Vistagen Therapeutics, Inc. annual report, FY2017

Business context and reporting period

VistaGen Therapeutics, Inc. filed this Form 10-K for the fiscal year ended March 31, 2017. Although the request identifies 2016 Q4, the filing is an annual report for FY2017; it also provides unaudited fourth-quarter results for the three months ended March 31, 2017.

VistaGen is a clinical-stage biopharmaceutical company with no approved products or product-sales revenue. Its lead candidate, oral AV-101, was in Phase 2 development for major depressive disorder (MDD). Its wholly owned VistaStem subsidiary pursued stem-cell-based drug-rescue and regenerative-medicine work.

Financial performance and position

FY2017 revenue was the $1.25 million upfront payment from the BlueRock sublicense; the filing does not report recurring product revenue. Gross margin is not meaningful because the company had no product sales. FY2017 net loss improved substantially year over year, principally because FY2016 included a $26.7 million noncash loss on extinguishment of debt and $1.9 million from a warrant-liability change. FY2017 G&A also fell, largely due to lower noncash equity-compensation and warrant-related expense, while R&D increased 33% as AV-101 development advanced.

In the March 2017 quarter, revenue was zero, operating loss was $2.55 million, net loss was $2.55 million, and net loss attributable to common stockholders was $2.79 million, or $0.32 per share.

At March 31, 2017, cash and cash equivalents were $2.92 million; current assets were $3.38 million and current liabilities $1.37 million. Total assets were $3.71 million, total liabilities $3.10 million, and stockholders’ equity $0.62 million. Notes payable were $54,800, all current, plus $14,300 of capital-lease obligations; the prior substantial debt had largely been converted or settled in 2015. Series B preferred stock carried a 10% in-kind dividend, with $1.58 million of accrued dividends recorded as a liability.

Material changes versus the prior comparable period

• Revenue rose from zero to $1.25 million from the BlueRock sublicense; future milestone or royalty revenue is contingent and not assured.
• R&D rose from $3.93 million to $5.20 million, while G&A declined from $13.92 million to $6.29 million.
• Operating cash use increased from $4.81 million to $7.26 million despite the lower reported net loss.
• Cash increased to $2.92 million from $0.43 million, primarily reflecting financing proceeds and the sublicense payment. Financing activities provided $9.99 million in FY2017, including approximately $9.5 million net from the May 2016 public offering.
• The company’s common stock began trading on Nasdaq in May 2016. Shares outstanding increased materially during the year, and preferred shares, warrants and options create further potential dilution.

Outlook, risks and unusual items

• Management expected to launch a 180-patient Phase 2 adjunctive MDD study in the first quarter of 2018, subject to adequate financing; it forecast completion by the end of 2018 and top-line results in the first quarter of 2019. The NIMH-funded 20-patient AV-101 monotherapy Phase 2 study was expected to complete in 2017, with top-line results in the first half of 2018. These are projections, not reported outcomes.
• Management estimated approximately $12 million of cash expenditures for the 12 months following issuance of the financial statements. The company said March 31 cash was insufficient for planned operations and the proposed adjunctive study. Subsequent private placements generated approximately $1.0 million, but the filing states that additional financing is needed and may not be available on acceptable terms or at all.
• The auditor’s report and management’s disclosures raise substantial doubt about the company’s ability to continue as a going concern, due to recurring losses, negative operating cash flows and limited liquidity. The financial statements contain no adjustments for a possible failure to continue as a going concern.
• Management reported material weaknesses in financial-reporting controls: inadequate segregation of duties due to limited staff and accounting software that did not adequately prevent unauthorized prior-period changes or ensure an audit trail. Management said disclosure controls were effective and described manual checks; remediation was dependent on resources.
• AV-101’s active compound patent had expired; the company was pursuing formulation, synthesis and method-of-use patents, with no assurance pending claims would issue or provide effective protection. Clinical efficacy and safety, regulatory approval, competition, manufacturing and patient recruitment remain major risks.
• The BlueRock transaction granted exclusive rights to specified cardiac stem-cell technologies. VistaGen received $1.25 million and could receive contingent milestones and royalties; it retained certain related drug-discovery, drug-rescue and testing rights.
• AV-101 Phase 1 safety studies were described as well tolerated, but they do not establish efficacy. The proposed larger MDD trial and other indications remained developmental. The company also disclosed that it had no product revenue, expected continued losses, and had no assurance it would achieve profitability.

Important facts for investors to verify

• Current cash, burn rate, financing completed since the filing, and whether funding supports the clinical plan; reconcile the stated subsequent-placement proceeds, reported in the filing at different points as $837,300 and approximately $1.0 million.
• Actual status and results of both AV-101 Phase 2 studies, including whether the planned 2018 study commenced and whether reported milestones were achieved.
• Any subsequent changes to going-concern status, internal-control remediation, or financial reporting.
• Current fully diluted share count, warrant and option terms, preferred-stock conversion rights, and the potential dilution from future fundraising.
• BlueRock milestone and royalty terms, any payments received beyond the upfront fee, and the scope and status of VistaGen’s retained intellectual-property rights.
• Patent prosecution and exclusivity prospects for AV-101, given that the compound itself was no longer patented.