Business context and reporting period
VistaGen Therapeutics, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2013, covering the three and six months ended that date. The company is a development-stage biotechnology business focused on human pluripotent stem-cell technology for drug rescue and predictive safety testing. Its AV-101 candidate completed Phase 1 development; VistaGen was exploring strategic alternatives for its further development.
Financial performance and liquidity
| Metric | Three months ended September 30, 2013 | Six months ended September 30, 2013 |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $669,300 | $1,364,800 |
| General and administrative expense | $545,900 | $1,150,500 |
| Net loss | $1,459,800 | $1,274,100 |
| Basic and diluted loss per share | $0.07 | $0.06 |
| Cash used in operating activities | Not presented for the quarter | $1,316,400 |
Six-month financing cash flow was $718,500 and investing cash flow was negative $33,700; cash declined by $631,600, from $638,100 to just $6,500. At September 30, total assets were $406,000, total liabilities $13,160,200, and stockholders’ deficit $12,754,200. Current liabilities were $3,253,400 against current assets of $154,000. The balance sheet also reported $4,657,300 of warrant liability. Debt includes senior secured convertible notes, other notes payable, and related-party notes; the filing reports carrying values net of substantial discounts.
No meaningful operating margin can be assessed because the company reported no revenue. Management estimated cash expenditures of approximately $4 million to $6 million over the next 12 months following receipt of the proposed Autilion financing; elsewhere it cited expected cash needs of approximately $5 million.
Material changes versus prior comparable periods
- Quarterly net loss narrowed from $1,955,700 to $1,459,800; six-month net loss narrowed from $3,781,600 to $1,274,100. The six-month improvement included a $1,883,500 non-cash gain from a decrease in the fair value of warrant and related liabilities.
- Quarterly R&D expense fell 39% and six-month R&D expense fell 31%, primarily reflecting lower AV-101 trial-related costs after Phase 1b studies in 2012. Management also cited temporary disruption from the laboratory relocation during the quarter.
- Six-month G&A expense decreased 29%, partly because 2012 included a $440,000 warrant-modification charge and higher investor-relations spending. Interest expense, net, increased 70% to $639,600 for the six months, mainly due to interest accruals and discount amortization on debt.
- Revenue fell to zero from $200,400 in the prior-year six-month period. The NIH grant expired in June 2012 and was not renewed.
Outlook, risks, and unusual items
- Going concern and funding: Management stated that existing cash was insufficient to fund planned operations and that recurring losses and negative operating cash flows raise substantial funding concerns. Continuation as a going concern depends on obtaining financing.
- Autilion agreement: Autilion was contractually obligated to buy 72 million restricted shares at $0.50 per share for $36 million. By September 30, only a $25,000 initial closing had occurred, and Autilion remained in default. It later indicated it would cure the default and fund the full amount, but VistaGen gave no assurance that further proceeds would arrive on time or at all.
- If Autilion funding exceeded $11.5 million and more than 23 million shares were issued, Autilion would hold over 50% of outstanding common stock, potentially resulting in a change of control. Completion of the financing would also substantially dilute existing holders.
- To meet near-term needs, VistaGen raised $205,000 through unit sales during August and September and reported a further $175,000 raised through October 31. Units included 10% convertible notes, common shares, and warrants. An officer also advanced $30,000 in September.
- Management said failure to secure Autilion or alternative financing could require delaying or scaling back research and development, harm operations, or prevent the company from continuing as a going concern. Other stated risks include clinical and regulatory uncertainty, competition, and the possibility that financing would be unavailable or highly dilutive.
- Warrant liabilities are Level 3 fair-value estimates subject to stock-price and other valuation assumptions. The quarter’s $78,600 warrant-liability gain was non-cash; the six-month gain was $1,883,500.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter. The company reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Autilion cured its default and delivered any of the remaining $36 million, and on what schedule and terms.
- VistaGen’s subsequent cash balance, operating cash burn, and ability to meet near-term obligations, given only $6,500 cash at quarter-end.
- The actual dilution, voting control, and potential change-of-control consequences of Autilion funding and other convertible securities, warrants, and notes.
- Progress and financing plans for the hPSC platform, CardioSafe 3D and LiverSafe 3D, and any strategic development path for AV-101.
- The effect of non-cash warrant revaluations and note-discount amortization on reported losses, compared with underlying cash requirements.