PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Dollars, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements, including Note 2, Basis of Presentation and Going Concern, for information on reverse split of common stock effective on June 6, 2023.

VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in Dollars, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements, including Note 2, Basis of Presentation and Going Concern, for information on reverse split of common stock effective on June 6, 2023.

VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Dollars)

See accompanying notes to Condensed Consolidated Financial Statements, including Note 2, Basis of Presentation and Going Concern, for information on reverse split of common stock effective on June 6, 2023.

VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS JUNE 30, 2023 AND 2022

(Unaudited)

(Amounts in Dollars, except share amounts)

See accompanying notes to Condensed Consolidated Financial Statements, including Note 2, Basis of Presentation and Going Concern, for information on reverse split of common stock effective on June 6, 2023.

VISTAGEN THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 outcomes and 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 domestic and foreign regulatory agencies, our ability to obtain, maintain and enforce patents on our products once approved for marketing, 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, and Board of Directors (Board) or disadvantageous to our 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.

Accordingly, 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

We are a late clinical-stage biopharmaceutical company aiming to transform the treatment landscape for individuals living with anxiety, depression and other central nervous system (CNS) disorders. We are advancing therapeutics with the potential to be faster-acting and with fewer side effects and safety concerns than those currently available. Our pipeline includes six clinical-stage product candidates, including five investigational agents belonging to a new class of drugs known as pherines, in addition to AV-101, an oral prodrug of an antagonist of the glycine site of the N-methyl-D-aspartate receptor (NMDAR). Pherines are neuroactive nasal sprays with an innovative rapid-onset mechanism of action (MOA). They activate chemosensory neurons in the nasal cavity which selectively modulate key neural circuits in the brain without requiring systemic absorption or direct activity on neurons in the brain. AV-101 inhibits the activity of the ion channel of the NMDAR but does not block it, unlike approved NMDAR antagonists having significant side effects.

Our goal is to develop and commercialize, on our own or with strategic partners, a broad range of innovative therapies for neuropsychiatric, neurological and neuroendocrine disorders where current treatment options are inadequate to meet the needs of millions of patients in the U.S. and worldwide.

Our Product Candidates

Pherine Product Candidates

Five of our product candidates – fasedienol (PH94B), itruvone (PH10), PH15, PH80 and PH284 – belong to a new class of drug candidates referred to as pherines. Pherines are odorless and tasteless neuroactive nasal sprays administered in low microgram level doses to selectively engage chemosensory neurons in the nasal cavity and induce fast-acting pharmacologic and behavioral benefits without requiring systemic absorption or direct activity on neurons in the brain. Specifically, each of our pherine product candidates is a distinct chemical entity that directly modulates particular areas of the brain, such as the limbic amygdala (the main fear and anxiety center of the brain), the hypothalamus (the thermoregulatory and appetite control areas of the brain), the hippocampus, the locus ceruleus, and the prefrontal cortex. We believe each of our pherine product candidates has the potential to be a fast-acting therapy for one or more CNS disorders, including social anxiety disorder (fasedienol), major depressive disorder (itruvone), cognitive impairment caused by mental fatigue (PH15), vasomotor syndrome (hot flashes) due to menopause, premenstrual dysphoric disorder and migraine headaches (PH80) and wasting syndrome and appetite stimulation (cachexia) (PH284), all without requiring apparent systemic absorption, binding to classic abuse liability receptors or other neurons in the brain or steroidal hormone receptors.

Fasedienol Nasal Spray for Social Anxiety Disorder

Fasedienol (PH94B) is a synthetic investigational pherine nasal spray from the androstane family in Phase 3 clinical development for the treatment of adults with social anxiety disorder (SAD). When administered intranasally in microgram doses, fasedienol activates receptors of peripheral nasal chemosensory neurons connected to subsets of neurons in the olfactory bulbs that, in turn, connect to neurons in the limbic amygdala involved in the pathophysiology of SAD, and potentially other anxiety and mood disorders. Fasedienol is pharmacologically active without requiring apparent systemic absorption or direct activity on neurons in the brain to achieve its rapid-onset and short duration of anxiolytic effects. We believe fasedienol has the potential to achieve these effects with significantly reduced risks of side effects and other safety concerns, such as potential drug-drug interactions, abuse, misuse and addiction, associated with certain other systemic pharmaceuticals that act directly on neurons in the brain and are sometimes prescribed for anxiety disorders.

The FDA has granted Fast Track designation for the development of fasedienol as a potential treatment for SAD.

PALISADE Phase 3 Program

PALISADE-1.  In May 2021, during the acute phase of the COVID-19 pandemic, we initiated PALISADE-1, a U.S. multi-center, randomized, double-blind, placebo-controlled, Phase 3 clinical study designed to evaluate the efficacy, safety, and tolerability of the acute administration of fasedienol to relieve anxiety symptoms in adult patients with SAD during a simulated anxiety-provoking public speaking challenge, as measured using the patient-reported Subjective Units of Distress Scale (SUDS). Enrolled patients had a diagnosis of SAD and demonstrated marked social anxiety at enrollment, as evidenced by a baseline score on the Liebowitz Social Anxiety Scale (LSAS) of at least 70. We announced top line results from PALISADE-1 in July 2022. Although the safety and tolerability of fasedienol during PALISADE-1 was favorable and consistent with results from previously reported clinical trials, PALISADE-1 did not achieve its primary efficacy endpoint, as measured by change from baseline using the SUDS as compared to placebo. We believe the unexpected outcome in PALISADE-1, which was inconsistent with positive placebo-controlled Phase 2 studies, may have been due to the extraordinary multifaceted impact of the acute phase of the COVID-19 pandemic, which introduced into the typical study dynamic significant and unprecedented logistical challenges and systemic variability from changing social dynamics, heightened subject stress and expectation bias, study site and contract research organization (CRO) personnel turnover and unpredictable intermittent clinic closures between subject visits, government face mask regulations, and reduced potential to respond to fasedienol due to impaired olfactory cell function from the COVID-19 virus, nasal swab testing, and/or heavy cannabis use, smoking or vaping.

PALISADE Open Label Study. The PALISADE Open Label Study (OLS) was a large Phase 3, open-label safety trial conducted in a real world setting and designed to evaluate the long-term safety and tolerability of multiple, patient-tailored, of fasedienol in adults with SAD when they experienced social and performance stressors in their daily lives. Long-term administration of 3.2 µg of fasedienol, as-needed, up to four times per day, was generally safe and well-tolerated, with no new safety findings or trends identified, regardless of the number of doses administered by each subject (safety population: n=481). Headache was the most common treatment-emergent adverse event (TEAE) (17.0%); no other TEAE occurred in more than 5.0% of subjects, except for COVID-19 TEAEs (11.4%), which were not considered related to fasedienol. Over 30,000 doses of fasedienol were administered by patients during this study.

The PALISADE OLS also evaluated the change from baseline in monthly standard clinical measurements and behavioral assessment scales (the LSAS, Clinician Global Impression of Improvement scale (CGI-I) and Patient Global Impression of Change scale (PGI-C)) after the administration of fasedienol. The key exploratory endpoint in the study included evaluation of the change from baseline on the LSAS, which measures SAD patients’ response to anxiety-provoking social and performance situations experienced in their daily lives. The LSAS was the primary efficacy endpoint in all registration studies for the three FDA-approved treatments for adults with SAD.

Analysis of the final data set from the PALISADE OLS demonstrates clinically meaningful functional improvement, as measured by the LSAS. In addition, total LSAS scores in both men and women continued to decline in consecutive months during the study. We believe the continued improvement in LSAS scores is indicative of the therapeutic potential of multiple, patient-tailored, as-needed administrations over time as fasedienol helps patients build confidence to engage in anxiety-provoking social and performance situations more frequently and with less fear and anxiety.

PALISADE-2.   In October 2021, near the end of the acute phase of the COVID-19 pandemic, we initiated our Phase 3 PALISADE-2 trial, a replicate study of PALISADE-1. As in PALISADE-1, enrolled patients in PALISADE-2 had a diagnosis of SAD and demonstrated marked social anxiety at enrollment, as evidenced by a baseline score on the LSAS of at least 70. After receiving top-line results from PALISADE-1 in July 2022, we paused ongoing recruitment and enrollment in PALISADE-2 to enable independent third-party biostatisticians to conduct an interim analysis of available data from the 141 subjects who were randomized and had completed the study up to the date it was paused. In September 2022, the independent third-party biostatisticians who conducted the interim analysis recommended that we continue PALISADE-2 as originally planned, without revealing to us any of the underlying data they had reviewed. However, for business reasons, we elected to extend our pause of PALISADE-2 pending our assessment of the then impending top-line results of the PALISADE OLS, the results of two SAD public speaking challenge studies conducted by peer companies, further discussions with the FDA regarding the continuing acceptability of the LSAS as a primary efficacy endpoint in Phase 3 studies for the treatment of SAD, as well as a comprehensive assessment of the expense, time, statistical and regulatory implications and logistical challenges associated with resuming PALISADE-2. Following positive results from our PALISADE OLS, the results of two SAD public speaking challenge studies conducted by peer companies, each of which did not meet its primary efficacy endpoint as measured by the SUDS, and positive discussions with the FDA in early 2023 regarding the continuing validity and reliability of the LSAS as a primary efficacy endpoint, for strategic reasons, we chose to close PALISADE-2 with 141 completed subjects rather than resume the study and randomize an additional 67 subjects, for a total of 208 subjects as originally planned.

In early August 2023, we received and reported positive topline results from the 141 subjects who completed PALISADE-2. The PALISADE-2 trial met its primary efficacy endpoint, the difference in mean SUDS scores during the public speaking challenge at baseline (Visit 2) and treatment (Visit 3) for subjects treated with fasedienol versus placebo at Visit 3.  Fasedienol-treated patients demonstrated a statistically significant greater mean change from baseline (least-squares (LS) mean = -13.8) compared to placebo (LS mean = -8.0), for a difference between groups of -5.8 (p=0.015).  The trial also met its secondary endpoint, demonstrating a statistically significant difference in the proportion of clinician-assessed responders between fasedienol and placebo as measured by the CGI-I.  Responders were identified as those who were rated ‘very much less anxious’ or ‘much less anxious’ and 37.7% of fasedienol-treated patients were rated as responders, as compared to 21.4% of those treated with placebo (p=0.033). The trial also met the important exploratory endpoint of the difference in the proportion of patient-assessed responders between fasedienol and placebo as measured by the PGI-C. Responders were identified as those who self-rated ‘very much less anxious’ or ‘much less anxious’ and 40.6% of fasedienol-treated patients were rated as responders, as compared to 18.6% of those treated with placebo (p=0.003). In addition, the PALISADE-2 trial also met the exploratory endpoint of the difference in the proportion of patients in each treatment group with a 20-point improvement in patient-assessed SUDS score from baseline (Visit 2) to treatment (Visit 3). Of the fasedienol-treated patients, 35.7% (n=70) demonstrated this statistically significant and clinically meaningful improvement in SUDS score, as compared to 18.6% (n=71) in the placebo-treated group (p=0.020). Fasedienol was observed to be well-tolerated with no serious adverse events, and the adverse event (AE) profiles were comparable between fasedienol and placebo. Overall, no TEAEs, except for pyrexia in the placebo group (2.49%), was more prevalent than 2.0%. 

PALISADE-3.  Based on the positive top-line results of the Phase 3 PALISADE-2 study, we are currently preparing for our Phase 3 PALISADE-3 trial, with potential to initiate the trial during the first half of calendar 2024. Like PALISADE-2, PALISADE-3 will be designed as a U.S. multi-center, randomized, double-blind, placebo-controlled, Phase 3 clinical study to evaluate the efficacy, safety, and tolerability of the acute administration of fasedienol to relieve anxiety symptoms in adult patients with SAD during a simulated, anxiety-provoking public speaking challenge, as measured using the patient-reported SUDS as the primary efficacy endpoint.   

FEARLESS Phase 3 Program  

In the first quarter of calendar 2023, we met with the FDA to discuss the next steps in our potential U.S. New Drug Application (NDA)-enabling Phase 3 clinical development plan for fasedienol for the treatment of adults with SAD.  Positive feedback from the FDA at this meeting confirmed the acceptable use of the LSAS as a primary efficacy endpoint, in a manner similar to its use in the registration studies for the three drugs currently approved for the treatment of SAD, paroxetine, sertraline and venlafaxine.  To complement our PALISADE Phase 3 program for fasedienol in SAD, we are currently preparing for FEARLESS, with potential to initiate the trial in the second half of calendar 2024 with a study design similar to the registration studies for the three drugs currently approved for the treatment of SAD, with the LSAS as the primary efficacy endpoint.  Accordingly, FEARLESS will be designed as a randomized, double-blind, placebo-controlled Phase 3 study of fasedienol in adults with SAD to evaluate the efficacy, safety and tolerability of multiple administrations of fasedienol, on a patient-tailored as-needed basis, up to six times per day in their daily lives, in a real-world setting over a multiple week period. To complement the positive results of PALISDAE-2, we believe the Phase 3 FEARLESS study design also will align with the way SAD patients will use fasedienol in their daily lives, should it be approved, because our planned fasedienol treatment model includes both repeated experiences of acute reduction of anxiety during performance and social events, evidenced by decreased SUDS scores as in PALISADE-2, as well as longer-term overall reduction in severity of SAD evidenced by reductions in LSAS scores, as will be assessed in FEARLESS.

We believe that each of PALISADE-3 and FEARLESS has the potential to complement PALISADE-2 as a potential NDA-enabling adequate and well-controlled Phase 3 clinical trial of fasedienol for the treatment of SAD.

Itruvone Nasal Spray for Major Depressive Disorder

Itruvone (PH10) is an odorless, tasteless synthetic investigational neuroactive pherine nasal spray from the pregnane family with an innovative potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for depression disorders. Itruvone neuroactive nasal spray is administered at microgram-level doses and is designed to engage and activate chemosensory neurons in the nasal cavity, which are connected to neural circuits in the brain that produce antidepressant effects. Unlike all currently approved oral antidepressants (ADs) and rapid-onset ketamine-based therapy, we believe itruvone does not require systemic absorption or direct activity on neurons in the brain to produce antidepressant effects without the side effects and safety concerns that may be associated with current antidepressants therapies.

In June 2023, we completed a small U.S. single-center, randomized, double-blinded, placebo-controlled Phase 1 study to investigate the safety and tolerability of itruvone in healthy adult subjects. The study was designed to confirm the favorable safety profile of itruvone established in three previous clinical studies conducted in Mexico and facilitate our plan for Phase 2B clinical development of itruvone in the U.S. as a fast-acting stand-alone treatment for MDD. Positive data from this study demonstrated that there were no reported treatment-related serious adverse events (SAEs) or discontinuations due to adverse events in the trial. Overall, itruvone was well-tolerated and continued to demonstrate a favorable safety profile.

The FDA has granted Fast Track designation for the development of itruvone as a potential adjunctive treatment for MDD.

PH80 Nasal Spray for Women’s Health Disorders and Migraine

PH80 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for vasomotor symptoms (hot flashes) due to menopause and other women’s health disorders and migraine headaches. PH80 activates chemosensory neurons in the nasal cavity connected to neural circuits that modulate the basal forebrain associated with the control of body temperature. We recently reported positive results from a previously unpublished exploratory randomized, double-blind, placebo-controlled Phase 2A study of PH80 for the acute treatment of vasomotor symptoms (hot flashes) due to menopause.  The Phase 2A study demonstrated a statistically significant reduction in the daily number of menopausal hot flashes compared to placebo at the end of the first week of treatment (p<.001), and the improvement was maintained through each treatment week until the end of the four-week treatment period. We are preparing to submit a U.S. IND to facilitate Phase 2B clinical development of PH80 for the treatment of moderate to severe vasomotor symptoms (hot flashes) due to menopause.

In addition, PH80 initiates neural impulses in the olfactory bulb transmitted by pathways that affect the function of multiple structures in the brain, including the amygdala and hypothalamus, that have been linked to the pathology of migraine and other women’s health disorders such as premenstrual dysphoric disorder (PMDD).

PH15 Nasal Spray for Cognitive and Psychomotor Performance and Improvement

PH15 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments to improve cognitive impairment caused by mental fatigue and potentially other disorders. We believe intranasal PH15 has the potential to improve cognitive and psychomotor performance and improvement of reaction time in individuals with mental fatigue. We are currently evaluating the path forward to submit a U.S. IND for further clinical development of PH15 in the U.S., on our own or with collaborators, including the appropriate indication for demonstrating improvement of cognitive function.

PH284 Nasal Spray for Cachexia

PH284 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for the loss of appetite associated with chronic disorders such as cancer. Cachexia is a serious but under-recognized consequence of many chronic diseases with body mass loss of >10% and a prevalence of 5 to 15 %. We believe PH284 may have therapeutic potential for improving subjective feelings of hunger in patients with cachexia.  We are currently evaluating the path forward to submit a U.S. IND for further clinical development of PH15 for the treatment of cachexia, on our own or with collaborators, including the appropriate patient populations for demonstrating an increase in appetite and weight gain.

AV-101 for Neurological Disorders   

AV-101 (4-Cl-KYN) is a novel, oral prodrug that targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. The active metabolite of AV-101, 7-chloro-kynurenic acid (7-Cl-KYNA), is a potent and selective full antagonist of the glycine binding site of the NMDAR that inhibits the function of the NMDAR. Unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. In clinical and nonclinical testing completed to date, AV-101 has demonstrated good oral bioavailability and an excellent pharmacokinetic (PK) profile. No binding of AV-101 or 7-Cl-KYNA to off-site targets was identified by an extensive receptor screening study. Moreover, in all clinical trials completed to date, AV-101 has been safe and very well-tolerated with no psychological side effects or safety concerns and no treatment-related serious adverse events that are often observed with classic channel-blocking NMDAR antagonists such as ketamine and amantadine. Nonclinical results also indicate that chronic administration of 4-Cl-KYN induces hippocampal neurogenesis, a hallmark of drugs that have anti-depressive effects, and increases endogenous levels of KYNA, which also is a functional NMDAR glycine site antagonist.

Based on observations and findings from preclinical studies, we believe AV-101 has the potential to become a new oral treatment alternative for multiple CNS disorders, including levodopa-induced dyskinesia, neuropathic pain, seizures, MDD, and suicidal ideation. We are currently assessing a potential path forward for Phase 2A clinical development of AV-101, on our own or with collaborators, as a treatment for levodopa-induced dyskinesia associated with Parkinson’s disease therapy and possibly one or more additional neurological disorders involving the NMDAR receptor. 

The FDA has granted Fast Track designation for the development of AV-101 as a potential adjunctive treatment for MDD and as a non-opioid treatment for neuropathic pain.

Subsidiaries

Our wholly-owned subsidiaries consist of Pherin Pharmaceuticals, Inc, a Delaware corporation (Pherin), and Vistastem, Inc., a California corporation founded in 1998 (Vistastem). For the relevant periods, our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report) also include the accounts of Vistastem’s two wholly owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation (Artemis), which was dissolved in April 2022, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada (VistaStem Canada), which was dissolved in June 2022.

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, 2023 (Form 10-K), as filed with the SEC on June 28, 2023, and in Note 3 to the accompanying unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report (Financial Statements). There have been no changes in significant accounting estimates during the three months ended June 30, 2023 since those disclosed in our Form 10-K.

Summary

Net Loss

We have not yet achieved recurring revenue-generating status from any of our product candidates or technologies in amounts sufficient to sustain our operations and enable our strategic business plans. We have devoted substantial resources to advance initiatives related to research, development, and contract manufacturing of our intranasal investigational product candidates, fasedienol and itruvone, including initiatives related to manufacturing processes, analytical methods and production programs for drug substance and finished drug product, as well as for preclinical studies and clinical studies focused on potential commercialization of these product candidates for neuropsychiatry indications. Throughout Fiscal 2022 and Fiscal 2023, we allocated significant resources to our PALISADE Phase 3 Program evaluating fasedienol for the acute treatment of anxiety in adults with SAD. In the first quarter of our fiscal year ending March 31, 2024, (Fiscal 2024) we have continued to focus our efforts on fasedienol and preparing to launch our FEARLESS program. We conducted, and are continuing to conduct, various preclinical studies and manufacturing activities that enabled submission of our U.S. IND for itruvone in MDD in late September 2022 and our initiation of a small Phase 1 clinical study of itruvone in December 2022 to facilitate its potential Phase 2B clinical development in the U.S. as a stand-alone treatment for MDD. With respect to AV-101, we are evaluating AV-101 in combination with probenecid, which may provide opportunities to explore the therapeutic potential of the combination for certain CNS indications involving the NMDAR. We have on-going initiatives for creating, protecting and patenting intellectual property (IP) related to our product candidates and technologies and raising sufficient working capital to fund these studies, initiatives and other activities. At June 30, 2023, we had an accumulated deficit of approximately $333.8 million. Our net loss for Fiscal 2023 and Fiscal 2022 was approximately $59.2 million and $47.8 million, respectively, and we incurred a net loss of approximately $6.9 million in the first quarter of Fiscal 2024. We expect losses to continue for the foreseeable future as we engage in further research, development and regulatory activities related to fasedienol, itruvone and AV-101 and, potentially, the new pherines acquired as a result of our acquisition of Pherin in February 2023.

Summary of the Quarter Ended June 30, 2023

During the quarter ended June 30, 2023, we worked to advance our FEARLESS Phase 3 Program to develop and commercialize fasedienol as a new treatment of anxiety in adults with SAD following the positive feedback received from the FDA on the use of the LSAS as the primary endpoint for our FEARLESS program. In addition, we completed our Phase 1B study of itruvone in MDD and began work required to launch our Phase 2B clinical development of itruvone as a potential stand-alone treatment for MDD. We also initiated IND-enabling nonclinical activities to facilitate Phase 2B development of PH80 for the treatment of vasomotor symptoms (hot flashes) due to menopause and conducted various nonclinical studies involving each of our product candidates. Each of these activities was completed as we carefully monitored our cash resources and evaluated our internal and external research and development expenditures.

We did not complete any capital-raising or other significant financing activities during Fiscal 2023.  In May 2021, we entered into an Open Market Sale Agreement ^SM  (the Sales Agreement) with Jefferies LLC, as sales agent (Jefferies), with respect to an at-the-market offering program (the ATM) under which we may, in our sole discretion, offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Jefferies. During June 2023, we sold an aggregate of 561,418 shares of our common stock and received net cash proceeds of $1,117,300 under the ATM. Since June 30, 2023 and through the date of the issuance of this report, we have sold an aggregate of 1,487,293 additional shares of our common stock under the Sales Agreement and received gross cash proceeds of $16,893,700.

Results of Operations

Comparison of Three Months Ended June 30, 2023 and 2022

The following table summarizes the results of our operations for the three months ended June 30, 2023 and 2022 (amounts in thousands).

Revenue   

We recognized $177,600 in sublicense revenue pursuant to the AffaMed Agreement during the quarter ended June 30, 2023, compared to $310,100 during the quarter ended June 30, 2022. As described more completely in Note 3, Summary of Significant Accounting Policies (Note 3) and Note 11, Sublicensing and Collaboration Agreements (Note 11), to our Condensed Consolidated Financial Statements in Part I of this Report (Financial Statements), on June 24, 2020, we entered into the AffaMed Agreement, pursuant to which we received a non-refundable upfront license fee payment of $5.0 million on August 3, 2020. This payment permitted the commencement of our revenue recognition under the AffaMed Agreement. We recognize revenue on a straight-line basis over the period during which we expect to perform our obligation under the AffaMed Agreement. Revenue related to our performance obligation, which is satisfied over time, could be materially impacted as a result of changes in our estimates of the time or effort necessary to satisfy the performance obligation. Due to the failure of PALISADE-1 to meet its primary efficacy endpoints and the resulting anticipated delays in subsequent clinical and regulatory processes for fasedienol in SAD, at September 30, 2022, we estimated that completion of our performance obligation under the AffaMed Agreement would be delayed until mid-calendar 2027. As described in Note 3 to the Financial Statements, as a result of the change in our estimate of the time required to complete our performance obligation under the AffaMed Agreement, we recorded a cumulative catch-up adjustment at September 30, 2022 pursuant to which we derecognized previously recorded revenue, and extended the future period over which we would recognize the remaining deferred revenue. Following the cumulative catch-up adjustment, through June 30, 2023, we have recognized an aggregate of $2,148,700 as revenue under the AffaMed Agreement and expect to recognize the remaining $2,851,300 as revenue over the estimated remaining performance period as our obligation is completed. We have not modified our September 30, 2022 estimate of the timing to complete our performance obligation, however, we will adjust our estimates, as necessary, in subsequent periods should more definitive information on which to base our projections become available. While we may potentially receive additional cash payments and royalties in the future under the AffaMed Agreement in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the AffaMed Agreement will provide any additional revenue beyond that noted or cash payments to us in the near term, or at all.

Research and Development Expense

Research and development (R&D) expense substantially decreased by approximately $11.1 million, from $15.3 million for the quarter ended June 30, 2022 to $4.2 million for the quarter ended June 30, 2023. Expenses related to closing processes for our PALISADE Phase 3 Program for fasedienol, including PALISADE-1, PALISADE-2 and the PALISADE OLS study, and the fasedienol Phase 2 Study in AjDA, as well as nonclinical development, regulatory and outsourced manufacturing activities for both fasedienol and itruvone, decreased by approximately $10.6 million during the quarter ended June 30, 2023 compared to those for the quarter ended June 30, 2022. Noncash research and development expense, primarily stock-based compensation and depreciation in both periods, accounted for approximately $344,000 and $353,000 for the quarters ended June 30, 2023 and 2022, respectively. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):

The decrease in salaries and benefits expense for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily reflects voluntary termination by six management and staff positions following the results of the PALISADE-1 study. Additionally, in anticipation of positive results from the PALISADE-1 study, we recorded an accrual for estimated bonus payment in the quarter ending June 30, 2022 that was subsequently reversed later in Fiscal 2023. No such accrual was made in the quarter ended June 30, 2023. Offsetting these decreases is the impact of five staff positions added during the second through fourth quarters of Fiscal 2023 and the realignment of a senior management position to research and development following the PALISADE-1 results.

Stock-based compensation expense for the quarter ended June 30, 2023 reflects the amortization of option grants made to our R&D staff and certain clinical and scientific consultants since August 2020, in addition to grants to new employees and forfeitures by terminated employees, as indicated above. All outstanding options granted to R&D employees and consultants prior to August 2020 have become fully vested and amortized prior to the quarter ended June 30, 2023. Grants awarded after June 30, 2022, including those granted to new employees and a single grant to a former employee in the current quarter, account for approximately $25,000 of expense in the quarter ended June 30, 2023, offset by an expense reduction of approximately $67,000 compared to the quarter ended June 30, 2022 attributable to options that became fully vested and amortized prior to or during the quarter ended June 30, 2023, primarily those granted in December 2020. The impact of option forfeitures recognized in the first quarter of Fiscal 2023 resulted in an expense increase of approximately $22,000 in the first quarter of Fiscal 2024 compared to expense for the quarter ended June 30, 2022. 2019 ESPP expense for the quarter ended June 30, 2023 was $2,100 compared to $15,900 in the quarter ended June 30, 2022.

Consulting and other professional services in both periods reflects fees incurred, generally on an as-needed basis, for project-based scientific, nonclinical and clinical development and regulatory advisory and analytical services rendered to us by third parties primarily in support of our fasedienol and itruvone development initiatives. Services related to both clinical and nonclinical activities have been curtailed to the extent possible following the results of PALISADE-1.

Following receipt of the topline results of the PALISADE-1 study in July 2022, we (i) initiated completion procedures for that study, (ii) paused, and ultimately terminated in early Fiscal 2024, the PALISADE-2 study, (iii) terminated the PALISADE OLS during the second quarter of Fiscal 2023, and (iv) ran the Phase 2A study of fasedienol in AjDA to its completion in the third quarter of Fiscal 2023. Each of these studies was actively enrolling subjects during the quarter ended June 30, 2022. Reduction or termination of these activities is the primary driver of the decrease in project expenses for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022. Despite reduction in clinical trial activity, during the quarters ended June 30, 2023 and 2022, manufacturing, formulation, process validation and stability analyses of sufficient quantities of drug substance and drug product for clinical trials and other developmental requirements were significant initiatives for advancing both fasedienol and itruvone. During the first quarter of Fiscal 2023, we prepared for and subsequently launched a small U.S. Phase 1 clinical trial of itruvone to facilitate its potential U.S. Phase 2B development for treatment of MDD. That trial was conducted during the fourth quarter of Fiscal 2023. Project costs related to itruvone were nominal during the quarters ended June 30, 2023 and 2022. In both periods, AV-101 project expense includes costs for certain preclinical studies related to the use of AV-101 with adjunctive probenecid and certain AV-101 manufacturing stability studies as well as the costs of our exploratory Phase 1B AV-101 and probenecid clinical trial, which has now been completed. We expect minimal costs in the near term for AV-101 projects.

Rent expense for both periods reflects our implementation of ASC 842 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. 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 October 2021, we entered into an amendment to this lease, pursuant to which the term of the lease was extended from August 1, 2022 to July 31, 2027 and the base rent under the lease for the five-year extension period was specified. We allocate total rent expense for our South San Francisco facility between R&D expense and G&A expense based generally on square footage dedicated to each function. In both periods reported, rent expense includes charges for such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.

General and Administrative Expense

General and administrative (G&A) expense decreased by approximately $1.8 million for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022. Primary components of the decrease compared to prior year include:

Noncash general and administrative expense, approximately $282,000 and $673,000 in the quarters ended June 30, 2023 and 2022, respectively, primarily reflects stock-based compensation and depreciation in both periods. The following table indicates the primary components of general and administrative expense for each of the periods (amounts in thousands):

The decrease in salaries and benefits expense for the quarter ended June 30, 2023 reflects the impact of the voluntary resignation of our Chief Commercial Officer in November 2022 and the re-alignment of a senior management position to research and development, both following the PALISADE-1 results, offset by the impact of hiring of our Chief Corporate Development Officer and General Counsel in May 2022 and our Vice President, Associate General Counsel in August 2022. Additionally, in anticipation of positive results from the PALISADE-1 study, we had recorded an accrual for estimated bonus payments in the quarter ending June 30, 2022 that was subsequently reversed later in Fiscal 2023. No such accrual was made in the quarter ended June 30, 2023.

Stock-based compensation expense for the quarter ended June 30, 2023 reflects the amortization of option grants made to our administrative staff, non-employee members of our Board, and certain consultants since December 2020, in addition to grants to new employees, as indicated above. All outstanding options granted to G&A employees and consultants prior to December 2020 have become fully vested and amortized prior to the quarter ended June 30, 2023. We made no grants to G&A employees, Board members or consultants during the quarter ended June 30, 2023. Grants awarded after June 30, 2022, including those granted to new employees account for approximately $23,000 of expense in the quarter ended June 30, 2023, offset by an expense reduction of approximately $387,000 compared to the quarter ended June 30, 2022 attributable to options that became fully vested and amortized prior to or during the quarter ended June 30, 2023, primarily those granted to employees in December 2020, to new Board members in July 2021, and to Board members in March 2022. 2019 ESPP expense for the quarter ended June 30, 2023 was $1,500 compared to $4,900 in the quarter ended June 30, 2022.

Board fees and other consulting services represents, in both periods, fees paid as consideration for Board and Board Committee services to the independent members of our Board of Directors. Expenses for the quarter ended June 30, 2023 also include fees paid to our former Chief Commercial Officer pursuant to a consulting agreement following her voluntary resignation.

Legal, accounting and other professional fees for both periods include expenses (i) related to routine and project-based legal services as well as accounting services related to the audit of our annual financial statements, (ii) the cost of certain outsourced financial and accounting services and our information technology service provider, and (iii) legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements, our AV-101 patents, or patents that we have elected to pursue for commercial purposes, recurring annual license fees, and costs we have incurred to advance various patent applications in the U.S. and numerous foreign countries, primarily with respect to AV-101 and our stem cell technology platform, but also with respect to our fasedienol and itruvone intellectual property portfolios.

Investor and public relations expense in both periods includes the fees of our various external service providers for a broad spectrum of investor relations, public relations and social media services, and, in the quarter ended June 30, 2022, additional corporate branding, market awareness and strategic advisory and support functions and initiatives. The latter activities were significantly curtailed following the results of the PALISADE-1 study. During both years, we conducted numerous virtual meetings and other communication activities focused on expanding global market awareness of the Company, our CNS product candidate pipeline and technologies and our research and development programs, including among registered investment professionals and investment advisors, individual and institutional investors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide.

During the quarter ended June 30, 2022, we incurred expenses for a number of pre-commercialization studies, analyses, projections, strategic modeling and awareness services, primarily attributable to fasedienol as a potential acute treatment of anxiety in adults with SAD. Given the results of PALISADE-1 and the resulting delay to our anticipated commercialization timeline for fasedienol, these activities were significantly reduced in the later quarters of Fiscal 2023 and in Fiscal 2024. We have evaluated the extent and timing of such future activities, and anticipate that such expenditures will, for the short term, remain at the modest level similar to that expended during the quarter ended June 30, 2023.

Insurance expense reflects increased coverage levels obtained under our directors’ and officers’ liability insurance upon restructuring of our program in May 2022 and its renewal in May 2023 and additional coverages, including cybersecurity and employment practices liability, that have been included in our insurance program since late in Fiscal 2022.

As a result of periodic shelter-in-place restrictions and travel and workplace precautions and restrictions associated with the COVID-19 pandemic during 2020 through 2022, management presentations and historically in-person meetings held in multiple U.S. markets and certain international markets 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, generally occurred remotely without requiring in-person business travel by our executives. We have resumed limited in-person meetings during calendar 2022 and 2023 and have accordingly incurred modest travel expenses for attendance at seminars, clinical trial site visits, certain investor-focused events and in-person corporate meetings, as conditions have permitted.

Rent expense for both periods reflects our implementation of ASC 842 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. 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 October 2021, we entered into an amendment to this lease, pursuant to which the term of the lease was extended from August 1, 2022 to July 31, 2027 and the base rent under the lease for the five-year extension period was specified. We allocate total rent expense for our South San Francisco facility between R&D expense and G&A expense based generally on square footage dedicated to each function. In both periods reported, rent expense includes charges for such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.

Beginning in the quarter ended September 30, 2020, we began to amortize the deferred contract acquisition costs related to our acquisition of the AffaMed Agreement, composed of the cash payment of $220,000 for sublicense fees which we were obligated to make pursuant to our fasedienol license from Pherin, and the $125,000 cash payment and $125,000 fair value of common stock issued for consulting services, in each case exclusively related to our acquisition of the AffaMed Agreement. The contract acquisition costs are amortized over the expected term of our performance obligation to be provided under the AffaMed Agreement. As described above in the section entitled Revenue, the outcome of the PALISADE-1 study resulted in an estimated extension of the period over which we will recognize both revenue under the AffaMed Agreement and the period over which we will amortize the deferred contract acquisition costs. Our estimate of the extended time required to satisfy our performance obligation required a cumulative catch-up adjustment to amortization of the contract acquisition costs, which we recorded in the second quarter of Fiscal 2023, and extended the future period over which we would recognize the remaining contract acquisition costs. During the quarters ended June 30, 2023 and 2022, we amortized approximately $16,700 and $29,200 of contract acquisition costs, respectively.

Interest and Other Expense   

Interest income, net totaled $97,200 for the quarter ended June 30, 2023, compared to $2,300 for the quarter ended June 30, 2022. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):

For the quarters ended June 30, 2023 and 2022, interest income relates to cash deposits in interest-bearing cash equivalent accounts. The increase in interest income primarily reflects a combination of increases in interest rates that have occurred during calendar 2022 and 2023 and our change in banking relationships and investment securities beginning late in the fourth quarter of Fiscal 2023. Interest expense for both quarters presented relates to interest paid on the insurance premium financing notes executed in May 2022 and May 2023 and on our financing lease of office equipment subject to ASC 842.

Liquidity and Capital Resources

Since our inception in May 1998 through June 30, 2023, 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 $209.9 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments and intellectual property licensing, and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $41.3 million in noncash acquisitions of product licenses, the Pherin Acquisition, and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.

We did not complete any capital-raising or other significant financing activities during Fiscal 2023. During the quarter ended June 30, 2023, we sold 561,418 shares of our common stock under the terms of our Open Market Sale Agreement ^SM (the Sales Agreement) for our at-the-market offering program (the ATM) resulting in gross cash proceeds of approximately $1.15 million. Since June 30, 2023 and through the date of the issuance of this Report, we sold an aggregate of 1,487,293 shares of our common stock under the Sales Agreement at a weighted average price of $11.36 per share and received gross cash proceeds of $16,893,700. Proceeds from public offerings, warrant exercises and other transactions consummated prior to Fiscal 2023 have provided the primary sources of our liquidity during Fiscal 2023 and through the date of this Report in our current fiscal year.

We had cash and cash equivalents of approximately $9.6 million at June 30, 2023, which we believe will not be sufficient to fund our planned operations for the twelve months following the issuance of the Financial Statements included elsewhere in this Report, which raises substantial doubt regarding our ability to continue as a going concern. We are continuing to manage our cash resources, including cash resources received since June 30, 2023, as we evaluate the potential implications for the initiation, conduct and timing of clinical trials, including Phase 3 trials of fasedienol, the Phase 2B trial of itruvone and nonclinical studies of our other pherine candidates, and strategies for the further development and potential commercialization, on our own or with collaborators, of all of our product candidates. However, as we have not yet developed products that generate recurring revenue and, in the event we successfully complete future clinical and/or nonclinical programs, we will need to obtain and invest substantial additional capital resources to develop and commercialize any of our product candidates.

During the next twelve months, subject to availability of adequate working capital or strategic partnering arrangements, either on our own or with collaborators, we plan to (i) prepare for and initiate, on our own or with a strategic partner, our Phase 3 PALISADE-3 and Phase 3 FEARLESS clinical trials of fasedienol as a potential new treatment of anxiety in adults with SAD, (ii) prepare for and initiate, on our own or with a strategic partner, a Phase 2B clinical trial of itruvone as a potential stand-alone treatment for MDD, (iii) prepare for and initiate, on our own or with a strategic partner, U.S. IND-enabling nonclinical activities to facilitate Phase 2B development, on or own or with a strategic partner, of PH80 for the treatment of vasomotor symptoms (hot flashes) due to menopause, (iv) prepare for and initiate, on our own or with a strategic partner, U.S. IND-enabling nonclinical activities to facilitate potential Phase 2A development of PH15 for cognitive and psychomotor performance improvement, PH284 for cachexia, (v) prepare for and initiate, on our own or with a strategic partner, Phase 2A development of AV-101 for one or more neurological disorders involving the NMDAR, and (vi) conduct various nonclinical studies involving each of our product candidates. 

When necessary and advantageous, we will seek additional financial resources to fund our planned operations through (i) sales of our equity and/or debt securities in one or more public offerings, including under the Sales Agreement, and/or private placements (ii) non-dilutive government grants and research awards and (iii) non-dilutive strategic partnering collaborations to advance development and commercialization of our product candidates. However, no assurance can be provided that any such sales of our securities, awards, agreements and/or collaborations will occur in the future. Subject to certain restrictions, our Registration Statement on Form S-3 (the S-3 Shelf 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 Shelf Registration Statement and/or under the Sales Agreement, we do not have an obligation to do so.

Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to adjustments in the size of our staff, the scope and nature of opportunities related to our success or failure and the success or failure of certain other companies in nonclinical and clinical trials, including the development and commercialization of our current product candidates, and the availability of, and our ability to enter into financing transactions and research, development and commercialization collaborations on terms acceptable to us. In the future, to further advance the clinical development of our product candidates, as well as support our operating activities, we plan to seek additional financing, including both equity-based capital and funding from non-dilutive sources, and continue to carefully manage our operating costs, including, but not limited to, our clinical and nonclinical programs.

Notwithstanding the foregoing, there can be no assurance that future financings will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all, or that current or future development and commercialization collaborations under the AffaMed Agreement or other potential strategic partnering collaborations will generate revenue from future potential milestone payments or otherwise.

Cash and Cash Equivalents

The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):

As indicated above, proceeds received from public offerings, warrant exercises and other transactions prior to Fiscal 2023 have provided our primary cash resources during Fiscal 2023 and to-date in Fiscal 2023. The decrease in cash used in operations during the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 primarily reflects our completion, pause or termination of fasedienol clinical trials including PALISADE-1, PALISADE-2, the PALISADE OLS, and the Phase 2 AjDA study, as previously described, while continuing to support ongoing manufacturing and regulatory initiatives and other nonclinical studies for our product candidates. While we had expanded our internal capabilities with the addition of numerous senior personnel with significant expertise in disciplines critical to the advancement of our product pipeline during Fiscal 2022 and Fiscal 2023, certain employees voluntarily resigned from their positions within the Company following announcement of the PALISADE-1 results. During Fiscal 2023, in parallel with our clinical trials and other regulatory initiatives, and in expectation of positive results from the PALISADE Phase 3 Program, we engaged in customary pre-commercialization analyses, modeling, planning and awareness initiatives. Given the outcome of the PALISADE-1 study, we terminated most of such activities, which further reduced our use of cash in the first quarter of Fiscal 2024.

We did not use cash in investing activities in the first quarter of Fiscal 2024. In the first quarter of Fiscal 2023, we purchased laboratory analytical equipment for our internal studies and experiments on both fasedienol and itruvone.

Cash provided by financing activities in the quarter ended June 30, 2023 primarily reflects net proceeds from our transactions under the ATM with Jefferies, net of a principal payment on our insurance premium financing note. Cash used by financing activities in the quarter ended June 30, 2022 primarily reflects the proceeds of option exercises and the purchase of common stock under our ESPP, net of a principal payment on our insurance premium financing note and expenditures related to the ATM transaction with Jefferies which are recorded as deferred offering costs.

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 In Part I of this Report.

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

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) from that described in our Annual Report on Form 10-K for our fiscal year ended March 31, 2023, filed with the Securities and Exchange Commission (SEC) on June 28, 2023, that occurred during the quarter ended June 30, 2023, to which this Report relates, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Our business is subject to substantial risk and an investment in our securities involves various risks. Some of the material risks include those set forth below. You should consider carefully these risks, and those discussed under “Risk Factors” below, before investing in our securities. These risks include, among others:

If we are unable to effectively manage the impact of these and other risks, our ability to operate and execute our business plan would be substantially impaired. In turn, the value of our securities would be materially reduced.

Risk Factors

You should consider carefully the risks and uncertainties described below, together with all of the other information in this Report before investing in our securities. The risks described below are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected.

We are a development-stage biopharmaceutical company with no recurring revenues from product sales or approved products, and limited experience developing new therapeutic product candidates, including conducting clinical trials and other areas required for the successful development of therapeutic products, which makes it difficult to assess our future viability.

We are a development-stage biopharmaceutical company. We currently have no approved products and no revenue from product sales, and we have not yet fully demonstrated an ability to overcome many of the fundamental risks and uncertainties frequently encountered by development stage companies in new and rapidly evolving fields of technology, particularly biotechnology. To execute our business plan successfully, we will need to accomplish or continue to accomplish the following fundamental objectives, either on our own or with collaborators:

We require additional financing to execute our long-term business plan.

From our inception through 2019, a substantial portion of our resources were dedicated to research and development of AV-101 and Vistastem’s stem cell technology platform. Since 2019, we have expended a considerable portion of our resources for research, clinical development, manufacturing and regulatory expense related to fasedienol and itruvone, including costs related to the PALISADE Phase 3 Program and our Phase 1 study of itruvone in MDD. We expect to continue to expend substantial resources for the foreseeable future developing fasedienol, itruvone, AV-101 and our other product candidates, PH15, PH80 and PH284, on our own and in collaborations. These expenditures will include costs associated with general and administrative costs, facilities costs, research and development, acquiring new technologies, manufacturing product candidates, conducting nonclinical experiments and clinical trials and obtaining regulatory approvals should the FDA approve any of such product candidates for sale.

We had cash and cash equivalents of approximately $9.6 million at June 30, 2023, and we have not yet developed products that generate recurring revenue. Assuming successful completion of our planned clinical and nonclinical programs, we will need to invest substantial additional capital resources to commercialize any of them.

During the next twelve months, subject to availability of adequate working capital, we plan to (i) continue to advance our FEARLESS Phase 3 Program, on our own or with a collaborator, to develop and commercialize fasedienol as a new acute treatment of anxiety in adults with SAD, (ii) complete preparations, on our own or with a collaborator, for and initiate further Phase 2B clinical development of itruvone as a potential stand-alone treatment for MDD, (iii) complete IND-enabling activities, either on our own with a collaborator, for Phase 2B development of PH80, PH15 and PH284 and Phase 2A development of AV-101 for one or more neurological disorders involving the NMDAR, and (iv) conduct various nonclinical studies involving each of our product candidates.

Although we received the $5 million upfront payment under the AffaMed Agreement in August 2020 and expect to recognize that amount as revenue in future periods, we have no other source of revenue or recurring cash flows from product sales to sustain our present activities, and we do not expect to generate sustainable positive operating cash flows until, and unless, we (i) out-license or sell a product candidate to a third-party that is subsequently successfully developed and commercialized, (ii) enter into additional transactions involving our stem cell technology, or (iii) obtain approval from the FDA and other regulatory authorities and successfully commercialize fasedienol, or one of our other product candidates, on our own or through collaborations.

As the outcome of our ongoing research and development activities, including the outcome of future anticipated nonclinical studies and clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any of our product candidates, on our own or in collaboration with others. As in prior periods, we will continue to incur substantial costs associated with other clinical and nonclinical development programs for our product candidates. In addition, other unanticipated costs may arise. As a result of these and other factors, we will need to seek additional capital to meet our future operating plans and requirements, including capital necessary to develop, obtain regulatory approval for fasedienol and our other product candidates, and may seek additional capital in the event there exists favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans and requirements.

We have completed in the past a range of potential financing transactions, including public or private equity or debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements or a combination of these approaches, and we intend to pursue and complete additional financing arrangements in the future. Our future capital requirements may depend on many factors, including:

Any additional fundraising efforts will divert certain members of our management team from their day-to-day activities, which may adversely affect our ability to develop our product candidates. We cannot guarantee that future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. The terms of any future financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional securities, whether equity or debt, by us, or the possibility of such issuance, may cause the market price of our shares to decline. The sale of additional equity securities and the conversion, exchange or exercise of certain of our outstanding securities will dilute all of our stockholders. The incurrence of debt could result in increased fixed payment obligations, and we could be required to agree to certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. We may also seek funds through arrangements with collaborative partners in certain territories, including the U.S., or at an earlier stage than otherwise would be desirable or aligned with our business plan, and we may be required to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us, any of which may have a material adverse effect on our business, operating results and prospects.

When necessary, if we are unable to obtain additional funding on a timely basis and on acceptable terms, we may be required to significantly curtail, delay or discontinue one or more of our research or product development programs or be unable to continue or expand our operations or otherwise capitalize on our business opportunities, as desired, which could materially affect our business, financial condition and results of operations.

Our future success is highly dependent upon our ability to successfully develop, on our own or with collaborators, any of our current CNS product candidates or acquire or license additional CNS product candidates, and we cannot provide any assurance that we will successfully develop and obtain regulatory approval of any of our current CNS product candidates or future product candidates, or that, if approved, any of our CNS product candidates will be successfully commercialized.

Business development and research and development programs designed to identify, acquire or license additional product candidates require substantial technical, financial and human resources, whether or not any additional CNS product candidate is acquired or licensed. If beneficial, we may seek to collaborate with others to develop and commercialize any of our current or future CNS product candidates, if and when they are acquired and developed.  If we enter into arrangements with third parties to perform sales, marketing and distribution services for our products, the resulting revenues or the profitability from these revenues to us are likely to be lower than if we had sold, marketed and distributed our products ourselves. In addition, we may not be successful entering into arrangements with third parties to sell, market and distribute our CNS product candidates or may be unable to do so on terms that are favorable to us.  We likely will have little control over such third parties, and any of these third parties may fail to devote the necessary resources and attention to sell, market and distribute our products effectively.  If we do not establish sales, marketing and distribution capabilities successfully, either on our own or in collaboration with third parties, we will not be successful in commercializing our product candidates.

Risks Related to Product Development, Regulatory Approval

Failures of our current and/or future clinical studies of our product candidates could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

Our PALISADE-1 Phase 3 clinical study of fasedienol for the acute treatment of anxiety in adults with SAD did not achieve its primary endpoint, as measured by change from baseline using the SUDS as compared to placebo. 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. Failure of any of our current and/or future clinical and nonclinical trials to achieve the planned endpoints, such as our PALISADE-1 Phase 3 clinical trial of fasedienol, could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

We depend heavily on the success of one or more of our current CNS drug candidates and we cannot be certain that we will be able to obtain regulatory approval for any of our product candidates.

We currently have no drug products for sale and may never be able to develop marketable drug products. Our business currently depends heavily on the successful development, manufacturing and regulatory approval of one or more of our current CNS drug candidates, as well as our ability to acquire, license or produce and develop additional product candidates. Each of our current investigational CNS 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. 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 or our collaborators 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:

Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for 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, certain of our product candidates, including fasedienol and itruvone, will be subject to regulation as combination products, which means that they are composed of both a drug product and device product. Although we do not contemplate doing so, 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. In the U.S., 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.

The COVID-19 pandemic has adversely impacted and may continue to adversely impact our business.

Beginning in late-2019, a new strain of coronavirus (COVID-19) spread across the world and caused considerable uncertainty about the potential effects of the virus and its variants, and the extent of and effectiveness of responses taken on international, national and local levels. Measures taken to limit the impact of the pandemic, including shelter-in-place orders, social distancing measures, travel bans and restrictions, and business and government shutdowns, resulted in significant negative economic impacts on a global basis. The COVID-19 pandemic has impacted our business and may continue to do so. Additionally, future outbreaks may have several adverse effects on our business, results of operations and financial condition.

COVID-19 also created significant disruption and volatility in national, regional and local economies and markets. Uncertainties related to, and perceived or experienced negative effects from COVID-19, may cause significant volatility or decline in the trading price of our securities, capital markets conditions and general economic conditions. Our future results of operations and liquidity could be adversely impacted by supply chain disruptions and operational challenges faced by our CROs, CMOs, clinical sites involved in our clinical studies and other contractors. The COVID-19 pandemic, or another highly transmissible and pathogenic infectious disease, could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in a further economic downturn or a global recession. Such events may limit or restrict our ability to access capital on favorable terms, or at all, lead to consolidation that negatively impacts our business, weaken demand, increase competition, cause us to reduce our capital spend further, or otherwise disrupt our business or make it more difficult to implement our strategic plans.

We have been granted Fast Track designation from the FDA for development of fasedienol for the treatment of social anxiety disorder (SAD) and AV-101 for the adjunctive treatment of major depressive disorder (MDD) and for the treatment of neuropathic pain (NP). However, these designations may not actually lead to faster development or regulatory review or approval processes for fasedienol or AV-101. Further, there is no guarantee the FDA will grant Fast Track designation for fasedienol or 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. In December 2019, the FDA granted Fast Track designation for development of fasedienol for the treatment of SAD. However, these FDA Fast Track designations may not lead to a faster development or regulatory review or approval process for fasedienol or AV-101 and the FDA may withdraw Fast Track designation of fasedienol or AV-101 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 fasedienol, AV-101 and any of our other product candidates as a treatment option for other CNS indications. The FDA has broad discretion whether or not to grant a Fast Track designation, and even if we believe our product candidates may be eligible for this designation, we cannot be sure that the FDA will grant it.

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 our current and/or our other future product candidates, if any, including positive results, may not be predictive of the results of later-stage clinical trials. Each of our current 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, as is the case for results from our PALISADE-1 clinical trial. Many companies in the biopharmaceutical industry have suffered significant setbacks in later-stage 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 or approval from a similar regulatory authority in another country. With respect to our current product candidates, if our future nonclinical or clinical studies fail to produce positive results, the development timeline and regulatory approval and commercialization prospects for these candidates and, correspondingly, our business and financial prospects, could be materially adversely affected.

Any changes in planned timing or nature of clinical trials compared to completed clinical trials could impede our ability to meet our clinical development objectives for our product candidates.

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 timing of planned clinical trials were effected by delays caused by the COVID-19 pandemic, including delays in recruitment and enrollment in our planned clinical and nonclinical studies or supply chain disruptions experienced by certain of our CMOs and/or CROs. In addition, clinical development of our products may be further 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. In addition, health and safety precautions at clinical sites resulting from the COVID-19 pandemic could cause us to incur additional costs or delay initiation or completion of planned clinical and/or nonclinical trials.

If serious adverse events or other undesirable side effects or safety concerns attributable to our product candidates occur, the clinical development of our product candidates may be delayed or adversely affected.

Undesirable side effects or safety concerns caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt our clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval. Although no treatment-related serious adverse events (SAEs) were reported in any clinical trials of any of our product candidates completed to date, if treatment-related SAEs or other undesirable side effects or safety concerns, or unexpected characteristics attributable to any of our product candidates are reported in any future clinical trials involving our drug candidates, they may adversely affect or delay our clinical development and commercialization of the effected product candidate, 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:

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 expense, which in turn could delay or prevent us from generating significant revenue from the sale of our product candidates.

Failures or delays in the commencement or completion of our planned nonclinical and clinical studies of our product candidates could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.

We will need to successfully complete at least two Phase 3 clinical trials and certain other clinical and nonclinical studies prior to our potential submission of an NDA for regulatory approval of fasedienol as an as needed, over time, treatment of anxiety in adults with SAD. For itruvone, at present, we believe we will need to complete at least one additional Phase 2B clinical study, two adequate and well-controlled Phase 3 clinical trials, as well as standard nonclinical and long-term clinical safety studies, as well as other smaller clinical studies prior to the potential submission of a NDA for regulatory approval of itruvone as a stand-alone rapid-onset treatment for MDD, or any other depression disorder. For AV-101, we believe we will need to complete our ongoing exploratory Phase 1B clinical study, two Phase 2 clinical studies, two adequate and well-controlled Phase 3 clinical trials, additional toxicology and other standard nonclinical and long-term clinical safety studies, as well as certain standard smaller clinical studies prior to the potential submission of an NDA for regulatory approval in any CNS indication. For PH15, PH80 and PH284, we are in the process of determining the work required to successfully complete the clinical and nonclinical development of each of these product candidates. 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. We do not know whether any of our future-planned nonclinical and clinical trials of any of our product candidates 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:

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:

Changes in regulatory requirements, regulatory guidance or unanticipated events during our nonclinical studies and clinical trials of our CNS 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 any of our CNS 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 our CNS 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 CNS product candidates and will continue to do so for any other future CNS 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 our current and/or future CNS product candidates may be delayed and we may not be able to obtain regulatory approval for our current or future CNS product candidates and our business could be substantially harmed.

By strategic design, we do not have the extensive internal staff resources to independently conduct nonclinical and clinical trials of our product candidates completely on our own. We rely on our network of strategic relationships with various academic research centers, medical institutions, nonclinical and clinical investigators, contract laboratories, CROs and other third parties 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 efficient 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 and inefficiencies in coordinating activities. CROs and other outside parties may:

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, or independent investigators does not relieve us of our regulatory responsibilities. We and our CROs, 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 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, 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, analyze, hold and distribute supplies of our CNS 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 CNS product candidates in the future.

By strategic design, we do not currently have, nor do we plan to acquire or develop, extensive internal infrastructure or technical capabilities to manufacture, formulate, analyze, 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 API and formulate final drug product for any of pir product candidates 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.

We do not directly control the manufacturing process, or the supply or quality of materials used in the manufacturing, analysis 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 due to supply chain disruptions, or successfully manufacture our product candidates, including 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 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 any of our product candidates 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.

We do not yet have long-term supply agreements in place with our CMOs and each batch manufactured of our product candidates 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 fasedienol, itruvone, PH15, PH80 and PH284, and the current and projected supply of API and finished drug product for each of our product candidates will be adequate to support our planned nonclinical and clinical studies, no assurance can be given that unanticipated supply shortages or CMO-related delays in the manufacture and formulation of API and/or finished drug product for any or all of our product candidates will not occur in the future.

Additionally, fasedienol, itruvone, PH15, PH80 and PH284 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 and 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 any of our CNS product candidate in the U.S., we may never receive regulatory approval to market the same CNS product candidate outside of the U.S.

In order to market any of our CNS 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.

If any of our CNS 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 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 broad sales and marketing capabilities on our own or enter into agreements with third parties to market and sell our CNS product candidates, we may not be able to generate any revenue from product sales.

We currently have limited internal resources for the sale, marketing and distribution of pharmaceutical products, and we may not be able to create broad internal capabilities in the foreseeable future. Therefore, to market our CNS product candidates, if approved by the FDA or any other regulatory body, we must establish broad internal capabilities related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates or make contractual arrangements with third parties to perform such services, prior to market approval. If we are unable to establish adequate internal sales, marketing and distribution capabilities, or if we are unable to do so contractually on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected. Moreover, creating broad sales and marketing capabilities will require substantial capital, which we may not be able to obtain.

Even if we receive marketing approval for our CNS product candidates, our product candidates may not achieve broad market acceptance, which would limit the revenue that we generate from their sales.