10-Q 1 vtgn10q_june302019.htm QUARTERLY REPORT Blueprint
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 20549
 
Form 10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2019
or
 
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                      .
 
Commission File Number: 001-37761
 
VistaGen Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
Nevada
 
20-5093315
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
343 Allerton Avenue
South San Francisco, CA 94080
(Address of principal executive offices including zip code)
 
(650) 577-3600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer
 [  ]
Accelerated filer
[  ]
Non-Accelerated filer
 [  ]
Smaller reporting company
[X]
 
 
Emerging growth company
[  ]
     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.001 per share
VTGN
Nasdaq Capital Market
 
As of August 13, 2019, 42,622,965 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding. 
 
 
 

 
 
 
VistaGen Therapeutics, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2019
 
 
TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
1
2
3
4
5
12
23
 
 
 
 
 
24
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58
58
58
 
 
 59
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Dollars, except share amounts)
 
 
 
June 30,
 
 
 March 31,
 
 
 
 2019
 
 
 2019
 
 
 
(Unaudited)
 
 
(Note 2)
 
 
 
 
 
 
 
 
 ASSETS
 
 
 
 
 
 
 Current assets:
 
 
 
 
 
 
 Cash and cash equivalents
 $8,297,100 
 $13,100,300 
 Receivable from supplier
  - 
  300,000 
 Prepaid expenses and other current assets
  482,600 
  250,900 
 Total current assets
  8,779,700 
  13,651,200 
 Property and equipment, net
  286,500 
  312,700 
 Right of use asset - operating lease
  3,833,300 
  - 
 Security deposits and other assets
  47,800 
  47,800 
 Total assets
 $12,947,300 
 $14,011,700 
 
    
    
 LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 Current liabilities:
    
    
 Accounts payable
 $933,900 
 $1,055,000 
 Accrued expenses
  1,847,000 
  1,685,600 
 Current notes payable
  246,400 
  57,300 
 Operating lease oligation
  278,100 
  - 
 Financing lease obligation
  3,000 
  3,000 
 Total current liabilities
  3,308,400 
  2,800,900 
 
    
    
 Non-current liabilities:
    
    
 Accrued dividends on Series B Preferred Stock
  4,050,700 
  3,748,200 
 Deferred rent liability
  - 
  381,100 
 Operating lease obligation
  3,956,900 
  - 
 Financing lease obligation
  5,500 
  6,300 
 Total non-current liabilities
  8,013,100 
  4,135,600 
 Total liabilities
  11,321,500 
  6,936,500 
 
    
    
 Commitments and contingencies
    
    
 Stockholders’ equity:
 
 
Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2019 and March 31, 2019
 
 
Series A Preferred, 500,000 shares authorized, issued and outstanding at June 30, 2019 and March 31, 2019
 500
 500
Series B Preferred; 4,000,000 shares authorized at June 30, 2019 and March 31, 2019;
1,160,240 shares issued and outstanding at June 30, 2019 and March 31, 2019
  1,200 
  1,200 
Series C Preferred; 3,000,000 shares authorized at June 30, 2019 and March 31, 2019;
  2,318,012 shares issued and outstanding at June 30, 2019 and March 31, 2019
  2,300 
  2,300 
Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2019 and March 31, 2019;
42,758,630 shares issued and outstanding at June 30, 2019 and March 31, 2019
  42,800 
  42,800 
 Additional paid-in capital
  192,890,400 
  192,129,900 
 Treasury stock, at cost, 135,665 shares of common stock held at June 30, 2019 and March 31, 2019
  (3,968,100)
  (3,968,100)
 Accumulated deficit
  (187,343,300)
  (181,133,400)
 Total stockholders’ equity
  1,625,800 
  7,075,200 
 Total liabilities and stockholders’ equity
 $12,947,300 
 $14,011,700 
 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Amounts in dollars, except share amounts)
 
 
 
 Three Months Ended June 30,
 
 
 
 2019
 
 
2018
 
Operating expenses:
 
 
 
 
 
 
Research and development
 $4,313,900 
 $2,743,700 
General and administrative
  1,910,100 
  1,466,300 
Total operating expenses
  6,224,000 
  4,210,000 
Loss from operations
  (6,224,000)
  (4,210,000)
Other income (expenses), net:
    
    
 Interest income (expense), net
  16,500 
  (2,100)
Loss before income taxes
  (6,207,500)
  (4,212,100)
Income taxes
  (2,400)
  (2,400)
Net loss and comprehensive loss
 $(6,209,900)
 $(4,214,500)
 
    
    
Accrued dividend on Series B Preferred stock
  (302,500)
  (273,500)
 
    
    
Net loss attributable to common stockholders
 $(6,512,400)
 $(4,488,000)
 
    
    
Basic and diluted net loss attributable to common
    
    
stockholders per common share
 $(0.15)
 $(0.20)
 
    
    
Weighted average shares used in computing
    
    
basic and diluted net loss attributable to common
    
    
stockholders per common share
  42,622,965 
  22,987,066 
 

See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Dollars)
 
 
 
 Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 Cash flows from operating activities:
 
 
 
 
 
 
  Net loss
 $(6,209,900)
 $(4,214,500)
 
 Adjustments to reconcile net loss to net cash used in operating activities:
 
    
   Depreciation and amortization
  26,200 
  15,000 
   Stock-based compensation
  1,063,000 
  612,600 
   Amortization of fair value of common stock issued for services
  69,100 
  145,000 
   Amortization of fair value of warrants issued for services
  10,300 
  - 
   Changes in operating assets and liabilities:
    
    
    Receivable from supplier
  300,000 
  - 
    Prepaid expenses and other current assets
  (80,900)
  148,500 
    Right of use asset - operating lease
  81,700 
  - 
    Operating lease liability
  (61,100)
  - 
    Accounts payable and accrued expenses
  40,200 
  171,700 
    Deferred rent
  - 
  (13,600)
     Net cash used in operating activities
  (4,761,400)
  (3,135,300)
 
    
    
 Cash flows from property and investing activities:
    
    
  Construction of tenant improvements
  - 
  (35,400)
     Net cash used in investing activities
  - 
  (35,400)
 
    
    
 Cash flows from financing activities:
    
    
  Net proceeds from issuance of common stock and warrants, including Units
  - 
  57,500 
  Repayment of financing lease obligation
  (700)
  (600)
  Repayment of notes payable
  (41,100)
  (33,300)
     Net cash provided by financing activities
  (41,800)
  23,600 
 Net increase in cash and cash equivalents
  (4,803,200)
  (3,147,100)
 Cash and cash equivalents at beginning of period
  13,100,300 
  10,378,300 
 Cash and cash equivalents at end of period
 $8,297,100 
 $7,231,200 
 
    
    
 Supplemental disclosure of noncash activities:
    
    
    Insurance premiums settled by issuing note payable
 $230,200 
 $160,500 
    Accrued dividends on Series B Preferred
 $302,500 
 $273,500 
 

See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
 
-3-
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
(Amounts in Dollars, except share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
Total
 
 
 
Series A Preferred Stock
 
 
Series B Preferred Stock
 
 
Series C Preferred Stock
 
 
 Common Stock
 
 
 Paid-in
 
 
Treasury
 
 
Accumulated
 
 
 Stockholders’
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
Stock
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2018
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  23,068,280 
 $23,100 
 $167,401,400 
 $(3,968,100)
 $(156,543,800)
 $6,916,600 
Proceeds from sale of common stock and warrants for cash in private placement offering
  - 
  - 
  - 
  - 
  - 
  - 
  40,000 
  - 
  50,000 
  - 
  - 
  50,000 
Proceeds from exercise of warrants
  - 
  - 
  - 
  - 
  - 
  - 
  5,000 
  - 
  7,500 
  - 
  - 
  7,500 
Accrued dividends on Series B Preferred stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (273,500)
  - 
  - 
  (273,500)
Stock-based compensation expense
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  612,600 
  - 
  - 
  612,600 
Fair value of common stock issued for services
  - 
  - 
  - 
  - 
  - 
  - 
  100,000 
  100 
  122,900 
  - 
  - 
  123,000 
 
    
    
    
    
    
    
    
    
    
    
    
    
Net loss for the quarter ended June 30, 2018
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (4,214,500)
  (4,214,500)
 
    
    
    
    
    
    
    
    
    
    
    
    
Balances at June 30, 2018
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  23,213,280 
 $23,200 
 $167,920,900 
 $(3,968,100)
 $(160,758,300)
 $3,221,700 
 
    
    
    
    
    
    
    
    
    
    
    
    
 
    
    
    
    
    
    
    
    
    
    
    
    
Balances at March 31, 2019
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  42,758,630 
 $42,800 
 $192,129,900 
 $(3,968,100)
 $(181,133,400)
 $7,075,200 
 
    
    
    
    
    
    
    
    
    
    
    
    
Accrued dividends on Series B Preferred stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (302,500)
  - 
  - 
  (302,500)
Stock-based compensation expense
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,063,000 
  - 
  - 
  1,063,000 
Net loss for the quarter ended June 30, 2019
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (6,209,900)
  (6,209,900)
 
    
    
    
    
    
    
    
    
    
    
    
    
Balances at June 30, 2019
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  42,758,630 
 $42,800 
 $192,890,400 
 $(3,968,100)
 $(187,343,300)
 $1,625,800 
 

VISTAGEN THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.  Description of Business
 
VistaGen Therapeutics. Inc., a Nevada corporation (which may be referred to as VistaGen, the Company, we, our, or us), is a clinical-stage biopharmaceutical company committed to developing and commercializing new generation medicines to treat diseases and disorders of the central nervous system (CNS) with high unmet need. Our CNS pipeline includes three differentiated clinical-stage product candidates focused on large and growing markets where we believe current treatments fall short of patient needs, with significant emphasis on major depressive disorder (MDD) and social anxiety disorder (SAD).
 
MDD is a serious neurobiologically-based mood disorder, affecting approximately 16 million adults in the U.S., according to the U.S. National Institutes of Health (NIH). Individuals diagnosed with MDD exhibit depressive symptoms, such as a depressed mood or a loss of interest or pleasure in daily activities, for more than a two-week period, as well as impaired social, occupational, educational or other important functioning which has a negative impact on their quality of life. Globally, MDD affects nearly 300 million people of all ages and is the leading cause of disability worldwide.
 
SAD affects approximately 20 million Americans and is the third most common psychiatric condition after depression and substance abuse. SAD is characterized by a persistent and unreasonable fear of one or more social or performance situations, where the individual fears that he or she will act in a way or show symptoms that will be embarrassing or humiliating, leading to avoidance of the situations when possible and anxiety or distress when they occur. These fears have a significant impact on the person's employment, social activities and overall quality of life. Only three drugs, all antidepressants, are approved by the U.S Food and Drug Administration (FDA) specifically for treatment of SAD. However, for treatment of both MDD and SAD, current oral antidepressants (ADs) have slow onset of effect (often several weeks to months) and significant side effects that may make them inadequate treatment alternatives for many individuals affected by MDD and SAD.
 
Our most advanced product candidate, PH94B neuroactive nasal spray, is fundamentally different from all current treatments for SAD. Developed from proprietary compounds called pherines and administered as a nasal spray, PH94B activates nasal chemosensory neurons that trigger neural circuits in the brain that suppress fear and anxiety. In a published double-blind, placebo-controlled Phase 2 clinical trial, PH94B was significantly more effective than placebo in reducing public-speaking and social interaction anxiety on laboratory challenges of individuals with SAD. Its novel mechanism of pharmacological action, rapid-onset of therapeutic effects and exceptional safety and tolerability profile in clinical trials to date make our PH94B neuroactive nasal spray an excellent product candidate with potential to become the first FDA-approved on-demand treatment for SAD. Additional potential indications for PH94B include post-traumatic stress disorder (PTSD), general anxiety disorder (GAD), post-partum anxiety (PPA) and other neuropsychiatric indications.
 
AV-101 (4-Cl-KYN), one of our two product candidates for MDD, belongs to a new generation of investigational medicines in neuropsychiatry and neurology known as NMDA (N-methyl-D-aspartate) glutamate receptor modulators. The NMDA receptor is a pivotal receptor in the brain and abnormal NMDA function is associated with multiple CNS diseases and disorders, including MDD, chronic neuropathic pain (NP), epilepsy, levodopa-induced dyskinesia (LID) and many others. AV-101 is an oral prodrug of 7-Cl-KYNA which binds uniquely at the glycine site of the NMDA receptor and has potential to be a new at-home treatment for MDD. AV-101 is currently in Phase 2 development in the U.S. for MDD. ELEVATE is our Phase 2 multicenter, double blind, placebo-controlled clinical study to evaluate the efficacy and safety of AV-101 as an add-on treatment for MDD in adult patients with an inadequate therapeutic response to current FDA-approved oral antidepressants (ADs) (the ELEVATE Study). We currently anticipate top line results from the ELEVATE Study in the second half of this calendar year. In addition to MDD, we believe preclinical data and positive safety data in all clinical studies to date support AV-101’s potential to treat LID, NP, and suicidal ideation (SI). The FDA has granted Fast Track designation for development of AV-101 both as a potential add-on treatment (together with a current FDA-approved antidepressant (an SSRI or an SNRI)) for adult patients with MDD who have an inadequate response to their current ADs and as a non-opioid treatment for NP. Additional potential indications for AV-101 include as a non-addictive, non-sedating treatment of NP, epilepsy, and to reduce LID in individuals with Parkinson’s disease.
 
We are collaborating with Baylor College of Medicine (Baylor) and the U.S. Department of Veterans Affairs (VA) on a small Phase 1b clinical trial of AV-101 in healthy volunteer U.S. Military Veterans from Operation Enduring Freedom, Operation Iraqi Freedom or Operation New Dawn (the Baylor Study). The Baylor Study is a randomized, double-blind, placebo-controlled cross-over study designed as a target engagement study as the first-step in plans to test potential anti-suicidal effects of AV-101 in U.S. Military Veterans who respond to ketamine-based therapy. In June 2018, we entered into a Material Transfer Cooperative Research and Development Agreement (MT CRADA) with the VA regarding clinical trial material for the Baylor Study. Government funding from the VA is being provided for substantially all other study costs.
 
 
 
 
-5-
 
Our other product candidate for MDD in Phase 2 development for MDD is PH10 neuroactive nasal spray. PH10 is a potential first-in-class, CNS neuroactive nasal spray administered in microgram doses for MDD. PH10 activates nasal chemosensory neurons that, in turn, engage GABA (gamma-aminobutyric acid) and CRH (corticotropin-releasing hormone) neurons in the limbic amygdala system. The activation of these neural circuits is believed to have the potential to lead to rapid antidepressant effects without psychological side effects, systemic exposure or safety concerns often associated with current antidepressants. Based on positive results of a small exploratory Phase 2a study in MDD in which rapid-onset antidepressant effects were observed without psychological side effects or systemic exposure, we are preparing for planned Phase 2b clinical development of PH10 as a stand-alone treatment for MDD.
 
Our wholly-owned subsidiary, VistaStem Therapeutics (VistaStem), is focused on applying pluripotent stem cell (hPSC) technology to discover, rescue and develop proprietary new chemical entities (NCEs) for CNS and other diseases. In addition, VistaStem’s hPSC technology has potential applications in cell therapy and regenerative medicine (CT/RM) involving hPSC-derived blood, cartilage, heart and liver cells. VistaStem’s drug rescue activities utilize CardioSafe 3D, its customized cardiac bioassay system, to discover and develop small molecule NCEs for our CNS pipeline or for out-licensing. To advance potential CT/RM applications of our cardiac stem cell technology, we have sublicensed to BlueRock Therapeutics LP, a next generation CT/ RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to the BlueRock Agreement, we may pursue additional CT/RM collaborations or licensing transactions involving hPSC-derived blood, cartilage, and/or liver cells.
 
Subsidiaries
 
As noted above, VistaStem, a California corporation, is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report) also include the accounts of VistaStem and VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.
 
Note 2.  Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete consolidated financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information. The accompanying Condensed Consolidated Balance Sheet at March 31, 2019 has been derived from our audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP.  The operating results for the three months ended June 30, 2019 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2020, or for any other future interim or other period.
 
The accompanying unaudited Condensed Consolidated Financial Statements and notes to Condensed Consolidated Financial Statements contained in this Report should be read in conjunction with our audited Consolidated Financial Statements for our fiscal year ended March 31, 2019 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 25, 2019.
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As a clinical-stage biopharmaceutical company having not yet developed commercial products or achieved sustainable revenues, we have experienced recurring losses and negative cash flows from operations resulting in a deficit of approximately $187.3 million accumulated from inception (May 1998) through June 30, 2019. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of AV-101, PH94B and PH10, execute our drug rescue programs and pursue potential drug development and regenerative medicine opportunities.
 
Since our inception in May 1998 through June 30, 2019, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $79.0 million, as well as from an aggregate of approximately $17.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials, strategic collaboration payments, intellectual property sublicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.1 million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
 
At June 30, 2019, we had cash and cash equivalents of approximately $8.3 million.
 
 
 
 
-6-
 
Although we believe our cash position at June 30, 2019 is sufficient to complete and announce top line results of our ELEVATE Study, our cash position at June 30, 2019 considered with our recurring and anticipated losses, negative cash flows from operations and limited stockholders’ equity make it probable, in the absence of additional financing, that we will not have sufficient resources to fund our planned operations for the twelve months following the issuance of these financial statements, during which time we plan to prepare for and launch a pivotal Phase 3 clinical trial of PH94B, prepare for additional Phase 2 clinical studies and certain nonclinical studies involving AV-101 and prepare for a Phase 2b clinical trial of PH10, and raises substantial doubt that we can continue as a going concern. When necessary and advantageous, we plan to raise additional capital, primarily through the sale of our equity securities in one or more private placements to accredited investors or in public offerings. Subject to certain restrictions, our effective Registration Statement on Form S-3 (Registration No. 333-215671) (the S-3 Registration Statement) remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so. As we have been in the past, we expect that, when and as necessary, we will be successful in raising additional capital from the sale of our equity securities either in one or more public offerings or in one or more private placement transactions with individual accredited investors or institutions.
 
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations that could generate revenue or provide funding, including non-dilutive funding, for development of AV-101, PH94B, PH10 and/or additional product candidates. We may also seek additional government grant awards or agreements similar to our relationships with Baylor and the VA in connection with the Baylor Study. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the BlueRock Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of AV-101, PH94B, PH10 or other product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.  
 
Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of opportunities related to our success and the success of certain other companies in clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of AV-101, PH94B, PH10 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and operating costs. 
 
Notwithstanding the foregoing, there can be no assurance that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain substantial additional financing on a timely basis when needed in 2019 and beyond, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern.  As noted above, these Condensed Consolidated Financial Statements do not include any adjustments that might result from the negative outcome of this uncertainty.
 
Note 3.  Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include those relating to share-based compensation, right-of-use assets and lease liabilities and assumptions that have been used historically to value warrants and warrant modifications. With the exception of the BlueRock Agreement pursuant to which we recorded sublicense revenue in the third quarter of our fiscal year ended March 31, 2017, we do not currently have, nor have we had during the periods covered by this Report, any arrangements requiring the recognition of revenue.
 
 
 
 
-7-
 
Research and Development Expenses
 
Research and development expenses are composed of both internal and external costs.  Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs.  External research and development expenses consist primarily of costs associated with clinical and non-clinical development of AV-101, PH94B, PH10, and stem cell research and development costs, and costs related to the application and prosecution of patents related to those product candidates and, to a lesser extent, our stem cell technology platform. All such costs are charged to expense as incurred. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by contract research organizations (CROs) and clinical trial sites. Progress payments are generally made to CROs, clinical sites, investigators and other professional service providers. We analyze the progress of the clinical trial, including levels of subject enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to research and development expense in the period in which the facts that give rise to the revision become known. Costs incurred in obtaining product or technology licenses are charged immediately to research and development expense if the product or technology licensed has not achieved regulatory approval or reached technical feasibility and has no alternative future uses. In September and October 2018, we acquired exclusive worldwide licenses to develop and commercialize PH94B and PH10 by issuing an aggregate of 2,556,361 unregistered shares of our common stock having an issuance-date fair market value of $4,250,000. Since, at the date of each acquisition, neither product candidate had achieved regulatory approval and each will require significant additional development and expense, we expensed the costs related to acquiring the licenses and the option during our fiscal year ended March 31, 2019.
 
Stock-Based Compensation
 
We recognize compensation cost for all stock-based awards to employees and non-employee consultants based on the grant date fair value of the award.  We record non-cash, stock-based compensation expense over the period during which the employee or other grantee is required to perform services in exchange for the award, which generally represents the scheduled vesting period.  We have not granted restricted stock awards to employees nor do we have any awards with market or performance conditions. Non-cash expense attributable to compensatory grants of stock to non-employees is determined by the quoted market price of the stock on the date of grant and is either recognized as fully-earned at the time of the grant or expensed ratably over the term of the related service agreement, depending on the terms of the specific agreement.
 
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2019 and 2018.
 
 
 
 Three Months Ended June 30,
 
 
 
 2019
 
 
 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Research and development expense
 $390,600 
 $230,100 
 
    
    
 
    
    
 General and administrative expense
  672,400 
  382,500 
 
    
    
 
    
    
 Total stock-based compensation expense
 $1,063,000 
 $612,600 
 
In May 2019, the Compensation Committee of our Board of Directors (the Board) approved the grant of options from our 2016 Amended and Restated Stock Incentive Plan (the 2016 Plan) to purchase an aggregate of 1,220,000 shares of our common stock at a then above-market exercise price of $1.00 per share to the independent members of our Board, our officers and employees and certain consultants. The options vested 25% upon grant with the remaining shares vesting over three years for independent directors, officers and employees, and over two years for consultants. We valued the options granted in May 2019 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
 
Assumption:
 
May 2019
 
Market price per share at grant date
 $0.80 
Exercise price per share
 $1.00 
Risk-free interest rate
  2.12%
Expected term in years
  5.53 
Volatility
  85.90%
Dividend rate
  0.0%
Shares
  1,220,000 
 
    
Fair Value per share
 $0.54 
 
 
 
 
-8-
 
Additionally, in May 2019, the Board approved, subject to subsequent stockholder approval at our 2019 Annual Meeting of Stockholders to be held in September 2019, the 2019 Omnibus Equity Incentive Plan (the 2019 Plan) and designated 7.5 million shares of our authorized common stock to be reserved thereunder. Further, in May 2019, the Compensation Committee of the Board granted options pursuant to the 2019 Plan to one of our officers to purchase 170,000 shares of our common stock at a then above-market exercise price of $1.00 per share, which grant is contingent upon the approval of the 2019 Plan by our stockholders. The option will vest 25% upon approval of the 2019 Plan with the remaining shares vesting over three years. We did not recognize any expense attributable to the conditional option grant from the 2019 Plan in the quarter ended June 30, 2019. Upon approval of the 2019 Plan by our stockholders, no further option or other equity awards will be made from our 2016 Plan and all remaining authorized shares of our common stock available for issuance under the 2016 Plan will become available for issuance under the 2019 Plan.
 
At June 30, 2019, there were stock options outstanding under our 2016 Plan to purchase 7,844,838 shares of our common stock at a weighted average exercise price of $1.76 per share. At that date, there were also 1,388,412 shares of our common stock available for future issuance under the 2016 Plan.
 
Leases, Right-of-Use Assets and Lease Liabilities
 
On April 1, 2019, we adopted Financial Accounting Standards Board (FASB) ASU (Accounting Standards Update) No. 2016-02, Leases, which replaced the existing guidance in ASC 840, “Leases”, and its subsequent amendments including ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (ASC 842) using the modified transition method.
 
We determine whether an arrangement is an operating or financing lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. In determining the present value of the lease payments, we use the interest rate implicit in the lease when it is readily determinable and we use our estimated incremental borrowing rate based upon information available at the commencement date when the implicit rate is not readily determinable.
 
The lease payments used to determine our operating lease assets include lease incentives and stated rent increases and may include escalation or other clauses linked to rates of inflation or other factors when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.
 
Our operating leases are reflected in right of use asset – operating leases, other current liabilities and non-current operating lease liability in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease.
 
Our accounting for financing leases, previously referred to as “capital leases” under prior guidance, remained substantially unchanged with our adoption of ASC 842. Financing leases are included in property and equipment, net and as current and non-current financing lease liabilities in our condensed consolidated balance sheets. Refer to “Recent Accounting Pronouncements” below and Note 10, Commitments and Contingencies, for additional information regarding our adoption of ASC 842 and its impact on our condensed consolidated financial statements.
 
Comprehensive Loss
 
We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.
 
Loss per Common Share
 
Basic net loss attributable to common stockholders per share of common stock excludes the effect of dilution and is computed by dividing net loss increased by the accrual of dividends on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred), by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net loss attributable to common stockholders per share, we have generally not increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method because the result is antidilutive.
 
 
 
 
-9-
 
As a result of our net loss for all periods presented, potentially dilutive securities were excluded from the computation of diluted net loss per share, as their effect would be antidilutive. Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:
 
 
 
 
As of June 30,
 
 
 
 
2019
 
 
 
 
 
2018
 
 
 
 
 
 
Series A Preferred stock issued and outstanding (1)
 
             750,000
 
             750,000
 
 
 
 
 
Series B Preferred stock issued and outstanding (2)
 
          1,160,240
 
          1,160,240
 
 
 
 
 
Series C Preferred stock issued and outstanding (3)
 
          2,318,012
 
          2,318,012
 
 
 
 
 
Outstanding options under the Amended and Restated 2016 (formerly 2008) Stock Incentive Plan (4)
          7,844,838
 
          5,300,338
 
 
 
 
 
Outstanding warrants to purchase common stock
 
        21,453,402
 
        16,638,516
 
 
 
 
 
Total
 
        33,526,492
 
        26,167,106
 ____________
(1)
Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement, as amended.
(2)
Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015; excludes common shares issuable in payment of dividends on Series B Preferred upon conversion.
(3)
Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016.
(4)
Excludes options to purchase 170,000 shares granted subject to stockholder approval of the Company's 2019 Omnibus Equity Incentive Plan.
 
Fair Value Measurements
 
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. We carried no assets or liabilities that are measured on a recurring basis at fair value at June 30, 2019 or March 31, 2019.
 
Recent Accounting Pronouncements
 
Except as described below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended June 30, 2019, as compared to the recent accounting pronouncements described in our Form 10-K for our fiscal year ended March 31, 2019, that are of significance or potential significance to us.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases, which replaced the existing guidance in ASC 840, “Leases”, and in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (ASC 842). The new leasing standards set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standards require lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to the prior guidance for operating leases. We adopted the standards on the required effective date of April 1, 2019 and did not restate lease expense or lease-related assets or liabilities reported in prior comparative periods. Presentation of our financing lease for office equipment in the consolidated balance sheet is generally consistent with capitalized lease presentation under the prior lease accounting guidance. Presentation of leases within the consolidated statements of operations and consolidated statements of cash flows is generally consistent with the prior lease accounting guidance. We elected the package of practical expedients permitted under the transition guidance and, accordingly, the adoption of ASC 842 did not change the prior classification of any of our leases. We elected not to record a right-of-use asset or a lease liability on the balance sheet for leases with a term of 12 months or less and will recognize the associated lease payments in the consolidated statements of operations over the lease term. On the April 1, 2019 adoption date, we recognized approximately $4.3 million as total lease liabilities and $3.9 million as total right-of-use assets in our Condensed Consolidated Balance Sheet and derecognized a deferred rent liability of approximately $0.4 million attributable to the operating lease of our primary office and laboratory facilities recorded in accordance with prior guidance.
 
 
 
-10-
 
Note 4.  Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets are composed of the following at June 30, 2019 and March 31, 2019:
 
 
 
 June 30,
 
 
March
 
 
 
 2019
 
 
 2019
 
 
 
 
 
 
 
 
 AV-101 and PH94B materials and contract services
 $134,100 
 $5,900 
 Fair value of securities issued for professional services
  26,500 
  105,900 
 Insurance
  292,700 
  96,300 
 Public offering filing fees and expenses
  22,300 
  22,300 
 All other
  7,000 
  20,500 
 
 $482,600 
 $250,900 
 
The fair value of securities issued for professional services reflects the unexpensed portion of the fair value of securities we have issued to certain professional service providers as full or partial compensation for services. The fair value of the securities issued is being expensed ratably over the term of the related service agreement.
 
Note 5. Property and Equipment
 
Property and equipment is composed of the following at June 30, 2019 and March 31, 2019:
 
 
 
 June 30,
 
 
 March 31,
 
 
 
 2019
 
 
 2019
 
 
 
 
 
 
 
 
 Laboratory equipment
 $892,500 
 $892,500 
 Tenant improvements
  214,400 
  214,400 
 Computers and network equipment
  54,600 
  54,600 
 Office furniture and equipment
  84,600 
  84,600 
 
  1,246,100 
  1,246,100 
 
    
    
 Accumulated depreciation and amortization
  (959,600)
  (933,400)
 Property and equipment, net
 $286,500 
 $312,700 
 
Included in amounts reported above for office furniture and equipment is the right-of-use asset related to a financing lease of certain office equipment. Amounts associated with assets subject to the financing lease at June 30, 2019 and March 31, 2019 are as follows:
 
 
 
 June 30,
 
 
 March 31,
 
 
 
 2019
 
 
 2019
 
 
 
 
 
 
 
 
 Office equipment subject to financing lease
 $14,700 
 $14,700 
 Accumulated depreciation
  (7,300)
  (6,500)
 Net book value of office equipment subject to financing lease
 $7,400 
 $8,200 
 
Note 6.  Accrued Expenses
 
Accrued expenses are composed of the following at June 30, 2019 and March 31, 2019:
 
 
 
 June 30,
 
 
 March 31,
 
 
 
 2019
 
 
 2019
 
 
 
 
 
 
 
 
 Accrued expenses for AV-101, PH94B, and PH10
 
 
 
 
 
 
      clinical trial, development and related expenses
 $1,643,600 
 $1,067,600 
 Accrued compensation
  - 
  439,200 
 Accrued professional services
  195,700 
  172,100 
 All other
  7,700 
  6,700 
 
 $1,847,000 
 $1,685,600 
 
    
    
 
 
 
 
-11-
 
Note 7.  Notes Payable
 
The following table summarizes our unsecured promissory notes at June 30, 2019 and March 31, 2019:
 
 
 
June 30, 2019
 
 
 March 31, 2019
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
 
Balance
 
 
Interest
 
 
Total
 
 
Balance
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.75% and 7.15% Notes payable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
to insurance premium financing company (current)
 $246,400 
 $- 
 $246,400 
 $57,300 
 $- 
 $57,300 
 
In May 2019, we executed a 7.15% promissory note in the principal amount of $230,200 in connection with certain insurance policy premiums. The note is payable in monthly installments of $23,800, including principal and interest, through March 2020, and had an outstanding principal balance of $207,800 at June 30, 2019. In February 2019, we executed a 7.75% promissory note in the principal amount of $63,500 in connection with other insurance policy premiums. That note is payable in monthly installments of $6,600 including principal and interest, through December 2019 and had an outstanding principal balance of $38,600 at June 30, 2019.
 
Note 8.  Capital Stock
 
During the quarter ended June 30, 2019, we did not engage in any capital-raising transactions, nor did we grant any equity securities as full or partial compensation to consultants, other than stock options as described in Stock Based Compensation in Note 3, Summary of Significant Accounting Policies.
 
Warrants Outstanding
 
During the quarter ended June 30, 2019, warrants issued in private placement transactions during calendar 2018 to purchase an aggregate of 805,800 shares of our common stock at exercise prices between $1.50 per share and $1.75 per share became fully-exercisable in accordance with their terms. Accordingly, all warrants outstanding at June 30, 2019 are now fully-exercisable at a weighted average exercise price of $2.53 per share as follows:
 
 
 Exercise
 
 Weighted 

 
Warrants Outstanding
 
 
 Price
 
 
Average
 
Expiration
 
and Exercisable at
 
 
 per Share
 
 
per Share
 
 
Date
 
 
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 $1.50 
 $1.50 
11/30/2021 to 12/13/2022
  14,335,200 
 $1.59 - $1.80
 $1.67 
2/28/2022 to 10/10/2022
  625,619 
 $1.82 
 $1.82 
3/7/2023
  1,388,931 
 $2.00 - $4.50 
 $2.23 
9/26/2019 to 10/19/2022
  721,693 
 $5.30 
 $5.30 
5/16/2021
  2,705,883 
 $6.00 - $20.00 
 $7.94 
9/15/2019 to 3/3/2023
  1,676,076 
    
 $2.53 
 
  21,453,402 
 
Of the warrants outstanding at June 30, 2019, 2,705,883 shares of common stock underlying the warrants exercisable at $5.30 per share issued in our May 2016 public offering, 1,388,931 shares of common stock underlying the warrants exercisable at $1.82 per share issued in our September 2017 public offering and 9,596,200 shares of common stock underlying the warrants exercisable at $1.50 per share issued in our December 2017 public offering are registered for resale by the warrant holders. The common shares issuable upon exercise of our remaining outstanding warrants are unregistered. At June 30, 2019, none of our outstanding warrants are subject to down round anti-dilution protection features and all of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share.
 
Note 9.  Related Party Transactions
 
Cato Holding Company (CHC), doing business as Cato BioVentures (CBV), is the parent of Cato Research Ltd. (CRL). CRL is a contract research, development and regulatory services organization (CRO) that we have engaged for a wide range of material aspects related to the nonclinical and clinical development, manufacturing and regulatory affairs associated with our efforts to develop and commercialize AV-101 for MDD, including our ELEVATE Study, and other potential CNS indications, PH94B, PH10, and other potential product candidates. At June 30, 2019, CBV held approximately 2% of our outstanding common stock.
 
 
 
 
-12-
 
In July 2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a substantially similar May 2007 master services agreement, pursuant to which CRL may assist us in the evaluation, development, manufacturing, commercialization and marketing of our potential product candidates, and provide regulatory and strategic consulting services as requested from time to time. Specific projects or services are and will be delineated in individual work orders negotiated from time-to-time under the MSA. Under the terms of work orders issued pursuant to the July 2017 MSA and our prior May 2007 master services agreement, we incurred expenses of $1,405,100 and $877,500 during the quarters ended June 30, 2019 and 2018, respectively. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to, AV-101, PH94B, PH10 and other potential product candidates will increase in future periods.
 
During our fiscal year ended March 31, 2019, we issued an aggregate of 2,556,361 shares of our unregistered common stock having an issue-date fair market value of $4,250,000 to Pherin Pharmaceuticals, Inc. (Pherin) to acquire exclusive worldwide licenses to develop and commercialize PH94B and PH10. We recorded the acquisition of the licenses as research and development expense during our fiscal year ended March 31, 2019. During the quarter ended June 30, 2019, we recorded an aggregate of $30,000 representing monthly support payments to Pherin under the terms of the PH94B license agreement. At June 30, 2019, Pherin held approximately 5% of our outstanding common stock.
 
During the quarter ended June 30, 2019, we engaged the consulting firm headed by one of the independent members of our Board to provide market research studies for certain of our product pipeline candidates and recorded research and development expense of $27,700 related to such studies.
 
Note 10. Commitments and Contingencies
 
Operating Leases
 
We lease our headquarters office and laboratory space in South San Francisco, California under the terms of a lease that expires on July 31, 2022 and that provides an option to renew for an additional five years at then-current market rates. Consistent with the guidance in ASC 842, effective beginning April 1, 2019, we have recorded this lease in our Condensed Consolidated Balance Sheet as an operating lease. For the purpose of determining the right-of-use asset and associated lease liability, we determined that the renewal of this lease is reasonably probable. The lease of our South San Francisco facilities does not include any restrictions or covenants requiring special treatment under ASC 842.
 
The following table summarizes the presentation of the operating lease in our Condensed Consolidated Balance Sheet at June 30, 2019:
 
 
 
As of June 30, 2019
 
Assets
 
 
 
Right of use asset – operating lease
 $3,833,300 
 
    
Liabilities
    
Current operating lease obligation
 $278,100 
Non-current operating lease obligation
  3,956,900 
Total operating lease liability
 $4,235,000 
 
The following table summarizes the effect of operating lease costs in the Company’s condensed consolidated statements of operations:
 
 
 
For the Three 
Months Ended
 
 
 
June 30, 2019
 
Operating lease cost
 $208,800 
 
We lease a small office in the San Francisco Bay Area under a month-to-month arrangement at immaterial cost and have made an accounting policy election not to apply the ASC 842 operating lease recognition requirements to such short-term lease. We recognize the lease payments for this lease in general and administrative expense over the lease term. For the three months ended June 30, 2019, we recorded $3,400 of expense attributable to this lease.
 
 
 
 
-13-
 
The minimum (base rental) lease payments related to our South San Francisco operating lease are expected to be as follows:
 
Fiscal Years Ending March 31,
 
 
 
2020 (remaining nine months)
 $471,500
2021
 645,800
2022
 668,400
2023
 726,000
2024
 766,000
Thereafter
 2,720,500
Total lease expense
 5,988,200
Less imputed interest
  (1,763,200)
Present value of operating lease liabilities
 $4,235,000 
 
Under the prior lease guidance, future minimum lease payments, under the non-cancellable portion (excluding the five-year extension assumed under ASC 842) of the South San Francisco operating lease were as follows at March 31, 2019:
 
Fiscal Years Ending March 31,
 
 
 
2020
 $623,900 
2021
  645,800 
2022
  668,400 
2023
  225,300 
2024
  - 
Thereafter
  - 
 
 $2,163,400 
 
The remaining lease term, including the assumed five-year extension at the expiration of the current lease period, and the discount rate assumption for our South San Francisco operating lease is as follows:
 
 
 
As of June 30, 2019
 
Assumed remaining lease term in years
  8.09 
Assumed discount rate
  8.54%
 
The interest rate implicit in lease contracts is typically not readily determinable and, as such, we used our estimated incremental borrowing rate based on information available at the adoption of ASC 842, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment.
 
Supplemental disclosure of cash flow information related to the Company’s operating leases included in cash flows used by operating activities in the condensed consolidated statements of cash flows is as follows:
 
 
For the Three 
Months Ended
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 $188,200 
 
During the three months ended June 30, 2019, other than the initial adoption of ASC 842 that required right of use assets and lease liabilities to be recorded, we recorded no new right of use assets arising from new lease liabilities.
 
Note 11.  Subsequent Events
 
We have evaluated subsequent events through August 13, 2019 and have determined that there are no matters requiring disclosure.
 
 
 
 
-14-
 
 
Item 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q (Report) includes forward-looking statements. All statements contained in this Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Our business is subject to significant risks including, but not limited to, our ability to obtain substantial additional financing, the results of our research and development efforts, the results of nonclinical and clinical testing, the effect of regulation by the U.S. Food and Drug Administration (FDA) and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk Factors” in this Report.  Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board and stockholders.
  
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management or Board to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 
Business Overview
 
VistaGen Therapeutics. Inc., a Nevada corporation (which may be referred to as VistaGen, the Company, we, our, or us), is a clinical-stage biopharmaceutical company committed to developing and commercializing new generation medicines to treat diseases and disorders of the central nervous system (CNS) with high unmet need. Our CNS pipeline includes three differentiated clinical-stage product candidates focused on large and growing markets where we believe current treatments fall short of patient needs, with significant emphasis on major depressive disorder (MDD) and social anxiety disorder (SAD).
 
MDD is a serious neurobiologically-based mood disorder, affecting approximately 16 million adults in the U.S., according to the U.S. National Institutes of Health (NIH). Individuals diagnosed with MDD exhibit depressive symptoms, such as a depressed mood or a loss of interest or pleasure in daily activities, for more than a two-week period, as well as impaired social, occupational, educational or other important functioning which has a negative impact on their quality of life. Globally, MDD affects nearly 300 million people of all ages and is the leading cause of disability worldwide.
 
SAD affects approximately 20 million Americans and is the third most common psychiatric condition after depression and substance abuse. SAD is characterized by a persistent and unreasonable fear of one or more social or performance situations, where the individual fears that he or she will act in a way or show symptoms that will be embarrassing or humiliating, leading to avoidance of the situations when possible and anxiety or distress when they occur. These fears have a significant impact on the person's employment, social activities and overall quality of life. Only three drugs, all antidepressants, are approved by the U.S Food and Drug Administration (FDA) specifically for treatment of SAD. However, for treatment of both MDD and SAD, current oral antidepressants (ADs) have slow onset of effect (often several weeks to months) and significant side effects that may make them inadequate treatment alternatives for many individuals affected by MDD and SAD.
 
 
 
 
-15-
 
Our most advanced product candidate, PH94B neuroactive nasal spray, is fundamentally different from all current treatments for SAD. Developed from proprietary compounds called pherines and administered as a nasal spray, PH94B activates nasal chemosensory neurons that trigger neural circuits in the brain that suppress fear and anxiety. In a published double-blind, placebo-controlled Phase 2 clinical trial, PH94B was significantly more effective than placebo in reducing public-speaking and social interaction anxiety on laboratory challenges of individuals with SAD. Its novel mechanism of pharmacological action, rapid-onset of therapeutic effects and exceptional safety and tolerability profile in clinical trials to date make our PH94B neuroactive nasal spray an excellent product candidate with potential to become the first FDA-approved on-demand treatment for SAD. Additional potential indications for PH94B include post-traumatic stress disorder (PTSD), general anxiety disorder (GAD), postpartum anxiety (PPA) and other neuropsychiatric indications.
 
AV-101 (4-Cl-KYN), one of our two product candidates for MDD, belongs to a new generation of investigational medicines in neuropsychiatry and neurology known as NMDA (N-methyl-D-aspartate) glutamate receptor modulators. The NMDA receptor is a pivotal receptor in the brain and abnormal NMDA function is associated with multiple CNS diseases and disorders, including MDD, chronic neuropathic pain (NP), epilepsy, levodopa-induced dyskinesia (LID) and many others. AV-101 is an oral prodrug of 7-Cl-KYNA which binds uniquely at the glycine site of the NMDA receptor and has potential to be a new at-home treatment for MDD. AV-101 is currently in Phase 2 development in the U.S. for MDD. ELEVATE is our Phase 2 multicenter, double blind, placebo-controlled clinical study to evaluate the efficacy and safety of AV-101 as an add-on treatment for MDD in adult patients with an inadequate therapeutic response to current FDA-approved oral antidepressants (ADs) (the ELEVATE Study). We currently anticipate top line results from the ELEVATE Study in the second half of this calendar year. In addition to MDD, we believe preclinical data and positive safety data in all clinical studies to date support AV-101’s potential to treat LID, NP, and suicidal ideation (SI). The FDA has granted Fast Track designation for development of AV-101 both as a potential add-on treatment (together with a current FDA-approved antidepressant (an SSRI or an SNRI)) for adult patients with MDD who have an inadequate response to their current ADs and as a non-opioid treatment for NP. Additional potential indications for AV-101 include as a non-addictive, non-sedating treatment of NP, epilepsy, and to reduce LID in individuals with Parkinson’s disease.
 
We are collaborating with Baylor College of Medicine (Baylor) and the U.S. Department of Veterans Affairs (VA) on a small Phase 1b clinical trial of AV-101 in healthy volunteer U.S. Military Veterans from Operation Enduring Freedom, Operation Iraqi Freedom or Operation New Dawn (the Baylor Study). The Baylor Study is a randomized, double-blind, placebo-controlled cross-over study designed as a target engagement study as the first-step in plans to test potential anti-suicidal effects of AV-101 in U.S. Military Veterans who respond to ketamine-based therapy. We previously entered into a Material Transfer Cooperative Research and Development Agreement (MT CRADA) with the VA regarding clinical trial material for the Baylor Study. Government funding from the VA is being provided for substantially all other study costs.
 
Our other product candidate for MDD in Phase 2 development for MDD is PH10 neuroactive nasal spray. PH10 is a potential first-in-class, CNS neuroactive nasal spray administered in microgram doses for MDD. PH10 activates nasal chemosensory neurons that, in turn, engage GABA (gamma-aminobutyric acid) and CRH (corticotropin-releasing hormone) neurons in the limbic amygdala system. The activation of these neural circuits is believed to have the potential to lead to rapid antidepressant effects without psychological side effects, systemic exposure or safety concerns often associated with current antidepressants. Based on positive results of a small exploratory Phase 2a study in MDD in which rapid-onset antidepressant effects were observed without psychological side effects or systemic exposure, we are preparing for planned Phase 2b clinical development of PH10 as a stand-alone treatment for MDD.
 
Our wholly-owned subsidiary, VistaStem Therapeutics (VistaStem), is focused on applying pluripotent stem cell (hPSC) technology to discover, rescue and develop proprietary new chemical entities (NCEs) for CNS and other diseases. In addition, VistaStem’s hPSC technology has potential applications in cell therapy and regenerative medicine (CT/RM) involving hPSC-derived blood, cartilage, heart and liver cells. VistaStem’s drug rescue activities utilize CardioSafe 3D, its customized cardiac bioassay system, to discover and develop small molecule NCEs for our CNS pipeline or for out-licensing. To advance potential CT/RM applications of our cardiac stem cell technology, we have sublicensed to BlueRock Therapeutics LP, a next generation CT/ RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to the BlueRock Agreement, we may pursue additional CT/RM collaborations or licensing transactions involving hPSC-derived blood, cartilage, and/or liver cells.
 
Subsidiaries
 
As noted above, VistaStem, a California corporation, is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Report also include the accounts of VistaStem and VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.
 
 
 
 
-16-
 
Financial Operations Overview and Results of Operations
 
Our critical accounting policies and estimates and recent accounting pronouncements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, as filed with the SEC on June 25, 2019, and in Note 3 to the accompanying unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.
 
Summary
 
Net Loss
 
We have not yet achieved recurring revenue-generating status from any of our product candidates or technologies. Since inception, we have devoted substantially all of our time and efforts to developing our initial CNS product candidate, AV-101, from early nonclinical studies to our ongoing Phase 2 clinical development program in MDD. In addition, we have devoted resources to stem cell technology research and development, bioassay development and small molecule drug development, as well as creating, protecting and patenting intellectual property (IP) related to our product candidates and technologies, with the corollary initiatives of recruiting and retaining personnel and raising working capital. As disclosed above, during our fiscal year ended March 31, 2019, we acquired the rights to develop and commercialize PH94B and PH10 and are actively pursuing initiatives to advance their clinical and nonclinical development. As of June 30, 2019, we had an accumulated deficit of approximately $187.3 million. Our net loss for the quarters ended June 30, 2019 and 2018 was approximately $6.2 million and $4.2 million, respectively. We expect losses to continue for the foreseeable future, primarily as we complete our ELEVATE Study, pursue further clinical development of AV-101 for the adjunctive treatment of MDD and for a range of other CNS indications, and further develop PH94B and PH10.
 
Summary of the Quarter Ended June 30, 2019
 
During the quarter ended June 30, 2019, we continued to (i) advance nonclinical development, including manufacturing, and clinical development of AV-101 as a potential new generation antidepressant and as a potential new therapeutic alternative for several CNS indications with significant unmet need, (ii) advance the nonclinical, including manufacturing, and regulatory initiatives necessary to facilitate pivotal Phase 3 clinical development of PH94B for SAD and Phase 2 clinical development of PH10 for MDD, (iii) expand the regulatory and intellectual property foundation to support broad clinical development and, ultimately, commercialization of AV-101 in the U.S. and foreign markets, and (iv) on a limited basis, advance drug rescue applications of our stem cell technology to further expand our CNS pipeline.
 
We have continued to conduct our ELEVATE Study throughout the quarter, in addition to producing supplies of AV-101 and conducting or initiating certain Phase 3-enabling nonclinical studies involving AV-101.
 
Pursuant to our MT CRADA with the VA and our arrangements with Baylor, Baylor continued the Baylor Study to define a dose-response relationship between AV-101 and relevant biomarkers related to NMDA function and others possibly related to suicidal ideation in U.S. Military Veterans.
 
We continue to pursue initiatives to secure a broad portfolio of patent protection for AV-101 that covers the treatment of multiple CNS indications, unit dose formulations of AV-101 effective to treat depression and chemical synthesis methods. With respect to CNS treatments, we obtained patents in several countries for the treatment of depression and we are pursuing patent applications related to treatment of L-DOPA induced dyskinesias, certain types of neuropathic pain, tinnitus and obsessive-compulsive disorder. Additional patent applications to other aspects of prognostic testing and treatment using AV-101 are under consideration.
 
Over the recent fiscal years and throughout this quarter, we have pursued patent applications in the U.S., Australia, China, Europe, Japan and other selected countries and regions with significant commercial potential. Several of these patent applications, including a patent for treatment of MDD with AV-101 granted in Australia, were recently allowed or have been granted in the U.S. and other major pharmaceutical markets. Based on patent issuances or allowances to-date in several countries, we believe that pending counterpart patent applications related to AV-101 currently under review in other countries also are likely to be granted, although there can be no assurance that all pending applications will ultimately be granted.
 
We have an exclusive license from Pherin to its portfolio of patent assets around PH94B, under clinical development for the treatment of SAD. Patents have issued in several countries, including the U.S., Australia, Canada, China, Europe, Japan, Korea and Mexico.
 
 
 
 
-17-
 
We also have an exclusive license from Pherin to its portfolio of patent assets around PH10, under clinical development for the treatment of depressive disorders. Patents in this portfolio have issued in Australia, China, Europe and Japan. Applications are pending in the U.S., Canada, Korea and Mexico.
 
As with AV-101, we plan to seek regulatory exclusivity in countries where this is available for the therapeutic use of PH94B, with initial emphasis on treating SAD as our lead indication in clinical development, and for the therapeutic use of PH10, with our lead indication being the treatment of MDD. 
 
We have obtained and are pursuing patent rights to the production of several types of stem cells and cells differentiated from those stem cells, including cardiomyocytes, hematopoietic cells, chondrocytes, cartilage cells and hepatocytes, as well as the use of certain cell types that have been differentiated from pluripotent stem cells for therapeutic purposes, including cell-based therapy and regenerative medicine.
 
Following the completion of our public offering in February 2019, which generated $11.5 million in gross proceeds to us, we did not complete any additional financing transactions during the period ended June 30, 2019. As a matter of course, we continue to minimize, to the greatest extent possible, cash commitments and expenditures for both internal and external research and development and general and administrative services. To further advance the clinical and nonclinical development of AV-101, PH94B, PH10 and our stem cell technology platform, as well as support our operating activities, we continue to carefully manage our routine operating costs, including our internal employee related expenses, as well as external costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and internal costs. 
 
Results of Operations
 
Comparison of Three Months Ended June 30, 2019 and 2018
 
The following table summarizes the results of our operations for the three months ended June 30, 2019 and 2018 (amounts in thousands).
 
 
 
 Three Months Ended
June 30,
 
 
 
 2019
 
 
 2018
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 Research and development
 $4,314 
 $2,744 
 General and administrative
  1,910 
  1,466 
  Total operating expenses
  6,224 
  4,210 
 
    
    
Loss from operations
  (6,224)
  (4,210)
 
    
    
Interest income (expense), net
  16 
  (2)
 
    
    
Loss before income taxes
  (6,208)
  (4,212)
Income taxes
  (2)
  (2)
 
    
    
Net loss
  (6,210)
  (4,214)
Accrued dividend on Series B Preferred Stock
  (302)
  (274)
Net loss attributable to common stockholders
 $(6,512)
 $(4,488)

Revenue   
 
We reported no revenue for either the quarter ended June 30, 2019 or 2018 and we presently have no recurring revenue generating arrangements with respect to AV-101, PH94B, PH10 or other potential product candidates. While we may potentially receive payments or royalties in the future under our December 2016 BlueRock Agreement in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the BlueRock Agreement will provide revenue to us in the near term or at all.
 
 
 
 
-18-
 
Research and Development Expense
 
Research and development expense increased to $4.3 million compared to $2.7 million for the quarters ended June 30, 2019 and 2018, respectively. Continuing expenses of the ELEVATE Study and various AV-101 nonclinical activities, including manufacturing additional quantities of AV-101 and other developmental studies, as well as nonclinical activities supporting the continuing development of PH94B are the primary reasons for the increase in research and development expense. Noncash expenses included in research and development expense, primarily stock compensation and depreciation, accounted for approximately $416,000 and $255,000 in the quarters ended June 30, 2019 and 2018, respectively. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
 
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Salaries and benefits
 $340 
 $316 
Stock-based compensation
  391 
  230 
Consulting and other professional services
  136 
  14 
Technology licenses and royalties
  167 
  124 
Project-related research and supplies:
    
    
ELEVATE Study and other AV-101 expenses
  2,666 
  1,903 
PH94B and PH10 expenses
  424 
  - 
Stem cell and all other
  42 
  39 
 
  3,132 
  1,942 
Rent
  136 
  104 
Depreciation
  12 
  12 
All other
  - 
  2 
Total Research and Development Expense
 $4,314 
 $2,744 
 
The increase in salaries and benefits expense reflects the impact of salary increases granted to our Chief Medical Officer (CMO), Chief Scientific Officer (CSO) and members of our scientific staff effective in April 2019.
 
Stock-based compensation expense reflects the routine amortization of option grants made to our CSO, CMO, scientific staff and certain consultants in June 2016 and thereafter, all earlier grants having become fully vested and amortized. Grants awarded after June 2018 account for approximately $139,000 of the $161,000 increase in 2019 expense compared to 2018. Expense attributable to these grants is generally being amortized over two-year to three-year vesting periods, with one-quarter of the grants made in August 2018 and May 2019 being immediately vested and expensed upon grant, in accordance with the terms of the respective grants.
 
Consulting services reflects fees paid or accrued for scientific, nonclinical and clinical development and regulatory advisory services rendered to us by third-parties, in 2018, primarily by members of our Scientific Advisory Board and CNS Clinical and Regulatory Advisory Board. The increase in 2019 expense also reflects consulting and analytical services in support of our PH94B and PH10 initiatives.
 
Technology license expense reflects both recurring annual license fees, as well as legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements or that we have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, this expense includes legal counsel and other costs we have incurred to advance various patent applications in the U.S. and numerous foreign countries with respect to AV-101 and our stem cell technology platform. Support of the intellectual property portfolios of PH94B and PH10 contributed only nominally to this expense in 2019.
 
AV-101 project expense for each of the quarters presented primarily reflects the costs of conducting the ELEVATE Study, including various CRO, investigator and clinical site costs, as well as expense incurred to manufacture additional quantities of AV-101 for use in future Phase 3-enabling nonclinical trials and clinical development of AV-101 for MDD and other potential CNS indications. In addition to increased ELEVATE Study costs in 2019, we have incurred further costs associated with various Phase 3-enabling initiatives and nonclinical trials.
 
Current quarter expense related to PH94B primarily reflects manufacturing and regulatory initiatives necessary to facilitate pivotal Phase 3 clinical development of PH94B for SAD. Similar initiatives with respect to PH10 for MDD were planned during the current quarter and are scheduled to begin in the quarter ending September 30, 2019.
 
Stem cell and other project related expenses reflects costs associated with drug rescue applications of our stem cell technology in both years.
 
 
 
 
-19-
 
The increase in rent expense reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term, for our South San Francisco office and laboratory facility lease. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. In implementing ASC 842, we also projected that we would exercise a five-year option to extend our tenancy under the lease when it expires in 2022, which extension would be subject to market rent conditions at that time. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Refer to Note 10, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements in Part I of this Report for additional information.
 
General and Administrative Expense
 
General and administrative expense increased to approximately $1.9 million, from approximately $1.5 million for the quarters ended June 30, 2019 and 2018, respectively. Noncash expense, $772,000 in the quarter ended June 30, 2019, increased from $503,000 in the quarter ended June 30, 2018 primarily due to an increase in stock-based compensation offset by a decrease in noncash components of investor and public relations expenses. The following table indicates the primary components of general and administrative expense for each of the periods (amounts in thousands):
 
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Salaries and benefits
 $344 
 $299 
Stock-based compensation
  672 
  382 
Board fees
  46 
  39 
Legal, accounting and other professional fees
  279 
  251 
Investor and public relations
  304 
  286 
Insurance
  82 
  68 
Travel expenses
  30 
  37 
Rent and utilities
  90 
  71 
All other expenses
  63 
  33 
 
 $1,910 
 $1,466 
 
The increase in salaries and benefits primarily reflects the impact of salary increases granted effective April 2019 to our Chief Executive Officer (CEO), Chief Financial Officer (CFO), Vice President-Corporate Development (VP Corporate Development) and a non-officer member of our administrative staff.
 
Stock-based compensation expense reflects the routine amortization of option grants made to our CEO, CFO, VP Corporate Development, administrative staff, independent members of our Board and certain consultants in June 2016 and thereafter, all earlier grants having become fully vested and amortized. Grants awarded after June 2018 account for approximately $248,500 of the $290,000 increase in 2019 expense compared to 2018 expense. Expense attributable to these grants is generally being amortized over two-year to three-year vesting periods, with one-quarter of the grants made in August 2018 and May 2019 being immediately vested and expensed upon grant, in accordance with the terms of the respective grants.
 
Board fees represents fees paid as consideration for the Board and Board Committee services of the independent members of our Board and the 2019 increase reflects the addition of a new independent member to our Board in January 2019.
 
Legal, accounting and other professional fees for the quarters ended June 30, 2019 and 2018 includes expense related to routine legal fees as well as the accounting expense related to the annual audit of the prior year’s financial statements and the review of the financial statements for the first quarter of the fiscal year. In 2019 and 2018, we also incurred $30,000 and $10,000, respectively, attributable to services provided by international business development consultants.
 
Investor and public relations expense includes the fees of our various external service providers for a broad spectrum of investor relations and public relations services, and well as market awareness and strategic advisory and support functions and initiatives that included numerous meetings in multiple U.S. markets and other communication activities focused on expanding market awareness of the Company and its research and development programs, including among registered investment professionals and investment advisors, and individual and institutional investors. In the quarter ended June 30, 2019, in addition to cash fees and expenses we incurred for such activities, we recognized $79,400 of noncash expense attributable to the amortization of the fair value of stock and warrants granted in the prior fiscal year to various corporate development, investor relations, and market awareness service providers. The balance of the fair value of the securities granted remains recorded as a prepaid expense at June 30, 2019 and is being amortized over the remaining service period of the respective contracts. In the quarter ended June 30, 2018, in addition to cash fees and expenses we incurred, we granted an aggregate of 100,000 unregistered shares of our common stock to certain investor relations, market awareness and financial advisory service providers as full or partial compensation for their services and recognized noncash expense of approximately $123,000, representing the fair value of the stock at the time of issuance.
 
 
 
 
-20-
 
In both periods, travel expense reflects costs associated with management presentations and meetings held in multiple U.S. markets, and certain international markets in 2019, with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development and partnering initiatives and in monitoring the progress of our ELEVATE Study in both years.
 
The increase in rent expense reflects our implementation of ASC 842 effective April 1, 2019 and the requirement to recognize, as an operating lease, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term, for our South San Francisco office and laboratory facility lease. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. In implementing ASC 842, we also projected that we would exercise a five-year option to extend our tenancy under the lease when it expires in 2022, which extension would be subject to market rent conditions at that time. We allocate total rent expense for our South San Francisco facility between research and development expense and general and administrative expense based generally on square footage dedicated to each function. Refer to Note 10, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements in Part I of this Report for additional information.
 
Interest and Other Expenses   
 
Interest income, net of interest expense, totaled $16,500 for the quarter ended June 30, 2019 compared to interest expense of $2,100 for the quarter ended June 30, 2018. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):
 
 
 
Three Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Interest income
 $19 
 $- 
Interest expense on premium financing and capital lease (2018)
  (3)
  (2)
Interest income (expense), net
 $16 
 $(2)
 
Following the completion of our public offering in February 2019, which generated $11.5 million in gross proceeds to us, during the quarter ended June 30, 2019, we deposited a portion of the proceeds in interest-bearing cash equivalent accounts and earned interest income. Interest expense in both periods relates to interest paid on insurance premium financing notes and on a lease of office equipment treated as a capitalized lease in 2018 and as a financing lease subject to ASC 842 in 2019.
 
We recognized $302,500 and $273,500 for the quarters ended June 30, 2019 and 2018, respectively, representing the 10% cumulative dividend payable on outstanding shares of Series B Preferred as an additional deduction in arriving at net loss attributable to common stockholders in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss included in Part I of this Report. There have been no conversions of outstanding shares of Series B Preferred stock into shares of our common stock since August 2016.
 
Liquidity and Capital Resources
 
Since our inception in May 1998 through June 30, 2019, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $79.0 million, as well as from an aggregate of approximately $17.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials such as the Baylor Study), strategic collaboration payments, intellectual property sublicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.1 million in non-cash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
 
At June 30, 2019, we had cash and cash equivalents of approximately $8.3 million.
 
 
 
 
-21-
 
Although we believe our cash position at June 30, 2019 is sufficient to complete and announce top line results of our ELEVATE Study, our cash position at June 30, 2019 considered with our recurring and anticipated losses, negative cash flows from operations and limited stockholders’ equity make it probable, in the absence of additional financing, that we will not have sufficient resources to fund our planned operations for the twelve months following the issuance of these financial statements, during which time we plan to complete our ELEVATE study, prepare for and launch a pivotal Phase 3 clinical trial of PH94B, prepare for additional Phase 2 clinical studies and certain nonclinical studies involving AV-101 and prepare for a Phase 2b clinical trial of PH10, and raises substantial doubt that we can continue as a going concern. When necessary and advantageous, we plan to raise additional capital, primarily through the sale of our equity securities in one or more private placements to accredited investors or in public offerings. Subject to certain restrictions, our effective Registration Statement on Form S-3 (Registration No. 333-215671) (the S-3 Registration Statement) remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so. As we have been in the past, we expect that, when and as necessary, we will be successful in raising additional capital from the sale of our equity securities either in one or more public offerings or in one or more private placement transactions with individual accredited investors or institutions.
 
In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations that could generate revenue or provide funding, including non-dilutive funding, for development of AV-101, PH94B, PH10 and/or additional product candidates. We may also seek additional government grant awards or agreements similar to our relationships with Baylor and the VA in connection with the Baylor Study. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. We may also pursue intellectual property arrangements similar to the BlueRock Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of AV-101, PH94B, PH10 or other product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.  
 
Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of opportunities related to our success and the success of certain other companies in clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of AV-101, PH94B, PH10 and, to a lesser extent, our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, acquisition and protection of intellectual property, public company compliance and other professional services and operating costs. 
 
Notwithstanding the foregoing, there can be no assurance that future financings or government or other strategic collaborations will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain substantial additional financing on a timely basis when needed in 2019 and beyond, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern.  As noted above, these Condensed Consolidated Financial Statements do not include any adjustments that might result from the negative outcome of this uncertainty.
 
Cash and Cash Equivalents
 
The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):
 
 
 
Three Months Eneded
June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Net cash used in operating activities
 $(4,761)
 $(3,135)
Net cash used in investing activities
  - 
  (35)
Net cash (used in) provided by financing activities
  (42)
  23 
 
    
    
 Net decrease in cash and cash equivalents
  (4,803)
  (3,147)
 Cash and cash equivalents at beginning of period
  13,100 
  10,378 
 Cash and cash equivalents at end of period
 $8,297 
 $7,231 
 
 
 
-22-
 
The increase in cash used in operations results primarily from the conduct of our ELEVATE Study, which commenced at the end of the fourth quarter of our fiscal year ended March 31, 2018. Contributing additionally to the increase are modest increases in employee cash compensation and benefits and an increase in various investor relations and corporate development and awareness initiatives. Cash used in investing activities in 2018 reflects the cost of tenant improvements at our office and laboratory facilities in South San Francisco, CA, substantially all of which were reimbursed by our landlord under the terms of our November 2016 lease extension, which reimbursement is reflected in operating activities. Cash provided by financing activities in 2018 reflects the first cash proceeds from our Summer 2018 Private Placement net of routine insurance premium financing note and lease payments in both years.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
Recent Accounting Pronouncements
 
For information relating to recent accounting pronouncements and the expected impact of such pronouncements on our condensed consolidated financial statements, see Note 3 of the Notes to Condensed Consolidated Financial Statements included elsewhere in this Report.
 
Item 4.
 
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.
 
Internal Control over Financial Reporting
 
In our Annual Report on Form 10-K for our fiscal year ended March 31, 2019 filed with the Securities and Exchange Commission on June 25, 2019, we identified two material weaknesses in our internal control over financial reporting relating to (i) segregation of duties and (ii) the functionality of our accounting software. Management does not believe that these weaknesses have resulted in any deficient financial reporting and believes that current resources would be more appropriately applied elsewhere and when resources permit, they will alleviate such material weaknesses through various steps, which may include the addition of qualified financial personnel and/or the acquisition and implementation of alternative accounting software. Accordingly, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this Report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
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PART II: OTHER INFORMATION
 
Item 1. Legal Proceedings
 
None.
 
Item 1A. Risk Factors
 
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q (Report) and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2019 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 one or more of our current drug candidates and we cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize any of our product candidates.
 
We currently have no drug products for sale and may never be able to develop and commercialize marketable drug products. Our business currently depends heavily on the successful development, manufacturing, regulatory approval and commercialization of one or more of our current drug candidates, as well as, but to a more limited extent, our ability to acquire, license or produce, develop and commercialize additional product candidates. Each of our current drug candidates will require substantial additional nonclinical and clinical development, manufacturing and regulatory approval before any of them may be commercialized, and there can be no assurance that any of them will ever achieve regulatory approval. Any DR NCE we produce will require substantial nonclinical development, all phases of clinical development, manufacturing and regulatory approval before it may be commercialized. The nonclinical and clinical development of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the U.S. and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through numerous nonclinical and clinical studies that the product candidate is safe and effective for use in each target indication. Research and development of product candidates in the pharmaceutical industry is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of nonclinical or clinical studies. This process takes many years and may also include post-marketing studies, surveillance obligations and drug safety programs, which would require the expenditure of substantial resources beyond the proceeds we have raised to date. Of the large number of drug candidates in development in the U.S., only a small percentage will successfully complete the required FDA regulatory approval process and will be commercialized. Accordingly, we cannot assure you that any of our current drug candidates or any future product candidates will be successfully developed or commercialized in the U.S. or any market outside the U.S.
 
We are not permitted to market our product candidates in the U.S. until we receive approval of a NDA from the FDA, or in any foreign countries until we receive the requisite approval from such countries. Obtaining FDA approval of a NDA is a complex, lengthy, expensive and uncertain process. The FDA may refuse to permit the filing of our NDA, delay, limit or deny approval of a NDA for many reasons, including, among others:
 
if we submit a NDA and it is reviewed by a FDA advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional nonclinical or clinical studies, limitations on approved labeling or distribution and use restrictions;
 
a FDA advisory committee may recommend, or the FDA may require, a REMS safety program as a condition of approval or post-approval;
 
a FDA advisory committee or the FDA or applicable regulatory agency may determine that there is insufficient evidence of overall effectiveness or safety in a NDA and require additional clinical studies;
 
the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or
 
the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations.
  
 
 
 
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Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully commercialize any current or future drug product candidate we may develop. Any such setback in our pursuit of regulatory approval for any product candidate would have a material adverse effect on our business and prospects.
 
In addition, we anticipate that certain of our product candidates, including PH94B and PH10, will be subject to regulation as combination products, which means that they are composed of both a drug product and device product. If marketed individually, each component would be subject to different regulatory pathways and reviewed by different centers within the FDA. Our product candidates that are considered to be drug-device combination products will require review and coordination by FDA’s drug and device centers prior to approval, which may delay approval. A combination product with a drug primary mode of action generally would be reviewed and approved pursuant to the drug approval processes under the Federal Food, Drug and Cosmetic Act of 1938. In reviewing the NDA application for such a product, however, FDA reviewers in the drug center could consult with their counterparts in the device center to ensure that the device component of the combination product met applicable requirements regarding safety, effectiveness, durability and performance. Under FDA regulations, combination products are subject to cGMP requirements applicable to both drugs and devices, including the Quality System (QS) regulations applicable to medical devices. Problems associated with the device component of the combination product candidate may delay or prevent approval.
 
We have been granted Fast Track designation from the FDA for development of AV-101 for the adjunctive treatment of MDD and for the treatment of NP. However, these designations may not actually lead to faster development or regulatory review or approval processes for AV-101. Further, there is no guarantee the FDA will grant Fast Track designation for AV-101 as a treatment option for other CNS indications or for any of our other product candidates in the future.
 
The Fast Track designation is a program offered by the FDA, pursuant to certain mandates under the FDA Modernization Act of 1997, designed to facilitate drug development and to expedite the review of new drugs that are intended to treat serious or life threatening conditions. Compounds selected must demonstrate the potential to address unmet medical needs. The FDA’s Fast Track designation allows for close and frequent interaction with the FDA. A designated Fast Track drug may also be considered for priority review with a shortened review time, rolling submission, and accelerated approval if applicable. The designation does not, however, guarantee FDA approval or expedited approval of any application for the product candidate.
 
In December 2017, the FDA granted Fast Track designation for development of AV-101 for the adjunctive (add-on) treatment of MDD in patients with an inadequate response to current antidepressants. In September 2018, the FDA granted Fast Track designation for development of AV-101 for the treatment of NP. However, these FDA Fast Track designations may not lead to a faster development or regulatory review or approval process for AV-101 and the FDA may withdraw Fast Track designation of AV-101 for either or both indications if it believes that the respective designation is no longer supported by data from our clinical development programs.
 
In addition, we may apply for Fast Track designation for AV-101 as a treatment option for other CNS indications, and for our other product candidates. The FDA has broad discretion whether or not to grant a Fast Track designation, and even if we believe AV-101, PH94B, PH10 and/or other product candidates may be eligible for this designation, we cannot be sure that the review or approval will compare to conventional FDA procedures.
   
Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.
 
The results of preclinical studies and early clinical trials of AV-101, PH94B, PH10 and/or our other future product candidates, if any, including positive results, may not be predictive of the results of later-stage clinical trials. AV-101, PH94B, PH10 or any other future product candidates in later stages of clinical development may fail to show the desired safety and efficacy results despite having progressed through nonclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, our future clinical trial results may not be successful for these or other reasons.
 
Moreover, nonclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in nonclinical studies and clinical trials nonetheless failed to obtain FDA approval. With respect to our current product candidates, if our ELEVATE Study, any future clinical study of AV-101, one or more of the future Phase 3 clinical trials of PH94B for SAD or a future Phase 2 clinical trial of PH10 for MDD fail(s) to produce positive results, the development timeline and regulatory approval and commercialization prospects for AV-101, PH94B, or PH10 and, correspondingly, our business and financial prospects, could be materially adversely affected.
  
 
 
 
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This drug candidate development risk is heightened by any changes in planned timing or nature of clinical trials compared to completed clinical trials. As product candidates are developed through preclinical to early- and late-stage clinical trials towards regulatory approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for later stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.
 
For example, the results of planned clinical trials may be adversely affected if we or any of our collaborators seek to optimize and scale-up production of a product candidate. In such case, we will need to demonstrate comparability between the newly manufactured drug substance and/or drug product relative to the previously manufactured drug substance and/or drug product. Demonstrating comparability may cause us to incur additional costs or delay initiation or completion of our clinical trials, including the need to initiate a dose escalation study and, if unsuccessful, could require us to complete additional nonclinical or clinical studies of our product candidates.
 
If serious adverse events or other undesirable side effects or safety concerns attributable to AV-101 are identified during the Baylor Study, other investigator-sponsored clinical trials, in our clinical trials of AV-101, including our ELEVATE study, or our clinical trials of PH94B or PH10, it may adversely affect or delay our clinical development and commercialization of AV-101, PH94B or PH10.
 
Undesirable side effects or safety concerns caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval. AV-101 was previously tested by the NIMH in the NIMH Study, is currently being tested by Baylor in the Baylor Study and may be subjected to testing in the future for other CNS indications in additional investigator-sponsored clinical trials. Although no treatment-related serious adverse events (SAEs) were observed in the NIMH Study, if treatment-related SAEs or other undesirable side effects or safety concerns, or unexpected characteristics attributable to AV-101 are observed in the Baylor Study other investigator-sponsored clinical trials of AV-101, our clinical trials of AV-101, including our ELEVATE Study, or in our future clinical trials of PH94B or PH10, it may adversely affect or delay our clinical development and commercialization of AV-101, PH94B or PH10, and the occurrence of these events could have a material adverse effect on our business and financial prospects. Results of our future clinical trials could reveal a high and unacceptable severity and prevalence of adverse side effects. In such an event, our trials could be suspended or terminated and the FDA or other regulatory agency could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims.
 
Additionally, if any of our product candidates receives marketing approval and we or others later identify undesirable or unacceptable side effects or safety concerns caused by these product candidates, a number of potentially significant negative consequences could result, including:
 
 
regulatory authorities may withdraw, suspend, or limit approvals of such product and require us to take them off the market;
 
 
regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
 
 
regulatory authorities may require a medication guide outlining the risks of such side effects for distribution to patients, or that we implement a REMS or REMS-like plan to ensure that the benefits of the product outweigh its risks;
 
 
we may be required to change the way a product is distributed or administered, conduct additional clinical trials or change the labeling of a product;
 
            
we may be required to conduct additional post-marketing studies or surveillance;
 
            
we may be subject to limitations on how we may promote the product;
 
            
sales of the product may decrease significantly;
 
 
we may be subject to regulatory investigations, government enforcement actions, litigation or product liability claims; and
 
            
our products may become less competitive or our reputation may suffer.
 
Any of these events could prevent us or any collaborators from achieving or maintaining market acceptance of our product candidates or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenue from the sale of our product candidates.
  
 
 
 
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Failures or delays in the commencement or completion of our planned clinical trials and nonclinical studies of AV-101, PH94B, PH10 or other our product candidates could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.
 
We will need to complete our ELEVATE Study, at least two pivotal Phase 3 clinical trials, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to the submission of any NDA for regulatory approval for AV-101 as an add-on treatment for MDD in patients with an inadequate response to current ADs, or any other CNS indication. Similarly, we will need to complete at least two pivotal Phase 3 clinical studies of PH94B, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to our submission of an NDA for regulatory approval of PH94B as an on-demand treatment for SAD or any CNS other indication. For PH10, we will need to complete at least one additional Phase 2 clinical study, two pivotal Phase 3 clinical trials, additional toxicology and other standard nonclinical and clinical safety studies, as well as certain standard smaller clinical studies prior to the submission of an NDA for regulatory approval of PH10 as treatment for MDD, or any other CNS indication. Successful completion of our nonclinical and clinical trials is a prerequisite to submitting an NDA and, consequently, the ultimate approval required before commercial marketing of any product candidate we may develop. Except as disclosed herein, we do not know whether the Baylor Study, our ELEVATE Study or any of our future-planned nonclinical and clinical trials of AV-101, PH94B, PH10 or any other product candidate will be completed on schedule, if at all, as the commencement and completion of nonclinical and clinical trials can be delayed or prevented for a number of reasons, including, among others:
 
the regulatory authority may deny permission to proceed with planned clinical trials or any other clinical trials we may initiate, or may place a planned or ongoing clinical trial on hold;
 
delays in filing or receiving approvals from regulatory authorities of additional INDs that may be required;
 
negative or ambiguous results from nonclinical or clinical studies;
 
delays in reaching or failing to reach agreement on acceptable terms with prospective CROs, investigators and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs, investigators and clinical trial sites;
 
delays in the manufacturing of, or insufficient supply of product candidates necessary to conduct nonclinical or clinical trials, including delays in the manufacturing of sufficient supply of drug substance or finished drug product;
 
inability to manufacture or obtain clinical supplies of a product candidate meeting required quality standards;
 
difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective clinical site or sites; 
 
challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to clinical trial sites;
 
eligibility criteria for a clinical trial, the nature of a clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;
 
severe or unexpected adverse drug-related side effects experienced by patients in a clinical trial;
 
delays in validating any endpoints utilized in a clinical trial;
 
the regulatory authority may disagree with our clinical trial design and our interpretation of data from prior nonclinical studies or clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;
  
reports from nonclinical or clinical testing of other CNS indications or therapies that raise safety or efficacy concerns; and
 
difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trial, lack of efficacy, side effects, personal issues or loss of interest.
    
 
 
 
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Clinical trials may also be delayed or terminated prior to completion as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the regulatory authority, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board (DSMB), overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others:
 
failure to conduct the clinical trial in accordance with regulatory requirements or approved clinical protocols;
 
inspection of the clinical trial operations or trial sites by the regulatory authority that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;
 
unforeseen safety issues, including any that could be identified in nonclinical carcinogenicity studies, adverse side effects or lack of effectiveness;
 
changes in government regulations or administrative actions;
 
problems with clinical supply materials that may lead to regulatory actions; and 
 
lack of adequate funding to continue nonclinical or clinical studies.
 
Changes in regulatory requirements, regulatory guidance or unanticipated events during our nonclinical studies and clinical trials of AV-101, PH94B, PH10 or other product candidates may occur, which may result in changes to nonclinical studies and clinical trial protocols or additional nonclinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.
 
Changes in regulatory requirements, guidance or unanticipated events during our nonclinical studies and clinical trials of AV-101, PH94B, PH10 or other product candidates may force us to amend nonclinical studies and clinical trial protocols or the regulatory authority may impose additional nonclinical studies and clinical trial requirements. Amendments or changes to our clinical trial protocols would require resubmission to the regulatory authority and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. Similarly, amendments to our nonclinical studies may adversely impact the cost, timing, or successful completion of those nonclinical studies. If we experience delays completing, or if we terminate, any of our nonclinical studies or clinical trials, or if we are required to conduct additional nonclinical studies or clinical trials, the commercial prospects for AV-101, PH94B, PH10 or other product candidates may be harmed and our ability to generate product revenue will be delayed.
 
We rely, and expect that we will continue to rely, on third parties to conduct our nonclinical and clinical trials of our current product candidates and will continue to do so for any other future product candidates. If these third parties do not successfully carry out their contractual duties and/or meet expected deadlines, completion of our nonclinical or clinical trials and development of AV-101, PH94B, PH10 or other future product candidates may be delayed and we may not be able to obtain regulatory approval for or commercialize AV-101, PH94B, PH10 or other future product candidates and our business could be substantially harmed.
 
By strategic design, we do not have the internal staff resources to independently conduct nonclinical and clinical trials of our product candidates completely on our own. We rely on our extensive network of strategic relationships with various academic research centers, medical institutions, nonclinical and clinical investigators, contract laboratories and other third parties, such as CROs, to assist us to conduct and complete nonclinical and clinical trials of our product candidates. We enter into agreements with third-party CROs to provide monitors for and to manage data for our clinical trials, as well as provide other services necessary to prepare for, conduct and complete clinical trials. We rely heavily on these and other third-parties for execution of nonclinical and clinical trials for our product candidates and we control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these nonclinical and clinical trials and the management of data developed through nonclinical and clinical trials than would be the case if we were relying entirely upon our own internal staff resources. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:
 
have staffing difficulties and/or undertake obligations beyond their anticipated capabilities and resources;
 
fail to comply with contractual obligations;
  
experience regulatory compliance issues;
 
undergo changes in priorities or become financially distressed; or
 
form relationships with other entities, some of which may be our competitors.
 
 
 
 
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These factors may materially adversely affect the willingness or ability of third parties to conduct our nonclinical and clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our nonclinical studies and clinical trials is conducted and completed in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs, Baylor or other independent investigators does not relieve us of our regulatory responsibilities. We and our CROs, Baylor and any investigator in an investigator-sponsored study are required to comply with regulations and guidelines, including current Good Clinical Practice regulations (cGCPs) for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we, any of our CROs or any of our third-party collaborators fail to comply with applicable cGCPs, the clinical data generated in clinical trials involving our product candidates may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs and will require a large number of test patients. Our failure or the failure of our CROs or other third-party collaborators to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
 
Although we design our clinical trials for our product candidates, our clinical development strategy involves having CROs and other third-party investigators and medical institutions conduct clinical trials of our product candidates. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, although CROs, or independent investigators or medical institutions, as the case may be, may not perform all of their obligations under arrangements with us or in compliance with applicable regulatory requirements, under certain circumstances, we may be responsible and subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of clinical trials of our product candidates. If such third parties do not perform clinical trials of our product candidates in a satisfactory manner, breach their obligations to us or fail to comply with applicable regulatory requirements, the development and commercialization of our product candidates may be delayed or our development program materially and irreversibly harmed. In certain cases, including the Baylor Study and other investigator-sponsored clinical studies, we cannot control the amount and timing of resources these third-parties devote to clinical trials involving our product candidates. If we are unable to rely on nonclinical and clinical data collected by our third-party collaborators, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.
 
If our relationships with one or more of our third-party collaborators terminates, we may not be able to enter into arrangements with alternative third-party collaborators.  If such third-party collaborators, including our CROs, Baylor or the VA do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to applicable clinical protocols, regulatory requirements or for other reasons, any clinical trials that such third-parties are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully develop and commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs would increase and our ability to generate revenue would be delayed.
 
We rely completely on third-parties to manufacture, formulate, hold and distribute supplies of our product candidates for all nonclinical and clinical studies, and we intend to continue to rely on third parties to produce all nonclinical, clinical and commercial supplies of our product candidates in the future.
 
By strategic design, we do not currently have, nor do we plan to acquire or develop, internal infrastructure or technical capabilities to manufacture, formulate, hold or distribute supplies of our product candidates, for use in nonclinical and clinical studies or commercial scale.  As a result, with respect to all of our product candidates, we rely, and will continue to rely, completely on CMOs to manufacture API and formulate, hold and distribute final drug product. The facilities used by our CMOs to manufacture AV-101, PH94B and PH10 API and AV-101, PH94B and PH10 final drug product are subject to a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable regulatory guidelines and requirements, including cGMPs, and may be required to undergo similar inspections by the FDA or other comparable foreign regulatory agencies, after we submit INDs, NDAs or relevant foreign regulatory submission equivalent to the applicable regulatory agency.
 
 
 
 
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We do not directly control the manufacturing process or the supply or quality of materials used in the manufacturing and formulation of our product candidates, and, with respect to all of our product candidates, we are completely dependent on our CMOs to comply with all applicable cGMPs for the manufacturing of both API and finished drug product. If our CMOs cannot secure adequate supplies of suitable raw materials or successfully manufacture our product candidates, including AV-101, PH94B and PH10 API and finished drug product, that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, production of sufficient supplies of our product candidates, including AV-101, PH94B and PH10 API and finished drug product, may be delayed and our CMOs may not be able to secure and/or maintain regulatory approval for their manufacturing facilities, or the FDA may take other actions, including the imposition of a clinical hold. In addition, we have no direct control over our CMOs’ ability to maintain adequate quality control, quality assurance and qualified personnel. All of our CMOs are engaged with other companies to supply and/or manufacture materials or products for such other companies, which exposes our CMOs to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of our CMO’s facilities generally or affect the timing of manufacture of AV-101, PH94B and PH10 for required or planned nonclinical and/or clinical studies. If the FDA or an applicable foreign regulatory agency determines now or in the future that our CMOs’ facilities are noncompliant, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates. Our reliance on CMOs also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.
 
With respect to AV-101, PH94B and PH10, we do not yet have long-term supply agreements in place with our CMOs and each batch of AV-101, PH94B and PH10 is or will be individually contracted under a separate supply agreement. If we engage new CMOs, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon CMOs and, potentially, collaboration partners, to manufacture research and development scale, and, if approved, commercial quantities of our product candidates. Although we believe our current scale of API manufacturing for AV-101, and our contemplated scale of API manufacturing for PH94B and PH10, and the current and projected supply of AV-101, PH94B and PH10 API and finished drug product will be adequate to support our planned nonclinical and clinical studies of AV-101, PH94B and PH10, no assurance can be given that unanticipated supply shortages or CMO-related delays in the manufacture and formulation of AV-101, PH94B or PH10 API and/or finished drug product will not occur in the future.
 
Additionally, we anticipate that PH94B and PH10 will be considered drug-device combination products. Third-party manufacturers may not be able to comply with cGMP requirements applicable to drug/device combination products, including applicable provisions of the FDA’s or a comparable foreign regulatory authority’s drug cGMP regulations, device cGMP requirements embodied in the Quality System Regulation (QSR) or similar regulatory requirements outside the U.S. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly affect supplies of our product candidates. The facilities used by our CMOs to manufacture our product candidates must be approved by the FDA anf comparable foreign regulatory authorities pursuant to inspections that will or may be conducted after we submit our NDA. We do not control the manufacturing process of, and are completely dependent on, our CMO partners for compliance with cGMPs and QSRs. If our CMOs cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or other comparable foreign regulatory authorities, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of our contract manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or a comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved. CMOs may face manufacturing or quality control problems causing drug substance production and shipment delays or a situation where the contractor may not be able to maintain compliance with the applicable cGMP and QSR requirements. Any failure to comply with cGMP or QSR requirements or other FDA, EMA and comparable foreign regulatory requirements could adversely affect our clinical research activities and our ability to develop our product candidates and market our products following approval.
 
Even if we receive marketing approval for AV-101, PH94B, PH10 or any other product candidate in the U.S., we may never receive regulatory approval to market AV-101, PH94B, PH10 or any other product candidate outside of the U.S.
 
In order to market AV-101, PH94B, PH10 or any other product candidate outside of the U.S., we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the U.S. as well as other risks. In particular, in many countries outside of the U.S., products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market our product candidates in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.
 
 
 
 
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If any of our product candidates are ultimately regulated as controlled substances, we, our CMOs, as well as future distributors, prescribers, and dispensers will be required to comply with additional regulatory requirements which could delay the marketing of our product candidates, and increase the cost and burden of manufacturing, distributing, dispensing, and prescribing our product candidates.
 
Before we can commercialize our product candidates in the U.S. or any market outside the U.S., the U.S. Drug Enforcement Administration (DEA) or its foreign counterpart may need to determine whether such product candidates will be considered to be a controlled substance, taking into account the recommendation of the FDA or its foreign counterpart, as the case may be. This may be a lengthy process that could delay our marketing of a product candidate and could potentially diminish any regulatory exclusivity periods for which we may be eligible, which would increase the cost associated with commercializing such products and, in turn, may have an adverse impact on our results of operations. Although we currently do not know whether the DEA or any foreign counterpart will consider any of our current or future product candidate to be controlled substances, we cannot yet give any assurance that such product candidates, including AV-101, PH94B and PH10 will not be regulated as controlled substances.
 
If any of our product candidates are regulated as controlled substances, depending on the DEA controlled substance schedule in which the product candidates are placed or that of its foreign counterpart, we, our CMOs, and any future distributers, prescribers, and dispensers of the scheduled product candidates may be subject to significant regulatory requirements, such as registration, security, recordkeeping, reporting, storage, distribution, importation, exportation, inventory, quota and other requirements administered by the DEA or a foreign counterpart of the DEA as the case may be. Moreover, if any of our product candidates are regulated as controlled substances, we and our CMOs would be subject to initial and periodic DEA inspection. If we or our CMOs are not able to obtain or maintain any necessary DEA registrations or comparable foreign registrations, we may not be able to commercialize any product candidates that are deemed to be controlled substances or we may need to find alternative CMOs, which would take time and cause us to incur additional costs, delaying or limit our commercialization efforts.
 
Because of their restrictive nature, these laws and regulations could limit commercialization of our product candidates, should they be deemed to contain controlled substances. Failure to comply with the applicable controlled substance laws and regulations can also result in administrative, civil or criminal enforcement. The DEA or its foreign counterparts may seek civil penalties, refuse to renew necessary registrations, or initiate administrative proceedings to revoke those registrations. In some circumstances, violations could result in criminal proceedings or consent decrees. Individual states also independently regulate controlled substances.
 
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate any revenue.
 
We do not currently have any internal resources for the sale, marketing and distribution of pharmaceutical products, and we may not create such internal capabilities in the foreseeable future. Therefore, to market our product candidates, if approved by the FDA or any other regulatory body, we must make contractual arrangements with third parties to perform services related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates, or establish those capabilities prior to market approval. If we are unable to establish adequate contractual arrangements for such sales, marketing and distribution capabilities, or if we are unable to do so on commercially reasonable terms, or if we are unable to establish such capabilities on our own, our business, results of operations, financial condition and prospects will be materially adversely affected.
 
 
 
 
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Even if we receive marketing approval for our product candidates, our product candidates may not achieve broad market acceptance, which would limit the revenue that we generate from their sales.
 
The commercial success of our product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients and healthcare payors. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:
 
the efficacy and safety of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other available therapies;
 
limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities;
 
the clinical indications for which our product candidates are approved;
 
availability of alternative treatments already approved or expected to be commercially launched in the near future;
  
the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future alternative treatments;
 
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
 
the strength of marketing and distribution support and timing of market introduction of competitive products;
 
publicity concerning our products or competing products and treatments;
 
pricing and cost effectiveness;
 
the effectiveness of our sales and marketing strategies;
  
our ability to increase awareness of our product candidates through marketing efforts;
 
our ability to obtain sufficient third-party coverage or reimbursement; or
 
the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
 
If our product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from our product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant resources and may never be successful.
 
Our product candidates may cause undesirable safety concerns and side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
 
Undesirable safety concerns and side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt nonclinical studies and clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.
 
 
 
 
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Further, clinical trials by their nature utilize a sample of potential patient populations. With a limited number of patients and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered with a significantly larger number of patients exposed to the product candidate. If our product candidates receive marketing approval and we or others identify undesirable safety concerns or side effects caused by such product candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including:
 
regulatory authorities may withdraw or limit their approval of such product candidates;
 
regulatory authorities may require the addition of labeling statements, such as a “black box” warning or a contraindication;
 
we may be required to change the way such product candidates are distributed or administered, conduct additional clinical trials or change the labeling of the product candidates;
 
we may be subject to regulatory investigations and government enforcement actions;
 
we may decide to remove such product candidates from the marketplace;
 
we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and
 
our reputation may suffer.
 
We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected product candidates and would substantially increase the costs of commercializing our product candidates and significantly impact our ability to successfully commercialize our product candidates and generate revenues.
 
Even if we receive marketing approval for our product candidates, we may still face future development and regulatory difficulties.
 
Even if we receive marketing approval for our product candidates, regulatory authorities may still impose significant restrictions on our product candidates, indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies. Our product candidates will also be subject to ongoing regulatory requirements governing the labeling, packaging, storage and promotion of the product and record keeping and submission of safety and other post-market information. The FDA and other regulatory authorities have significant post-marketing authority, including, for example, the authority to require labeling changes based on new safety information and to require post-marketing studies or clinical trials to evaluate serious safety risks related to the use of a drug. The FDA and other regulatory authorities also have the authority to require, as part of an NDA or post-approval, the submission of a REMS or comparable safety program. Any REMS or comparable safety program required by the FDA or other regulatory authority may lead to increased costs to assure compliance with new post-approval regulatory requirements and potential requirements or restrictions on the sale of approved products, all of which could lead to lower sales volume and revenue.
 
Manufacturers of drug and device products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs and other regulations. If we or a regulatory agency discover problems with our product candidates, such as adverse events of unanticipated severity or frequency, or problems with the facility where our product candidates are manufactured, a regulatory agency may impose restrictions on our product candidates, the manufacturer or us, including requiring withdrawal of our product candidates from the market or suspension of manufacturing. If we, our product candidates, or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may, among other things:
 
issue warning letters or untitled letters;
 
seek an injunction or impose civil or criminal penalties or monetary fines;
 
suspend or withdraw marketing approval;
 
suspend any ongoing clinical trials;
 
refuse to approve pending applications or supplements to applications submitted by us;
 
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
 
seize or detain products, refuse to permit the import or export of products, or require that we initiate a product recall.
 
 
 
 
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Competing therapies could emerge adversely affecting our opportunity to generate revenue from the sale of our product candidates.
 
The pharmaceutical industry is highly competitive. There are many public and private pharmaceutical companies, universities, governmental agencies and other research organizations actively engaged in the research and development of product candidates that may be similar to and compete with our product candidates or address similar markets. It is probable that the number of companies seeking to develop product candidates similar to and competitive with our product candidates will increase.
 
Currently, management is unaware of any FDA-approved oral adjunctive therapy for MDD patients with an inadequate response to standard antidepressants having the same mechanism of pharmacological action and safety profile as our orally-administered AV-101 or our intranasally-administered PH10. However, new antidepressant products with other mechanisms of pharmacological action or products approved for other indications, including the FDA-approved anesthetic ketamine hydrochloride administered intravenously, are being or may be used off-label for treatment of MDD, as well as other CNS indications for which AV-101 or PH10 may have therapeutic potential. Additionally, other non-pharmaceutical treatment options, such psychotherapy and electroconvulsive therapy (ECT) are used before or instead of standard antidepressant medications to treat patients with MDD. Management is also unaware of any FDA-approved rapid-onset, on-demand treatment for SAD having the same mechanism of pharmacological action and safety profile as our PH94B.
 
In the field of new generation, oral adjunctive treatments for adult patients with MDD with an inadequate response to standard FDA-approved ADs, we believe our principal competitors may be Axsome’s AX-05, Alkermes’ ALKS-5461, Allergan’s AGN-241751 and Sage’s Sage-217. Additional potential competitors may include, but not be limited to, academic and private commercial clinics providing intravenous ketamine therapy on an off-label basis and Janssen’s intranasally-administered Spravato (esketamine). With respect to PH94B and current FDA-approved treatment options for SAD in the U.S., our competition may include, but is not limited to, certain current generic ADs approved by the FDA for treatment of SAD and certain classes of drugs used on an off-label basis for treatment of SAD, including benzodiazepines such as alprazolam, and beta blockers such as propranolol.
 
Many of our potential competitors, alone or with their strategic partners, have substantially greater financial, technical and human resources than we do and significantly greater experience in the discovery, and development of product candidates, obtaining FDA and other regulatory approvals of treatments and the commercialization of those treatments.  With respect to AV-101 and PH10, we believe that a range of pharmaceutical and biotechnology companies have programs to develop drug candidates for the treatment of depression, including MDD, Parkinson’s disease levodopa-induced dyskinesia, neuropathic pain, epilepsy, and other neurological conditions and diseases, including, but not limited to, Abbott Laboratories, Acadia, Allergan, Alkermes, Aptynix, AstraZeneca, Eli Lilly, GlaxoSmithKline, IntraCellular, Janssen, Lundbeck, Merck, Novartis, Ono, Otsuka, Pfizer, Roche, Sage, Sumitomo Dainippon, and Takeda, as well as any affiliates of the foregoing companies.  With respect to PH94B, in addition to potential competition from certain current FDA-approved antidepressants and off-label use of benzodiazepines and beta blockers, we believe additional drug candidates in development for SAD may include, but potentially not be limited to, an oral fatty acid amide hydrolase inhibitor in development by Janssen and a sublingual formulation of the sodium channel blocker riluzole in development by Biohaven. 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 nonclinical and clinical trials, the likelihood of approval by the FDA or similar regulatory authorities outside the United States, the potential markets for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such collaboration could be more attractive than the one with us for our product candidate. The terms of any collaboration or other arrangements that we may establish may not be favorable to us.
 
 
 
 
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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 MDD, and we are planning for Phase 2a studies of AV-101 for treatment of NP and LID, for Phase 3 development of PH94B for on-demand treatment of SAD, and a Phase 2b study of PH10 for treatment of MDD, we may fail to pursue additional development opportunities for AV-101, PH94B or PH10, or identify additional product candidates for clinical development for a number of reasons. Our research methodology may be unsuccessful in identifying new product candidates or our product candidates may be shown to have harmful side effects or may have other characteristics that may make the products unmarketable or unlikely to receive marketing approval.
 
Because we currently have limited financial and management resources, we necessarily focus on a limited number of research and development programs and product candidates and are currently focused primarily on development of AV-101, PH94B and PH10, with additional limited focus on NCE DR and, through a third-party collaboration, 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, PH94B and/or PH10 that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial drugs or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable drugs. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
 
If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations. Research and development programs to identify and advance new product candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
 

 
 
 
 
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We are subject to healthcare laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
 
Although we do not currently have any products on the market, once we begin commercializing our product candidates, we may be subject to additional healthcare statutory and regulatory requirements and enforcement by the federal government and the states and foreign governments in which we conduct our business. Healthcare providers, physicians and others will play a primary role in the recommendation and prescription of our product candidates, if approved. Our future arrangements with third-party payors will expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market, sell and distribute our product candidates, if we obtain marketing approval. Restrictions under applicable federal and state healthcare laws and regulations include the following:
 
The federal anti-kickback statute prohibits, among other things, persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment may be made under federal healthcare programs such as Medicare and Medicaid.
 
The federal False Claims Act imposes criminal and civil penalties, including those from civil whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease, or conceal an obligation to pay money to the federal government.
 
The federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act, imposes criminal and civil liability for executing a scheme to defraud any healthcare benefit program and also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information.
 
The federal false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services.
 
The federal transparency requirements, sometimes referred to as the “Sunshine Act,” under the Patient Protection and Affordable Care Act, require manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program to report to the Department of Health and Human Services information related to physician payments and other transfers of value and physician ownership and investment interests.
 
Analogous state laws and regulations, such as state anti-kickback and false claims laws and transparency laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, and some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance.
 
Guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other healthcare providers or marketing expenditures and drug pricing.
 
Foreign Corrupt Practices Act and its application to marketing and selling practices as well as to clinical trials.
 
Ensuring that our future business arrangements with third parties comply with applicable healthcare laws and regulations could be costly. It is possible that governmental authorities will conclude that our business practices do not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations were found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines and exclusion from government funded healthcare programs, such as Medicare and Medicaid, any of which could substantially disrupt our operations. If any of the physicians or other providers or entities with whom we expect to do business are found to be out of compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.
 
The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found to have improperly promoted off-label uses, we may become subject to significant liability.
 
The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, such as AV-101, PH94B and PH10, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. For example, if we receive FDA marketing approval for AV-101 as an adjunctive treatment of MDD, physicians may prescribe AV-101 to their patients in a manner that is inconsistent with the FDA-approved label. However, if we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper off-label promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or imposed permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.
 
 
 
 
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Even if approved, reimbursement policies could limit our ability to sell our product candidates.
 
Market acceptance and sales of our product candidates will depend heavily on reimbursement policies and may be affected by healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels for those medications. Cost containment is a primary concern in the United States healthcare industry and elsewhere. Government authorities and these third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. We cannot be sure that reimbursement will be available for our product candidates and, if reimbursement is available, the level of such reimbursement. Reimbursement may impact the demand for, or the price of, our product candidates. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our product candidates.
 
In some foreign countries, particularly in Canada and European countries, the pricing of prescription pharmaceuticals is subject to strict governmental control. In these countries, pricing negotiations with governmental authorities can take six months or longer after the receipt of regulatory approval and product launch. To obtain favorable reimbursement for the indications sought or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates with other available therapies. If reimbursement for our product candidates is unavailable in any country in which we seek reimbursement, if it is limited in scope or amount, if it is conditioned upon our completion of additional clinical trials, or if pricing is set at unsatisfactory levels, our operating results could be materially adversely affected.
 
We may seek FDA Orphan Drug designation for one or more of our product candidates. Even if we have obtained FDA Orphan Drug designation for a product candidate, there may be limits to the regulatory exclusivity afforded by such designation.
 
We may, in the future, choose to seek FDA Orphan Drug designation for one or more of our current or future product candidates. Even if we obtain Orphan Drug designation from the FDA for a product candidate, there are limitations to the exclusivity afforded by such designation. In the U.S., the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines “same drug” as a drug that contains the same active moiety and is intended for the same use as the drug in question. To obtain Orphan Drug status for a drug that shares the same active moiety as an already approved drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the U.S. may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition or if another drug with the same active moiety is determined to be safer, more effective, or represen