomes known to a manufacturer of an approved biological product. Product approvals may be withdrawn if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market.
Prior to approving an application, the FDA will inspect the prospective manufacturer to ensure that the manufacturer conforms to the FDA’s current good manufacturing practice (“cGMP”) regulations that apply to biologics. To comply with the cGMP regulations, manufacturers must expend time, money and effort in product recordkeeping and quality control to assure that the product meets applicable specifications and other requirements. The FDA periodically inspects manufacturing facilities in the U.S. and abroad in order to assure compliance with applicable cGMP requirements. Our failure to comply with the FDA’s cGMP regulations or other FDA regulatory requirements could have a significant adverse effect on us.
After a product is approved for a given indication in a BLA, subsequent new indications or dosage levels for the same product are reviewed by the FDA via the filing and approval of a BLA supplement. The BLA supplement is more focused than the BLA and deals primarily with safety and effectiveness data related to the new indication or dosage. Applicants are required to comply with certain post-approval obligations, such as compliance with cGMPs.
Risks Related to Our Intellectual Property
If we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends.
Our business depends on several critical technologies that are based in part on patents licensed from third parties. Those third-party license agreements impose obligations on us, such as payment obligations and obligations to diligently pursue development of commercial products under the licensed patents. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation our ability to carry out the development and commercialization of potential products could be significantly and negatively affected. If our license rights were restricted or ultimately lost, our ability to continue our business based on the affected technology would be severely adversely affected.
If we elect to leverage prior discovery and development of drug candidates under license arrangements with third-party pharmaceutical or biotechnology 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 lead Drug Descue Variants we develop in connection with any such third-party licenses.
If, instead of identifying drug candidates for our drug rescue programs based on information available to us in the public domain, we elect to negotiate and obtain licenses from pharmaceutical and biotechnology companies, or other third-parties, to drug candidates that these third-parties have discontinued in development because of unexpected heart or liver safety concerns, there can be no assurances that we will obtain ownership rights over intellectual property we derive from our licenses to the failed drug candidates or rights to Drug Rescue Variants we generate and develop as new, safer and effective alternatives to the original failed drug candidates. If we are unable to obtain ownership rights over intellectual property related to Drug Rescue Variants we generate, or economic participation rights relating to the successful development and commercialization of such Drug Rescue Variants by potential collaborators, our business will be adversely affected.
If we are not able to obtain and enforce patent protection or other commercial protection for AV-101 or our pluripotent stem cell technologies, the value of AV-101 and our stem cell technologies and product candidates will be harmed.
Commercial protection of AV-101 and our proprietary pluripotent stem cell technologies is critically important to our business. Our success will depend in large part on our ability to obtain and enforce our patents and maintain trade secrets, both in the U.S. and in other countries, and, with respect to AV-101, secure 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.
Additional patents may not be granted, and our existing U.S. and foreign patents might not provide us with commercial benefit or might be infringed upon, invalidated or circumvented by others. In addition, the availability of patents in foreign markets, and the nature of any protection against competition that may be afforded by those patents, is often difficult to predict and vary significantly from country to country. With respect to AV-101. the principle U.S. method of use patent and its foreign counterparts have expired. Although recently we have filed three new U.S. patent applications relating to AV-101, we or others with whom we may collaborate for the development and commercialization of AV-101 may choose not to seek, or may be unable to obtain, patent protection in a country that could potentially be an important market for AV-101.
The patent positions of pharmaceutical and biopharmaceutical companies, including ours, are highly uncertain and involve complex legal and technical questions. In particular, legal principles for biotechnology patents in the U.S. and in other countries are evolving, and the extent to which we will be able to obtain patent coverage to protect our technology, or enforce issued patents, is uncertain.
For example, the European Patent Convention prohibits the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes”. The European Patent Office is presently interpreting this prohibition broadly, and is applying it to reject patent claims that pertain to ES Cells. However, this broad interpretation is being challenged through the European Patent Office appeals system. As a result, we do not yet know whether or to what extent we will be able to obtain European patent protection for our proprietary ES Cell-based technology and systems.
Publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by at least several months and sometimes several years. Therefore, the persons or entities that we or our licensors name as inventors in our patents and patent applications may not have been the first to invent the inventions disclosed in the patent applications or patents, or the first to file patent applications for these inventions. As a result, we may not be able to obtain patents for discoveries that we otherwise would consider patentable and that we consider to be extremely significant to our future success.
Where several parties seek U.S. patent protection for the same technology, the U.S. Patent and Trademark Office (“U.S. PTO”) may declare an interference proceeding in order to ascertain the party to which the patent should be issued. Patent interferences are typically complex, highly contested legal proceedings, subject to appeal. They are usually expensive and prolonged, and can cause significant delay in the issuance of patents. Moreover, parties that receive an adverse decision in interference can lose patent rights. Our pending patent applications, or our issued patents, may be drawn into interference proceedings, which may delay or prevent the issuance of patents or result in the loss of issued patent rights. If more groups become engaged in scientific research related to ES Cells, the number of patent filings by such groups and therefore the risk of our patents or applications being drawn into interference proceedings may increase. The interference process can also be used to challenge a patent that has been issued to another party.
Outside of the U.S., certain jurisdictions, such as Europe, Japan, New Zealand and Australia, permit oppositions to be filed against the granting of patents. Because our intent is to commercialize our products internationally, securing both proprietary protection and freedom to operate outside of the U.S. is important to our business.
Patent opposition proceedings are not currently available in the U.S. patent system, but legislation is pending to introduce them. However, issued U.S. patents can be re-examined by the U.S. PTO at the request of a third party. Patents owned or licensed by us may therefore be subject to re-examination. As in any legal proceeding, the outcome of patent re-examinations is uncertain, and a decision adverse to our interests could result in the loss of valuable patent rights.
Successful challenges to our patents through interference, opposition or re-examination proceedings could result in a loss of patent rights in the relevant jurisdiction(s). As more groups become engaged in scientific research and product development areas of hES Cells, the risk of our patents being challenged through patent interferences, oppositions, re-examinations or other means will likely increase. If we institute such proceedings against the patents of other parties and we are unsuccessful, we may be subject to litigation, or otherwise prevented from commercializing potential products in the relevant jurisdiction, or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which could harm our business.
Furthermore, if such challenges to our patent rights are not resolved promptly in our favor, our existing business relationships may be jeopardized and we could be delayed or prevented from entering into new collaborations or from commercializing certain products, which could materially harm our business.
The confidentiality agreements that are designed to protect our trade secrets could be breached, and we might not have adequate remedies for the breach. Additionally, our trade secrets and proprietary know-how might otherwise become known or be independently discovered by others, all of which could materially harm our business.
We may have to engage in costly litigation to enforce or protect our proprietary technology, particularly our pluripotent stem cell technology and human heart and liver cell-based bioassay systems, or to defend challenges to our proprietary technology by our competitors, which may harm our business, results of operations, financial condition and cash flow.
Litigation may be necessary to protect our proprietary rights, especially our rights to our pluripotent stem cell technology and human heart and liver cell-based bioassay systems. Such litigation is expensive and would divert material resources and the time and attention of our management. We cannot be certain that we will have the required resources to pursue litigation or otherwise to protect our proprietary rights. In the event that we are unsuccessful in obtaining and enforcing patents, our business would be negatively impacted and th price of our Common Stock could decline. Further, our patents may be challenged, invalidated or circumvented, and our patent rights may not provide proprietary protection or competitive advantages to us.
Patent litigation may also be necessary to enforce patents issued or licensed to us or to determine the scope and validity of our proprietary rights or the proprietary rights of others. We may not be successful in any patent litigation. An adverse outcome in a patent litigation, patent opposition, patent interference, or any other proceeding in a court or patent office could subject our business to significant liabilities to other parties, require disputed rights to be licensed from other parties or require us to cease using the disputed technology, any of which could severely harm our business and could cause the price of our Common Stock to decline.
We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.
Our business may bring us into conflict with our institutional investors, licensees, licensors, or others with whom we have contractual or other business relationships, or with our competitors or others whose interests differ from ours. If we are unable to resolve such conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. Any such litigation is likely to be expensive and may require a significant amount of management’s time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require us to pay damages, enjoin us from certain activities, or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.
Much of the information and know-how that is critical to our business is not patentable and we may not be able to prevent others from obtaining this information and establishing competitive enterprises.
We rely, in significant part, on trade secrets to protect our proprietary technologies, especially in circumstances that we believe patent protection is not appropriate or available. We attempt to protect our proprietary technologies in part by confidentiality agreements with our advisors, collaborators, consultants, contractors and employees. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known or be independently discovered by competitors, any of which would harm our business significantly.
We may be subject to infringement claims that are costly to defend, and which may limit our ability to use disputed technologies and prevents us from pursuing research and development or commercialization of potential products.
Our commercial success depends significantly on our ability to operate without infringing patents and the proprietary rights of others. Our technologies may infringe on the patents or proprietary rights of others. In addition, we may become aware of discoveries and technology controlled by third parties that are advantageous to our programs. In the event our technologies infringe the rights of others or we require the use of discoveries and technologies controlled by third parties, we may be prevented from pursuing research, development or commercialization of potential products or may be required to obtain licenses to those patents or other proprietary rights or develop or obtain alternative technologies. We have obtained licenses from several universities and companies for technologies that we anticipate incorporating into our Human Clinical Trials in a Test TubeTM platform. We may not be able to obtain a license to patented technology on commercially favorable terms, or at all. If we do not obtain a necessary license, we may need to redesign our technologies or obtain rights to alternate technologies, the research and adoption of which could cause delays in product development. In cases where we are unable to license necessary technologies, we could be prevented from developing certain potential products. Our failure to obtain alternative technologies or a license to any technology that we may require to research, develop or commercialize our product candidates would significantly and negatively affect our business and the price of our Common Stock could decline.
Risks Related to Development, Clinical Testing and Regulatory Approval of Drug Rescue Variants and other Drug Candidates, Biologic Candidates and Regenerative Cell Therapy Product Candidates
We have limited experience as a corporation conducting clinical trials, or in other areas required for the successful commercialization and marketing of Drug Rescue Variants and other drug candidates, biologic candidates or regenerative cell therapy product candidates.
We will need to receive regulatory approval for any product candidate before it may be marketed and distributed. Such approval will require, among other things, completing carefully controlled and well-designed clinical trials demonstrating the safety and efficacy of each product candidate. This process is lengthy, expensive and uncertain. As a company, we have limited experience in conducting clinical trials. Such trials will require additional financial and management resources, collaborators with the requisite clinical experience or reliance on third party clinical investigators, contract research organizations and consultants. Relying on third parties may force us to encounter delays that are outside of our control, which could materially harm our business.
We also do not currently have marketing and distribution capabilities for product candidates. Developing an internal sales and distribution capability would be an expensive and time-consuming process. To market and distribute any Drug Rescue Variant and other drug candidate, biologic candidate or regenerative cell therapy product candidate we develop, we plan to enter into strategic a agreement with a third-party collaborator that would be responsible for marketing and distribution. However, these third-party collaborators may not be capable of successfully selling any of our product candidates.
Because we and our collaborators must complete lengthy and complex development and regulatory approval processes required to market drug products in the U.S. and other countries, we cannot predict whether or when we or our collaborators will be permitted to commercialize Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates to which we have commercial rights.
Federal, state and local governments in the U.S. and governments in other countries have significant regulations in place that govern many of our activities and may prevent us from creating commercially viable products derived from our drug rescue, drug development and regenerative cell therapy programs.
The regulatory process, particularly for drug and biologic candidates, is uncertain, can take many years and requires the expenditure of substantial resources. Any Drug Rescue Variant or other drug candidate, biologic candidate or regenerative cell therapy product candidate that we or our collaborators develop must receive all relevant regulatory agency approvals before it may be marketed in the U.S. or other countries. Biological drugs and non-biological drugs are rigorously regulated. In particular, human pharmaceutical therapeutic product candidates are subject to rigorous preclinical and clinical testing and other requirements by the FDA in the U.S. and similar health authorities in other countries in order to demonstrate safety and efficacy. Because any Drug Rescue Variant or other drug candidate, biologic candidate or regenerative cell therapy product candidate we develop, or collaborate with others to develop, are expected to involve the application of new technologies or are based upon new therapeutic approaches, they may be subject to substantial additional review by various government regulatory authorities, and, as a result, the process of obtaining regulatory approvals for them may proceed more slowly than for drug or biologic candidates based upon more conventional technologies. We may never obtain regulatory approval to market a Drug Rescue Variant or other drug candidate, biologic candidate or regenerative cell therapy product candidate.
Data obtained from preclinical and clinical activities is susceptible to varying interpretations that could delay, limit or prevent regulatory agency approvals. In addition, delays or rejections may be encountered as a result of changes in regulatory agency policy during the period of product development and/or the period of review of any application for regulatory agency approval for a drug or biologic candidate. Delays in obtaining regulatory agency approvals could significantly harm the marketing of any product that we or our collaborators develop, impose costly procedures upon our activities or the activities of our collaborators, diminish any competitive advantages that we or our collaborators may attain, or adversely affect our ability to receive royalties and generate revenues and profits.
If we obtain regulatory agency approval for a new drug, biologic or regenerative cell therapy product, this approval may entail limitations on the indicated uses for which it can be marketed that could limit the potential commercial use of the product. Additionally, approved products and their manufacturers are subject to continual review, and discovery of previously unknown problems with a product or its manufacturer may result in restrictions on the product or manufacturer, including withdrawal of the product from the market. The sale by us or our collaborators of any commercially viable product will be subject to government regulation from several standpoints, including the processes of manufacturing, advertising and promoting, selling and marketing, labeling and distribution. Failure to comply with regulatory requirements can result in severe civil and criminal penalties, including but not limited to product recall or seizure, injunction against product manufacture, distribution, sales and marketing and criminal prosecution. The imposition of any of these penalties could significantly impair our business, financial condition and results of operations.
Entry into clinical trials with one or more drug candidates, biologic candidates or regenerative cell therapy product candidates may not result in any commercially viable products.
We may never generate revenues from product sales because of a variety of risks inherent in our business, including the following risks:
clinical trials may not demonstrate the safety and efficacy of our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates;;
completion of clinical trials may be delayed, or costs of clinical trials may exceed anticipated amounts;
we may not be able to obtain regulatory approval of our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates; or may experience delays in obtaining such approval;
we may not be able to manufacture our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates economically on a commercial scale;
we and any licensees of ours may not be able to successfully market our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates;
physicians may not prescribe our products, or patients or third party payors may not accept our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates;
others may have proprietary rights which prevent us from marketing our Drug Rescue Variants or other drug candidates, biologic candidates or regenerative cell therapy product candidates; and
competitors may sell similar, superior or lower-cost products.
To be successful, our Drug Rescue Variants, drug candidates, biologic candidates and regenerative cell therapy product candidates must be accepted by the healthcare community, which can be very slow to adopt or unreceptive to new technologies and products.
Our Drug Rescue Variants, drug candidates, biologic candidates and regenerative cell therapy product candidates, if developed and approved for marketing, may not achieve market acceptance because hospitals, physicians, patients or the medical community in general may decide not to accept and utilize these products. The Drug Rescue Variants, drug candidates, biologic candidates and regenerative cell therapy product candidatesextent that we may attempt to develop may represent substantial departures from established treatment methods and will compete with a number of conventional drugs and therapies manufactured and marketed by major pharmaceutical and biotechnology companies. The degree of market acceptance of any of our product candidates will depend on a number of factors, including:
our establishment and demonstration to the medical community of the clinical efficacy and safety of our Drug Rescue Variants, drug candidates, biologic candidates and regenerative cell therapy product candidates;
our ability to create product candidates that are superior to alternatives currently on the market;
our ability to establish in the medical community the potential advantage of our treatments over alternative treatment methods; and
reimbursement policies of government and third-party payors.
If the healthcare community does not accept our developed Drug Rescue Variants, drug candidates, biologic candidates or regenerative cell therapy product candidates for any of the foregoing reasons, or for any other reason, our business would be materially harmed.
Risks Related to Our Dependence on Third Parties
Our reliance on the activities of our non-employee advisors, consultants, research institutions and scientific contractors, whose activities are not wholly within our control, may lead to delays in development of our product candidates.
We rely upon and have relationships with scientific consultants at academic and other institutions, some of whom conduct research at our request, and other advisors, including former pharmaceutical company executives, contractors and consultants with expertise in drug discovery, drug development, medicinal chemistry, regulatory strategy, corporate development or other matters. These parties are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of our advisors, consultants and contractors and, except as otherwise required by our collaboration and consulting agreements, can expect only limited amounts of their time to be dedicated to our activities.
In addition, we have formed, and anticipate forming additional, sponsored research collaborations with academic and other research institutions throughout the world. We are highly dependent on these sponsored research collaborations for the development of our intellectual property. These research facilities may have commitments to other commercial and non-commercial entities. There can also be no assurances that any intellectual property will be created from our sponsored research collaborations and, even if it is created, that the intellectual property will have any value or application to our business. We have limited control over the operations of these laboratories and can expect only limited amounts of their time to be dedicated to our research goals.
If any third party with whom we have or enter into a relationship is unable or refuses to contribute to projects on which we need their help, our ability to advance our technologies and develop our product candidates could be significantly harmed.
Our stem cell technology-based drug rescue business model involves reliance on strategic collaborations with third parties.
Our stem cell technology-based business model contemplates making arrangements with third parties:
to identify, in the public domain or elsewhere, and access failed drug candidates to rescue and develop;
to license lead Drug Rescue Variants that we develop; and
to perform stem cell research and development and supply contract services, such as medicinal chemistry, that is our key to our future success.
A key component of our strategy is developing a “drug rescue ecosystem” by entering into collaborative arrangements with pharmaceutical and biotechnology companies, academic institutions, contract research and development and regulatory service organizations and others for certain aspects of ourresearch and development programs. There can be no assurance, however, that we will be able to maintain our current collaborations or establish additional collaborations on favorable terms, if at all, or that our current or future collaborative arrangements will be successful.
Should any collaborator fail to develop or commercialize successfully any Drug Rescue Variant, drug candidate or biologic candidate to which it has rights from us, or any of the collaborator’s drug candidate or biologic candidate to which we may have rights, our business may be adversely affected. In addition, while we believe that collaborators will have sufficient economic motivation to continue their funding, there can be no assurance that any of these collaborations will be continued or result in successfully commercialized product candidates. Failure of a collaborator to continue funding any particular program, or our inability to provide our collaborator with required funding, could delay or halt the development or commercialization of any technology or product candidates arising out of such programs. In addition, there can be no assurance that the collaborators will not pursue alternative technologies, change strategy, re-allocate resources, terminate our agreement, develop alternative product candidates either on their own or in collaboration with others, including our competitors.
If a conflict of interest arises between us and one or more of our collaborators, they may act in their own self-interest and not in our interest or in the interest of our shareholders. Some of our collaborators are conducting, and any of our future collaborators may conduct, multiple product candidate development efforts within the disease area that is the subject of collaboration with us.
Given these risks, our current and future collaborative efforts with third parties may not be successful. Failure of these efforts could require us to devote additional internal resources to the activities currently performed, or to be performed, by third parties, to seek alternative third-party collaborators, or to delay product candidate development or commercialization, which could have a material adverse effect on our business, financial conditions or results of operations.
Risks Related to Our Operations
We depend on key scientific and management personnel and collaborators for the implementation of our business plan, the loss of whom would slow our ability to conduct research and develop and impair our ability to compete.
Our future success depends to a significant extent on the skills, experience and efforts of our executive officers and key employees on our scientific staff. Competition for personnel, especially scientific personnel, is intense and we may be unable to retain our current personnel, attract or assimilate other highly qualified management and scientific personnel in the future. The loss of any or all of these individuals would result in a significant loss in the knowledge and experience that we, as an organization, possess and could harm our business and might significantly delay or prevent the achievement of research, development or business objectives. Our management and key employees can terminate their employment with us at any time.
We also rely on numerous consultants, strategic advisors and strategic collaborators, especially our long-term strategic collaboration with Dr. Gordon Keller, who assists us in formulating our stem cell research and development strategies. We face intense competition for qualified individuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. We may not be able to attract and retain these individuals on acceptable terms. Failure to do so could materially harm our business.
Although the current term of our sponsored research collaboration agreement with UHN and our co-founder, Dr. Gordon Keller, does not expire until September 2017, and our intention is to renew and extend the agreement beyond 2017, there can be no assurances that we will be able to renew or extend the agreement beyond 2017 on mutually agreeable terms, if at all. Additionally, there can be no assurances that we will receive any invention notices or secure a license to any intellectual property resulting from such sponsored research.
We will need to hire additional highly specialized, skilled personnel to achieve our business plan. Our inability to hire qualified personnel in a timely manner will harm our business.
Our ability to execute on our business plan will depend on the talents and efforts of highly skilled individuals with specialized training in the field of stem cell research and bioassay development, as well as in vitro drug candidate screening and nonclinical and clinical development. Our future success depends on our ability to identify, hire and retain these highly skilled personnel during our early stages of development. Competition in our industry for qualified employees with the specialized training we require is intense. In addition, our compensation arrangements may not always be successful in attracting the new employees we require. Our ability to execute our drug rescue business model effectively depends on our ability to attract these new employees.
Our research and development activities involve the controlled use of hazardous materials,iPSCs and improper handlingthe manipulation of these materials by our employees or agents could expose us to significant legalhuman tissue and financial penalties.
Ourgenetic information, the information we derive from such iPSC-related research and development activities involvecould be used in a variety of applications, which may have underlying legal, social and ethical concerns, including the controlledgenetic 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 hazardous materials, chemicalsiPSCs and various radioactive compounds. As a consequence, we are subject to numerous environmental and safety laws and regulations, including those governing laboratory procedures exposure to blood-borne pathogens andgenetic testing or the handling of bio-hazardous materials. We may be required to incur significant costs to comply with currentmanufacture or future environmental laws and regulations and may be adversely affected by the cost of compliance with these laws and regulations.
Although we believe that our safety procedures for using, handling, storing and disposing of hazardous materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, state or federal authorities could curtail our use of thesecertain biological materials involved in our iPSC-related research and wedevelopment programs. Such concerns or governmental restrictions could be liable for any civil damages that result, the cost oflimit our future research and development activities, which could be substantial. Further, any failure by us to control the use, disposal, removal or storage, or to adequately restrict the discharge, or assist in the cleanup, of hazardous chemicals or hazardous, infectious or toxic substances could subject us to significant liabilities, including joint and several liability under certain statutes. Any such liability could exceed our resources and could have a material adverse effect on our business, financial condition and results of operations. Additionally,
Our human cellular bioassay systems and human cells we derive from human pluripotent stem cells, although not currently subject to regulation by the FDA or other regulatory agencies as biological products or drugs, could become subject to regulation in the future.
The human cells we produce from hPSCs and our customized bioassay systems using such cells, including CardioSafe 3D, are not currently sold, for research purposes or any other purpose, to biotechnology or pharmaceutical companies, government research institutions, academic and nonprofit research institutions, medical research organizations or stem cell banks, and they are not therapeutic procedures. As a result, they are not subject to regulation as biological products or drugs by the FDA or comparable agencies in other countries. However, if, in the future, we seek to include human cells we derive from hPSCs in therapeutic applications or product candidates, such applications and/or product candidates would be subject to the FDA’s pre- and post-market regulations. For example, if we seek to develop and market human cells we produce for use in performing regenerative medicine applications, such as tissue engineering or organ replacement, we would first need to obtain FDA pre-market clearance or approval. Obtaining such clearance or approval from the FDA is expensive, time-consuming and uncertain, generally requiring many years to obtain, and requiring detailed and comprehensive scientific and clinical data. Notwithstanding the time and expense, these efforts may not result in FDA approval or clearance. Even if we were to obtain regulatory approval or clearance, it may not be for the uses that we believe are important or commercially attractive.
Risks Related to Our Financial Position
We have incurred significant net losses since inception and we will continue to incur substantial operating losses for the foreseeable future. We may never achieve or sustain profitability, which would depress the market price of our common stock, and could cause you to lose all or a part of your investment.
We have incurred significant net losses in each fiscal year since our inception in 1998, including net losses of $47.2 million and $13.9 million during the fiscal years ending March 31, 2016 and 2015, respectively. As of March 31, 2016, we had an accident could damageaccumulated deficit of approximately $131.7 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 manufacturing facilitiesdevelopment programs and operations.
Additional federal, statefrom general and local lawsadministrative costs associated with our operations. We expect to incur increasing levels of operating losses over the next several years and regulations affecting us may be adoptedfor 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 the future. Weconnection with non-clinical studies and clinical trials of our product candidates. In addition, if we obtain marketing approval for our product candidates, we may incur substantialsignificant sales, marketing and outsourced-manufacturing expenses should we elect not to collaborate with one or more third parties for such services and capabilities. As a public company, we incur additional costs associated with operating as a public company. As a result, we expect to complycontinue to incur significant and increasing operating losses for the foreseeable future. Because of the numerous risks and uncertainties associated with these laws and regulations and substantial finesdeveloping pharmaceutical products, we are unable to predict the extent of any future losses or penaltieswhen we will become profitable, if at all. Even if we violate any of these laws or regulations.
We may not be able to obtain or maintain sufficient insurance on commercially reasonable terms or with adequate coverage against potential liabilities in order to protect ourselves against product liability claims.
Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products and testing technologies. We maydo become subject to product liability claims if the use of our potential products is alleged to have injured subjects or patients. This risk exists for product candidates tested in human clinical trials as well as potential products that are sold commercially. In addition, product liability insurance is becoming increasingly expensive. As a result,profitable, we may not be able to sustain or increase our profitability on a quarterly or annual basis.
Our ability to become profitable depends upon our ability to generate revenues. To date, we have generated approximately $16.4 million in revenues, primarily from the receipt of research and development grants from the NIH. We have not yet commercialized any product or generated any revenues from product sales, and we do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue unless and until we obtain marketing approval of, and begin to experience sales of, AV-101, or maintainwe enter into one or more development and commercialization agreements with respect to AV-101 or one or more other product liability insurance in the futurecandidates. Our ability to generate revenue depends on acceptable terms or with adequate coverage against potential liabilities that could have a material adverse effect onnumber of factors, including, but not limited to, our business.
ability to:
| | initiate and successfully complete preclinical and clinical trials that meet their prescribed endpoints; |
| | initiate and successfully complete all safety studies required to obtain U.S. and foreign marketing approval for our product candidates; |
| | commercialize our product candidates, if approved, by developing a sales force or entering into collaborations with third parties; and |
| | achieve market acceptance of our product candidates in the medical community and with third-party payors. |
Unless we enter into a development and commercialization collaboration or partnership agreement, we expect to incur significant sales and marketing costs as we prepare to commercialize AV-101 or other product candidates. Even if we initiate and successfully complete pivotal clinical trials of AV-101 or other product candidates, and AV-101 or other product candidates are approved for commercial sale, and despite expending these costs, AV-101 or other product candidates may not be commercially successful. We may not achieve profitability soon after generating product sales, if ever. If we are unable to generate product revenue, we will not become profitable and may be unable to continue operations without continued funding.
Despite consummation of the May 2016 Public Offering (defined below), we require additional financing to execute our business plan and continue to operate as a going concern.
Our businessconsolidated financial statements for the year ended March 31, 2016 have been prepared assuming we will continue to operate 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 risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by man-made problems such as computer viruses or terrorism.
Our corporate headquarters are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could harm our business. In addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism or war could cause disruptions in our business or the economy as a whole.
We may select and develop product candidates that fail.
We may select for development and expend considerable resources including time and money on product candidates that fail to complete trials, obtain regulatory approval or achieve sufficient sales, if any, to be profitable.
Additional Risks
Our principal institutional stockholders own a significant percentagesale of our stocksecurities 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 exercise significant influence.
Our current principal institutional stockholders, Platinum Long Term Growth Fund, Cato BioVentures and their respective affiliates own, and Autilion AG is anticipatedobtain such funding on favorable terms or at all. If we are unable to own, a significant percentageobtain sufficient financing from the sale of our outstanding capital stock. Accordingly, these stockholderssecurities or from alternative sources, we may be ablerequired to determine the composition of a majorityreduce, defer, or discontinue certain or all of our Board of Directors, retain the voting power to approve certain matters requiring stockholder approval,research and continue to have significant influence over our affairs. This concentration of ownership could have the effect of delayingdevelopment activities or preventing a change in our control. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” for further information about the ownership of our capital stock by our executive officers, directors, and principal shareholders.
When we require future capital, we may not be able to secure additional funding in ordercontinue as a going concern.
Since our inception, most of our resources have been dedicated to expandresearch and development of AV-101 and the drug rescue capabilities of our operationsstem cell technology platform. In particular, we have expended substantial resources advancing AV-101 through preclinical development and developPhase 1 clinical safety studies, and developing CardioSafe 3D for drug rescue applications, and we will continue to expend substantial resources for the foreseeable future developing and commercializing AV-101, and, potentially, developing drug rescue NCEs and RM therapies. These expenditures will include costs associated with general and administrative costs, facilities costs, research and development, acquiring new products.technologies, manufacturing product candidates, conducting preclinical experiments and clinical trials and obtaining regulatory approvals, as well as commercializing any products approved for sale.
WeAt March 31, 2016, our existing cash and cash equivalents were not sufficient to fund our current operations for the next 12 months. As described in Note 16, Subsequent Events, to the accompanying Consolidated Financial Statements for the fiscal year ended March 31, 2016 included elsewhere in this Annual Report, on May 16, 2016, we consummated an underwritten public offering, pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at a public sales price of $4.24 per share and five-year warrants, exercisable at $5.30 per share, to purchase an aggregate of 2,705,883 shares of our common stock at a public sales price of $0.01 per warrant share, including shares and warrants issued pursuant to the exercise of the underwriters’ over-allotment option, resulting in gross proceeds of $10,924,000 (May 2016 Public Offering). Our net proceeds from the May 2016 Public Offering were approximately $9.5 million after deducting underwriters’ commissions and other expenses of the offering. Additionally, in February 2015, we entered into the CRADA with the NIH, under which the NIH is fully funding and conducting the initial Phase 2a clinical efficacy and safety of AV-101 in MDD. However, we have no current source of revenue to sustain our present activities, and we do not expect to seek opportunitiesgenerate revenue until, and unless, we (i) out-license or sell AV-101, a drug rescue NCE, and/or another drug candidate unrelated to raise additional fundsAV-101 to third-parties, (ii) enter into license arrangements involving our stem cell technology, or (iii) obtain approval from public and private stock offerings, issuance of promissory notes or debentures, borrowings under lease lines of credit, corporate partnering arrangements,the FDA or other sources. This additional financingregulatory authorities and successfully commercialize, on our own or through a future collaboration, one or more of our compounds.
As the outcome of our AV-101 and NCE drug rescue activities and future anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates, on our own or in collaboration with others. In addition, other unanticipated costs may not be available onarise. As a timely basis on terms acceptable to us, or at all. Additional financing may be dilutive to stockholders or may require us to grant a lender a security interest in our assets. The amountresult of moneythese and other factors, we will need willto seek additional capital in the near term to meet our future operating requirements, including capital necessary to obtain regulatory approval for, and to commercialize, our product candidates, and may seek additional capital in the event there exists favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. We are considering a range of potential sources of funding, including public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches, and we may complete additional financing arrangements in 2016. Raising funds in the current economic environment may present additional challenges. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital if market conditions are favorable or if we have specific strategic considerations.
Our future capital requirements depend on many factors, including:
• revenues generated, if any; | | the number and characteristics of the product candidates we pursue, including AV-101 and drug rescue NCEs; |
• development expenses incurred; | | the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical and clinical studies; |
• | | the timing of, and the costs involved in, obtaining regulatory approvals for our product candidates; |
| ● | the cost of commercialization activities if any of our product candidates are approved for sale, including marketing, sales and distribution costs; |
| | the cost of manufacturing our product candidates and any products we successfully commercialize; |
| | our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements; |
| | market acceptance of our products; |
| | the effect of competing technological and market developments; |
| | our ability to obtain government funding for our programs; |
| | the costs involved in obtaining and enforcing patents to preserve our intellectual property; |
| | the costs involved in defending against such claims that we infringe third-party patents or violate other intellectual property rights and the outcome of such litigation; |
| | the timing, receipt and amount of potential future licensee fees, milestone payments, and sales of, or royalties on, our future products, if any; and |
| | the extent to which we acquire or invest in businesses, products and technologies, although we currently have no commitments or agreements relating to any of these types of transactions. |
Any additional fundraising efforts will divert 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, in a timely manner, or on terms acceptable to us, if at all, and the commercial successterms of any financing may adversely affect the holdings or the rights of our drug rescuestockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity securities and the conversion or exchange of certain of our outstanding securities will dilute all of our stockholders. The incurrence of debt could result in increased fixed payment obligations and we could be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other researchoperating 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 development efforts; and
• the emergence of competing scientific and technological developments.
If adequate funds are not available, we may be required to relinquish rights to some of our technologies or product candidate or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.
If we are unable to obtain additional funding on a timely basis and on acceptable terms, we may be required to significantly curtail, delay or reduce the scopediscontinue one or more of our drug rescue andresearch or product development programs or the commercialization of any product candidate or be unable to continue or expand our product candidates and technologiesoperations or license to third parties the rights to commercialize products or technologies that we would otherwise seek to commercialize ourselves. We may also have to reduce collaboration efforts, including sponsored research collaborations. Any of these results wouldcapitalize on our business opportunities, as desired, which could materially harmaffect our business, financial condition and results of operations.
The market priceProceeds from the May 2016 Public Offering will not be sufficient to complete the Phase 2b MDD Study, resulting in the need for additional financing.
Although we anticipate that the net proceeds from the May 2016 Public Offering will provide sufficient funding for our operations through the release of topline results of our fully-funded, NIH-sponsored AV-101 Phase 2a clinical study in MDD (Phase 2a MDD Study), anticipated in the second quarter of 2017, as well as the launch and conduct of a substantial portion of our AV-101 Phase 2b clinical study in MDD (Phase 2b MDD Study), the proceeds received will not be sufficient to complete the Phase 2b MDD Study, unless we also receive, prior to the end of the second quarter of 2017, proceeds resulting from the exercise of a substantial portion of the warrants offered in the May 2016 Public Offering and the underwriters exercise their option to purchase additional shares of common stock. Assuming no exercise of the warrants issued in the May 2016 Public Offering and no exercise of the underwriters’ option to purchase additional shares of common stock, we believe an additional $10.0 million to $12.0 million will be required prior to the end of the second quarter of 2017 in order to complete the Phase 2b MDD Study before the second half of 2018. No assurances can be provided that such additional capital will be available to us when necessary, on reasonable terms, or at all. In the event we are unable to raise such additional capital, our operations, including the conduct of the Phase 2b MDD Study, will be negatively and materially affected
Raising additional capital will cause dilution to our existing stockholders, and may restrict our operations or require us to relinquish rights.
We intend to pursue private and public equity offerings, debt financings, collaborations and licensing arrangements in 2016 and beyond. To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, or to the extent, for strategic purposes, we convert or exchange certain of our outstanding securities into common stock, our current stockholders’ ownership interest in our company will be diluted. In addition, the terms of any such securities may include liquidation or other preferences that materially adversely affect rights of our stockholders. Debt financing, if available, would increase our fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic partnerships and licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, our intellectual property, future revenue streams or grant licenses on terms that are not favorable to us.
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 NIH’s National Institute of Mental Health, 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, 2016, we had federal and state net operating loss carryforwards of $67.9 million and $60.1 million, respectively, which begin to expire in fiscal 2017. Under Section 382 of the Internal Revenue Code of 1986, as amended (the Code) changes in our ownership may limit the amount of our net operating loss carryforwards that could be utilized annually to offset our future taxable income, if any. This limitation would generally apply in the event of a cumulative change in ownership of our company of more than 50% within a three-year period. Any such limitation may significantly reduce our ability to utilize our net operating loss carryforwards and tax credit carryforwards before they expire. Any such limitation, whether as the result of future offerings, prior private placements, sales of our common stock has been volatile and may fluctuate significantly in response to many factors, some of which are beyondby our control and may be unrelated to our performance.
We anticipate that the market priceexisting stockholders or additional sales of our common stock by us in the future, could have a material adverse effect on our results of operations in future years. We have not completed a study to assess whether an ownership change for purposes of Section 382 has occurred, or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such study.
General Company-Related Risks
If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully produce, develop and commercialize AV-101, drug rescue NCEs, other potential product candidates and other commercial applications of our stem cell technology.
Our success depends in part on our continued ability to attract, retain and motivate highly qualified management and scientific and technical personnel. We are highly dependent upon our Chief Executive Officer, President and Chief Scientific Officer, Chief Medical Officer and Chief Financial Officer, as well as other employees, consultants and scientific collaborators. As of the date of this Annual Report, we have nine full-time employees, which may make us more reliant on our individual employees than companies with a greater number of employees. The loss of services of any of these individuals could delay or prevent the successful development of AV-101, drug rescue NCEs, other product candidates, and other applications of our stem cell technology, including our production and assessment of potential drug recuse NCEs or disrupt our administrative functions.
Although we have not historically experienced unique difficulties attracting and retaining qualified employees, we could experience such problems in the future. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We will fluctuate significantlyneed to hire additional personnel as we expand our research and development and administrative activities. We may not be able to attract and retain quality personnel on acceptable terms.
In addition, we rely on a diverse range of strategic consultants and advisors, including manufacturing, scientific and clinical development, and regulatory advisors, to assist us in responsedesigning and implementing our research and development and regulatory strategies and plans, including our AV-101 development and drug rescue strategies and plans. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to many factors, someus.
As we seek to advance development of AV-101 for MDD and other CNS-related conditions, as well as drug rescue and stem cell technology-related RM programs, we will need to expand our research and development capabilities and/or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to develop and commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our research and development efforts effectively and hire, train and integrate additional management, administrative and technical personnel. The hiring, training and integration of new employees may be more difficult, costly and/or time-consuming for us because we have fewer resources than a larger organization. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing the company.
If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product candidates.
If we develop AV-101, drug rescue NCEs, other product candidates, or regenerative medicine product candidates, either on our own or in collaboration with others, we will face inherent risks of product liability as a result of the required clinical testing of such product candidates, and will face an even greater risk if we or our collaborators commercialize any such product candidates. For example, we may be sued if AV-101, any drug rescue NCE, other product candidate, or regenerative medicine product candidate we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
| | decreased demand for products that we may develop; |
| | injury to our reputation; |
| | withdrawal of clinical trial participants; |
| | costs to defend the related litigation; |
| | a diversion of management's time and our resources; |
| | substantial monetary awards to trial participants or patients; |
| | product recalls, withdrawals or labeling, marketing or promotional restrictions; |
| | 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 unpredictable, beyondnot covered by our controlinsurance, and unrelatedwe may not have, or be able to obtain, sufficient capital to pay such amounts.
As a public company, we incur significant administrative workload and expenses to comply with U.S. regulations and requirements imposed by The NASDAQ Stock Market concerning corporate governance and public disclosure.
As a public company with common stock listed on The NASDAQ Capital Market, we must comply with various laws, regulations and requirements, including certain provisions of the Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and The NASDAQ Stock Market. Complying with these statutes, regulations and requirements, including our performance,public company reporting requirements, continues to occupy a significant amount of the time of management and involves significant accounting, legal and other expenses. Furthermore, these laws, regulations and requirements require us to observe greater corporate governance practices than we have employed in the past, including, specific factorsbut not limited to maintaining a sufficient number of independent directors, increased frequency of board meetings, and holding annual stockholder meetings. Our efforts to comply with these regulations are likely to result in increased general and administrative expenses and management time and attention directed to compliance activities.
Unfavorable global economic 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 and stock markets. Global financial crises cause extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, such as the announcementrecent global financial crisis, could result in a variety of new products or product enhancements by us or our competitors, developments concerning intellectual property rights and regulatory approvals, quarterly variations in our and our competitors’ results of operations, changes in earnings estimates or recommendations by any securities analysts, developments in our industry, strategic actions by us or our competitors, such as acquisitions or restructurings, new laws or regulations or new interpretations of existing laws or regulations applicablerisks to our business, the public’s reaction toincluding, weakened demand for our press releases, our other public announcementsproduct candidates and our filings with the SEC, changes in accounting standards, policies, guidance, interpretations or principles, our inabilityability to raise additional capital aswhen needed substantial saleson 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 common stock underlying warrantsthe 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 preferred stock, salesthe 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 common stockoperations, financial condition and prospects. If a natural disaster, power outage or other securities byevent occurred that prevented us from using all or a significant portion of our management team,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 general market conditions and other factors, including factors unrelated to our own operating performancebusiness continuity plans we have in place may prove inadequate in the event of a serious disaster or the condition or prospectssimilar event. We may incur substantial expenses as a result of the biotechnology industry.limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business.
Further, the stock market in general, and securitiesOur internal computer systems, or those of micro-cap and small-cap companies in particular, frequently experience extreme price and volume fluctuations. Continued broad market fluctuationsour third-party CROs or other contractors or consultants, may fail or suffer security breaches, which could result in extreme volatilitya material disruption of our product candidates’ development programs.
Despite the implementation of security measures, our internal computer systems and those of our third-party CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for AV-101 or other product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates could be delayed.
We may acquire businesses or products, or form strategic alliances, in the price of our common stock, which could cause a decline in the value of our common stock. You should also be aware that price volatility is likely to be worse if the trading volume of our common stock is low.
Therefuture, and we may not ever be an active market for our common stock.realize the benefits of such acquisitions.
AlthoughWe may acquire additional businesses or products, form strategic alliances or create joint ventures with third parties that we believe will complement or augment our common stock is quoted on the OTC Bulletin Board, the trading of our common stock may be extremely sporadic. For example, several days may pass before any shares are traded. There can be no assurance that an active market for our common stock will develop. Accordingly, investors must bear the economic risk of an investment in our common stock for an indefinite period of time.
Becauseexisting business. If we became a public company by means of a strategic reverse merger,acquire businesses with promising markets or technologies, we may not be able to attractrealize the attentionbenefit of investorsacquiring 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 major brokerage firms.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.
BecauseRisks Related to Our Intellectual Property Rights
If we becameare 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 public companymaterial adverse impact on our business, results of operations, financial condition and prospects.
We strive to protect and enhance the proprietary technologies that we believe are important to our business, including seeking patents intended to cover our products and compositions, their methods of use and any other inventions we consider are important to the development of our business. We also rely on trade secrets to protect aspects of our business that are not amenable to, or that we do not consider appropriate for, patent protection.
Our success will depend significantly on our ability to obtain and maintain patent and other proprietary protection for commercially important technology, inventions and know-how related to our business, to defend and enforce our patents, should they issue, to preserve the confidentiality of our trade secrets and to operate without infringing the valid and enforceable patents and proprietary rights of third parties. We also rely on know-how, continuing technological innovation and in-licensing opportunities to develop, strengthen and maintain the proprietary position of our product candidates. We own patent applications related to AV-101 and we own and have licensed patents and patent applications related to human pluripotent stem cell technology.
We currently have no issued patents covering AV-101. We cannot provide any assurances that any of our numerous pending U.S. and foreign patent applications relating to AV-101 will mature into issued patents and, if they do, that such patents will include claims with a scope sufficient to protect AV-101 or otherwise provide any competitive advantage. Moreover, other parties may have developed technologies that may be related or competitive to our approach, and may have filed or may file patent applications and may have received or may receive patents that may overlap or conflict with our patent applications, either by meansclaiming the same methods or formulations or by claiming subject matter that could dominate our patent position. Such third-party patent positions may limit or even eliminate our ability to obtain patent protection.
The patent positions of a strategic reverse merger transactionbiotechnology 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 May 2011 rather than through a traditional firmly-underwritten initial public offering involving an investment bankingdistrict court. Patents may be subjected to opposition, post-grant review, or brokerage firm, securities analystscomparable proceedings lodged in various foreign, both national and regional, patent offices. These proceedings could result in either loss of the patent or major brokerage firmsdenial 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 coverage ofany protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, because therewhich 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 limited incentiveable to recommend the purchase ofdesign around our common stock.
Because we became a public companypatents, such as a result of a strategic reverse merger with a public shell, unknown liabilitiesusing pre-existing or newly developed technology. Other parties may adversely affect our financial condition.
We became a public company by means of a strategic reverse merger with a public shell. While management conducted extensive due diligence prior to consummating our strategic reverse merger in May 2011, in the event the public shell contained undisclosed liabilities,develop and management was unable to addressobtain patent protection for more effective technologies, designs or otherwise offset such liabilities, such liabilities may materially, and adversely affect our financial condition. As a result of the risks associated with unknown liabilities, potential investors may be unsure or unwilling to invest in our common stock.
methods. We will incur significant costs to ensure compliance with corporate governance, federal securities law and accounting requirements.
Since becoming a public company by means of a strategic reverse merger in May 2011, we are subject to the periodic reporting and other requirements of the federal securities laws, rules and regulations. We have incurred and will incur significant costs to comply with such requirements, including accounting and related auditing costs, and costs to comply with corporate governance and other costs of operating a public company. The filing and internal control reporting requirements imposed by federal securities laws, rules and regulations are rigorous and we may not be able to meet them, resultingprevent 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 possible decline incompetitor’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 priceattention of our common stockmanagement and our inability to obtain future financing. Any failure to comply or adequately comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affectkey personnel from our business results of operationsoperations. We may not prevail in any lawsuits that we initiate and financial condition.
the damages or other remedies awarded if we were to prevail may not be commercially meaningful.
In addition, proceedings to enforce or defend our patents, 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:
| | any of our AV-101 or other pending patent applications, if issued, will include claims having a scope sufficient to protect AV-101 or any other products or product candidates, particularly considering that the compound patent to AV-101 has expired; |
| | any of our pending patent applications will issue as patents at all; |
| | we will be able to successfully commercialize our product candidates, if approved, before our relevant patents expire; |
| | we were the first to make the inventions covered by each of our patents and pending patent applications; |
| | we were the first to file patent applications for these inventions; |
| | others will not develop similar or alternative technologies that do not infringe our patents; |
| | others will not use pre-existing technology to effectively compete against us; |
| | any of our patents, if issued, will be found to ultimately be valid and enforceable; |
| | any patents issued to us will provide a basis for an exclusive market for our commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties; |
| | we will develop additional proprietary technologies or product candidates that are separately patentable; or |
| | that our commercial activities or products will not infringe upon the patents or proprietary rights of others. |
We also rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our product candidates, if approved.
Our compliance withsuccess will depend in part on our ability to operate without infringing the Sarbanes-Oxley Actintellectual property and SEC rules concerning internal controlsproprietary rights of third parties. We cannot assure you that our business, products and methods do not or will not infringe the patents or other intellectual property rights of third parties.
The pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may allege that our product candidates or the use of our technologies infringes patent claims or other intellectual property rights held by them or that we are employing their proprietary technology without authorization. As we continue to develop and, if approved, commercialize our current product candidates and future product candidates, competitors may claim that our technology infringes their intellectual property rights as part of business strategies designed to impede our successful commercialization. There may be time consuming, difficult and costly.
Our management team has limited experience as officersthird-party patents or patent applications with claims to materials, formulations, methods of a publicly-traded company, and priormanufacture or methods for treatment related to May 2011, we did not operate as a publicly-traded company. Itthe use or manufacture of our product candidates. Because patent applications can take many years to issue, third parties may have currently pending patent applications that may later result in issued patents that our product candidates may infringe, or which such third parties claim are infringed by our technologies. The outcome of intellectual property litigation is subject to uncertainties that cannot be time consuming, difficult and costly for usadequately quantified in advance. The coverage of patents is subject to implement and maintain the internal controls and reporting procedures requiredinterpretation by the Sarbanes-Oxley Act.courts, and the interpretation is not always uniform. If we are unablesued for patent infringement, we would need to comply withdemonstrate that our product candidates, products or methods either do not infringe the Sarbanes-Oxley Act’s internal controlspatent claims of the relevant patent or that the patent claims are invalid, and disclosure requirements, we may not be able to do this. Even if we are successful in these proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted in pursuing these proceedings, which could have a material adverse effect on us. In addition, we may not have sufficient resources to bring these actions to a successful conclusion.
Patent and other types of intellectual property litigation can involve complex factual and legal questions, and their outcome is uncertain. Any claim relating to intellectual property infringement that is successfully asserted against us may require us to pay substantial damages, including treble damages and attorney’s fees if we are found to be willfully infringing another party’s patents, for past use of the asserted intellectual property and royalties and other consideration going forward if we are forced to take a license. In addition, if any such claim was successfully asserted against us and we could not obtain such a license, we may be forced to stop or delay developing, manufacturing, selling or otherwise commercializing our product candidates.
Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the independent registeredpatent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court, or redesign our products. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, intellectual property litigation or claims could force us to do one or more of the following:
| | cease developing, selling or otherwise commercializing our product candidates; |
| | pay substantial damages for past use of the asserted intellectual property; |
| | obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and |
| | in the case of trademark claims, redesign, or rename, some or all of our product candidates to avoid infringing the intellectual property rights of third parties, which may not be possible and, even if possible, could be costly and time-consuming. |
Any of these risks coming to fruition could have a material adverse effect on our business, results of operations, financial condition and prospects.
We may be subject to claims challenging the inventorship or ownership of our patents and other intellectual property.
We enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. These agreements generally provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual property rights to us. For example, even if we have a consulting agreement in place with an academic advisor pursuant to which such academic advisor is required to assign any inventions developed in connection with providing services to us, such academic advisor may not have the right to assign such inventions to us, as it may conflict with his or her obligations to assign all such intellectual property to his or her employing institution.
Litigation may be necessary to defend against these and other claims challenging inventorship or ownership. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
The U.S. Patent and Trademark Office (USPTO) 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 accounting firm attestationsannouncements 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 Sarbanes-Oxley Act requirespatent covering our product candidate is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge include alleged failures to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for unenforceability assertions include allegations that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may also raise similar claims before administrative bodies in the U.S. 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 publicly-tradedthat there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our product candidates. Such a loss of patent protection would have a material adverse impact on our business.
We will not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
Filing, prosecuting and defending patents on product candidates in all countries and jurisdictions throughout the world is prohibitively expensive, and our intellectual property rights in some countries outside the United States could be less extensive than those in the United States, assuming that rights are obtained in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. The statutory deadlines for pursuing patent protection in individual foreign jurisdictions are based on the priority date of each of our patent applications. For the patent applications relating to AV-101, as well as for many of the patent families that we own or license, the relevant statutory deadlines have not yet expired. Thus, for each of the patent families that we believe provide coverage for our lead product candidates or technologies, we will need to decide whether and where to pursue protection outside the United States.
Competitors may use our technologies in jurisdictions where we do not pursue and obtain patent protection to develop their own products and further, may export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing. Even if we pursue and obtain issued patents in particular jurisdictions, our patent claims or other intellectual property rights may not be effective or sufficient to prevent third parties from so competing.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to obtain.biotechnology. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Furthermore, proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We are dependent, in part, on licensed intellectual property. If we were to lose our rights to licensed intellectual property, we may not be able to continue developing or commercializing our product candidates, if approved. If we breach any of the agreements under which we license the use, development and commercialization rights to our product candidates or technology from third parties or, in certain cases, we fail to meet certain development or payment deadlines, we could lose license rights that are important to our business.
We are a party to a number of license agreements under which we are granted rights to intellectual property that are or could become important to our business, and we expect that we may need to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that future license agreements will impose on us, various development, regulatory and/or commercial diligence obligations, payment of fees, milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to a bankruptcy, the licensor may have the right to terminate the license, in which event we would not be able to develop or market products, which could be covered by the license. Our business could suffer, for example, if any current or future licenses terminate, if the licensors fail to abide by the terms of the license, if the licensed patents or other rights are found to be invalid or unenforceable, or if we are unable to enter into necessary licenses on acceptable terms. See “Business—Intellectual Property” herein for a description of our license agreements, which includes a description of the termination provisions of these agreements.
As we have done previously, we may need to obtain licenses from third parties to advance our research or allow commercialization of our product candidates, and we cannot provide any assurances that third-party patents do not exist that might be enforced against our current product candidates or future products in the absence of such a license. We may fail to obtain any of these licenses on commercially reasonable terms, if at all. Even if we are able to obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology. If we are unable to do so, we may be unable to develop or commercialize the affected product candidates, which could materially harm our business and the third parties owning such intellectual property rights could seek either an injunction prohibiting our sales, or, with respect to our sales, an obligation on our part to pay royalties and/or other forms of compensation.
Licensing of intellectual property is determinedof critical importance to our business and involves complex legal, business and scientific issues. Disputes may arise between us and our licensors regarding intellectual property subject to a license agreement, including:
● | the scope of rights granted under the license agreement and other interpretation-related issues; |
● | whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement; |
● | our right to sublicense patent and other rights to third parties under collaborative development relationships; |
● | our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our product candidates, and what activities satisfy those diligence obligations; and |
| the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners. |
If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected product candidates.
We have entered into several licenses to support our various stem cell technology-related programs. We may enter into additional license(s) to third-party intellectual property that are necessary or useful to our business. Our current licenses and any future licenses that we may enter into impose various royalty payments, milestone, and other obligations on us. For example, the licensor may retain control over patent prosecution and maintenance under a material weaknesslicense 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 internal control over financial reporting,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 our independent registered accounting firm iswe are unable to provideenter into necessary licenses on acceptable terms our business could suffer.
Some intellectual property which we have licensed may have been discovered through government funded programs and thus may be subject to federal regulations such as “march-in” rights, certain reporting requirements, and a preference for U.S. industry. Compliance with such regulations may limit our exclusive rights, subject us to expenditure of resources with respect to reporting requirements, and limit our ability to contract with non-U.S. manufacturers.
Some of the intellectual property rights we have licensed or license in the future may have been generated through the use of U.S. government funding and may therefore be subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in our current or future product candidates pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). The U.S. government also has the right to take title to these inventions if we fail, or the applicable licensor fails, to disclose the invention to the government and fail to file an unqualified attestation reportapplication to register the intellectual property within specified time limits. In addition, the U.S. government may acquire title to these inventions in any country in which a patent application is not filed within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us, or the applicable licensor, to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured substantially in the U.S. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the U.S. or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our internal controls when required,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 incur additional costs and suffer adverse publicity and other consequencesbe less than we request. If we are unable to obtain patent term extension or restoration or the term of any such determination, investorsextension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our ability to generate revenues could be materially adversely affected.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.
As is the case with other biotechnology companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining and enforcing patents in the biotechnology industry involve both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-ranging patent reform legislation: the Leahy-Smith America Invents Act, referred to as the America Invents Act. The America Invents Act includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. It is not yet clear what, if any, impact the America Invents Act will have on the operation of our business. However, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of any patents that may issue from our patent applications, all of which could have a material adverse effect on our business and financial condition.
In addition, recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. The full impact of these decisions is not yet known. For example, on March 20, 2012 in Mayo Collaborative Services, DBA Mayo Medical Laboratories, et al. v. Prometheus Laboratories, Inc., the Court held that several claims drawn to measuring drug metabolite levels from patient samples and correlating them to drug doses were not patentable subject matter. The decision appears to impact diagnostics patents that merely apply a law of nature via a series of routine steps and it has created uncertainty around the ability to obtain patent protection for certain inventions. Additionally, on June 13, 2013 in Association for Molecular Pathology v. Myriad Genetics, Inc., the Court held that claims to isolated genomic DNA are not patentable, but claims to complementary DNA molecules are patent eligible because they are not a natural product. The effect of the decision on patents for other isolated natural products is uncertain. Additionally, on March 4, 2014, the USPTO issued a memorandum to patent examiners providing guidance for examining claims that recite laws of nature, natural phenomena or natural products under the Myriad and Prometheus decisions. This guidance did not limit the application of Myriad to DNA but, rather, applied the decision to other natural products. Further, in 2015, in Ariosa Diagnostics, Inc. v. Sequenom, Inc., the Court of Appeals for the Federal Circuit held that methods for detecting fetal genetic defects were not patent eligible subject matter.
In addition to increasing uncertainty with regard to our ability to obtain future patents, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on these and other decisions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce any patents that may issue in the future.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
Certain of our current employees have been, and certain of our future employees may have been, previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We also engage advisors and consultants who are concurrently employed at universities or who perform services for other entities.
Although we are not aware of any claims currently pending or threatened against us, we may be subject to claims that we or our employees, advisors or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. We have and may in the future also be subject to claims that an employee, advisor or consultant performed work for us that conflicts with that person’s obligations to a third party, such as an employer, and thus, that the third party has an ownership interest in the intellectual property arising out of work performed for us. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary claims, we may lose confidencevaluable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize our product candidates, which would materially adversely affect our commercial development efforts.
Numerous factors may limit any potential competitive advantage provided by our intellectual property rights.
The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, provide a barrier to entry against our competitors or potential competitors, or permit us to maintain our competitive advantage. Moreover, if a third party has intellectual property rights that cover the practice of our technology, we may not be able to fully exercise or extract value from our intellectual property rights. The following examples are illustrative:
● | others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology but that is not covered by the claims of patents, should such patents issue from our patent applications; |
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● | we might not have been the first to make the inventions covered by a pending patent application that we own; |
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● | we might not have been the first to file patent applications covering an invention; |
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● | others may independently develop similar or alternative technologies without infringing our intellectual property rights; |
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● | pending patent applications that we own or license may not lead to issued patents; |
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● | patents, if issued, that we own or license may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors; |
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● | 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; and |
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● | the patents of others may have an adverse effect on our business. |
Should any of these events occur, they could significantly harm our business and results of operations.
If, instead of identifying drug rescue candidates based on information available to us in the public domain, we seek to in-license drug rescue candidates from biotechnology, medicinal chemistry and pharmaceutical companies, academic, governmental and nonprofit research institutions, including the NIH, or other third-parties, there can be no assurances that we will obtain material ownership or economic participation rights over intellectual property we may derive from such licenses or similar rights to the drug rescue NCEs we may produce and develop. If we are unable to obtain ownership or substantial economic participation rights over intellectual property related to drug rescue NCEs we produce and develop, our business may be adversely affected.
Risks Related to our Securities
The limited public market for the Company’s securities may adversely affect an investor’s ability to liquidate an investment in the Company.
Although the Company’s common stock is currently quoted on The NASDAQ Capital Market, there is limited trading activity. The Company can give no assurance that an active market will develop, or if developed, that it will be sustained. If an investor acquires shares of the Company’s common stock, including shares sold in connection with the Offering, the investor may not be able to liquidate the Company’s shares should there be a need or desire to do so.
Market volatility may affect our stock price and the value of your investment.
The market price for our common stock, similar to other biopharmaceutical companies, is likely to be volatile. The market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including, among others:
● | plans for, progress of or results from non-clinical studies and clinical trials of our product candidates; |
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● | the failure of the FDA to approve our product candidates; |
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● | announcements of new products, technologies, commercial relationships, acquisitions or other events by us or our competitors; |
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● | the success or failure of other CNS therapies; |
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● | regulatory or legal developments in the United States and other countries; |
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● | failure of our product candidates, if approved, to achieve commercial success; |
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● | fluctuations in stock market prices and trading volumes of similar companies; |
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● | general market conditions and overall fluctuations in U.S. equity markets; |
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● | variations in our quarterly operating results; |
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● | changes in our financial guidance or securities analysts’ estimates of our financial performance; |
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● | changes in accounting principles; |
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● | our ability to raise additional capital and the terms on which we can raise it; |
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● | sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders; |
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● | additions or departures of key personnel; |
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● | discussion of us or our stock price by the press and by online investor communities; and |
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● | other risks and uncertainties described in these risk factors. |
Future sales and issuances of our common stock may cause our stock price to decline.
Sales or issuances of a substantial number of shares of our common stock in the public market, or the perception that these sales or issuances are occurring or might occur, could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.
The stock market in general, and biotechnology-based companies like ours in particular, has frequently experienced volatility in the market prices for securities that often has been unrelated to the operating performance of the underlying companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our operating performance. In certain recent situations in which the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against such company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results. Additionally, if the trading volume of our common stock remains low and limited there will be an increased level of volatility and you may not be able to generate a return on your investment.
A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. Future sales of shares by existing stockholders could cause our stock price to decline, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. Historically, there has been a highly limited public market for shares of our common stock. Future sales and issuances of a substantial number of shares of our common stock in the public market, including shares issued upon the conversion of our Series A Preferred, Series B Preferred or Series C Preferred, and the exercise of outstanding options and warrants for common stock which are issuable upon exercise, in the public market, or the perception that these sales and issuances are occurring or might occur, could significantly reduce the market price for our common stock and impair our ability to raise adequate capital through the sale of equity securities.
Our principal institutional stockholders may continue to have substantial control over us and could limit your ability to influence the outcome of key transactions, including changes in control.
Certain of our current institutional stockholders own a substantial portion of our outstanding capital stock, including our common stock, all of our Series A Preferred, a substantial portion of our Series B Preferred, and all of our Series C Preferred, all of which preferred stock is convertible into a substantial number of shares of common stock. Accordingly, institutional stockholders may exert significant influence over us and over the outcome of any corporate actions requiring approval of holders of our common stock, including the election of directors and amendments to our organizational documents, such as increases in our financial informationauthorized 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.
We cannot assure you thatThe trading market for our common stock will be liquid orrelies 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 will become listed on the New York Stock Exchange, a NASDAQ OMX market,could decline if one or other similar exchanges.
We do not yet meet the initial listing standards of the New York Stock Exchange, the NASDAQ Global Market, or other similar exchanges. Untilmore equity research analysts downgrade our common stock is listed on a broader exchange, we anticipate that it will remain quoted on the OTC Bulletin Board, another over-the-counter quotation system, or in the “pink sheets.” In those venues, however, investors may find it difficult to obtain accurate quotations as to the market value ofif analysts issue other unfavorable commentary or cease publishing reports about us or our common stock. In addition, if we failed 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 would also make it more difficult to raise additional capital.business.
There may be additional issuances of shares of preferred stock in the future.
Following approval by our stockholders in October 2011, ourOur Articles of Incorporation now(the Articles) permit us to issue up to 10.0 million shares of preferred stock and ourstock. Our Board of Directors has authorized the issuance of (i) 500,000 shares of Series A Convertible Preferred, Stock, all of which shares are currently issued and outstanding; (ii) 4.0 million shares of Series B 10% Convertible Preferred stock, of which approximately 1.3 million shares are issued and outstanding at March 31, 2013.as of the date of this Annual Report; and (iii) 3.0 million shares of Series C Convertible Preferred Stock, of which approximately 2.3 million shares are issued and outstanding as of the date of this Annual Report. 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.
Our common stock may be considered a “penny stock.”
Since we became a publicly-traded company in May 2011, our common stock has traded on the OTC Bulletin Board at a price of less than $5.00 per share. The Securities and Exchange Commission (“SEC”) has adopted regulations which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. To the extent that the market price of our common stock is less than $5.00 per share and, therefore, may be considered a “penny stock,” brokers and dealers effecting transactions in our common stock must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect your ability to sell shares of our common stock. In addition, as long as our common stock remains listed on the OTC Bulletin Board, investors may find it difficult to obtain accurate quotations of the stock, and may find few buyers to purchase such stock and few market makers to support its price.
We do not intend to pay cash dividends on our common stock and, consequently, our stockholders’ ability to achieve a return on their investment will depend on appreciation in the foreseeable future.price of our common stock.
We have never declared or paid any dividendscash dividend on our shares of common stock and we 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 suchcash dividends in the foreseeable future. Any paymentTherefore, the success of cash dividendsan investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased them.
We incur significant costs to ensure compliance with corporate governance, federal securities law and accounting requirements.
Since becoming a public company by means of a reverse merger in 2011, we have been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), which requires that we file annual, quarterly and current reports with respect to our business and financial condition, contractual restrictions, financing agreement covenants, solvency testsand the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act, and the Public Company Accounting Oversight Board, each of which imposes additional reporting and other obligations on public companies. We have incurred and will continue to incur significant costs to comply with these public company reporting requirements, including accounting and related audit costs, legal costs to comply with corporate governance requirements and other costs of operating as a public company. These legal and financial compliance costs will continue to require us to divert a significant amount of money that we could otherwise use to achieve our research and development and other strategic objectives.
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The filing and internal control reporting requirements imposed by corporate law,federal securities laws, rules and regulations on companies that are not “smaller reporting companies” under federal securities laws are rigorous and, once we are no longer a smaller reporting company, we may not be able to meet them, resulting in a possible decline in the price of our common stock and our inability to obtain future financing. Certain of these requirements may require us to carry out activities we have not done previously and complying with such requirements may divert management’s attention from other business concerns, which could have a material adverse effect on our business, results of operations, anticipatedfinancial condition and cash requirementsflows. Any failure to adequately comply with applicable federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and other factors and will be at the discretion of our Board of Directors. Furthermore, we may incur indebtedness that may severely restrict or prohibit the payment of dividends.financial condition.
WeIn addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may be at risk of securities class action litigation thatevolve over time as new guidance is provided by regulatory and governing bodies. This could result in substantialcontinuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and divertgovernance practices. We will continue to invest resources to comply with evolving laws, regulations and standards, however this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and resources.standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.
In the past, securities class action litigation has been brought against a company following periods
Item 1B. Unresolved Staff Comments
The disclosures in this section are not required since we qualify as a smaller reporting company.
Our corporate headquarters and laboratories are located at 384 Oyster Point Boulevard, No. 8,343 Allerton Avenue, South San Francisco, California 94080-1967,94080, where we occupy approximately 6,90010,900 square feet of office and lab space under a lease expiring on June 30, 2013. In April 2013, we entered into a four-year lease of laboratory and headquarters office space at 343 Allerton Avenue, South San Francisco, California 94080. Our occupancy at that location is anticipated to commence in August 2013.July 31, 2017. We believe that our new facilities at 343 Allerton Avenue, South San Francisco, California will beare suitable and adequate for our current and futureforeseeable needs.
Item 3. Legal Proceedings
From time to time, we may become involved in claims and other legal matters arising in the ordinary course of business. We are not presently involved ina party to any legal proceedings nor doand we knoware not aware of any legal proceedings which areclaims or actions pending or threatened or contemplated.against us.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
OnOur common stock was approved for listing, and began trading on The NASDAQ Capital Market under the symbol “VTGN” on May 11, 2016. From June 21, 2011 through May 10, 2016, our common stock began tradingtraded on the OTC Bulletin BoardMarketplace (OTCQB), under the symbol “VSTA.”“VSTA”. There was no established trading market for our common stock prior to that date. On May 23, 2011 our directors approved a 2-for-1 stock split. The stock split became effective on the OTC Bulletin Board on June 21, 2011.
Shown below is the range of high and low closingsales prices for our common stock for the periods indicated as reported by the OTC Bulletin Board.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.
| | High | | | Low | |
Year Ending March 31, 2013 | | | | | | |
First quarter ending June 30, 2012 | | $ | 2.80 | | | $ | 0.50 | |
Second quarter ending September 30, 2012 | | $ | 1.50 | | | $ | 0.51 | |
Third quarter ending December 31, 2012 | | $ | 0.95 | | | $ | 0.55 | |
Fourth quarter ending March 31, 2013 | | $ | 0.90 | | | $ | 0.60 | |
| | | | | | | | |
Year Ending March 31, 2012 | | | | | | | | |
First quarter ending June 30, 2011 (from June 21, 2011) | | $ | 2.60 | | | $ | 2.45 | |
Second quarter ending September 30, 2011 | | $ | 2.60 | | | $ | 1.80 | |
Third quarter ending December 31, 2011 | | $ | 3.10 | | | $ | 2.57 | |
Fourth quarter ending March 31, 2012 | | $ | 3.15 | | | $ | 2.55 | |
| | High | | | Low | |
Year Ending March 31, 2016 | | | | | | | | |
First quarter ending June 30, 2015 | | | | | | | | |
Second quarter ending September 30, 2015 | | | | | | | | |
Third quarter ending December 31, 2015 | | | | | | | | |
Fourth quarter ending March 31, 2016 | | | | | | | | |
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 | | | | | | | | |
On July 10, 2013June 22, 2016 the closing price of our common stock on the OTC Bulletin BoardThe NASDAQ Capital Market was $0.60$3.85 per share.
As of July 10, 2013,June 22, 2016, we had 21,265,9677,970,705 shares of common stock outstanding and 350approximately 300 stockholders of record. On the same date, one stockholdertwo stockholders held all 500,000 outstanding restricted shares of our Series A Preferred Stock.Stock, which shares are convertible into 750,000 shares of common stock; two stockholders held 1,247,740 outstanding shares of our Series B 10% Convertible Preferred Stock, which shares are convertible into 1,247,740 shares of common stock; and one stockholder held all 2,318,012 outstanding shares of our Series C Preferred stock, which shares are convertible into 2,318,012 shares of common stock.
Dividend Policy
We have notnever paid or declared any cash dividends in the paston our common stock, and we do not anticipate that we will paypaying 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.
Issuer Purchase Our Series B Preferred accrues dividends at a rate of Equity Securities
There were no repurchases of our common stock during the fiscal year ended March 31, 2013
Securities Authorized for Issuance Under Equity Compensation Plans
Equity Grants
As of March 31, 2013, options to purchase a total of 4,912,604 restricted10% per annum, which dividends are payable solely in unregistered shares of our common stock are outstanding at a weighted average exercise price of $1.32 per share, of which 4,227,436 options are vested and exercisable at a weighted average exercise price of $1.35 per share and 687,168 are unvested and not exercisable at a weighted average exercise price of $1.12 per share. These options were issued under our 2008 Plan and our 1999 Plan, each as described below. At March 31, 2013, an additional 257,867 shares remain available for future equity grants under our 2008 Plan.the time the Series B Preferred is converted into common stock.
Plan category | | 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) | |
Equity compensation plans approved by security holders | | | 4,442,133 | | | $ | 1.33 | | | | 257,867 | |
Equity compensation plans not approved by security holders | | | 470,471 | | | | 1.21 | | | | -- | |
Total | | | 4,912,604 | | | $ | 1.32 | | | | 257,867 | |
2008 Stock Incentive Plan
Shareholders of VistaGen California adopted our 2008 Plan on December 19, 2008. We assumed the 2008 Plan in connection with the Merger. The maximum number of shares of our common stock that may be granted pursuant to the 2008 Plan is currently 5,000,000. 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 5,000,000.
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, determining the exercise or purchase price of each award and determining 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 parent or subsidiary of us, the exercise price of any incentive stock option granted must not be less than 110% of the fair market value on the grant date. The maximum term of these 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 parent or subsidiary of us must not exceed five years. The maximum term of an incentive stock option granted to any other participant must not exceed ten years. The Administrator will determine 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 applicationIssuer Purchases 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 2,500,000 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 500,000 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 2,500,000 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.Equity Securities
The terms and conditionsWe did not purchase any of awards shall be determinedour registered equity securities during the period covered 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. The performance criteria established by the Administrator may be based on any one of, or combination of, the following:
total shareholder return;
earnings before interest, taxes and depreciation;
economic value added; and
market share.
this Annual Report.
Subject to any required action by our shareholders, 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 shall have 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.
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, 2013, we have options to purchase an aggregate of 4,442,133 restricted shares of 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 has terminated under its own terms, and as a result, no awards may currently be granted under the 1999 Plan. However, the options and awards that have already been granted pursuant to the 1999 Plan 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 450,000 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 our capitalization. Generally, shares that were forfeited or cancelled from awards under the 1999 Plan also were 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.
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, 2013, we have options outstanding under our 1999 Plan to purchase an aggregate of 470,471 restricted shares of our common stock.
Recent Sales of Unregistered Securities
During the three years preceding the date of this report, weWe have issued the following securities in private placement transactions which were not registered under the Securities Act of 1933, as amended (the “(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:8-K.
2012Sale of Units in Series B Preferred Unit Private Placement of Units
Between January 2013February 17, 2016 and March 2013,May 4, 2016, we entered into self-placed private placement transactions involving securities purchase agreements with accredited investors, pursuant to which we sold 1,415,074Series B Preferred Units inconsisting of an aggregate of (i) 111,142 shares of our Series B Preferred Stock; and (ii) five-year warrants to purchase an aggregate of 111,142 shares of our common stock at a private placementfixed exercise price of $7.00 per share, subject to 25 accredited investorsadjustment only for customary stock dividends, reclassifications, splits and similar transactions (Series B Warrants). We received cash proceeds of $657,537$778,000, which we expect to use for general corporate purposes. The Series B Preferred Units were offered and settled outstanding amounts payable for professional feessold in lieua self-placed private placement transaction exempt from registration under the Securities Act in reliance on Section 4(2) thereof and Rule 506 of cash payment for services inRegulation D thereunder.
Each share of Series B Preferred is convertible, at the amountoption of $50,000. We sold the Units for $0.50 per Unit, with each Unit consisting ofHolder (Voluntary Conversion), into one restricted(1) share of our common stock, subject to adjustment only for customary stock dividends, reclassifications, splits and similar transactions (Fixed Conversion Price). All shares of Series B Preferred are also convertible automatically into common stock (Automatic Conversion) upon the closing or effective date of any of the following transactions or events: (i) a five-year warrantstrategic transaction involving AV-101 with an initial up-front cash payment to purchase one half (1/2)us of one restricted shareat least $10.0 million; (ii) a registered public offering of Common Stock with aggregate gross proceeds to us of at least $10.0 million (Registered Offering); 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 customary beneficial ownership blockers and certain other equity conditions. Prior to Conversion, shares of Series B Preferred will accrue dividends, payable only in unregistered shares of Common Stock, at a rate of 10% per annum (the Accrued Dividend). The Accrued Dividend is payable on the date of Conversion solely in that number of shares of Common Stock equal to the Accrued Dividend. Effective on May 19, 2016, 82,571 shares of the Series B Preferred reported herein automatically converted into an equivalent number of unregistered shares of our common stock atupon the consummation of the May 2016 Public Offering, and, as further described below, all Accrued Dividends were paid in shares of unregistered common stock.
Warrants Exchanged for Common Stock
Between February 17, 2016 and May 4, 2016, we entered into Warrant Exchange Agreements with certain holders of outstanding warrants to purchase an exercise priceaggregate of $1.50 per share.303,373 shares of our common stock pursuant to which the holders agreed to the cancellation of such warrants in exchange for our issuance to them of an aggregate of 227,542 shares of our unregistered common stock. The common stock was issued in private placement transactions exempt from registration under the Securities Act, in reliance on Section 3(a)(9) and/or 4(2) thereof.
Securities Issued for Professional Services
On March 25, 2016, we granted warrants to purchase an aggregate of 230,000 unregistered shares of our common stock to eleven accredited investors as compensation for various legal, business development, regulatory and other professional services. We have used thewill receive all proceeds from the saleexercise of the Units for general corporate purposes. We offered and sold the Unitswarrants granted; however, there can be no assurance that we will receive any proceeds therefrom. The warrants 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.
Common Stock issued for Dividends on Series B Preferred
Effective on May 19, 2016 and June 15, 2016, upon the automatic conversion of 2,403,051 shares and 44,500 shares, respectively, of our Series B Preferred into an equivalent number of shares of our common stock pursuant to the consummation of our May 2016 Public Offering and the exercise of the underwriters’ over-allotment option, we issued an aggregate of 426,386 unregistered shares of our common stock in payment of accrued dividends to the accredited investor holders of our Series B Preferred. The common stock issued in payment of dividends was issued in a private placement transaction exempt from registration under the Securities Act, in reliance on Section 3(a)(9) and/or 4(2) thereof.
Item 6. Selected FinancialFinancial 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
The following discussion containsThis Annual Report on Form 10-K (Annual Report) includes forward-looking statements that are based on the current beliefs of our management, as well as current assumptions made by, and information currently available to, our management.statements. All statements contained in the discussion below,this Annual Report other than statements thatof 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 purely historical,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 uncertainties that could cause our future actual results, performance or achievements to differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those risks and uncertainties discussed in this section, as well as in the section entitled “Risk Factors,” and elsewhere in our other filings with the SEC. Forward-looking statements are based on estimates and assumptions we make in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable in the circumstances. See “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this Annual Report on Form 10-K.
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”)(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” and in our other filings with the Securities and Exchange Commission.this Annual Report. Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board of Directors and stockholders.
Investors are cautioned not to place undue reliance on the forward-looking statements contained herein. Additionally, unless otherwise stated, the forward-looking statements containedMoreover, we operate in this report are made as of the date of this report,a very competitive and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.rapidly changing environment. New factorsrisks emerge from time to time, and ittime. It is not possible for usour management to predict which factors may arise. In addition,all risks, nor can we cannot assess the impact of each factorall factors on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
Business Overview
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 a biotechnology company applying human pluripotent stem cell technology for drug rescue and regenerative cell therapy.
under no duty to update any of these forward-looking statements after the date of this Annual Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
Business Overview
We are a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative product candidates for patients with diseases and disorders involving the central nervous system (CNS). Our lead product candidate, AV-101, is a next generation, orally available prodrug candidate in Phase 2 development, initially for the adjunctive treatment of Major Depressive Disorder (MDD) in patients with an inadequate response to standard antidepressants currently approved by the U.S. Food and Drug rescue involvesAdministration (FDA).
AV-101’s mechanism of action, as an N-methyl D aspartate receptor (NMDAR) antagonist binding selectively at the combinationglycine binding (GlyB) co-agonist site of the NMDAR, is fundamentally differentiated from all antidepressants, as well as all atypical antipsychotics used adjunctively with standard, FDA-approved antidepressants.
Our ongoing Phase 2a clinical study of AV-101 in subjects with treatment-resistant MDD is being conducted and funded by the U.S. National Institute of Mental Health (NIMH) under our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIMH. The first patient in this NIMH-sponsored Phase 2a study was dosed in November 2015. The Principal Investigator of the study is Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders. Previous NIMH studies, including studies conducted by Dr. Zarate, have focused on the effects of low dose intravenous (I.V.) ketamine on treatment-resistant depression. These NIMH studies, as well as clinical research by others, have demonstrated robust antidepressant effects in patients with treatment-resistant MDD within hours of a single low dose of I.V. ketamine and stimulated research and development around a new generation of antidepressants with potential to deliver ketamine-like fast-acting antidepressant benefits without ketamine-like side effects.
We are preparing to launch our Phase 2b clinical study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants. We anticipate commencement of this multi-center, multi-dose, double blind, placebo-controlled Phase 2b efficacy and safety study in the fourth quarter of 2016. Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute and Executive Director, MGH Clinical Trials Network and Institute, will be the Principal Investigator of our Phase 2b study of AV-101 in MDD.
We also believe AV-101 has broad therapeutic utility, with multiple CNS pipeline expansion opportunities, including chronic neuropathic pain, epilepsy, Huntington’s disease and Parkinson’s disease.
In addition to clinical development of AV-101, we are focused on collaborating with third-parties to advance potential commercial applications of our human pluripotent stem cell (hPSC) technology with modern medicinal chemistryplatform, including drug rescue to generatedevelop proprietary small molecule new chemical variants (“entities (Drug Rescue VariantsNCEs”) of promising small moleculefor our internal drug candidates that pharmaceutical or biotechnology companies have discontinued during development due to unexpected safety concerns involving the heart and/or liver. We anticipate that our stem cell technology platform, Human Clinical Trials in a Test Tubetm, will allow us to assess the heartcandidate pipeline, and liver toxicity profile of new drug candidates with greater speed and precision than regenerative medicine (in vitroRM techniques and technologies currently used in the drug development process. Our drug rescue model is designed to leverage both substantial prior third-party investment in discovery and development of once-promising drug candidates which ultimately were discontinued prior to market approval and the predictive toxicology and other drug development capabilities of our Human Clinical Trials in a Test Tubetm platform.
Our Human Clinical Trials in a Test Tubetm platform is based on a combination of proprietary and exclusively licensed stem cell technologies, including technologies developed over the last 20 years by VistaGen California’s co-founder and Canadian scientist, Dr. Gordon Keller, and Dr. Ralph Snodgrass, VistaGen California’s co-founder, and our President and Chief Scientific Officer. Dr. Keller is currently the Director of the University Health Network’s McEwen Centre for Regenerative Medicine in Toronto. Dr. Keller’s research is focused on understanding and controlling stem cell differentiation (development) and production of multiple types of mature, functional, human cells from pluripotent stem cells, including heart cells and liver cells that can be used in our biological assay systems for drug rescue and development. Dr. Snodgrass has over 20 years of experience in both academia and industry in the development and application of stem cell differentiation systems for drug discovery and development.
With mature heart cells produced from stem cells, we have developed CardioSafe 3D ™, a three-dimensional (“3D”) bioassay system. We believe CardioSafe 3D ™ is capable of predicting the in vivo cardiac effects, both toxic and non-toxic, of small molecule drug candidates before they are tested in humans. Our immediate goal is to leverage CardioSafe 3D ™ to generate and monetize a pipeline of small molecule drug candidates through drug rescue collaborations. We intend to expand our drug rescue capabilities by developing LiverSafe 3D ™, a human liver cell-based bioassay system for assessing potential liver toxicity and adverse drug-drug interactions.
In parallel with our drug rescue activities, we plan to advance pilot nonclinical development of regenerative cell therapy programs focused onusing blood, cartilage, heart and/or liver and pancreas cells. Each of these regenerative cell therapy programs is based on the proprietary differentiation and production capabilities of our Human Clinical Trials in a Test Tubetm platform.cells derived from hPSCs.
With grant funding from the U.S. National Institutes of Health (“NIH”), we have successfully completed Phase 1 development of AV-101 during calendar 2012. AV-101 is an orally available small molecule prodrug candidate aimed at the multi-billion dollar neurological disease and disorders market, including neuropathic pain, a serious and chronic condition causing pain after an injury or disease of the peripheral or central nervous system. Neuropathic pain affects approximately 1.8 million people in the U.S. alone. To date, we have been awarded over $8.8 million of grant funding from the NIH for non-clinical and Phase I clinical development of AV-101.
Our immediate plan is to utilize the vast amount of information available in the public domain with respect to potential small molecule drug candidates for inclusion in our drug rescue programs. We may also seek to acquire rights to drug rescue candidates that third-parties, including academic research institutions and biotechnology, medicinal chemistry and pharmaceutical companies have discontinued due to unexpected safety concerns involving the heart and/or liver. In connection with our drug rescue programs, we will collaborate with contract medicinal chemistry and other third parties to generate and assess the therapeutics and commercial potential of each Drug Rescue Variant we generate. We plan to have economic participation rights in each Drug Rescue Variant we are able to generate in connection with our projected drug rescue programs.
The Merger
VistaGen Therapeutics, Inc., a California corporation (“VistaGen California”) is a wholly-owned subsidiary of the Company. VistaGen California was incorporated in California 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. After being unable to generate material revenues based on its original business plan, Excaliber became inactive in 2007. In May 2011, after assessing the prospects associated with its original business plan and the business opportunities associated with a strategic merger with an established, privately-held, biotechnology company seeking the potential advantages of being a publicly-held company, Excaliber’s Board of Directors agreed to pursue a strategic merger with VistaGen California.
On May 11, 2011, pursuantPursuant to a strategic merger transaction with VistaGen California,on May 11, 2011, Excaliber acquired all outstanding shares of VistaGen California in exchange for 6,836,452 restricted341,823 shares of Excaliber’sour common stock (the “Merger”), and Excaliber assumed all of VistaGen California’s pre-Merger obligations to contingently issue restricted shares of common stock in accordance with VistaGen California’s stock option agreements, warrant agreements, and a convertible promissory note. In connection with the (the Merger Excaliber repurchased 5,064,207 shares of Excaliber common stock from two of its stockholders for a nominal amount, resulting in a total of 784,500 shares of Excaliber common stock outstanding at the date of the Merger. The 6,836,452 restricted shares issued to VistaGen California stockholders in connection with the Merger represented approximately 90% of Excaliber’s outstanding shares of common stock after the closing of the Merger. As a result of the Merger, the biotechnology business of VistaGen California became the operating business of Excaliber.). Shortly after the Merger:Merger, Excaliber’s name was changed to “VistaGen Therapeutics, Inc.” (a Nevada corporation).
· | Each of the pre-Merger directors of VistaGen California was appointed as a director of Excaliber; |
· | The pre-Merger directors and officers of Excaliber resigned as officers and directors of Excaliber; |
· | Each of VistaGen California’s pre-Merger officers was appointed an officer of like tenor of Excaliber; |
· | The post-Merger directors of Excaliber (consisting of the pre-Merger directors of VistaGen California) approved a two-for-one (2:1) stock split of Excaliber’s common stock; |
· | The post-Merger directors of Excaliber approved an increase in the number of shares of common stock Excaliber was authorized to issue from 200 million to 400 million shares, (see Note 9, Capital Stock, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K);
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· | Excaliber’s name was changed to “VistaGen Therapeutics, Inc.”; and |
· | VistaGen California's fiscal year-end of March 31 was adopted as Excaliber’s fiscal year-end. |
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. ThisThe accounting treatment for the Merger was identical to that resulting from a reverse acquisition, except that we recorded no goodwill or other intangible assets were recorded.assets. A total of 1,569,00078,450 shares of our common stock, representing the 784,500 shares held by stockholders of Excaliber immediately prior to the Merger and effected for the post-Merger two-for-one (2:1) stock split mentioned above, have been retroactively reflected as outstanding for the period prior to the Merger in the fiscal year ended March 31, 2012 for purposes of determining basic and diluted loss per common share in the Consolidated Statements of Operations and Comprehensive Income of the Company included in Item 8 of this Form 10-K. Additionally, the accompanying Consolidated Balance Sheets of the Company retroactively reflect the authorized capital stock and $0.001 par value of Excaliber’s common stock and the two-for one (2:1) stock split after the Merger.
The financial statements included in this discussion andall periods presented in the Consolidated Financial Statements of the Company included in Item 8 of this Annual Report on Form 10-K represent10-K. Additionally, the activityConsolidated Balance Sheets reflect the $0.001 par value of VistaGen California for the pre-Merger portion of fiscal 2012 and the consolidated activity of VistaGen California and Excaliber from May 11, 2011 (the date of the Merger) through March 31, 2013. The activities and results of operations of Excaliber in the pre-Merger period presented were not material.
Excaliber’s common stock.
Primary Merger-Related Transactions
Immediately preceding and concurrent with the Merger:
● | VistaGen California sold 2,216,106 Units, consisting of one restricted share of VistaGen's common stock and a three-year warrant to purchase one-fourth (1/4) of one restricted share of VistaGen common stock at an exercise price of $2.50 per share, at a price of $1.75 per Unit in a private placement for aggregate gross offering proceeds of $3,878,197, including $2,369,194 in cash (“2011 Private Placement”). The restricted shares and warrants issued in the 2011 Private Placement became restricted shares and warrants of the Company upon consummation of the Merger;
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● | Holders of certain promissory notes issued by VistaGen California from 2006 through 2010 converted their notes totaling $6,174,793, including principal and accrued but unpaid interest, into 3,528,290 Units at $1.75 per Unit. These Units were the same Units issued in connection with the 2011 Private Placement. The restricted shares and warrants issued upon the conversion of such promissory notes became restricted shares and warrants of the Company upon consummation of the Merger; and |
● | All holders of VistaGen California's then-outstanding preferred stock converted all 2,884,655 of their restricted shares of VistaGen California preferred stock into 2,884,655 restricted shares of VistaGen California common stock, all of which shares became restricted shares of the Company upon consummation of the Merger. See Note 8, Convertible Promissory Notes and other Notes Payable and Note 9, Capital Stock, to the Consolidated Financial Statements included in Item 8 of this Form 10-K for a further description of these transactions.
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Financial Operations Overview
Net Loss
We are in the development stage and, since inception, have devoted substantially all of our time and efforts to hPSC research and bioassay development, small molecule drug development, creating, protecting and patenting intellectual property, recruiting personnel and raising working capital. As of March 31, 2013, we had an accumulated deficit of $67.7 million. Our net loss for the years ended March 31, 2013 and 2012 was $12.9 million and $12.2 million, respectively. We expect these conditions to continue for the foreseeable future as we expand our drug rescue activities and the capabilities of our Human Clinical Trials in a Test Tube™ platform.
Summary of Fiscal Year 2013
During the fiscal year ending March 31, 2013, we have continued to expand the capabilities of CardioSafe 3D™ and develop and validate LiverSafe 3D™. Additionally, we have continued to advance our review of prospective drug rescue candidates and successfully completed Phase 1 clinical development of AV-101. We also directed concentrated effort to finalizing and analyzing the AV-101 Phase 1b clinical trial results and preparing final clinical study reports required under the terms of our NIH grant awards. Our executive management has been significantly focused on providing sufficient operating capital to advance our research and development objectives while meeting our continuing operational needs. To that end, in June 2012 and October 2012 we entered into agreements with Platinum Long Term Growth VII, LLC (“Platinum”) pursuant to which we received an aggregate of $3.25 million in cash proceeds from the issuance of senior secured convertible promissory notes and related warrants to purchase 3.25 million restricted shares of our common stock. Subject to certain adjustments, these notes are convertible into restricted shares of our common stock at a conversion price of $0.50 per share and the warrants are exercisable at an exercise price of $0.50 per share. Further, we modified Platinum’s exchange rights with respect to the 500,000 restricted shares of our Series A preferred stock that it holds. Additionally, we entered into strategic debt restructuring agreements with certain long-term service providers and research and development collaborators to modify the payment requirements of our liabilities to them by significantly reducing the monthly cash payment requirements or, in several cases, to entirely restructure the liability so that it is now payable only in restricted shares of our common stock.
In August 2012, we entered into such a strategic debt restructuring agreement with Morrison & Foerster (“M&F”), our former general corporate counsel and continuing intellectual property counsel. Pursuant to the M&F strategic debt restructuring agreement, we converted approximately $1.4 million of our then-existing promissory note debt to M&F into a new unsecured promissory note payable only in restricted shares of our common stock in connection with M&F’s future exercise of a warrant to purchase approximately 1.4 million shares of our common stock at $1.00 per share, provided, however, that M&F has the option to require us to repay the note in cash upon a change of control or event of default, as both are defined in the agreement.
In October 2012, we entered into similar strategic debt restructuring agreements with Cato Research Ltd. (“CRL”), our CRO collaborator for development of AV-101, and University Health Network (“UHN”), our long-term stem cell research and development collaborator in Canada, in which we converted approximately $1.0 million of existing accounts payable debt owed to CRL and approximately $0.55 million of existing accounts payable debt owed to UHN into new notes payable only in restricted shares of our common stock in connection with future warrant exercises by CRL and UHN to purchase approximately 1,000,000 and 550,000 restricted shares of our common stock, respectively, at $1.00 per share. Additionally, we reduced the current monthly unsecured promissory note payment requirements with respect to existing debt of $1.0 million owed to M&F and $0.3 million owed to Cato Holding Company. The Platinum, M&F, CRL and UHN debt restructuring transactions are described in greater detail 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. The accounting for these transactions resulted in10-K represent the recognition inactivity of VistaGen California from May 26, 1998, and the financial statements for fiscal 2013consolidated activity of (i) non-cash losses attributable to certainVistaGen California and Excaliber (now VistaGen Therapeutics, Inc., a Nevada corporation), from May 11, 2011 (the date of the debt modifications (loss on early extinguishmentMerger). The Consolidated Financial Statements also include the accounts of debt); (ii) liabilities related to certainVistaGen 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 the warrants issued and potentially issuable to Platinum and the related non-cash expense attributable to the change in the fair value of the warrant liability during the period; (iii) non-cash interest expense attributable to the discounts recorded with respect to the Platinum, M&F, CRL and UHN promissory notes; and (iv) a deemed dividend with respect to the modification of the exchange rights for the shares of our Series A Preferred stock held by Platinum and the related prospective issuance of a five-year warrant to purchase restricted shares of our common stock upon Platinum's exercise of its Series A Preferred Stock exchange rights. These transactions and agreements, including the conversion of certain promissory notes into shares of restricted common stock, the exercise of warrants to purchase restricted common stock or Platinum’s exercise of its exchange rights with respect to the shares of our Series A Preferred stock it holds, will potentially require the issuance of a significant number of restricted shares of our common stock at various points in the future, which may be substantially dilutive to our existing stockholders.Ontario, Canada (VistaStem Canada).
The following table summarizes the results of our operations for the fiscal years ended March 31, 2013 and 2012 (amounts in $000):
| | Fiscal Year Ended March 31, | |
| | 2013 | | | 2012 | |
| | | | | | |
Revenues: | | | | | | |
Grant revenue | | $ | 200 | | | $ | 1,342 | |
Operating expenses: | | | | | | | | |
Research and development | | | 3,431 | | | | 5,389 | |
General and administrative | | | 3,562 | | | | 4,997 | |
Total operating expenses | | | 6,993 | | | | 10,386 | |
Loss from operations | | | (6,793 | ) | | | (9,044 | ) |
Other expenses, net: | | | | | | | | |
Interest expense, net | | | (921 | ) | | | (1,893 | ) |
Change in warrant and put and note extension option liabilities | | | (1,636 | ) | | | (78 | ) |
Loss on early extinguishment of debt | | | (3,568 | ) | | | (1,193 | ) |
Other income | | | 35 | | | | - | |
Loss before income taxes | | | (12,883 | ) | | | (12,208 | ) |
Income taxes | | | (4 | ) | | | (2 | ) |
Net loss | | $ | (12,887 | ) | | $ | (12,210 | ) |
Deemed dividend on Series A Preferred Stock | | | (10,193 | ) | | | - | |
Net loss attributable to common stockholders | | $ | (23,080 | ) | | $ | (12,210 | ) |
Revenue
Our primary sources of revenue for the fiscal years ended March 31, 2013 and 2012 were government grant awards from the NIH to pursue the development of AV-101 and from California Institute of Regenerative Medicine (“CIRM”) to develop our bioassay system for predictive liver toxicology and drug metabolism drug screening, and from a strategic research contract with third parties. Our AV-101 grant from NIH accounted for 94% and 87% of our total revenue for fiscal year 2013 and 2012, respectively. The NIH grant expired in its normal course on June 30, 2012 and has not been extended or renewed. Our CIRM grant terminated in September 2011 and accounted for 6% of our total revenue in fiscal year 2012. Government grant revenue typically reimburses us for expenses incurred in the subject research area plus a nominal allocation or fee to cover our related administrative and infrastructure costs.
Research and Development Expense
Research and development expense represented approximately 49% and 52% of our operating expenses for the years ended March 31, 2013 and 2012, respectively. Research and development costs are expensed as incurred. Research and development expense consists of both internal and external expenses incurred in sponsored stem cell research and drug development activities, costs associated with the development of AV-101 and costs related to the licensing, application and prosecution of our intellectual property. These expenses primarily consist of the following:
salaries, benefits, including stock-based compensation costs, travel and related expense for personnel associated with research and development activities;
fees paid to contract research organizations and other professional service providers for services related to the conduct and analysis of clinical trials and other development activities;
fees paid 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.
General and Administrative Expense
General and administrative expense consists primarily of salaries and related 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. Following the Merger in May 2011, we increased our administrative headcount and engaged certain consulting services to meet our obligations as a public reporting company.
Other Expenses, Net
We incurred interest expense on the outstanding balance of our convertible promissory notes issued beginning in 2006, substantially all of which were converted into Units consisting of restricted common stock and warrants in May 2011 at a price of $1.75 per Unit in connection with the Merger. We also incurred interest expense on the May 2011 Platinum Note prior to its exchange into our Series A Preferred Stock in December 2011, on the Senior Secured Convertible Promissory Notes issued to Platinum in October 2012 and in February 2013 and March 2013, and on various notes issued to certain service providers during the years ended March 31, 2011 and 2012 and on the new and modified notes issued to M&F, CRL and UHN during the year ended March 31, 2013.
We recorded non-cash expense in fiscal 2013 and 2012 related to the change in the fair values of the derivatives associated with various promissory notes issued to Platinum prior to fiscal 2012 and during fiscal 2013. In fiscal 2013, we recorded non-cash losses on early extinguishment of debt in connection with the modification of certain promissory notes issued to Platinum, Morrison & Foerster, Cato Holding Company and to investors in convertible promissory notes issued in February 2012 as well as in connection with the settlement of accounts payable by issuing promissory notes to Cato Research Ltd and University Health Network, In fiscal 2012, we recorded a non-cash loss on early extinguishment of debt related to the exchange of the Platinum Note into shares of our Series A Preferred Stock under the terms of a note and warrant exchange agreement. In fiscal 2013, we also recorded a non-cash deemed dividend related to the modification of the exchange rights of our Series A Preferred Stock held by Platinum, including the impact of the prospective issuance of a five-year warrant to purchase restricted shares of our common stock upon Platinum's exercise of its Series A Preferred Stock exchange rights.
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
Our revenues consist primarily of revenuesAlthough 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 grant awards and strategic collaborations.grants. We recognize revenue under the provisions of the Securities and Exchange CommissionSEC 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.
We recognize revenue when the four basic criteria of revenue recognition are met: (1)(i) a contractual agreement exists; (2)(ii) the transfer of technology has been completed or services have been rendered; (3)(iii) the fee is fixed or determinable; and (4)(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.
| ● | 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.
| ● | 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.
| ● | 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 statementsConsolidated Statements of operations.Operations and Comprehensive Loss.
Research and Development Expenses
Research and development expenses includeare composed of both internal and external costs. Internal costs include salaries and employment relatedemployment-related expenses of scientific personnel and direct project costs. External research and development expenses consist primarily of sponsored stem cell research and development costs, costs associated with clinical and non-clinical development of AV-101, our lead drugprodrug candidate in 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 Human Clinical Trials in a Test Tube™, and AV-101. All such costs are charged to expense as incurred.
Stock-Based Compensation
We account for stock-based payment arrangements in accordance with ASC 718, Compensation-Stock Compensation and ASC 505-50, Equity-Equity Based Payments to Non-Employees which requires the recognition of compensation expense, using a fair-value based method, for all costs related to stock-based payments including stock options and restricted stock awards. We recognize compensation cost for all share-basedstock-based awards to employees based on theirthe grant date fair value. Share-basedvalue of the award. We record non-cash, stock-based compensation expense is recognized over the period during which the employee is required to perform serviceservices 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.
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 termsterm 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 and its historically limited trading volume, is based on the historical daily trading data of the common stock of a peer group of public companies over the expected term of the option.
Warrant Liability
Between October 2013 and July 2014, we issued to Platinum Long Term Growth VII, LLC (PLTG) warrants to purchase a substantial number of unregistered shares of our common stock and, subject to PLTG’s exercise of its rights to exchange shares of our Series A Preferred Stock that it holds, we were obligated to issue to PLTG an additional warrant to purchase unregistered shares of common stock (Series A Exchange Warrant) (collectively, the PLTG Warrants). The PLTG Warrants contained an exercise price adjustment feature that would reduce the exercise price of the warrants in the event we subsequently issued equity instruments at a price lower than the exercise price of the PLTG Warrants. We accounted for the PLTG Warrants as non-cash liabilities and estimated their fair value at the end of each financial reporting period and recorded the change in the fair value as non-cash expense or non-cash income. The key component in determining the fair value of the PLTG Warrants and the related liability was 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 was therefore also subject to significant fluctuation and would have continued to be so until all of the PLTG Warrants were issued and exercised, amended or expired. Assuming all other fair value inputs remained generally constant, we recorded an increase in the warrant liability and non-cash losses when our stock price increased and a decrease in the warrant liability and non-cash income when our stock price decreased.
Notwithstanding the foregoing, and as described in Note 9, Capital Stock, to the Consolidated Financial Statements included in this Annual Report, on May 12, 2015, we entered into an agreement with PLTG pursuant to which PLTG agreed to amend the PLTG Warrants to (A) fix the exercise price thereof at $7.00 per share, (B) eliminate the exercise price reset features and (C) fix the number of shares of our common stock issuable thereunder. This agreement and the related amendments to the PLTG Warrants resulted in the elimination of the warrant liability with respect to the PLTG Warrants during the quarter ending June 30, 2015. As further described in Note 9, Capital Stock, the PLTG Warrants, including the right to receive the Series A Exchange Warrant, were cancelled in exchange for our issuance of shares of our Series C Preferred stock to PLTG in January 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 statementsConsolidated 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, 20132016 and 20122015
Although our financial resources have been limited, we have continued to advance development of AV-101 for MDD and other possible CNS indications, and explore NCE drug rescue and regenerative medicine opportunities related to our stem cell technology platform. Pursuant to our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIH, the NIH is funding and conducting our Phase 2 clinical study of AV-101 101 in subjects with treatment-resistant MDD.
Throughout fiscal 2015 and 2016, through self-placed private placement transactions and other corporate finance initiatives, our executive management has been focused on raising sufficient operating capital to continue to advance development of AV-101, as well as other research and development objectives, while meeting our continuing operational needs. Our most significant accomplishments during fiscal 2015 and 2016 have included the following: (i) entering into CRADA with the NIMH; (ii) launching, under the CRADA, our NIH-funded Phase 2A clinical study of AV-101 in subjects with treatment-resistant MDD, with Dr. Carlos Zarate, Jr., Chief of the Section on the Neurobiology and Treatment of Mood Disorders and Chief of the Experimental Therapeutics and Pathophysiology Branch at the NIMH, as Principal Investigator; (iii) bolstering our Clinical and Scientific Advisory Board with the additions of Maurizio Fava, M.D., Professor of Psychiatry at Harvard Medical School and Director of the Division of Clinical Research of the Massachusetts General Hospital Research Institute; Gerard Sanacora, M.D., Ph.D., Associate Professor at Yale School of Medicine and Director of the Yale Depression Research Program; Thomas Laughren, M.D., former Division Director for the FDA’s Division of Psychiatry Products, Center for Drug Evaluation and Research; and Sanjay Matthew, M.D., Associate Professor of Psychiatry and Behavioral Sciences at Baylor College of Medicine; (iv) publishing AV-101 preclinical data in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article entitled “The prodrug 4-chlorokynurenine causes ketamine-like antidepressant effects, but not side effects, by NMDA/glycineB-site inhibition;” (v) successfully negotiating, extinguishing and converting (in self-placed private placement transactions) approximately $17.2 million (substantially all) of our outstanding indebtedness into our equity securities; and (vi) completing self-placed private placement financing transactions with accredited investors to provide additional operating capital through the sale of our equity securities.
Revenue To meet our working capital needs, in April and May 2015, we completed self-placed private placement transactions involving securities purchase agreements with accredited investors, pursuant to which we sold to such accredited investors 2014 Private Placement 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; (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. Between May 2015 and March 31, 2016, we entered into self-placed private placement transactions involving securities purchase agreements with accredited investors, pursuant to which we sold Series B Preferred Units, for aggregate cash proceeds of approximately $5.0 million, consisting of an aggregate of (i) 717,978 shares of our Series B 10% Convertible Preferred Stock (Series B Preferred); and (ii) five-year warrants to purchase an aggregate of 717,978 shares of our common stock. In May 2016, we completed an underwritten registered public offering of our common stock and warrants pursuant to which we received net proceeds after commissions and expenses of approximately $8.7 million.
As a matter of course, we seek to minimize cash commitments and expenditures for both internal and external research and development and general and administrative services to the greatest extent possible. The conversion of such a substantial portion of our outstanding indebtedness during fiscal 2016 materially reduced our cash requirements for debt service.
The following table comparessummarizes the results of our primary revenue sources betweenoperations for the periods (in $000):fiscal years ended March 31, 2016 and 2015 (amounts in thousands).
| | Fiscal Year Ended March 31, | |
| | 2013 | | | 2012 | |
| | | | | | |
NIH - AV-101 grant | | $ | 187 | | | $ | 1,163 | |
CIRM grant | | | - | | | | 79 | |
Subcontract revenue | | | 13 | | | | 100 | |
| | | | | | | | |
Total Revenue | | $ | 200 | | | $ | 1,342 | |
| | Fiscal Years Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | |
Operating expenses: | | | | | | |
Research and development | | $ | 3,932 | | | $ | 2,433 | |
General and administrative | | | 13,919 | | | | 4,344 | |
Total operating expenses | | | 17,851 | | | | 6,777 | |
| | | | | | | | |
Loss from operations | | | (17,851 | ) | | | (6,777 | ) |
| | | | | | | | |
Interest expense (net) | | | (771 | ) | | | (4,549 | ) |
Change in warrant liabilities | | | (1,895 | ) | | | (35 | ) |
Loss on extinguishment of debt | | | (26,700 | ) | | | (2,388 | ) |
Other expense | | | (2 | ) | | | (135 | ) |
| | | | | | | | |
Loss before income taxes | | | (47,219 | ) | | | (13,884 | ) |
Income taxes | | | (2 | ) | | | (2 | ) |
| | | | | | | | |
Net loss | | $ | (47,221 | ) | | $ | (13,886 | ) |
Accrued dividend on Series B Preferred Stock | | | (2,140 | ) | | | - | |
Deemed dividend on Series B Preferred Stock | | | (2,058 | ) | | | - | |
Net loss attributable to common stockholders | | $ | (51,419 | ) | | $ | (13,886 | ) |
Revenue
Although limited project work on AV-101 continued through fiscal 2013, we
We reported no grant revenue fromfor the years ended March 31, 2016 or 2015 and we presently have no revenue generating arrangements. However, as indicated previously, we entered into a CRADA with the NIH grant afterproviding for a Phase 2a clinical study of AV-101 in treatment-resistant MDD. This Phase 2a study, which began in late-2015, is being funded by the first quarter of fiscal 2013, asNIH and being conducted at the grant expired in its normal course at June 30, 2012. We had drawn the maximum amount available under the grant award prior to its expiration. Our work under the California Institute of Regenerative Medicine ("CIRM") grant was completed in the quarter ended September 30, 2011. Revenue associated with our subcontract research arrangement terminated in May 2012.NIMH.
Research and Development Expense
Research and development expense decreasedincreased by 36% to $3.4 million62% in fiscal 20132016 compared to $5.4 million in fiscal 2012.2015. The following table compares the primary components of research and development expense between the periods (in $000)(amounts in thousands):
| | Fiscal Years Ended March 31, | |
| | 2013 | | | 2012 | |
| | | | | | |
Salaries and benefits | | $ | 792 | | | $ | 862 | |
Stock-based compensation | | | 510 | | | | 477 | |
UHN research under SRCA | | | 466 | | | | 830 | |
Consulting services | | | 14 | | | | - | |
Technology licenses and royalties | | | 136 | | | | 340 | |
Project-related third-party research and supplies: | |
AV-101 | | | 1,079 | | | | 2,191 | |
CIRM | | | - | | | | 37 | |
All other including CardioSafe and LiverSafe | | | 293 | | | | 410 | |
| | | 1,372 | | | | 2,638 | |
Rent | | | 115 | | | | 104 | |
Depreciation | | | 26 | | | | 37 | |
| | | - | | | | 101 | |
Total Research and Development Expense | | $ | 3,431 | | | $ | 5,389 | |
| | Fiscal Years Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | |
Salaries and benefits | | $ | 818 | | | $ | 889 | |
Stock-based compensation | | | 1,093 | | | | 849 | |
Consulting and other professional services | | | 112 | | | | 109 | |
Technology licenses and royalties | | | 1,010 | | | | 217 | |
Project-related research and supplies: | | | | | | | | |
AV-101 | | | 406 | | | | 51 | |
Stem cell and all other | | | 100 | | | | 54 | |
| | | 506 | | | | 105 | |
Rent | | | 219 | | | | 220 | |
Depreciation | | | 37 | | | | 44 | |
Warrant modification expense | | | 135 | | | | - | |
All other | | | 2 | | | | - | |
| | | | | | | | |
Total Research and Development Expense | | $ | 3,932 | | | $ | 2,433 | |
Salary
The decrease in salaries and benefits expense decreasedis primarily as athe result of salary reductions taken voluntarily by the Company’s senior management duringdeparture of one member of our scientific staff at the last three quartersend of fiscal 2013September 2014 and another at the end of December 2015.
The increase in stock based compensation expense for 2016 primarily reflects the $852,200 fair value, determined using the Black-Scholes Option Pricing Model and the absenceassumptions indicated in fiscal 2013Note 9, Capital Stock, to the accompanying Consolidated Financial Statements for year ended March 31, 2016 of a compensation bonus granted in fiscal 2012, partially offset by the costs attributable to new scientific personnel added since June 2011. Stock-based compensation increased in fiscal 2013 compared to fiscal 2012 primarily as a resultSeptember 2015 grant of recognizing (i) the expense resulting from the October 2012 modification of certain stock option grants having exercise prices between $1.13 per shareimmediately vested and $2.58 per share made to certain scientific employees and consultants in prior years to reduce the exercise price to $0.75 per share and (ii) the March 2013 grant to our Chief Scientific Officer of a ten-year warrantexpensed warrants to purchase 1,000,000150,000 shares of our common stock at an exercise pricegranted to our CSO offset by reductions in expense related to the ratable amortization of $0.64 per share. Partially offsetting this increase was the expense impact of certain option grants made to scientific staff and consultants, most recently in September 2015, March 2014 and October 2013, and the amortization of a warrant grant made to our CSO in March 2014. Our stock options are generally amortized over a two-year or four-year vesting period, and the warrant granted to the CSO in March 2014 has been amortized over a two-year vesting period. Essentially all of the option grants made prior years thatto October 2013 and the warrant grants made to our CSO in March 2013 and March 2014 became fully-vested late inand fully-expensed during the fiscal year 2012ended March 31, 2016 or in the first quarter of fiscal 2013, requiring little, if any, expense during fiscal 2013. Sponsored research in both fiscal 2013earlier.
Consulting and fiscal 2012other professional services reflects the continuationfees paid or accrued for scientific services rendered to us by third parties, primarily by members of our long-term stem cell research collaboration with Dr. Gordon Keller’s laboratory in accordance with modifications to our collaboration agreement with UHN made in the thirdscientific and fourth quarters of fiscal 2012 and in a further modification effective beginning in the third quarter of fiscal 2013. Additionally, fiscal 2012 expense for sponsored research at UHN included a non-cash grant of our common stock valued at $175,000 made in May 2011. clinical advisory board.
Technology license and royalty expense decreased in fiscal 2013 reflecting reducedreflects 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 stem cell technology license agreements.agreements, as well as those we elected to make for commercial purposes. We recognize these costs as they are passed oninvoiced to us by the licensors and they do not occur ratably throughout the year or between years. We began a Phase 1b clinical trial ofAdditionally, in fiscal 2016, this expense includes significant costs we have incurred to advance, in the U.S. and numerous foreign counties, multiple pending patent applications with respect to AV-101 earlyand our stem cell technology platform.
AV-101 expenses in calendar 2012 and completed it late in calendar 2012, with expenses during the second half of fiscal 2013 primarily reflectingboth periods presented reflect the costs associated with finalizingmonitoring for and analyzingresponding to potential feedback related to the AV-101 Phase 1b1 clinical trial results and preparing final clinical studyother reports required under the terms of theour prior NIH grant, primarily through third-party collaborators, includingour contract research collaborator, Cato Research Ltd. AV-101We incurred additional expenses in fiscal 2012 included2016 to explore and develop more efficient and cost-effective production methods for AV-101 as well as for updating documentation to facilitate the costs of preparing for thePhase 2 clinical trial of AV-101 in treatment resistant MDD that is being funded and conducted by the NIH. Stem cell and other primarily grant-reimbursable efforts conducted by Cato Research Ltd. and other third-party collaborators. The CIRM grant expired at the end of September 2011 and grant-related effort on that project has ceased. We do not track internal research and developmentrelated expenses including compensation costs, by project as we do not currently believe that such project accounting is required given the level and overlap of project resources, including staffing, that are dedicated to our research and development projects. in both periods were nominal.
Warrant modification expense reflects an increase in fiscal 2012 relatesthe fair value attributable to the non-cash expense we recorded as a resultNovember 2015 modification of the December 2011 Agreement Regarding Payment of Invoices and Warrant Exercises between the Company and Cato Holding Company (“CHC”), Cato Research Ltd. (“CRL”) and certain CHC affiliates pursuant to which CHC and the CHC affiliates exercisedoutstanding warrants at discounted exercise prices to purchase an aggregate of 492,541 restricted315,000 shares of our common stock previously granted to our CSO and we received $60,200 cash, and, in lieua key scientific advisor to reduce the exercise prices thereof from a range of cash payment for certain of the warrant exercises, settled outstanding liabilities of $245,300 for past services received from CRL and prepaid $226,400 for future services that were received from CRL.$9.25 to $12.80 per share to $7.00 per share.
General and Administrative Expense
General and administrative expense decreased by 29% to $3.6 millionincreased significantly in fiscal 20132016 compared to $5.0 million in fiscal 2012.2015, primarily due to increased noncash stock compensation and warrant modification expenses. The following table compares the primary components of general and administrative expense between the periods (in $000)(amounts in thousands):
| | Fiscal Years Ended March 31, | |
| | 2013 | | | 2012 | |
| | | | | | |
Salaries and benefits | | $ | 617 | | | $ | 875 | |
Stock-based compensation | | | 731 | | | | 1,114 | |
Consulting services | | | 157 | | | | 558 | |
Legal, accounting and other professional fees | | | 554 | | | | 1,033 | |
Investor relations | | | 622 | | | | 343 | |
Insurance | | | 122 | | | | 101 | |
Travel and entertainment | | | 37 | | | | 68 | |
Rent and utilities | | | 85 | | | | 89 | |
Warrant modification expense | | | 507 | | | | 641 | |
All other | | | 130 | | | | 175 | |
| | | | | | | | |
Total general and administrative expense | | $ | 3,562 | | | $ | 4,997 | |
| | Fiscal Years Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | |
Salaries and benefits | | $ | 694 | | | $ | 714 | |
Stock-based compensation | | | 2,949 | | | | 1,611 | |
Consulting Services | | | 98 | | | | 112 | |
Legal, accounting and other professional fees | | | 3,405 | | | | 1,197 | |
Investor relations | | | 172 | | | | 132 | |
Insurance | | | 140 | | | | 136 | |
Travel expenses | | | 96 | | | | 71 | |
Rent and utilities | | | 157 | | | | 155 | |
Warrant modification expense | | | 6,083 | | | | 98 | |
All other expenses | | | 125 | | | | 118 | |
| | | | | | | | |
Total General and Administrative Expense | | $ | 13,919 | | | $ | 4,344 | |
Administrative employee headcount and pay rates have remained essentially consistent between the periods reported.
The increase in stock based compensation expense for 2016 primarily reflects the $2,840,700 fair value, determined using the Black-Scholes Option Pricing Model and the assumptions indicated in Note 9, Capital Stock, to the accompanying Consolidated Financial Statements for the year ended March 31, 2016 of the September 2015 grant of immediately vested and expensed warrants to purchase an aggregate of 500,000 shares of our common stock granted to our officers, independent members of our Board of Directors and certain administrative consultants, offset by reductions in the ratable amortization of option grants made to administrative staff and consultants, most recently in September 2015, March 2014 and October 2013, and the amortization of warrant grants made to certain officers and independent members of our Board of Directors in March 2014. Our stock options are generally amortized over a two-year or four-year vesting period, and warrants granted to officers and directors in March 2014 were amortized over a two-year vesting period. Essentially all of the option grants made prior to October 2013 and the warrant grants made to our officers and independent members of our Board of Directors in March 2013 and March 2014 became fully-vested and fully-expensed during the fiscal year ended March 31, 2016 or earlier.
Consulting services primarily includes fees accrued for the services of independent members of our Board of Directors.
The increase in legal, accounting and other professional service fees results primarily from (i) the $1,012,500 noncash expense recognized pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B Preferred having an aggregate fair value of $1,350,000 as compensation for financial advisory and corporate development service contracts with two independent contractors for services to be performed through June 30, 2016; (ii) the grant of an aggregate of 50,000 shares of our common stock having an aggregate fair value of $500,000 pursuant to two corporate development contracts initiated during the quarter ended June 30, 2015; (iii) the grant of 25,000 shares of our Series B Preferred having a fair value of $250,000 to legal counsel as compensation for services in connection with our debt restructuring and other corporate finance matters, and (iv) $138,000 of noncash expense attributable to the fair value of 15,750 shares of our unregistered common stock and a five-year warrant to purchase 7,500 unregistered shares of our common stock granted in connection with investment banking services. As described in Note 9, Capital Stock, to the accompanying Consolidated Financial Statements for the year ended March 31, 2016, the $1,350,000 fair value of the 90,000 shares of Series B Preferred was recorded as a prepaid expense at the date of the grant and is being expensed ratably over the twelve months ending June 30, 2016. Legal expense for 2016 also includes one-time cash fees for services associated with the conversion of our promissory notes and other debt into our Series B Preferred. Professional services expense in 2016 reflects a $100,000 reduction in expense related to a contract for strategic advisory and business development services compared to 2015. In both years, accounting service fees include the expense related to the annual audit of the prior year financial statements and current fiscal year quarterly financial statement review services.
The decreaseincrease in salariesinvestor relations expense is primarily attributable to the March 2016 grant of 7,250 shares of our common stock having a fair value of $58,000 for website maintenance and benefitsother services and resulting in an equivalent amount of noncash expense.
In both fiscal 2016 and 2015, travel expense reflects costs associated with meetings with accredited investors in connection with the self-placed private placements of our securities, and in 2016, with various creditors in connection with extinguishment of a substantial portion of our indebtedness.
Noncash warrant modification expense in fiscal 2013 compared with fiscal 2012 results primarily from our May 2011 forgiveness, in conjunction with our going-public transaction, of notes receivable from certain officers2016 includes (i) $122,000 representing the increase in the aggregate amount of $185,000, plus an accrual for related tax gross-ups aggregating $136,000fair value attributable to which they remain entitled, which we recorded as compensation expense. Partially offsetting that decrease is the impact of converting certain current employees from consulting status during fiscal 2012 to employee status in fiscal 2013. Stock-based compensation expense decreased in fiscal 2013 as option grants of significant size and expense made in prior years became fully-vested in the second half of fiscal 2012, requiring no additional expense in fiscal 2013. Partially offsetting that decrease is the impact of recognizing (i) the expense resulting from the October 2012June 2015 strategic modification of certainoutstanding warrants to purchase an aggregate of 54,576 shares of our common stock option grants having exercise prices between $1.13 per share and $2.58 per share made to certain administrative employees and business consultants in prior years to reduce the exercise price to $0.75prices thereof, generally from $30.00 per share andto $10.00 per share; (ii) $358,000 representing increase in the March 2013 grantfair value attributable to the November 2015 modification of outstanding warrants to purchase an aggregate of 808,553 shares of our common stock previously granted to our senior managementCEO, CFO, and independent members of our Board of Directors to reduce the exercise prices thereof from a range of ten-year$9.25 to $12.80 per share to $7.00 per share; and (iii) $5,603,200 representing the aggregate increase in the fair value of certain warrant exchange transactions conducted during the fourth quarter of fiscal 2016. In January 2016, we entered into an Exchange Agreement with PLTG pursuant to which PLTG exchanged warrants, including all outstanding PLTG Warrants and the shares issuable pursuant to the Series A Preferred Exchange Warrant, to purchase an aggregate of 2,824,016 shares of our common stock for 2,118,012 unregistered shares of our Series C Convertible Preferred Stock (Series C Preferred) at the ratio of 0.75 share of Series C Preferred for each warrant share cancelled. We accounted for this transaction as a warrant modification and recognized related noncash expense of $3,195,000. In February and March 2016, we entered into similar agreements with certain other warrant holders pursuant to which such warrant holders exchanged outstanding warrants to purchase an aggregate of 2,000,000 restricted1,086,611 shares of our common stock atfor an exercise priceaggregate of $0.64 per share. Legal, accounting and other professional fees in fiscal 2012 included significant one-time charges related to the Merger and going-public814,989 shares of our unregistered common stock. We also accounted for this transaction and positioning the Company for its initial public and SEC reporting status. Expense recorded in the current year reflects more normalized levels. Since becoming a public reporting and publicly-traded company, we have engaged certain third parties to provide us with investor relations services and to conduct market awareness initiatives that were not necessary as a private company. A portion of the compensation that we have provided to certain of these providers has been in the form of grants of restricted common stock or warrants to purchase restricted common stock. In those situations, we have expensed the grant date fair value of the restricted stock or warrants ratably over the term of the underlying contract, all of which have been completed at March 31, 2013. Additionally, we incurred non-cash warrant modification, expense totaling $507,000resulting in fiscal 2013 related to reducing the exercise priceour recognition of certain outstanding warrants to purchase our common stock, as describedan additional $2,362,000 in Note 9 to the Consolidated Financial Statements included in Item 8 of this report.noncash expense. In fiscal 2012,February 2016, we incurred non-cash warrant modification expense of $641,000 related to reducing the exercise price and, in some cases, extendingalso extended the term of certain outstanding warrants to purchase our common stock.
Other Expenses, Net
Other expenses, net includes interest expense, netan aggregate of interest income, in both years, and the non-cash impact of changes in the fair value of the warrant liabilities related to warrants issued or issuable to Platinum as a result of the October 2012 Agreement in fiscal 2013 and of the derivatives treated as liabilities resulting from the issuance of prior notes and warrants to Platinum in fiscal 2012. Other expenses, net also includes the non-cash loss on extinguishment of debt resulting from the modification of indebtedness to Platinum, Morrison & Foerster, Cato Research Ltd., and University Health Network, as well as the conversion by the holders of our 12% Convertible Promissory Notes issued in February 2012 into restricted91,230 shares of our common stock and warrants during fiscal 2013,recognized $46,000 of noncash expense as a result of such modifications.
Interest and Other Expenses, Net
Interest expense, net totaled $770,800 for the cancellationyear ended March 31, 2016 compared to $4,548,700 reported for the year ended March 31, 2015, reflecting the impact of a $4.0 million note issued to Platinum and Platinum’s related exercisethe extinguishment of warrants and exchange of restricted sharessubstantially all of our common stockpromissory notes and related discounts upon conversion into restricted shares of our Series A preferred stock during fiscal 2012.
B Preferred between May 2015 and August 2015. The following table comparessummarizes the primary components of net interest expense betweenfor each of the periods (in $000)(amounts in thousands):
| | Fiscal Year Ended | |
| | March 31, | |
| | 2013 | | | 2012 | |
| | | | | | |
Interest expense on promissory notes, including discount amortization | | $ | 796 | | | $ | 1,887 | |
Charge for fair value of replacement warrants issued in connection | |
with exercise of modified warrants | | | 36 | | | | - | |
Charge related to losses on accounts payable settled by issuance | |
of common stock or notes payable | | | 80 | | | | - | |
Charge for investment banker warrants related to February 2012 Convertible | |
promissory notes | | | 28 | | | | - | |
Charge for legal fees related to issuance of Senior Secured Promissory | |
Notes to Platinum under June and October 2012 agreements | | | 59 | | | | - | |
Other interest expense, including on capital leases and premium financing | | | 5 | | | | 7 | |
| | | 1,004 | | | | 1,894 | |
Effect of foreign currency fluctuations on notes payable | | | (53 | ) | | | - | |
Interest Income | | | (30 | ) | | | (1 | ) |
| | | | | | | | |
Interest Expense, net | | $ | 921 | | | $ | 1,893 | |
| | Fiscal Years Ended March 31, | |
| | 2016 | | | 2015 | |
| | | | | | |
Interest expense on promissory notes | | $ | 209 | | | $ | 1,238 | |
Amortization of discount on promissory notes | | | 565 | | | | 3,372 | |
Other interest expense, including on capital leases and premium financing | | | 3 | | | | 7 | |
| | | 777 | | | | 4,617 | |
Effect of foreign currency fluctuations on notes payable | | | (6 | ) | | | (63 | ) |
Interest income | | | - | | | | (5 | ) |
| | | | | | | | |
Interest expense, net | | $ | 771 | | | $ | 4,549 | |
The reduction ofsubstantial overall decrease in interest expense applicable toon promissory notes and the related amortization of discounts on such notes between the related discountsperiods primarily reflects the effectcessation of interest accrual and discount amortization upon the December 2011 conversion to equity of $4.0 million principal amount ofall outstanding Senior Secured Convertible Promissory Notes, 10% convertible promissory notes plus accrued interest issued to Platinum prior to fiscal 2012, including the amortization(2014 Unit Notes) and other outstanding promissory notes aggregating approximately $13.3 million into shares of related note discounts. Further, in Aprilour Series B Preferred between May 2015 and May 2011, other convertible notes and accrued interest outstanding prior to the Merger were converted into restricted common stock at the time of the Merger. Offsetting these reductions is theAugust 2015, offset by accrued interest and discount amortization recorded for the issuances between July 2012 through March 2013 issuance2014 and restructuringMay 2015 of an aggregate of $3.3approximately $1.8 million of 10% senior secured convertible notes to Platinum2014 Unit Notes.
Under the terms of our October 2012 Note Exchange and the restructuring of an additional $3.9 million of debt into new convertible notes to other service providers including Morrison & Foerster, Cato Research Ltd., and University Health Network. Additionally, during the quarter ended September 30, 2012,Purchase Agreement with PLTG, we issued restricted shares of our common stock and a note payable in settlement of certain past due accounts payable liabilities and recognized losses aggregating $80,000 based on the fair value of the restricted stock and note issued compared to the recorded liability. In fiscal 2013, we recognized interest income related to the restructuring of the May 2011 note receivable we accepted for the purchase of shares of our common stock.
In conjunction with the issuance, pursuant to the October 2012 Agreement, of the Senior Secured Convertible Promissory Notes and a related Exchange Warrant and Investment Warrants to Platinum inbetween October 2012 February 2013 and March 2013 (as described more completely in Note 8, Convertible Promissory Notes and Other Notes Payable in the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K), and the potential issuanceJuly 2013. Further, upon PLTG’s exchange of the shares of our Series A Preferred Stock held by PLTG into shares of our common stock, we would also be required to issue a Series A Exchange Warrant to Platinum (as described in Note 9,PLTG (all of the warrants, collectively, the Capital StockPLTG Warrants in the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K), we). We determined that the warrantsPLTG Warrants included certain exercise price adjustment features requiring us to treat the warrants to be treated as liabilities. WeAccordingly, we recorded thea noncash warrant liability at its estimated fair value as of the date of warrant issuance or contract execution. During fiscal 2013, we recognized non-cash expense of $1.6 million relatedAs described in Note 9, Capital Stock, and Note 4, Fair Value Measurements, to the increase inConsolidated Financial Statements for the estimatedyear ended March 31, 2016, on May 12, 2015, we entered into an agreement with PLTG pursuant to which we amended the various warrants to fix the exercise price thereof and eliminate the anti-dilution reset features that had previously required the warrants to be treated as liabilities and carried at fair value. Accordingly, during the quarter ended June 30, 2015, we adjusted these warrants to their fair value, estimated to be $4,903,200, reflecting an increase of these liabilities, which resulted$1,894,700 since March 31, 2015, resulting primarily from the increase in the market price of our common stock relatedin relation to the anticipated exercise price of the warrants, and then subsequently eliminated the entire warrant liability with respect to these warrants. The $78,000As indicated previously, during the fourth quarter of non-cash expense recognized in fiscal year 2012 related2016, we entered into an agreement with PLTG whereby PLTG exchanged the PLTG Warrants to the terminationpurchase an aggregate of liability treatment for certain derivatives associated with earlier notes and warrants issued to Platinum as a result of our going-public transaction.
We recognized non-cash losses on the early extinguishment of debt in the aggregate amount of $3.6 million in fiscal 2013 as a result of the restructuring of notes payable to Platinum and Cato Holding Company, and the restructuring of accounts payable to Cato Research, Ltd. and University Health Network that were converted in to notes payable, as well as upon the conversion by the holders of our 12% Convertible Promissory notes issued in February 2012 into restricted2,824,016 shares of our common stock and warrants, allfor 2,118,012 unregistered shares of which were treated as extinguishmentour Series C Convertible Preferred Stock. During the year ended March 31, 2015, we recognized noncash expense of debt for accounting purposes, all as$34,600 related to the net increase in the estimated fair value of the warrant liabilities since March 31, 2014.
As described more completely in Note 8, Convertible Promissory Notes and Otherother Notes Payable in the Consolidated Financial Statements included in Item 8 of this report. In fiscal 2012, we recognized a non-cash loss of $1.2 million on the early extinguishment of debt in connection with the cancellation of a $4.0 million note and related accrued interest issued to Platinum and Platinum’s related exercise of warrants and exchange of shares of our common stock into shares of our Series A preferred stock.
In October 2012, in connection with the Note and Exchange Agreement we entered with Platinum, as described in Note 8, Convertible Promissory Notes and Other Notes Payable,, and Note 9, Capital Stock, into the accompanying Consolidated Financial Statements included in this report,for the year ended March 31, 2016, between May 2015 and August 2015, we recorded a non-cash deemed dividendextinguished the outstanding balances of $10.2approximately $17.2 million as a resultof promissory notes, including our Senior Secured Notes, our 2014 Unit Notes and other debt and certain adjustments thereto that were either already due and payable or would have otherwise matured prior to March 31, 2016 by converting such balances into shares of our Series B Preferred. We treated the conversion of the modificationindebtedness into Series B Preferred as extinguishments of debt for accounting purposes. Since the fair value of the exchange rights forSeries B Preferred we negotiated in settlement of the promissory notes and other indebtedness exceeded the carrying value of the debts, we incurred noncash losses on each of the extinguishments. Additionally, under the terms of the PLTG Agreement, we issued to PLTG 400,000 shares of Series AB Preferred Stock held by Platinumhaving an aggregate fair value of $4.0 million and the related prospective issuance of a five-year warrantSeries B Warrants to purchase restricted1.2 million shares of our common stock upon Platinum’s exercisehaving an aggregate of itsfair value of $8,270,900. We recognized this aggregate fair value as an additional noncash component of loss on extinguishment of debt. Many of the 2014 Unit Notes that were converted into Series AB Preferred Stock exchange rights.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 the 2014 Unit Notes were extinguished and converted, an aggregate of $2,237,100, as a reduction to the loss on extinguishment of debt. We recorded a nonrecurring aggregate net noncash loss of $26.7 million attributable to the extinguishment of the indebtedness converted into Series B Preferred.
During the quarter ended June 30, 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 to essentially conform them to the 2014 Unit Notes and 2014 Unit Warrants. We treated the amendments as an extinguishment of debt for accounting purposes and recognized noncash losses on the extinguishment of debt in the aggregate amount of $526,200 attributable to the amendments. We also recognized an additional $241,800 as a noncash 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 during the quarter ended June 30, 2014. In July 2014, we entered into an agreement with PLTG, as further amended in September 2014, pursuant to which PLTG agreed to convert into our unregistered equity securities all then outstanding Senior Secured Notes and related accrued interest held by PLTG upon our consummation prior to October 31, 2014 of either (i) a Private Financing or a Public Offering, each as defined in the agreement. Prior to the agreement, the Senior Secured Notes were convertible, at PLTG’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 Secured Notes was treated as an extinguishment of the debt for accounting purposes and we recognized a non-cash loss on the extinguishment of debt in the aggregate amount of $1,603,400 attributable to the amendment in the quarter ended September 30, 2014. In March 2015, we issued 16,667 shares of our common stock valued at $166,700 in settlement of legal fees related to services provided with respect to certain financing initiatives. We recognized a loss on extinguishment of debt in the amount of $16,700 with respect to this settlement.
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 on the note receivable was $195,000, resulting in a noncash loss of $135,000 related to the settlement, which was recognized in Other Expense in the year ended March 31, 2015. Other expense in the year ended March 31, 2016 reflects the noncash loss on the disposition of a piece of failed lab equipment.
We allocated the proceeds from the self-placed private placement sales of Series B Preferred Units between May 2015 and March 31, 2016 to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. The difference, for accounting purposes, between the relative fair value per share of the Series B Preferred, approximately $4.13 per share, and its Conversion Price (or stated value) of $7.00 per share represents a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we have recognized a deemed dividend in the aggregate amount of $2,058,000 in arriving at net loss attributable to common stockholders for the year ended March 31, 2016 in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended March 31, 2016. Further, we have recognized $2,140,500 representing the 10% cumulative dividend payable on our Series B Preferred as an additional deduction in arriving at net loss attributable to common stockholders for the year ended March 31, 2016 in the accompanying Consolidated Statement of Operations and Comprehensive Loss for the year ended March 31, 2016.
Liquidity and Capital Resources
AtSince our inception in May 1998 through March 31, 2013, we had cash and cash equivalents of $638,100 and our current liabilities exceeded our current assets by $1.7 million. However, in April 2013, we entered into a Securities Purchase Agreement pursuant to which, as amended,2016, we have agreedfinanced our operations through (1) the issuance and sale of our common stock, preferred stock, warrants for common stock, and promissory notes for aggregate cash proceeds of approximately $34.5 million; (2) issuance of common stock and preferred stock with an approximate value at issuance of $29.1 million as consideration for, among other things, technology licenses and patent prosecution, sponsored research, contract research, drug development, drug manufacturing, regulatory services, and legal, investor relations, corporate development and financial advisory services; and (3) receipt of aggregate non-dilutive cash proceeds of approximately $16.4 million from government research and development grant awards and strategic collaboration transactions.As described more completely in Note 8, Convertible Promissory Notes and other Notes Payable, and Note 9, Capital Stock, to sell,the accompanying Consolidated Financial Statements for the year ended March 31, 2016, between May 2015 and Autilion, AG,March 31, 2016, we created our Series B Preferred and eliminated the outstanding balances of approximately $17.2 million of promissory notes, other indebtedness 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 company organized and existing underportion of the laws of Switzerland (“Autilion”), has agreedindebtedness converted, warrants to purchase 72.0 million restrictedcommon stock. More specifically, through March 31, 2016, we have extinguished and converted (i) all of the Senior Secured Convertible Promissory Notes originally issued to PLTG, (ii) all of the 2014 Unit Notes outstanding at March 31, 2015 and those issued subsequently, and (iii) substantially all other outstanding promissory notes and accounts payable, including those issued to Cato Research Ltd., Cato Holding Company, Morrison & Foerster (Note A and Note B), University Health Network, McCarthy Tetrault, Desjardins Securities, Burr Pilger & Mayer, National Jewish Health, MicroConstants and several others, into an aggregate of 2,618,917 shares of our Series B Preferred. Additionally, through March 31, 2016, in our self-placed private placement of Series B Units, we have sold Series B Preferred Units consisting of an aggregate of 717,978 unregistered shares of Series B Preferred and five year warrants to purchase 717,978 shares of our common stock, for $0.50 per share resulting in aggregate gross proceeds to us of $36.0 million, in a series of tranches scheduled to close between June 27, 2013 and September 30, 2013 (the “Autilion Financing”). The Autilion Financing also provides for the election to our Board of Directors of a designee of Autilion. Through the date of this report, we have completed a nominal initial closingreceived cash proceeds of the Autilion Financing. $5,025,800.During our fiscal year ended
At March 31, 2013,2016, we financeddid not have sufficient cash and cash equivalents to enable us to fund our planned operations primarily throughover the issuancenext twelve months, including expected cash expenditures of $3.3 million of 10% Senior Secured Convertible Promissory Notesapproximately $9.1 million. However, as disclosed in Note 16, Subsequent Events, to Platinum, the sale ofaccompanying Consolidated Financial Statements, between April 1, 2016 and May 4, 2016, we sold to accredited investors additional Series B Preferred Units consisting of 39,714 unregistered shares of Series B Preferred and five year warrants to purchase 39,714 shares of our common stock, and we received cash proceeds of $278,000. Further, on May 16, 2016 we consummated an underwritten public offering pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at the public offering price of $4.24 per share and five-year warrants to purchase up to 2,705,883 registered shares of our common stock, that generated approximately $1.1 millionwith an exercise price of cash proceeds,$5.30 per share, at the public offering price of $0.01 per warrant, including shares and warrants issued pursuant to the exercise of warrants, mostthe underwriters’ over-allotment option (May 2016 Public Offering). We received net cash proceeds of which were modifiedapproximately $9.5 million from the May 2016 Public Offering after deducting fees and expenses. We expect the proceeds of these transactions to reduce their original exercise prices, that generated approximately $0.3 million ofprovide sufficient cash proceeds.
Since inception in May 1998, we have financedto sustain our operations technology development and technology acquisitions primarily through our fiscal year ending March 31, 2017, however they will not be adequate to enable the issuance and salecompletion of equity and equity-linked securities for cash consideration and convertible promissory notes and short-term promissory notes, as well as from government research grant awards and strategic collaboration payments.
We anticipate that our cash expenditures during the next twelve months will be approximately $4.0 millionPhase 2b clinical trial of AV-101 in MDD. Accordingly, we intend to $6.0 million. We believe that our current cash and cash equivalents, combined with the expected cash proceeds from the Autilion Financing, will enable us to fund our operations well beyond the next twelve months. Additionally, we may supplement those funds to meet our cash needs and fund our workingraise additional capital requirements through a combination of additional private placementssales of our securities, which may include both debt and equity securities, stem cell technology-basedsecurities. We may also seek research and development collaborations stem cell technology and drug candidate license fees andthat could generate revenue, as well as government grant awards. SinceFurther, strategic collaborations, similar to our inception, we have demonstratedFebruary 2015 CRADA with the ability to manage our costs aggressively and increase our operating efficiencies while advancing our stem cell technology platform and AV-101 development programs. To further advance drug rescue applicationsNIMH providing NIMH funding of our stem cell technology platform,Phase 2a study of AV-101 in MDD, may provide resources to support a portion of our future cash needs and working capital requirements. Although we may seek additional collaborations that could generate revenue, as well as support our operating activities, we plan to continue to manage our monthly operating costs associated with salaries and benefits, regulatory and public company consulting, contract research and development, legal, accounting and other working capital costs carefully.
Although we have been successful since May 1998 with raising sufficient capital, and we will continue to pursue additional financing opportunities, as and when required, to meet our business objectives, there can be no assurance that additional capital will be available to us in sufficient amounts, on terms favorable to us, and without substantial dilution to our current stockholders, if at all. If we are unable to complete the Autilion Financing or one or more private placements, or otherwise obtain sufficient financing through strategic collaborations ornew government grant awards, weno assurance can be provided that any such collaborations or awards will be required to delay, scale back or discontinue certain drug rescue and/or research and development activities, and this will adversely affect our ability to operate as a going concern and could cause our stock price to decline. If we obtain additional strategic financing by selling our equity or debt securities, including sales of our common stock pursuant tooccur in the completion of the Autilion Financing, substantial dilution to our existing stockholders will result.future. Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of our strategic opportunities related to our success and the success of certain other companies in clinical trials, including our development of AV-101 as a treatment for MDD and other CNS conditions, and our stem cell technology platform, including drug rescuethe availability of, and cell therapy research and development efforts, 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 our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including the size of our staff and staff salaries and benefits, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate 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.
Cash and Cash Equivalents
The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):
| | Fiscal Year Ended | | |
| | March 31, | | | Fiscal Years Ended March 31, | |
| | 2013 | | | 2012 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | |
Net cash used in operating activities | | $ | (3,463 | ) | | $ | (3,566 | ) | | $ | (4,809 | ) | | $ | (2,769 | ) |
Net cash used in investing activities | | $ | (135 | ) | | $ | (32 | ) | | | (26 | ) | | | - | |
Net cash provided by financing activities, including warrant exercises and sale of Units in 2012 and sale of Units in 2011 | | $ | 4,156 | | | $ | 3,540 | | |
Net cash provided by financing activities | | | | 5,193 | | | | 2,839 | |
| | | | | | | | | |
Net increase in cash and cash equivalents | | | | 358 | | | | 70 | |
Cash and cash equivalents at beginning of period | | | | 70 | | | | - | |
| | | | | | | | | |
Cash and cash equivalents at end of period | | | $ | 428 | | | $ | 70 | |