UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
(Mark One)

þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended December 31, 2013
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from __________ to __________ .
 
Commission File Number: 000-54014
 
VistaGen Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
Nevada
 
20-5093315
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
343 Allerton Avenue
South San Francisco, CA 94080
(Address of principal executive offices including zip code)
 
(650) 577-3600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 [  ]
 
Accelerated filer
[  ]
Non-Accelerated filer
 [  ]
 
Smaller reporting company
[X]
(do not check if a smaller reporting company)
     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of February 10,  2014, 23,361,877 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding. 
 
 
 




VistaGen Therapeutics, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended December 31, 2013

 
TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
   
 
   
1
   
2
   
3
   
4
   
21
   
30
   
PART II. OTHER INFORMATION
 
 
 
30
   
30
   
31
   
31
   
31
   
 33
 

 
-i-

PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
VISTAGEN THERAPEUTICS, INC.
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Dollars, except share amounts)

 
December 31,
   
March 31,
 
 
2013
   
2013
 
 
(Unaudited)
   
(Note 2)
 
ASSETS
 
 Current assets:
         
Cash and cash equivalents
$ 20,700     $ 638,100  
Prepaid expenses and other current assets
  70,600       33,700  
Total current assets
  91,300       671,800  
 Property and equipment, net
  190,700       180,700  
 Security deposits and other assets
  46,900       29,000  
Total assets
$ 328,900     $ 881,500  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 Current liabilities:
             
Accounts payable
$ 2,256,600     $ 1,353,600  
Accrued expenses
  532,500       342,900  
Advance from officer
  10,300       -  
Current portion of notes payable and accrued interest
  638,600       617,200  
Current portion of notes payable to related parties and accrued interest
  99,500       93,000  
Convertible promissory notes and accrued interest, net of discount of $423,900 at December 31, 2013
  169,200       -  
Capital lease obligations
  5,600       7,600  
Total current liabilities
  3,712,300       2,414,300  
 Non-current liabilities:
             
            Senior secured convertible promissory notes, net of discount of $2,135,800 at December 31, 2013 and $1,963,100 at March 31, 2013 and accrued interest
  1,781,200       1,425,700  
Notes payable, net of discount of $929,000 at December 31, 2013 and $1,142,600 at March 31, 2013 and accrued interest
  2,479,200       2,091,800  
Notes payable to related parties, net of discount of $115,000 at December 31, 2013 and $147,200 at March 31, 2013 and accrued interest
  1,209,700       1,106,000  
Warrant liability
  2,717,100       6,394,000  
Deferred rent liability
  97,300       -  
Capital lease obligations
  2,400       6,100  
Total non-current liabilities
  8,286,900       11,023,600  
Total liabilities
  11,999,200       13,437,900  
 Commitments and contingencies
             
 Stockholders’ deficit:
             
Preferred stock, $0.001 par value; 10,000,000 shares, including 500,000 Series A shares, authorized at December 31, 2013 and March 31, 2013; 500,000 Series A shares issued and outstanding at December 31, 2013 and March 31, 2013, respectively
  500       500  
Common stock, $0.001 par value; 200,000,000 shares authorized at December 31, 2013 and March 31, 2013; 25,295,185 and 23,480,169 shares issued at December 31, 2013 and March 31, 2013, respectively
  25,300       23,500  
Additional paid-in capital
  61,282,400       59,266,000  
Treasury stock, at cost, 2,713,308 shares of common stock held at December 31, 2013 and March 31, 2013
  (3,968,100 )     (3,968,100 )
Note receivable from sale of common stock
  (198,100 )     (209,100 )
Deficit accumulated during development stage
  (68,812,300 )     (67,669,200 )
Total stockholders’ deficit
  (11,670,300 )     (12,556,400 )
Total liabilities and stockholders’ deficit
$ 328,900     $ 881,500  

See accompanying notes to Condensed Consolidated Financial Statements.
 
-1-


VISTAGEN THERAPEUTICS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Amounts in dollars, except share amounts)

                           
May 26, 1998
 
                           
(Inception)
 
   
Three Months Ended
   
Nine Months Ended
   
Through
 
   
December 31,
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
   
2013
 
Revenues:
                             
 Grant revenue
  $ -     $ -     $ -     $ 200,400     $ 12,963,100  
 Collaboration revenue
    -       -       -       -       2,283,600  
 Other
    -       -       -       -       1,123,500  
  Total revenues
    -       -       -       200,400       16,370,200  
Operating expenses:
                                       
 Research and development
    551,300       1,119,600       1,916,100       3,092,200       31,471,800  
 Acquired in-process research and development
    -       -       -       -       7,523,200  
 General and administrative
    897,000       799,000       2,047,500       2,430,200       32,728,600  
  Total operating expenses
    1,448,300       1,918,600       3,963,600       5,522,400       71,723,600  
Loss from operations
    (1,448,300 )     (1,918,600 )     (3,963,600 )     (5,322,000 )     (55,353,400 )
Other expenses, net:
                                       
 Interest expense, net
    (360,900 )     (235,400 )     (1,000,500 )     (611,700 )     (11,362,700 )
 Change in warrant and put and note extension option liabilities
    1,940,200       357,800       3,823,700       357,800       2,606,400  
 Loss on early extinguishment of debt
    -       (3,537,000 )     -       (3,537,000 )     (4,761,300 )
 Other income
    -       -       -       -       81,900  
Income (loss) before income taxes
    131,000       (5,333,200 )     (1,140,400 )     (9,112,900 )     (68,789,100 )
Income taxes
    -       (1,800 )     (2,700 )     (3,700 )     (23,200 )
Net income (loss)
    131,000       (5,335,000 )     (1,143,100 )     (9,116,600 )     (68,812,300 )
Deemed dividend on Series A Preferred stock
    -       (10,193,200 )     -       (10,193,200 )     (10,193,200 )
Net income (loss) attributable to common stockholders
  $ 131,000     $ (15,528,200 )   $ (1,143,100 )   $ (19,309,800 )   $ (79,005,500 )
Basic net income (loss) attributable to common stockholders per common share
  $ 0.01     $ (0.85 )   $ (0.05 )   $ (1.11 )        
Diluted net loss attributable to common stockholders per common share
  $ (0.02 )   $ (0.85 )   $ (0.05 )   $ (1.11 )        
Weighted average shares used in computing:
                                       
Basic net income (loss) attributable to common stockholders per common share
    22,210,573       18,292,301       21,554,929       17,411,993          
Diluted net loss attributable to common stockholders per common share
    22,210,573       18,292,301       21,554,929       17,411,993          
Comprehensive income (loss)
  $ 131,000     $ (5,335,000 )   $ (1,143,100 )   $ (9,116,600 )   $ (68,812,300 )

See accompanying notes to Condensed Consolidated Financial Statements.

 
-2-

VISTAGEN THERAPEUTICS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Dollars)
               
Period From
 
               
May 26, 1998
 
         
(Inception)
 
   
Nine Months Ended
December 31,
   
Through
December
 
   
2013
   
2012
   
31, 2013
 
 Cash flows from operating activities:
                 
  Net loss
  $ (1,143,100 )   $ (9,116,600 )   $ (68,812,200 )
  Adjustments to reconcile net loss to net cash used in operating activities:
                       
   Depreciation and amortization
    40,200       21,000       817,700  
   Amortization of discounts on convertible and promissory notes
    356,100       352,200       5,031,700  
   Change in warrant liability and put and note term extension option liabilities
    (3,823,700 )     (357,800 )     (2,606,500 )
   Stock-based compensation
    893,700       962,000       6,489,200  
   Expense related to modification of warrants
    174,500       440,700       1,424,400  
   Non-cash rent and relocation expense
    56,700       -       56,700  
   Interest income on note receivable for stock purchase
    (400 )     (26,800 )     (28,000 )
   Fair value of common stock granted for services following the Merger
    -       340,000       846,000  
   Fair value of warrants granted for services and interest following the Merger
    54,000       150,000       748,300  
   Gain on currency fluctuation
    (30,100 )     (37,100 )     (83,100 )
   Fair value of additional warrants granted pursuant to exercises of modified warrants
    -       35,900       173,900  
   Loss on settlements of accounts payable
    -       78,300       78,300  
   Acquired in-process research and development
    -       -       7,523,200  
   Loss on early extinguishment of debt
    -       3,537,000       4,761,300  
   Fair value of Series C preferred stock, common stock, and warrant granted for services prior to the Merger
    -       -       3,150,900  
   Fair value of common stock issued for note term modification
    -       -       22,400  
   Consulting services by related parties settled by issuing promissory notes
    -       -       44,600  
   Gain on sale of assets
    -       -       (16,700 )
   Changes in operating assets and liabilities:
                       
    Unbilled contract payments receivable
    -       106,200       -  
    Prepaid expenses and other current assets
    56,100       (16,500 )     97,800  
    Security deposits and other assets
    (17,900 )     -       (46,900 )
    Accounts payable and accrued expenses, including accrued interest
    1,725,000       1,051,500       17,696,400  
    Deferred revenues
    -       (13,200 )     -  
     Net cash used in operating activities
    (1,658,900 )     (2,493,200 )     (22,630,600 )
 Cash flows from investing activities:
                       
  Purchases of equipment, net
    (9,600 )     (131,100 )     (825,800 )
     Net cash used in investing activities
    (9,600 )     (131,100 )     (825,800 )
 Cash flows from financing activities:
                       
  Net proceeds from issuance of common stock and warrants, including Units
    597,900       480,600       4,583,000  
  Proceeds from exercise of modified warrants
    264,200       262,100       1,692,600  
  Net proceeds from issuance of Platinum notes and warrants
    250,000       2,222,100       7,172,100  
  Advance from officer
    64,000       -       64,000  
  Proceeds from issuance of notes under line of credit
    -       -       200,000  
  Proceeds from issuance of 7% note payable to founding stockholder
    -       -       90,000  
  Net proceeds from issuance of 7% convertible notes
    -       -       575,000  
  Net proceeds from issuance of 10% convertible notes and warrants
    -       -       1,655,000  
  Net proceeds from issuance of preferred stock and warrants
    -       -       4,198,600  
  Net proceeds from issuance of notes and warrants from 2006 to 2010
    -       -       4,851,800  
  Net proceeds from issuance of February 2012 12% convertible notes and warrants
    -       -       466,500  
  Repayment of capital lease obligations
    (5,700 )     (15,300 )     (123,100 )
  Repayment of notes
    (119,300 )     (382,000 )     (1,948,400 )
     Net cash provided by financing activities
    1,051,100       2,567,500       23,477,100  
 Net (decrease) increase in cash and cash equivalents
    (617,400 )     (56,800 )     20,700  
 Cash and cash equivalents at beginning of period
    638,100       81,000       -  
 Cash and cash equivalents at end of period
  $ 20,700     $ 24,200     $ 20,700  

See accompanying notes to Condensed Consolidated Financial Statements.
 
-3-


VISTAGEN THERAPEUTICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  History and Organization
 
    VistaGen Therapeutics, Inc., a Nevada corporation (“VistaGen” or the “Company”), is a biotechnology company with expertise in human pluripotent stem cell technology.  The Company is applying and developing its stem cell technology for drug rescue, drug discovery and regenerative medicine. The Company’s primary goal is to use its stem cell technology platform, Human Clinical Trials in a Test Tube™, and its network of strategic relationships, to design and generate novel, proprietary, safer variants, which the Company refers to as Drug Rescue Variants™, of once-promising small molecule drug candidates discovered, developed and ultimately discontinued by pharmaceutical companies and others prior to market approval due to unexpected heart or liver safety concerns.  The Company refers to these once-promising drug candidates that are now potentially suitable for drug rescue as Drug Rescue Candidates™.  The Company’s drug rescue strategy is to leverage (i) substantial prior investment in discovery and development of Drug Rescue Candidates by others, (ii) its unique insight into heart and liver biology from its stem cell-derived bioassay systems, and (iii) medicinal chemistry to generate proprietary Drug Rescue Variants for license and sale to pharmaceutical companies and others.
 
In parallel with its drug rescue activities, VistaGen plans to explore, internally and/or through sponsored external programs, pilot nonclinical development opportunities relating to small molecule drug discovery and/or regenerative medicine focused on blood, bone, cartilage, heart, liver and pancreas (insulin-producing beta islet) cells. Each of these drug discovery and regenerative medicine programs would be based on the proprietary differentiation and production capabilities of the Company’s Human Clinical Trials in a Test Tubetm platform.

AV-101 is VistaGen's orally-available, small molecule prodrug candidate.  AV-101 has successfully completed Phase 1 clinical development in the Unites States for treatment of neuropathic pain, a serious and chronic condition causing pain after an injury or disease of the peripheral or central nervous system that affects millions of people worldwide. The NIH awarded VistaGen approximately $8.8 million for preclinical and Phase 1 clinical development of AV-101.  
 
VistaGen is in the development stage and, since inception, has devoted substantially all of its time and efforts to human pluripotent stem cell technology research and development, including, among other things, bioassay system development, small molecule drug development, creating, protecting and patenting intellectual property, recruiting personnel and raising working capital.

VistaGen Therapeutics, Inc., a California corporation incorporated on May 26, 1998 (“VistaGen California”), is a wholly-owned subsidiary of the Company.  As described more completely in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013, pursuant to a strategic merger transaction on May 11, 2011, the Company acquired all outstanding shares of VistaGen California in exchange for 6,836,452 shares of the Company’s common stock (the “Merger”), and assumed all of VistaGen California’s pre-Merger obligations. The Condensed Consolidated Financial Statements of the Company included in this report also include the accounts of VistaGen California’s two wholly-owned subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada.

Note 2.  Basis of Presentation and Going Concern

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.  Accordingly, they do not contain all of the information and footnotes required for complete consolidated financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial information. The accompanying Condensed Consolidated Balance Sheet at March 31, 2013 has been derived from the Company's audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP.  The operating results for the three and nine months ended December 31, 2013 are not necessarily indicative of the operating results to be expected for the Company's fiscal year ending March 31, 2014 or for any other interim period or any other future period.
 
The accompanying unaudited Condensed Consolidated Financial Statements and notes to Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements for the fiscal year ended March 31, 2013 contained in its Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission (“SEC”).
 
-4-

 
The accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern. As a development stage company without sustainable revenues, the Company has experienced recurring losses and negative cash flows from operations. From inception through December 31, 2013, the Company has a deficit accumulated during its development stage of $68.8 million. The Company expects these conditions to continue for the foreseeable future as it expands its Human Clinical Trials in a Test Tube™ platform and executes its drug rescue programs and, potentially, regenerative medicine programs.
 
    Since its inception in May 1998, the Company has financed its operations and technology acquisitions primarily through the issuance and sale of equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $25.4 million, as well as from an aggregate of approximately $16.4 million of government research grant awards, strategic collaboration payments and other revenues. Additionally, the Company has issued equity securities with an approximate value at issuance of $12.6 million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to the Company or as compensation for such services. At December 31, 2013, the Company had approximately $20,700 in cash and cash equivalents. Such cash and cash equivalents are not sufficient to enable the Company to fund its planned operations, including expected cash expenditures of approximately $5 million through the next twelve months. However, on April 8, 2013, the Company entered into a Securities Purchase Agreement (as amended, the “Securities Purchase Agreement”) with Autilion AG, a company organized and existing under the laws of Switzerland (“Autilion”). Under the terms of the Securities Purchase Agreement, Autilion is contractually obligated to purchase an aggregate of 72.0 million restricted shares of the Company’s common stock at a purchase price of $0.50 per share for aggregate cash consideration of $36.0 million (the “Autilion Financing”). At December 31, 2013, the Company had completed a nominal initial closing of $25,000 and issued 50,000 restricted shares of its common stock under the Securities Purchase Agreement.  Although there can be no assurance that an additional closing of the Autilion Financing will occur, in early January 2014, Autilion informed the Company of its expectation that the Company will receive the full $36.0 million committed under the terms of the Securities Purchase Agreement by mid-February 2014. As of the date of this report, there has not been a subsequent closing of the Autilion Financing.  To provide working capital for operations prior to any closing of the Autilion Financing, from December 31, 2013 through the date of this report, the Company completed private placements of its securities resulting in aggregate cash proceeds of $390,000, as described in Note 11, Subsequent Events.
 
To the extent necessary, the Company may also seek to meet its cash needs and fund its working capital requirements through a combination of additional private placements of its securities, which may include both debt and equity securities issued to Platinum Long Term Growth Fund VII (“Platinum”), currently the Company’s largest institutional investor, and/or other investors, research and development collaborations, license fees and government grant awards. Additionally, the Company believes that its participation in strategic collaborations, including licensing transactions, may provide additional cash in support of its future working capital requirements.  If the Company is unable to complete the Autilion Financing in a timely manner or to obtain sufficient financing from other sources, if required, it may be required to reduce, defer, or discontinue certain of its research and development activities or it may not be able to continue as a going concern.  

Note 3.  Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include those relating to revenue recognition, share-based compensation, and assumptions that have been used to value warrants, warrant modifications, and previous put option and note term extension liabilities.

Revenue Recognition

Although the Company does not currently have any such arrangements, it has historically generated revenue principally from collaborative research and development arrangements, technology access fees and government grants.  Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer. Consideration received is allocated among the separate units of accounting based on their respective selling prices.  The selling price for each unit is based on vendor-specific objective evidence, or VSOE, if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third party evidence is available.  The applicable revenue recognition criteria are then applied to each of the units.

 
-5-

 
The Company recognizes revenue when the four basic criteria of revenue recognition are met: (1) a contractual agreement exists; (2) the transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.  For each source of revenue, the Company complies with the above revenue recognition criteria in the following manner:

 
Collaborative arrangements typically consist of non-refundable and/or exclusive technology access fees, cost reimbursements for specific research and development spending, and various milestone and future product royalty payments.  If the delivered technology does not have stand-alone value, the amount of revenue allocable to the delivered technology is deferred.  Non-refundable upfront fees with stand-alone value that are not dependent on future performance under these agreements are recognized as revenue when received, and are deferred if the Company has continuing performance obligations and has no objective and reliable evidence of the fair value of those obligations.  The Company recognizes non-refundable upfront technology access fees under agreements in which it has a continuing performance obligation ratably, on a straight-line basis, over the period in which the Company is obligated to provide services.  Cost reimbursements for research and development spending are recognized when the related costs are incurred and when collectability is reasonably assured.  Payments received related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the milestone event specified in the underlying contracts, which represent the culmination of the earnings process.  Amounts received in advance are recorded as deferred revenue until the technology is transferred, costs are incurred, or a milestone is reached.

 
Technology license agreements typically consist of non-refundable upfront license fees, annual minimum access fees and/or royalty payments. Non-refundable upfront license fees and annual minimum payments received with separable stand-alone values are recognized when the technology is transferred or accessed, provided that the technology transferred or accessed is not dependent on the outcome of the continuing research and development efforts. Otherwise, revenue is recognized over the period of the Company’s continuing involvement.

 
Government grants, which support the Company’s research efforts on specific projects, generally provide for reimbursement of approved costs as defined in the terms of grant awards. Grant revenue is recognized when associated project costs are incurred.

Research and Development Expenses

Research and development expenses are composed of both internal and external costs.  Internal costs include salaries and employment-related expenses of scientific personnel and direct project costs.  External research and development expenses consist primarily of sponsored stem cell research and development costs, costs associated with clinical and non-clinical development of AV-101, the Company’s small molecule prodrug candidate for neuropathic pain, depression and potentially other neurological conditions, and costs related to the application and prosecution of patents related to the Company’s stem cell technology platform, Human Clinical Trials in a Test Tube™, and AV-101. All such costs are charged to expense as incurred.

Stock-Based Compensation

The Company recognizes compensation cost for all stock-based awards to employees based on the grant date fair value of the award.  Stock-based compensation expense is recognized over the period during which the employee is required to perform services in exchange for the award, which generally represents the scheduled vesting period.  The Company has no awards with market or performance conditions.  For equity awards to non-employees, the Company re-measures the fair value of the awards as they vest and the resulting value is recognized as an expense during the period over which the services are performed.
 
    The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the quarter and nine months ended December 31, 2013:

   
Three Months Ended
   
Nine Months Ended
 
   
December 31,
   
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
 Research and development expense:
                       
 Stock option grants, including expense related to modifications
  $ 126,900     $ 574,700     $ 240,300     $ 666,800  
 Warrants granted to officer in March 2013
    33,400       -       100,300       -  
      160,300       574,700       340,600       666,800  
 General and administrative expense:
                               
 Stock option grants, including expense related to modifications
    242,100       239,000       352,500       295,200  
 Warrants granted to officers and directors in March 2013
    66,900       -       200,600       -  
      309,000       239,000       553,100       295,200  
 Total stock-based compensation expense
  $ 469,300     $ 813,700     $ 893,700     $ 962,000  
 
-6-

During the nine months ended December 31, 2013, the Company granted options to purchase an aggregate of 156,000 shares of its common stock at exercise prices from $0.40 per share to $0.82 per share (the quoted market price on the grant dates) to certain employees and consultants. During the quarter ended December 31, 2013, the Company modified certain outstanding options granted from its 2008 Stock Incentive Plan to reduce the exercise price to $0.40 per share or $0.50 per share and modified certain options granted from its 1999 Stock Incentive Plan to reduce the exercise price to $0.50 per share. The expense indicated in the table above for the three and nine months ended December 31, 2013 includes an aggregate of $252,000 attributable to these modifications. The Company modified certain options during the quarter ended December 31, 2012 and recognized an aggregate of $788,800 attributable to such modifications in the three and nine month periods ended December 31, 2012. At December 31, 2013, there were options outstanding to purchase 4,705,270 shares of the Company’s common stock at a weighted average exercise price of $0.59 per share.
 
Warrant Liability

The Company has issued certain warrants to Platinum and, subject to Platinum’s exercise of its rights to exchange shares of the Company’s Series A preferred stock that it holds, the Company is also obligated to issue an additional warrant to Platinum, that contain an exercise price adjustment feature in the event the Company subsequently issues additional equity instruments at a price lower than the exercise price of the warrants. The Company accounts for these warrants as non-cash liabilities and estimates their fair value as described in Note 4, Fair Value Measurements; Note 7, Convertible Promissory Notes and Other Notes Payable, and Note 9, Capital Stock. The Company computes the fair value of the warrant liability at each reporting period and the change in the fair value is recorded as non-cash expense or non-cash income. The key component in determining the fair value of the warrant and the related liability is the Company‘s stock price, which is subject to significant fluctuation and is not under the Company’s control. The resulting change in the fair value of the warrant liability on the Company’s net income or loss is therefore also subject to significant fluctuation and will continue to be so until all of the warrants are issued and exercised, amended or expire. Assuming all other fair value inputs remain generally constant, the Company will record an increase in the warrant liability and non-cash expense when its stock price increases and a decrease in the warrant liability and non-cash income when its stock price decreases.

Comprehensive Loss

The Company has no components of other comprehensive loss other than net loss, and accordingly the Company’s comprehensive loss is equivalent to its net loss for the periods presented.

Income (Loss) per Common Share

Basic income (loss) per share of common stock excludes the effect of dilution and is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted income (loss) per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net income (loss) per share, the numerator is adjusted for the change in the fair value of the warrant liability attributable to outstanding warrants, only if dilutive, and the denominator is increased to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method. Based on the market price of the Company’s common stock for the quarter ended December 31, 2013, no potentially dilutive securities were assumed to be converted into common shares and outstanding during the period for purposes of calculating diluted earnings per share. For all loss periods presented, potentially dilutive securities have been excluded from the computation as their effect would be antidilutive.

Basic net income (loss) and diluted net loss attributable to common stockholders per share was computed as follows:

   
Quarters Ended
December 31,
   
Nine Months Ended
December 31,
 
   
2013
   
2012
   
2013
   
2012
 
 Numerator:
                       
 Net income (loss) attributable to common stockholders for basic earnings per share
  $ 131,100     $ (15,528,200 )   $ (1,143,100 )   $ (19,309,800 )
  less: change in fair value of warrant liability attributable to Exchange, Investment and Bridge Warrants issued to Platinum
    (620,900 )     -       -       -  
                                 
 Net loss for diluted earnings per share attributable to common stockholders
  $ (489,800 )   $ (15,528,200 )   $ (1,143,100 )   $ (19,309,800 )
                                 
 Denominator:
                               
 Weighted average basic common shares outstanding
    22,210,573       18,292,301       21,554,929       17,411,993  
   Assumed conversion of dilutive securities:
                               
 Warrants to purchase common stock
    -       -       -       -  
 Potentially dilutive common shares assumed converted
    -       -       -       -  
Denominator for diluted earnings per share - adjusted weighted average shares
    22,210,573       18,292,301       21,554,929       17,411,993  
 Basic net income (loss) attributable to common stockholders per common share
  $ 0.01     $ (0.85 )   $ (0.05 )   $ (1.11 )
 Diluted net loss attributable to common stockholders per common share
  $ (0.02 )   $ (0.85 )   $ (0.05 )   $ (1.11 )
 
-7-

 
Potentially dilutive securities excluded in determining diluted net loss per common share are as follows:

   
December 31,
 
   
2013
   
2012
 
Series A preferred stock issued and outstanding (1)
    15,000,000       15,000,000  
Warrant shares issuable to Platinum upon exercise of common stock warrants by Platinum upon exchange of Series A preferred stock under the terms of the October 11, 2012 Note Purchase and Exchange Agreement
    7,500,000       7,500,000  
Outstanding options under the 2008 and 1999 Stock Incentive Plans
    4,705,270       4,966,771  
Outstanding warrants to purchase common stock
    15,710,885       9,873,034  
10% convertible Exchange Note and Investment Notes issued to Platinum in October 2012, February 2013 and March 2013, including accrued interest through December 31, 2013 (2)
    7,271,640       4,645,198  
10% Convertible note issued to Platinum on July 26, 2013, including accrued interest through December 31, 2013
    522,339       -  
10% Convertible notes issued as a component of Unit Offering, including accrued interest through December 31, 2013
    1,186,097       -  
Total
    51,896,231       41,985,003  
____________
(1) assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum
(2) assumes conversion under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum and the terms of the individual notes
 
Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended December 31, 2013, as compared to the recent accounting pronouncements described in the Company’s Form 10-K for the fiscal year ended March 31, 2013, that are of significance or potential significance to the Company.

Note 4.  Fair Value Measurements

The Company follows the principles of fair value accounting as they relate to its financial assets and financial liabilities. Fair value is defined as the estimated exit price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, rather than an entry price that represents the purchase price of an asset or liability.  Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models are applied.  These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on several factors, including the instrument’s complexity.  The required fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels is described as follows:

 
Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 
Level 3 — Unobservable inputs (i.e., inputs that reflect the reporting entity’s own assumptions about the assumptions that market participants would use in estimating the fair value of an asset or liability) are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
 
 
-8-

 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  Where quoted prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. If quoted market prices are not available for the specific financial instrument, then the Company estimates fair value by using pricing models, quoted prices of financial instruments with similar characteristics or discounted cash flows. In certain cases where there is limited activity or less transparency around inputs to valuation, financial assets or liabilities are classified as Level 3 within the valuation hierarchy.

The Company does not use derivative instruments for hedging of market risks or for trading or speculative purposes. In conjunction with the issuance of the Senior Secured Convertible Promissory Notes and related Exchange Warrant and Investment Warrants to Platinum in October 2012, February 2013, March 2013, and the potential issuance of the Series A Exchange Warrant (see Note 9, Capital Stock), all pursuant to the Note Exchange and Purchase Agreement of October 2012 between the Company and Platinum (see Note 7, Convertible Promissory Notes and Other Notes Payable), and the issuance of the warrant related to the Senior Secured Convertible Promissory Note issued to Platinum in July 2013, the Company determined that the warrants included certain exercise price adjustment features requiring the warrants to be treated as liabilities, which were recorded at their estimated fair value. The Company determined the initial fair value of the warrant liability using a Monte Carlo simulation model with Level 3 inputs or the Black-Scholes Option Pricing model. Inputs used to determine fair value include the remaining contractual term of the warrants, risk-free interest rates, expected volatility of the price of the underlying common stock, and the probability of a financing transaction that would trigger a reset in the warrant exercise price, and, in the case of the Series A Exchange Warrant, the probability of Platinum’s exchange of the shares of Series A preferred stock it holds into shares of common stock. Changes in the fair value of these warrant liabilities since March 31, 2013 have been recognized as a non-cash component of other expense, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the quarter and nine months ended December 31, 2013.

The fair value hierarchy for the warrant liability measured at fair value on a recurring basis is as follows:

         
Fair Value Measurements at Reporting Date Using
 
     
Total
Carrying
Value
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant Other
Observable Inputs
(Level 2)
      Significant Unobservable
Inputs
(Level 3)
 
December 31, 2013:
                       
 Warrant liability
  $ 2,717,100     $ -     $ -     $ 2,717,100  
March 31, 2013:
                               
 Warrant liability
  $ 6,394,000     $ -     $ -     $ 6,394,000  
 
    During the nine month period ended December 31, 2013, there was no significant change to the valuation models used for purposes of determining the fair value of the Level 3 warrant liability.  The decline in the market price of the Company’s common stock since March 31, 2013 and the reduction in the exercise price of the warrants as described in Note 9, Capital Stock, are the primary factors resulting in the reduction in the warrant liability.

 
-9-

 
The changes in Level 3 liabilities measured at fair value on a recurring basis are as follows:
   
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
       
   
Warrant Liability
 
Balance at March 31, 2013
  $ 6,394,000  
Recognition of warrant liability upon issuance of Senior Secured Convertible Promissory Note and warrant to Platinum on July 26, 2013
    146,800  
Mark to market gain included in net loss
    (3,823,700 )
Balance at December 31, 2013
  $ 2,717,100  

    No assets or other liabilities were carried at fair value at December 31, 2013 or March 31, 2013.

Note 5.  Prepaid Expenses and Other Current Assets

    Prepaid expenses and other current assets is composed of the following at December 31, 2013 and March 31, 2013:

   
December 31,
   
March 31,
 
   
2013
   
2013
 
 Insurance
  $ 48,100     $ 19,700  
 Legal fees
    3,400       3,400  
 Interest receivable on note receivable from sale
               
    of common stock
    400       1,600  
 Technology license fees and all other
    18,700       9,000  
    $ 70,600     $ 33,700  

Note 6.  Accrued Expenses

Accrued expenses is composed of the following at December 31, 2013 and March 31, 2013:

   
December 31,
   
March 31,
 
   
2013
   
2013
 
 Accrued professional services
  $ 104,800     $ 67,800  
 Accrued compensation
    427,700       219,300  
 Accrued royalties and license fees
    -       25,000  
 All other
    -       30,800  
    $ 532,500     $ 342,900  
 
 
-10-


Note 7.  Convertible Promissory Notes and Other Notes Payable
 
The following table summarizes the Company’s secured and unsecured promissory notes and other notes payable at December 31, 2013 and March 31, 2013.
 
 
 
December 31, 2013
         
March 31, 2013
       
   
Principal
Balance
   
Accrued
Interest
   
Total
   
Principal
Balance
   
Accrued
Interest
   
Total
 
Senior Secured 10% Convertible Promissory Notes issued to Platinum:
                                   
Exchange Note issued on October 11, 2012
  $ 1,272,600     $ 167,100     $ 1,439,700     $ 1,272,600     $ 61,700     $ 1,334,300  
Investment Note issued on October 11, 2012
    500,000       65,700       565,700       500,000       24,200       524,200  
Investment Note issued on October 19, 2012
    500,000       64,400       564,400       500,000       23,000       523,000  
Investment Note issued on February 22, 2013
    250,000       22,500       272,500       250,000       2,600       252,600  
Investment Note issued on March 12, 2013
    750,000       63,500       813,500       750,000       4,700       754,700  
      3,272,600       383,200       3,655,800       3,272,600       116,200       3,388,800  
                                                 
Convertible promissory note issued on July 26, 2013
    250,000       11,200       261,200       -       -       -  
    Total Senior notes
    3,522,600       394,400       3,917,000       3,272,600       116,200       3,388,800  
                                                 
Aggregate note discount
    (2,135,800 )     -       (2,135,800 )     (1,963,100 )     -       (1,963,100 )
    Net Senior notes (non-current)
  $ 1,386,800     $ 394,400     $ 1,781,200     $ 1,309,500     $ 116,200     $ 1,425,700  
                                                 
10% Convertible Promissory Notes (2013 Unit Notes)
  $ 580,000     $ 13,100     $ 593,100     $ -     $ -     $ -  
 Note discount
    (423,900 )     -       (423,900 )     -       -       -  
    Net convertible notes (all current)
  $ 156,100     $ 13,100     $ 169,200     $ -     $ -     $ -  
                                                 
Notes Payable to unrelated parties:
                                               
7.5% Notes payable to service providers for
                                         
accounts payable converted to notes payable:
                                         
     Burr, Pilger, Mayer
  $ 90,400     $ 5,100     $ 95,500     $ 90,400     $ -     $ 90,400  
     Desjardins
    184,800       11,200       196,000       194,100       800       194,900  
     McCarthy Tetrault
    373,300       18,800       392,100       403,100       1,700       404,800  
     August 2012 Morrison & Foerster Note A
    918,200       63,500       981,700       937,400       -       937,400  
     August 2012 Morrison & Foerster Note B (1)
    1,379,400       161,100       1,540,500       1,379,400       60,100       1,439,500  
     University Health Network  (1)
    549,500       50,500       600,000       549,500       19,400       568,900  
      3,495,600       310,200       3,805,800       3,553,900       82,000       3,635,900  
        Note discount
    (929,000 )     -       (929,000 )     (1,142,600 )     -       (1,142,600 )
      2,566,600       310,200       2,876,800       2,411,300       82,000       2,493,300  
 less: current portion
    (352,800 )     (98,600 )     (451,400 )     (450,300 )     (2,500 )     (452,800 )
     non-current portion and discount
  $ 2,213,800     $ 211,600     $ 2,425,400     $ 1,961,000     $ 79,500     $ 2,040,500  
                                                 
5.75% and 10.25% Notes payable to insurance
                                         
premium financing company (current)
  $ 28,400     $ -     $ 28,400     $ 4,200     $ -     $ 4,200  
                                                 
10% Notes payable to vendors for accounts
                                         
payable converted to notes payable
  $ 119,400     $ 31,700     $ 151,100     $ 128,800     $ 23,300     $ 152,100  
 less: current portion
    (119,400 )     (31,700 )     (151,100 )     (128,800 )     (23,300 )     (152,100 )
     non-current portion
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
  7.0% Note payable (August 2012)
  $ 58,800     $ 2,700     $ 61,500     $ 59,400     $ -     $ 59,400  
 less: current portion
    (5,000 )     (2,700 )     (7,700 )     (8,100 )     -       (8,100 )
  7.0% Notes payable - non-current portion
  $ 53,800     $ -     $ 53,800     $ 51,300     $ -     $ 51,300  
                                                 
  Total notes payable to unrelated parties
  $ 3,702,200     $ 344,600     $ 4,046,800     $ 3,746,300     $ 105,300     $ 3,851,600  
 less: current portion
    (505,600 )     (133,000 )     (638,600 )     (591,400 )     (25,800 )     (617,200 )
     non-current portion
    3,196,600       211,600       3,408,200       3,154,900       79,500       3,234,400  
 less: discount
    (929,000 )     -       (929,000 )     (1,142,600 )     -       (1,142,600 )
    $ 2,267,600     $ 211,600     $ 2,479,200     $ 2,012,300     $ 79,500     $ 2,091,800  
Notes payable to related parties:
                                               
  October 2012 7.5% Note to Cato Holding Co.
  $ 293,600     $ 24,800     $ 318,400     $ 293,600     $ 7,400     $ 301,000  
  October 2012 7.5% Note to Cato Research Ltd. (1)
    1,009,000       96,800       1,105,800       1,009,000       36,200       1,045,200  
      1,302,600       121,600       1,424,200       1,302,600       43,600       1,346,200  
            Note discount
    (115,000 )     -       (115,000 )     (147,200 )     -       (147,200 )
     Total notes payable to related parties
    1,187,600       121,600       1,309,200       1,155,400       43,600       1,199,000  
 less: current portion
    (74,700 )     (24,800 )     (99,500 )     (85,600 )     (7,400 )     (93,000 )
    non-current portion and discount
  $ 1,112,900     $ 96,800     $ 1,209,700     $ 1,069,800     $ 36,200     $ 1,106,000  
____________
                                               
(1) Note and interest payable solely in restricted shares of the Company's common stock.
         
 
 
-11-


Senior Secured Convertible Promissory Notes Issued to Platinum
 
On July 2, 2012 and on August 31, 2012, the Company issued to Platinum senior secured convertible promissory notes in the principal amount of $500,000 (the “July 2012 Platinum Note”) and $750,000 (the "August 2012 Platinum Note"), respectively.  The July 2012 Platinum Note and the August 2012 Platinum Note each accrued interest at the rate of 10% per annum and were due and payable on July 2, 2015.  The July 2012 Platinum Note and the August 2012 Platinum Note were each mandatorily convertible into securities that may be issued by the Company in an equity, equity-based, or debt financing, or series of financings, subsequent to the issuance of the note resulting in gross proceeds to the Company of at least $3,000,000, excluding any additional investment by Platinum.

On October 11, 2012, the Company and Platinum entered into a Note Exchange and Purchase Agreement (the “October 2012 Agreement”) in which the July 2012 Platinum Note and the August 2012 Platinum Note (together, the “Existing Notes”), as well as the related accrued interest, were consolidated into and exchanged for a single senior secured convertible note in the amount of $1,272,600 (the “Exchange Note”) and Platinum agreed to purchase four additional 10% senior secured convertible promissory notes in the aggregate principal amount of $2.0 million (the “Investment Notes”), issuable over four separate $500,000 tranches between October 2012 and December 2012.  The first and second $500,000 Investment Notes, in the aggregate principal amount of $1.0 million, were purchased by Platinum on October 11, 2012 and October 19, 2012, respectively.

On November 14, 2012 and January 31, 2013, the Company and Platinum entered into amendments to the October 2012 Agreement (the “NEPA Amendments”), pursuant to which the final two $500,000 tranches contemplated by the October 2012 Agreement were combined into a single Investment Note in the aggregate principal amount of $1.0 million (the “$1.0 Million Note”). Under the terms and conditions of the NEPA Amendment, Platinum agreed to purchase the $1.0 Million Note within five business days of the Company's notice to Platinum of the consummation of a debt or equity financing, or combination of financings, prior to February 15, 2013, resulting in gross proceeds to the Company of at least $1.0 million (the “Additional Financing Requirement”).  The Company satisfied the Additional Financing Requirement on February 12, 2013.  Effective February 22, 2013, the Company and Platinum entered into an additional amendment to the October 2012 Agreement pursuant to which Platinum agreed to purchase an Investment Note in the face amount of $250,000 on February 22, 2013 and an additional Investment Note in the face amount of $750,000 on or before March 12, 2013, which Investment Note was issued by the Company and purchased by Platinum on March 12, 2013.

The Exchange Note and each Investment Note (together, the “Notes”) accrue interest at a rate of 10% per annum and, subject to certain limitations and exceptions set forth in the Notes, unless converted earlier and voluntarily by Platinum, will be due and payable in restricted shares of the Company’s common stock on October 11, 2015, or three years from the date of issuance, as determined by the terms of the respective Investment Notes. At maturity, all principal and accrued interest under the Notes will be payable by the Company through the issuance of restricted shares of common stock to Platinum.  Subject to certain potential adjustments set forth in the Notes, the number of restricted shares of common stock issuable as payment in full for each of the Notes at maturity will be calculated by dividing the outstanding Note balance plus accrued interest by $0.50 per share. Prior to maturity, the outstanding principal and any accrued interest on the Exchange Note and each of the Investment Notes is convertible, in whole or in part, at Platinum’s option into shares of the Company’s common stock at a conversion price of $0.50 per share, subject to certain adjustments. The conversion feature in each of the Notes constituted a beneficial conversion feature at the date of issuance.

As additional consideration for the purchase of the Investment Notes, the Company agreed to issue to Platinum warrants to purchase an aggregate of 2,000,000 shares of the Company’s common stock, issuable in separate tranches together with each Investment Note, of which a warrant to purchase 500,000 shares was issued to Platinum on October 11, 2012 and on October 19, 2012, a warrant to purchase 250,000 shares was issued to Platinum on February 22, 2013 and a warrant to purchase 750,000 shares was issued to Platinum on March 12, 2013 (each an “Investment Warrant”).  In addition, the Company issued Platinum a warrant to purchase 1,272,577 shares of the Company’s common stock in connection with the issuance of the Exchange Note (the “Exchange Warrant”). At issuance, the Platinum Exchange Warrant and each Investment Warrant had a term of 5 years and an exercise price of $1.50 per share, subject to certain adjustments. See Note 9, Capital Stock, regarding a modification of the exercise price of the Exchange Warrant and the Investment Warrants made in May 2013.  In connection with the October 2012 Agreement, the Company and Platinum also executed and subsequently amended a security agreement to secure repayment of all obligations due and payable under the terms of the Exchange Note and all of the Investment Notes.   

 
-12-

 
On July 26, 2013, the Company issued an additional senior secured convertible promissory note in the principal amount of $250,000 to Platinum (the “July 2013 Note”). The July 2013 Note matures on July 26, 2016 and accrues interest at a rate of 10% per annum. Subject to certain terms and conditions, all principal and accrued interest under the July 2013 Note will be payable by the Company through the issuance of restricted shares of common stock to Platinum. Subject to certain potential adjustments set forth in the July 2013 Note, the number of restricted shares of common stock issuable as payment in full for the July 2013 Note at maturity will be calculated by dividing the outstanding balance plus accrued interest of the July 2013 Note by $0.50 per share. In the same manner as the earlier Notes, prior to maturity, the outstanding principal and any accrued interest on the July 2013 Note is convertible, in whole or in part, at Platinum’s option into shares of the Company’s restricted common stock at a conversion price of $0.50 per share, subject to certain adjustments. The conversion feature in the July 2013 Note constituted a beneficial conversion feature at the date of issuance. As additional consideration for the purchase of the July 2013 Note, the Company issued to Platinum a five-year warrant to purchase 250,000 shares of the Company’s common stock at an exercise price of $0.50 per share (the “July 2013 Warrant”). In addition, the Company granted Platinum the right to exchange all amounts due under the terms of the July 2013 Note into the 2013 Unit Private Placement securities (see Note 9, Capital Stock) offered by the Company to third party investors to finance its short-term working capital needs (the “Exchange Securities”). Upon the Company’s receipt of gross proceeds of at least $10.0 million from the Autilion Financing, the Company expects the July 2013 Note to be converted into the Exchange Securities.

Subject to limited exceptions, the Exchange Warrant, each of the Investment Warrants, and the July 2013 Warrant include certain exercise price reset and anti-dilution protection features in the event that the Company issues other shares of common stock during the five-year term of the warrants at a price less than their initial $1.50 per share exercise price (subsequently modified to $0.50 per share exercise price as described in Note 9, Capital Stock), or $0.50 per share exercise price in the case of the July 2013 Warrant. As a result of these provisions, the Exchange Warrant, the Investment Warrants and the July 2013 Warrant do not meet the criteria set forth in ASC 815, Derivatives and Hedging, to be considered indexed to the Company’s own stock and treated as equity instruments. Consequently, the Company recorded the Exchange Warrant, each of the Investment Warrants and the July 2013 Warrant as liabilities at their fair value, which was estimated at the issuance date using a Monte Carlo simulation model or the Black-Scholes Option Pricing model.  The fair value of the Exchange Warrant at the date of issuance was recorded as a liability and as a corresponding charge to loss on early extinguishment of debt in the Statement of Operations and Comprehensive Income in the third quarter of the fiscal year ended March 31, 2013.  The fair value of each Investment Warrant at the date of issuance was recorded as a liability and as a corresponding discount to the respective Investment Note.  Subject to limitations of the absolute amount of discount attributable to each Investment Note and the July 2013 Note, the Company treated the issuance-date intrinsic value of the beneficial conversion feature embedded in each note as an additional component of the discount attributable to each note and recorded a discount attributable to the beneficial conversion feature for each note.

The fair value of the July 2013 Warrant at inception was determined to be $146,800 using the Black-Scholes Option Pricing Model and the following assumptions:  market price per share: $0.75; exercise price per share: $0.50; risk-free interest rate: 1.36%; contractual term: 5.0 years; volatility: 96.9%; expected dividend rate: 0%. The fair value was recorded as a liability and as a corresponding discount to the July 2013 Note.  The table below summarizes the components of the discount and the effective interest rate at inception for the July 2013 Note.
 
 Face value   $ 250,000  
 Discount attributable to:        
     Fair value of warrant     (146,800 )
     Beneficial conversion feature     (100,700 )
 Inception date carrying value   $ 2,500  
 Effective Interest Rate     159.05 %
 
The Company amortizes the aggregate discount attributable to each of the Investment Notes and the July 2013 Note using the interest method over the respective term of each note.  The effective interest rate attributable to the July 2013 Note is 159.05%

The fair value of the Exchange Warrant, Investment Warrants and the July 2013 Warrant was re-measured as of December 31, 2013 at an aggregate fair value of $780,400.  The accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss reflects the $620,900 and $1,354,400 decrease in fair value of these warrants for the quarter and nine months ended December 31, 2013, respectively.

 
-13-

 
10% Convertible Notes Issued in Connection with 2013 Unit Private Placement

As described more completely in the section entitled 2013 Unit Private Placement in Note 9, Capital Stock, between August and December 2013, the Company issued to accredited investors 10% convertible notes (the “Unit Notes”) in an aggregate face amount of $580,000 in connection with its private placement offering of Units. The Unit Notes mature on July 30, 2014 and each Unit Note and its related accrued interest is convertible into shares of the Company’s common stock at a fixed conversion price of $0.50 per share at or prior to maturity, at the option of the investor.  The Company has the right to prepay the Unit Notes and accrued interest in cash prior to maturity without penalty.

The Company allocated the proceeds from the sale of the Units to the Unit Notes, the common stock and the warrants comprising the Units based on the relative fair values of the individual securities on the dates of the Unit sales. Based on the short-duration of the Unit Notes and their other terms, the Company determined that the fair value of the Unit Notes at the date of issuance was equal to their face value. Accordingly, the Company recorded an initial discount attributable to each Unit Note for an amount representing the difference between the face value of the Unit Note and its relative value. Additionally, the Unit Notes contain an embedded conversion feature, certain of which have an intrinsic value at the issuance date, which value the Company treated as an additional discount attributable to those Unit Notes, subject to limitations on the absolute amount of discount attributable to each Unit Note. The Company recorded a corresponding credit to additional paid-in capital, an equity account in the Condensed Consolidated Balance Sheet, attributable to the beneficial conversion feature.  The Company amortizes the aggregate discount attributable to each of the Unit Notes using the interest method over the respective term of each Unit Note.  Based on their respective discounts, the effective interest rates attributable to the Unit Notes range from 72.8% to 701.9%

Notes Payable to Morrison & Foerster

On May 5, 2011, the Company and Morrison & Foerster LLP (“Morrison & Foerster”), the Company’s legal and intellectual property counsel, amended a previously outstanding note (the “Original Note”) issued by the Company in payment of legal services (the “Amended Note”).  Under the Amended Note, the principal balance of the Original Note was increased to $2,200,000, interest accrued at the rate of 7.5% per annum, and the Company was required to make an additional payment of $100,000 within three business days of the date of the Amended Note, which the Company made in a timely manner.

On August 31, 2012, the Company restructured the Amended Note (the “Restructuring Agreement”). Pursuant to the Restructuring Agreement, the Company issued to Morrison & Foerster two new unsecured promissory notes to replace the Amended Note, one in the principal amount of $1,000,000 ("Replacement Note A") and the other in the principal amount of $1,379,400 ("Replacement Note B") (together, the "Replacement Notes"); amended an outstanding warrant to purchase 425,000 restricted shares of the Company’s common stock (the “Amended M&F Warrant”); and issued a new warrant to purchase 1,379,376 restricted shares of the Company’s common stock (the “New M&F Warrant”). Under the terms of the Restructuring Agreement, the Amended Note was cancelled and all of the Company's past due payment obligations under the Amended Note were satisfied.  The Company made a payment of $155,000 to Morrison & Foerster on August 31, 2012 pursuant to the terms of the Amended Note, and issued the Replacement Notes, each dated as of August 31, 2012.  Both Replacement Notes accrue interest at the rate of 7.5% per annum and are due and payable on March 31, 2016.  Replacement Note A required monthly payments of $15,000 per month through March 31, 2013, and $25,000 per month thereafter until maturity. For strategic purposes, the Company has not made the payments required on Replacement Note A since April 2013 and accordingly, the interest rate on the Replacement Notes has increased to 10.0 % per annum from May 2013 until payments resume. Payment of the principal and interest on Replacement Note B will be made solely in shares of the Company’s common stock pursuant to Morrison & Foerster’s surrender from time to time of all or a portion of the principal and interest balance due on Replacement Note B in connection with its exercise of the New M&F Warrant, at an exercise price of $1.00 per share, and concurrent cancellation of indebtedness and surrender of Replacement Note B; provided, however, that Morrison & Foerster will have the option to require payment of Replacement Note B in cash upon the occurrence of a change in control of the Company or an event of default, and only in such circumstances. 

The Company treated the aggregate of the incremental value of the Amended M&F Warrant and the fair value of the New M&F Warrant as a discount to the Replacement Notes. Through December 31, 2013, the Company has adjusted the New M&F Warrant to increase the number of restricted shares available for purchase by 161,179 shares, based on interest accrued on Replacement Note B through that date. The Company has recorded the fair value of the additional warrant shares as a charge to interest expense and a corresponding credit to additional paid-in capital.

 
-14-

 
Note Payable to University Health Network (“UHN”)

On October 10, 2012, the Company issued to UHN: (i) an unsecured promissory note in the principal amount of $549,500, which is payable solely in restricted shares of the Company’s common stock and which accrues interest at the rate of 7.5% per annum, as payment in full for all sponsored stem cell research and development activities by UHN and Gordon Keller, Ph.D. under the Sponsored Research Collaboration Agreement (“SRCA”, described in Note 8, Licensing and Collaborative Agreements) through September 30, 2012 (the “UHN Note”), and (ii) a five-year warrant to purchase, at a price of $1.00 per share, 549,500 restricted shares of the Company’s common stock, the amount equal to the sum of the principal amount of the UHN Note, plus all accrued interest thereon, divided by $1.00 per share (the “UHN Warrant”). The UHN Note is due and payable on March 31, 2016 and is payable solely by UHN's surrender from time to time of all or a portion of the principal and interest balance due on the UHN Note in connection with its concurrent exercise of the UHN Warrant, provided, however, that UHN will have the option to require payment of the UHN Note in cash upon the occurrence of a change in control of the Company or an event of default, and only in such circumstances.

The difference between the face value of the UHN Note and its issuance-date fair value has been treated as a discount to the note and is being amortized over the term of the note using the interest method. Through December 31, 2013, the Company has adjusted the UHN Warrant to increase the number of shares available for purchase by 50,471 shares, based on interest accrued on the UHN Note through that date. The Company has recorded the fair value of the additional warrant shares as a charge to interest expense and a corresponding credit to additional paid-in capital.

Notes Payable for Cancellation of Amounts Payable

On February 25, 2011, the Company issued to Burr, Pilger, and Mayer, LLC (“BPM”) an unsecured promissory note in the principal amount of $98,674 for amounts payable in connection with valuation services provided to the Company by BPM.  The BPM note bears interest at the rate of 7.5% per annum and has payment terms of $1,000 per month, beginning March 1, 2011 and continuing until all principal and interest are paid in full.  In addition, a payment of $25,000 shall be due upon the sale of the Company or upon the Company completing a financing transaction of at least $5.0 million during any three-month period, with the payment increasing to $50,000 (or the amount then owed under the note, if less) upon the Company completing a financing of over $10.0 million.
 
On April 29, 2011, the Company issued to Desjardins Securities, Inc. (“Desjardins”) an unsecured promissory note in the principal amount of CDN $236,000 for amounts payable for legal fees incurred by Desjardins in connection with investment banking services provided to the Company by Desjardins. The Desjardins note bears interest at 7.5% and will be due, along with all accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a Change of Control, as defined in the Desjardins note, and (iii) any failure to pay principal or interest when due. The Company was required to make payments of CDN $4,000 per month beginning May 31, 2011, increasing to CDN $6,000 per month on January 31, 2012. Beginning on January 1, 2012, the Company shall also make payments equal to one-half percent (0.5%) of the net proceeds of all private or public equity financings closed during the term of the note.
 
On May 5, 2011, the Company issued to McCarthy Tetrault LLP (“McCarthy”) an unsecured promissory note in the principal amount of CDN $502,797 for the amounts payable in connection with Canadian legal services provided to the Company.  The McCarthy note bears interest at 7.5% and will be due, along with all accrued but unpaid interest on the earliest of (i) June 30, 2014, (ii) the consummation of a Change of Control, as defined in the McCarthy note, and (iii) any failure to pay principal or interest when due.  The Company was required to make payments of CDN $10,000 per month beginning May 31, 2011, which payment amounts increased to CDN $15,000 per month on January 31, 2012. Beginning on January 1, 2012, the Company is also required to make payments equal to one percent (1%) of the net proceeds of all private or public equity financings closed during the term of the note.  At September 30, 2012, the Company had not made the monthly payments required for February through September 2012. In October 2012, the Company and McCarthy agreed to extend the term of the note through March 2015.

 
-15-

 
On August 30, 2012, the Company issued a promissory note in the principal amount of $60,000 and 15,000 restricted shares of its common stock valued at a market price of $0.94 per share to Progressive Medical Research in settlement of past due obligations for clinical research services in the amount of $79,900. Under the terms of the settlement, the company also agreed to make monthly cash payments of $5,000 in August 2012 through December 2012. The promissory note bears interest at 7% per annum and requires payments of $1,000 per month beginning January 15, 2013 until all principal and interest is paid in full.  The note requires payment in full upon the sale of all or substantially all of the Company’s assets or upon the Company completing a financing transaction, or series of transactions, resulting in gross proceeds to the Company of at least $4.0 million in any three-month period, excluding proceeds from stock option or warrant exercises. The Company charged the loss on the settlement to interest expense during the second quarter of the fiscal year ended March 31, 2013.

Note Payable to Cato Holding Company

In April 2011, all amounts owed by the Company to Cato Holding Company ("CHC"), a related party, and its affiliates, were consolidated into a single note, in the principal amount of $352,300 (the “2011 CHC Note”).  Concurrently, CHC released all of its security interests in certain of the Company’s personal property.  The 2011 CHC note was to bear interest at 7% per annum, compounded monthly.  Under the terms of the note, the Company was to make six monthly payments of $10,000 each beginning June 1, 2011, and thereafter to make payments of $12,500 monthly until the note was repaid in full. The Company had the option to prepay the outstanding balance under this note in full or in part at any time during its term without penalty. 

On October 10, 2012, the Company and CHC restructured the 2011 CHC Note by cancelling the 2011 CHC Note and exchanging it for a new unsecured promissory note in the principal amount of $310,400 (the “2012 CHC Note”) and a five-year warrant to purchase 250,000 shares of the Company’s common stock at a price of $1.50 per share (the “CHC Warrant”).  The 2012 CHC Note accrues interest at a rate of 7.5% per annum and is due and payable in monthly installments of $10,000, beginning November 1, 2012 and continuing until the outstanding balance is paid in full.

The Company determined that the cancellation of the 2011 CHC Note and the issuance of the 2012 CHC Note should be accounted for as an extinguishment of debt.  Accordingly, the Company recorded the 2012 CHC Note at its fair value of $291,100 based on the present value of its scheduled cash flows and assumptions regarding market interest rates for unsecured debt of similar quality. The Company determined the fair value of the CHC Warrant to be $0.48 per share, or $120,500. The Company recognized the difference between the sum of the fair values of the 2012 CHC Note and the CHC Warrant less the carrying value of the 2011 CHC Note, $119,100, as a non-cash loss on early extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Income for the third quarter of the fiscal year ended March 31, 2013.  The fair value of the warrant, $120,500, which is treated as an equity instrument, was credited to additional paid in capital at the issuance date. The difference between the face value of the 2012 CHC Note and its fair value, $19,300, has been treated as a discount to the note and is being amortized over the term of the note using the interest method.

Note Payable to Cato Research Ltd.

On October 10, 2012, the Company issued to Cato Research Ltd. (“CRL”), a related party: (i) an unsecured promissory note in the initial principal amount of $1,009,000, which is payable solely in restricted shares of the Company’s common stock and which accrues interest at the rate of 7.5% per annum, compounded monthly (the “CRL Note”), as payment in full for all contract research and development services and regulatory advice (“CRO Services”) rendered by CRL to the Company and its affiliates through December 31, 2012 with respect to the preclinical and clinical development of AV-101, and (ii) a five-year warrant to purchase, at a price of $1.00 per share, 1,009,000 restricted shares of the Company’s common stock, the amount equal to the sum of the principal amount of the CRL Note, plus all accrued interest thereon, divided by $1.00 per share (the “CRL Warrant”). The principal amount of the CRL Note may, at the Company’s option, be automatically increased as a result of future CRO Services rendered by CRL to the Company and its affiliates from January 1, 2013 to June 30, 2013.  The CRL Note is due and payable on March 31, 2016 and is payable solely by CRL's surrender from time to time of all or a portion of the principal and interest balance due on the CRL Note in connection with its concurrent exercise of the CRL Warrant, provided, however, that CRL will have the option to require payment of the CRL Note in cash upon the occurrence of a change in control of the Company or an event of default, and only in such circumstances.

 
-16-

 
The Company determined that the cancellation of the accounts payable to CRL for CRO Services and the related issuance of the CRL Note should be accounted for as an extinguishment of debt.  Accordingly, the Company recorded the CRL Note at its fair value of $857,900 based on the present value of its scheduled cash flows and assumptions regarding market interest rates for unsecured debt of similar quality. The Company determined the fair value of the CRL Warrant to be $0.48 per share, or $486,200. The Company recognized the difference between the sum of the fair values of the CRL Note and the CRL Warrant less the accounts payable balance due to CRL, $335,100, as a non-cash loss on early extinguishment of debt in the Consolidated Statements of Operations and Comprehensive Income for the third quarter of the fiscal year ended March 31, 2013.  The fair value of the warrant, $486,200, which is treated as an equity instrument, was credited to additional paid in capital at the issuance date. The difference between the face value of the CRL Note and its fair value, $151,100, has been treated as a discount to the note and is being amortized over the term of the note using the interest method.  Through December 31, 2013, the Company has adjusted the CRL Warrant to increase the number of restricted shares available for purchase by 96,754 shares, based on interest accrued on the CRL Note through that date. The Company has recorded the fair value of the additional warrant shares as a charge to interest expense and a corresponding credit to additional paid-in capital.

Note 8.  Licensing and Collaborative Agreements

University Health Network
 
On September 17, 2007, the Company and UHN entered into a Sponsored Research Collaboration Agreement (“SRCA”) to develop certain stem cell technologies for drug discovery and drug rescue technologies. The SRCA was amended on April 19, 2010 to extend the term to five years and give the Company various options to extend the term for an additional three years. On December 15, 2010, the Company and UHN entered into a second amendment to expand the scope of work to include induced pluripotent stem cell technology and to further expand the scope of research and term extension options. On April 25, 2011, the Company and UHN amended the SRCA a third time to expand the scope to include therapeutic and stem cell therapy applications of induced pluripotent cells and to extend the date during which the Company may elect to fund additional projects to April 30, 2012.  On October 24, 2011, the Company and UHN amended the SRCA a fourth time to identify five key programs that will further support the Company’s core drug rescue initiatives and potential cell therapy applications.  Under the terms of the fourth amendment, the Company committed to making monthly payments of $50,000 per month from October 2011 through September 2012 to fund these programs.  As disclosed in Note 7, Convertible Notes and Other Notes Payable, in October 2012, the Company issued a promissory note in the principal amount of $549,500 and a warrant to UHN as payment in full for services rendered under the fourth amendment. Additionally, the Company and UHN entered into Amendment No. 5 to the SRCA establishing the sponsored research projects and the sponsored research budgets under the SRCA from October 1, 2012 to September 30, 2013, as well as a schedule of the Company’s sponsored research payments for such period totaling $309,000.  
 
Concurrent with the execution of the fourth amendment to the SRCA, the Company and UHN entered into a License Agreement under the terms of which UHN granted the Company exclusive rights to the use of a novel molecule that can be employed in the identification and isolation of mature and immature human cardiomyocytes from pluripotent stem cells, as well as methods for the production of cardiomyocytes from pluripotent stem cells that express this marker.  In consideration for the grant of the license, the Company has agreed to make payments to UHN totaling $3.9 million, if, and when, it achieves certain commercial milestones set forth in the License Agreement, and to pay UHN royalties based on the receipt of revenue by the Company attributable to the licensed patents.

U.S. National Institutes of Health

During fiscal years 2006 through 2008, the U.S. National Institutes of Health ("NIH") awarded the Company a $4.2 million grant to support preclinical development of AV-101, the Company’s lead drug candidate for treatment of neuropathic pain and other neurodegenerative diseases such as Huntington’s and Parkinson’s diseases.  In June 2009, the NIH awarded the Company a $4.2 million grant to support the Phase I clinical development of AV-101, which amount was subsequently increased to a total of $4.6 million in July 2010.  The Company recognized NIH grant revenue related to AV-101 in the amount of $187,000 in the quarter ended June 30, 2012. The grant expired in the ordinary course on June 30, 2012.
 
 
-17-

 
Cato Research Ltd.

The Company has built a strategic development relationship with Cato Research Ltd. (“CRL”), a global contract research and development organization, or CRO, and an affiliate of one of the Company’s largest stockholders.  CRL has provided the Company with access to essential CRO services and regulatory expertise supporting its AV-101 preclinical and clinical development programs and other projects.  The Company recorded research and development expenses for CRO services provided by CRL in the amounts of $7,500 and $45,000 for the three and nine month periods ended December 31, 2013, respectively, and $124,700 and $639,300 for the three and nine month periods ended December 31, 2012, respectively. As described in Note 7, Convertible Promissory Notes and Other Notes Payable, in October 2012, the Company issued an unsecured promissory note in the principal amount of $1,009,000, and a warrant exercisable for 1,009,000 shares of the Company’s common stock, as payment in full of all amounts owed to CRL for CRO services rendered to the Company through December 31, 2012.

Note 9.  Capital Stock

Autilion AG Securities Purchase Agreement

On April 8, 2013, the Company entered into a Securities Purchase Agreement (as amended, the “Securities Purchase Agreement”) with Autilion AG, a company organized and existing under the laws of Switzerland (“Autilion”).  On April 12, 2013, Autilion assigned the Purchase Agreement to its affiliate, Bergamo Acquisition Corp. PTE LTD, a corporation organized and existing under the laws of Singapore (“Bergamo Singapore”). On April 30, 2013, the Company and Bergamo Singapore amended the Securities Purchase Agreement to modify the investment dates.  On June 27, 2013, the Company, Autilion and Bergamo Singapore further amended the Securities Purchase Agreement to vacate Autilion’s April 2013 assignment of the Securities Purchase Agreement to Bergamo Singapore, provide for an initial closing under the Securities Purchase Agreement, and amend certain of the investment dates under the Securities Purchase Agreement. Under the terms of the Securities Purchase Agreement, Autilion is contractually obligated to purchase an aggregate of 72.0 million restricted shares of the Company’s common stock at a purchase price of $0.50 per share for aggregate cash consideration of $36.0 million, in a series of closings scheduled to have occurred by September 30, 2013 (the “Autilion Financing”). At December 31, 2013, the Company had completed a nominal initial closing of the Autilion Financing in the amount of $25,000 and issued 50,000 restricted shares of common stock. Although there can be no assurance that an additional closing of the Autilion Financing will occur, in early January 2014, Autilion informed the Company of its expectation that the Company will receive the full $36.0 million committed under the terms of the Securities Purchase Agreement by mid-February 2014. As of the date of this report, there has not been a subsequent closing of the Autilion Financing. The Securities Purchase Agreement also provides for the election to the Company’s Board of Directors of a designee of Autilion upon completion of the Autilion Financing.

The Company and Autilion also entered into a Voting Agreement, pursuant to which Autilion has agreed to vote all shares of capital stock of the Company held by Autilion consistent with the recommendation of a majority of the members of the Company’s Board of Directors.  In addition, in the event of a Change in Control of the Company, as defined in the Voting Agreement, or an extraordinary transaction outside of the ordinary course of the Company’s business, in each case approved by a majority of the Company’s Board of Directors, including Autilion’s designee, as well as by the holders of a majority of the outstanding shares of Common Stock held by stockholders unaffiliated with Autilion (an “Approved Transaction”), Autilion is required to vote all shares of capital stock of the Company held by it for such Approved Transaction.

2013 Unit Private Placement

Between August and December 2013, the Company entered into securities purchase agreements with accredited investors pursuant to which it sold to such investors 116 Units, each Unit consisting of (i) a 10% convertible note in the face amount of $5,000 maturing on July 30, 2014 (the “Unit Note”); (ii) 10,000 shares of the Company’s restricted common stock (the “Unit Stock”); and (iii) a warrant exercisable through July 30, 2016 to purchase 10,000 restricted shares of the Company’s common stock at an exercise price of $1.00 per share (the “Unit Warrant”).  Accordingly, the Company issued Unit Notes in the aggregate face amount of $580,000; an aggregate of 1,160,000 shares of Unit Stock, and warrants to purchase an aggregate of 1,160,000 shares of the Company’s restricted common stock pursuant to the Unit Warrants, and received cash proceeds of $580,000, including $50,000 in lieu of repayment of previous advances to the Company made by one of its executive officers. The Unit Notes and related accrued interest are convertible into shares of the Company’s common stock at a conversion price of $0.50 per share at or prior to maturity, at the option of each investor. The Units also represent the Exchange Securities into which Platinum may convert the July 2013 Note.

 
-18-

 
The Company allocated the proceeds from the sale of the Units to the various securities based on their relative fair values on the dates of the sales. As described in Note 7, Convertible PromissoryNotes and Other Notes Payable, based on the short-term nature of the Unit Notes, the Company determined that fair value of the Unit Notes was equal to their face value. The Company determined the fair value of the Unit Stock based on the quoted market price of its stock on the date of the Unit sale. The Company calculated the fair value of the Unit Warrants using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. The table below also presents the aggregate allocation of the Unit sales proceeds based on the relative fair values of the Unit Stock, Unit Warrants and Unit Notes at the Unit sales date.

Unit Warrants
       
 
Weighted Average Issuance Date Valuation Assumptions
Per Share
Aggregate
Aggregate
Aggregate Allocation of Proceeds
Warrant
     
Risk free
   
Fair
Fair Value
Proceeds
Based on Relative Fair Value of:
Shares
Market
Exercise
Term
Interest
 
Dividend
Value of
of Unit
of Unit
 
Unit
 
Issued
Price
Price
(Years)
Rate
Volatility
Rate
Warrant
Warrants
Sales
Unit Stock
Warrant
Unit Note
                         
 1,160,000
 $0.47
 $1.00
 2.80
0.57%
76.85%
0.0%
 $0.14
 $166,400
 $580,000
 $238,200
 $69,300
 $272,500

Modification of Warrants held by Platinum

Effective on May 24, 2013, the Company and Platinum entered into an Amendment and Waiver Agreement (the “Amendment and Waiver”) pursuant to which the Company agreed to reduce the exercise price of the Exchange Warrant and the Investment Warrants issued to Platinum in October 2012 and February 2013 and March 2013 (collectively, the “Warrants”) from $1.50 per share to $0.50 per share in consideration for Platinum’s agreement to waive its rights for any increase in the number of shares of common stock issuable under the adjustment provisions of the Exchange Warrant and the Investment Warrants that would otherwise occur from (i) the Company’s sale of shares of its common stock at a price of $0.50 per share in connection with the Autilion Financing; (ii) the March 2013 grant of warrants to certain of the Company’s officers and independent directors to purchase an aggregate of 3.0 million restricted shares of common stock at an exercise price of $0.64 per share; and (iii) the Company’s issuance of restricted shares of its common stock resulting in gross proceeds not to exceed $1.5 million in connection with the exercise by warrant holders, by no later than June 30, 2013, subsequently extended to July 30, 2013, of previously outstanding warrants for which the Company may reduce the exercise price to not less than $0.50 per share. (See “Other Warrant Modifications and Exercises” below.)

As described in Note 4, Fair Value Measurements and in Note 7, Convertible Promissory Notes and Other Notes Payable, the Company re-measures the fair value of the Exchange Warrant, the Investment Warrants and the July 2013 Warrant at the end of each quarterly reporting period.  The fair value re-measurement at June 30, 2013 incorporated the modification of the exercise price resulting from the Amendment and Waiver and the corresponding adjustment was reflected as a component of the Warrant Liability at that date.  At December 31, 2013, the Company determined the fair values of the Exchange Warrant, the Investment Warrants and the July 2013 Warrant to be a weighted average of $0.22 per share, or an aggregate of $780,400, recorded as a component of Warrant Liability in the accompanying Condensed Consolidated Balance Sheet at December 31, 2013, using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.42; exercise price per share: $0.50; risk-free interest rate: 1.16% to 1.54%; remaining contractual term: 3.78 years to 4.56 years; volatility: 76.1% to 81.5%; and expected dividend rate: 0%. At December 31, 2013, the Company also re-measured the fair value of the Series A Exchange Warrant which is contingently issuable to Platinum upon the exchange of its shares of the Company’s Series A Preferred Stock into shares of the Company’s restricted common stock.  The Company determined the fair value of the Series A Exchange Warrant, also recorded as a component of Warrant Liability in the accompanying Condensed Consolidated Balance Sheets at December 31, 2013, to be $0.27 per share, or $1,936,700, using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.42; exercise price per share: $0.50; risk-free interest rate: 1.75%; contractual term: 5.00 years; volatility: 85.7%; expected dividend rate: 0%; and assumed probability of issuance of 95%.

 
-19-

 
Other Warrant Modifications and Exercises

During the months of June and July 2013, the Company offered certain long-term warrant holders the opportunity to exercise warrants having an exercise price of $1.50 per share to purchase shares of the Company’s restricted common stock at a reduced exercise price of $0.50 per share through July 30, 2013.  Warrant holders exercised warrants to purchase an aggregate of 528,370 restricted shares of the Company’s common stock and the Company received cash proceeds of $264,200.  In addition, certain warrant holders exercised modified warrants to purchase 16,646 shares of the Company’s restricted common stock in lieu of payment by the Company in satisfaction of amounts due for professional services in the aggregate amount of $8,300.
 
The Company calculated the fair value of the warrants exercised immediately before and after the modifications and determined that the fair value of the warrants exercised decreased by $32,900, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications were valued using the Black-Scholes Option Pricing Model and the following assumptions:

Assumption:
 
Pre-modification
   
Post-modification
 
Market price per share (weighted average)
 
$
0.74
   
$
0.74
 
Exercise price per share (weighted average)
 
$
1.50
   
$
0.50
 
Risk-free interest rate (weighted average)
   
0.82%
     
0.03%
 
Contractual term in years (weighted average)
   
3.47
     
0.06
 
Volatility (weighted average)
   
84.6%
     
73.3%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
0.30
   
$
0.24
 

In October 2013 the Company modified certain outstanding warrants held by its long-term investors and consultants to purchase an aggregate of 1,292,778 shares of the Company’s restricted common stock to reduce the exercise price of the warrants to $0.50 per share and, for warrants scheduled to expire on December 31, 2013, extend the exercise term of the warrants until January 31, 2015, generally without modifying the exercise price.  The Company calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $77,800, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes Option Pricing Model and the following assumptions:

Assumption:
 
Pre-modification
   
Post-modification
 
Market price per share at modification date
 
$
0.50
   
$
0.50
 
Exercise price per share (weighted average)
 
$
1.50
   
$
1.23
 
Risk-free interest rate (weighted average)
   
0.33%
     
0.44%
 
Contractual term in years (weighted average)
   
1.40
     
2.10
 
Volatility (weighted average)
   
74.4%
     
75.8%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
0.05
   
$
0.11
 

 
-20-

 
Additionally, in October 2013, the Company issued new warrants to purchase an aggregate of 237,500 shares of its restricted common stock to certain former warrant holders whose warrants to purchase an equivalent number of shares of the Company’s restricted common stock at an exercise price of $1.50 per share had recently expired.  The Company calculated the fair value of the new warrants as $0.03 per share, using the Black-Scholes Option Pricing Model and the following assumptions. market price per share: $0.50; exercise price per share: $1.50; risk-free interest rate: 0.20%; contractual term: 1.32 years; volatility: 73.5%; and expected dividend rate: 0%.  The Company recorded the aggregate fair value of $7,400 for the new warrants in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a corresponding credit to additional paid-in capital, an equity account.

In December 2013, the Company modified additional outstanding warrants held by certain of its long-term investors, consultants, and members of management and its Board of Directors to purchase an aggregate of 1,260,251 shares of its restricted common stock to reduce the exercise price of the warrants to $0.50 per share and, in limited cases, extend the exercise term of the warrants.  The Company calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $344,000, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications and term extensions were valued using the Black-Scholes Option Pricing Model and the following assumptions:

Assumption:
 
Pre-modification
   
Post-modification
 
Market price per share at modification date
 
$
0.40
   
$
0.40
 
Exercise price per share (weighted average)
 
$
1.67
   
$
0.50
 
Risk-free interest rate (weighted average)
   
0.51%
     
0.57%
 
Contractual term in years (weighted average)
   
2.06
     
2.34
 
Volatility (weighted average)
   
73.6%
     
74.4%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
0.05
   
$
0.14
 

In making its fair value determinations for both warrant modifications and new grants using the Black Scholes Option Pricing Model, the Company utilizes the following principles in selecting its input assumptions. The market price per share is based on the quoted market price of the Company’s common stock on the Over-the-Counter Bulletin Board on the date of the modification or grant.  Because of its short history as a public company, the Company estimates volatility based on the historical volatilities of a peer group of public companies over the contractual or remaining contractual term of the warrant.  The contractual term of the warrant is determined based on the grant or modification date and the latest date on which the warrant can be exercised under its terms or under the terms of the discounted exercise price offer. The risk-free rate of interest is based on the quoted constant maturity rate for U.S Treasury Bills on the date of the modification for the term corresponding with the contractual term of the warrant.  The dividend rate is zero as the Company has not paid and does not expect to pay dividends in the near future.

On June 27, 2013, the Company’s Chief Executive Officer exercised an outstanding warrant to purchase 50,000 restricted shares of the Company’s common stock at an exercise price of $0.64 per share and the Company received cash proceeds of $32,000 from his exercise.

 
-21-

 
Following the warrant issuances, modifications and exercises described above, at December 31, 2013, the Company had outstanding warrants to purchase shares of its restricted common stock at a weighted average exercise price of $0.89 per share as follows:

       
Shares
Subject to
 
Exercise
     
Purchase at
 
Price
 
Expiration
 
December 31,
 
per Share
 
Date
 
2013
 
$ 0.50  
5/11/2014 to 7/26/2018
    5,254,019  
$ 0.64  
3/3/2023
    2,940,000  
$ 0.88  
5/11/2014
    15,428  
$ 1.00  
7/30/2016 to 9/30/2017
    4,406,281  
$ 1.25  
5/11/2014 to 12/31/2014
    50,280  
$ 1.50  
5/11/2014 to 3/14/2018
    2,491,016  
$ 2.00  
9/15/2017
    425,000  
$ 2.50  
5/11/2014
    42,443  
$ 2.625  
1/31/2015
    61,418  
$ 3.00  
2/13/2016
    25,000  
            15,710,885  

Deemed Dividend

Pursuant to the October 2012 Agreement described in Note 7, Convertible Promissory Notes and Other Notes Payable, Platinum’s exchange rights in the Company’s Series A Preferred were modified such that Platinum currently has the right and option to exchange 500,000 restricted shares of the Company’s Series A Preferred that it holds for (i) a total of 15,000,000 restricted shares of the Company’s common stock (increased from 5,000,000 shares), and (ii) a five-year warrant to purchase 7,500,000 restricted shares of the Company’s common stock at an initial exercise price of $1.50 per share (the “Series A Exchange Warrant”). The modification of the exchange ratio and the contingent grant of the Series A Exchange Warrant pursuant to the October 2012 Agreement resulted in a deemed dividend on the Series A Preferred in the aggregate amount of $10,193,200 for accounting purposes, which has been reflected in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine month periods ended December 31, 2012. The aggregate amount of the deemed dividend was determined based on (i) the fair value of the 10 million incremental shares to which Platinum is entitled pursuant to the October 2012 Agreement valued at the $0.75 per share quoted market price for the Company’s common stock on the date of the agreement, an aggregate of $7.5 million, adjusted for an expected 95% probability of exercise of the exchange rights by Platinum, or $7,125,000, plus (ii) the fair value of the Series A Exchange Warrant, determined to be $0.43 per share, on the date of the agreement using the Black Scholes Option Pricing Model and the following assumptions: market price per share: $0.75; exercise price per share: $1.50; risk-free interest rate: 0.67%; contractual term: 5 years; volatility: 89.9%; expected dividend rate: 0%; further adjusted for an expected 95% probability of exercise of the exchange rights by Platinum, for a fair value of $3,068,200.  The fair value of the Series A Exchange Warrant was also recognized as a liability at the date of the October 2012 Agreement, with a corresponding charge to additional paid-in capital, an equity account.
 
Note 10.  Related Party Transactions

Between September and December 2013, one of the Company’s executive officers provided short-term cash advances aggregating $64,000 to meet the Company’s short-term working capital requirements. In lieu of cash repayment of the advances by the Company, in December 2013, the officer elected to invest $50,000 in the 2013 Unit Private Placement.  The Company has partially repaid the remaining balance of the advances.

Cato Holding Company, doing business as Cato BioVentures ("CBV"), the parent of CRL, is one of the Company’s largest institutional stockholders at December 31, 2013.  As described in Note 7, Convertible Promissory Notes and Other Notes Payable, in October 2012, the 2011 CHC Note was cancelled and exchanged for the 2012 CHC Note and the CHC Warrant.  The 2012 CHC Note bears interest at the rate of 7.5% compounded monthly and is payable in monthly installments of $10,000 beginning November 1, 2012 until the balance is paid in full, with the final monthly payment to be made in the amount equal to the then current outstanding balance of principal and interest due under the 2012 Cato Note.  Total interest expense, including amortization of note discount, on notes payable to CHC was $7,900 and $24,000 in the three and nine month periods ended December 31, 2013, respectively, and $34,700 and $51,400 in the three and nine month periods ended December 31, 2012, respectively.

 
-22-

 
During fiscal year 2007, the Company entered into a contract research organization arrangement with CRL related to the development of its lead drug candidate, AV-101, and subsequent other projects under which the Company incurred expenses of $7,500 and $124,700 in the three month periods ended December 31, 2013 and 2012, respectively, and $45,000 and $639,300 in the nine month periods ended December 31, 2013 and 2012, respectively.

As described in Note 7, Convertible Promissory Notes and Other Notes Payable, in October 2012, the Company issued to CRL (i) the CRL Note as payment in full for all contract research and development services and regulatory advice (“CRO Services”) rendered by CRL to the Company and its affiliates through December 31, 2012 with respect to the preclinical and clinical development of AV-101, and (ii) the CRL Warrant. The principal amount of the CRL Note may, at the Company’s option, be automatically increased as a result of future CRO Services rendered by CRL to the Company and its affiliates from January 1, 2013 to June 30, 2013.  The CRL Note accrues interest at a rate of 7.5% compounded monthly, is due and payable on March 31, 2016 and is payable solely by CRL's surrender from time to time of all or a portion of the principal and interest balance due on the CRL Note in connection with its concurrent exercise of the CRL Warrant.  Total interest expense, including amortization of the note discount, on the CRL Note for the three and nine month periods ended December 31, 2013 was $32,000 and $103,500, respectively, and $26,300 for both the three and nine month periods ended December 31, 2012.

Note 11.  Subsequent Events
 
2014 Unit Private Placement

Through February 10, 2014, the Company entered into additional securities purchase agreements with accredited investors pursuant to which it sold to such investors aggregate Units consisting of (i) one-year 10% convertible Unit Notes in the aggregate face amount of $390,000; (ii) an aggregate of 780,000 shares of the Company’s restricted common stock; and (iii) warrants exercisable through July 30, 2016 to purchase an aggregate of 780,000 restricted shares of the Company’s common stock at an exercise price of $1.00 per share.  The Company received cash proceeds of $390,000 from the sales of the Units.
 
 
-23-

 
Item 2.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements
 
     The following discussion contains forward-looking statements that are based on the current beliefs of our management, as well as current assumptions made by, and information currently available to, our management. All statements contained in the discussion below, other than statements that are purely historical, are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause our future actual results, performance or achievements to differ materially from those expressed in, or implied by, any such forward-looking statements as a result of certain factors, including, but not limited to, those risks and uncertainties discussed in this section, as well as elsewhere in our other filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are based on estimates and assumptions we make in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable in the circumstances.

Our business is subject to significant risks including, but not limited to, our ability to obtain additional financing, the results of our research and development efforts, the results of non-clinical and clinical testing, the effect of regulation by the United States Food and Drug Administration (“FDA”) and other agencies, the impact of competitive products, product development, commercialization and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2013 and in our other filings with the SEC. Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board of Directors and stockholders.

Investors are cautioned not to place undue reliance on the forward-looking statements contained herein. Additionally, unless otherwise stated, the forward-looking statements contained in this report are made as of the date of this report, and we have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.  New factors emerge from time to time, and it is not possible for us to predict which factors may arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause our actual results to differ materially from those contained in any forward-looking statements.
 
Business Overview

We are a biotechnology company with expertise applying human pluripotent stem cell technology for drug rescue, drug discovery and regenerative medicine.

Our Human Clinical Trials in a Test Tubetm platform is based on a combination of proprietary and exclusively licensed stem cell technologies focused on understanding and controlling stem cell differentiation (development) and production of multiple types of mature, functional, human cells from human pluripotent stem cells, including human heart cells and liver cells used in our novel bioassay systems.
 
 
-24-

 
With mature heart cells produced from stem cells, we have developed CardioSafe 3D ™, a novel bioassay system for assessing cardiotoxicity. We believe CardioSafe 3D ™ is capable of predicting the in vivo cardiac effects, both toxic and non-toxic, of small molecule drug candidates before they are ever tested in animals or humans. We are developing LiverSafe 3D™, a human liver cell-based bioassay system, for assessing potential liver toxicity and adverse drug-drug interactions early in development. We believe our human pluripotent stem cell-derived bioassay systems will allow us to assess the heart and liver safety profile of new drug candidates with greater speed and precision than nonclinical surrogate safety testing models currently used in drug development.
 
 
Drug rescue involves the combination of human pluripotent stem cell technology with medicinal chemistry. The primary goal of drug rescue is to generate new, safer proprietary variants of once-promising small molecule drug candidates that pharmaceutical companies and others have discovered, developed and ultimately discontinued prior to market approval due to unexpected heart or liver safety concerns. We refer to once-promising drug candidates now suitable for drug rescue as Drug Rescue Candidates™. And we refer to new, safer proprietary variants generated in drug rescue campaigns as Drug Rescue Variants™. Our drug rescue strategy is to leverage (i) prior R&D investment in Drug Rescue Candidates™ by pharmaceutical companies and others, (ii) our unique insight into heart and liver biology from CardioSafe 3D ™ and LiverSafe 3D™, and (iii) medicinal chemistry to generate Drug Rescue Variants for license and sale to pharmaceutical companies and others.

We are utilizing the vast amount of information available in the public domain to identify and assess potential Drug Rescue Candidates. We may also seek to acquire rights to certain Drug Rescue Candidates from third-parties, including academic research institutions and biotechnology, medicinal chemistry and pharmaceutical companies. We plan to have a range of economic participation rights in each lead Drug Rescue Variant we license or sell, including up-front payments, milestone payments and, if approved for commercial sale, royalties on net sales.

In parallel with our drug rescue activities, we plan to explore, internally and/or through sponsored external programs, pilot nonclinical development opportunities relating to small molecule drug discovery and/or regenerative medicine focused on blood, bone, cartilage, heart, liver and pancreas (insulin-producing beta islet) cells. Each of these drug discovery and regenerative medicine programs would be based on the proprietary differentiation and production capabilities of our Human Clinical Trials in a Test Tubetm platform.
 
With grant funding from the U.S. National Institutes of Health (“NIH”), we have successfully completed Phase 1 development of AV-101.  AV-101 is an orally available small molecule prodrug candidate aimed at the multi-billion dollar neurological disease and disorders market, including neuropathic pain, a serious and chronic condition causing pain after an injury or disease of the peripheral or central nervous system, and depression. We were awarded over $8.8 million of grant funding from the NIH to support our nonclinical and Phase I clinical development of AV-101 for neuropathic pain. We intend to explore potential strategic partnering alternatives for further development of AV-101 for neuropathic pain, depression or other neurological conditions and diseases.

 
-25-

 
Financial Operations Overview and Results of Operations

Our critical accounting policies and estimates and recent accounting pronouncements are disclosed in our Form 10-K for the fiscal year ended March 31, 2013, as filed with the United States Securities and Exchange Commission, and in Note 3 to the accompanying unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Summary

During the nine months ended December 31, 2013, our scientific personnel have continued to expand the drug rescue capabilities of CardioSafe 3D™ and further develop LiverSafe 3D™.  Scientific operations were curtailed somewhat during the quarter ended September 30, 2013 as we decommissioned our former lab space in preparation for our move to expanded lab and office facilities at the end of July 2013 and completed the corresponding relocation, recalibration and recertification of our laboratories and equipment following the move. Limited cash resources during the quarter ended December 31, 2013 have limited certain scientific activities and collaborations. Nevertheless, we have continued to advance the capabilities of our heart and liver cells and pursue our internal evaluation of prospective drug rescue candidates. We successfully completed Phase 1 clinical development of AV-101 during our fiscal year ended March 31, 2013 and directed effort during our first fiscal quarter to finalizing AV-101 Phase 1b clinical study reports, as required under the terms of our NIH grant awards and to facilitate further collaborative development of AV-101.

Throughout this fiscal year, our executive management has been significantly focused on providing sufficient operating capital to advance our research and development objectives while meeting our continuing operational needs. To that end, in April 2013, we entered into a Securities Purchase Agreement (as amended, the “Securities Purchase Agreement”) with Autilion AG, a company organized and existing under the laws of Switzerland (“Autilion”).  Under the terms of the Securities Purchase Agreement, Autilion is contractually obligated to purchase an aggregate of 72.0 million restricted shares of our common stock at a purchase price of $0.50 per share for aggregate cash proceeds to us of $36.0 million (the “Autilion Financing”). At December 31, 2013, we had completed a nominal initial closing of the Autilion Financing. Although there can be no assurance that an additional closing of the Autilion Financing will occur, in early January 2014, Autilion informed the Company of its expectation that the Company will receive the full $36.0 million committed under the terms of the Securities Purchase Agreement between mid-January and mid-February 2014. [As of the date of this report, there has not been a subsequent closing of the Autilion Financing.] The Securities Purchase Agreement also provides for the election to our Board of Directors of a designee of Autilion upon completion of the Autilion Financing.  This transaction is described in greater detail in Note 9, Capital Stock, in the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.

For strategic purposes and to meet our working capital needs prior to the closing of the Autilion Financing, during June and July 2013, we offered certain warrant holders the opportunity to exercise outstanding warrants having an exercise price of $1.50 per share to purchase shares of our restricted common stock at a reduced exercise price of $0.50 per share. Through July 2013, warrant holders exercised modified warrants to purchase an aggregate of 528,370 restricted shares of our common stock and we received cash proceeds of $264,200.  In addition, certain long-term warrant holders exercised modified warrants to purchase 16,646 shares of our restricted common stock in lieu of payment by us in satisfaction of amounts due for professional services in the aggregate amount of $8,300. Additionally, in July 2013, we issued to Platinum a senior secured convertible note in the face amount of $250,000 (the “July 2013 Note”) and a five-year warrant to purchase 250,000 shares of our restricted common stock at an exercise price of $0.50 per share. Between August 2013 and February 10, 2014 we entered into strategic securities purchase agreements with accredited investors pursuant to which we sold to such investors Units of our securities consisting, in aggregate, of: (i) one-year 10% convertible notes in the aggregate face amount of $970,000; (ii) an aggregate of 1,940,000 shares of our restricted common stock; and (iii) warrants exercisable through July 30, 2016 to purchase an aggregate of 1,940,000 restricted shares of our common stock at an exercise price of $1.00 per share.  We received cash proceeds of $970,000 from the sale of the Units, including $50,000 in lieu of repayment of previous advances made to us by one of our executive officers. Under certain circumstances, the July 2013 Note issued to Platinum is convertible into Units.

 
-26-

 
Comparison of Three Months Ended December 31, 2013 and 2012
 
The following table summarizes the results of our operations for the three months ended December 31, 2013 and 2012 (amounts in $000).

   
Three Months Ended December 31,
 
   
2013
   
2012
 
Grant Revenue
  $ -     $ -  
Operating expenses:
               
 Research and development
    551       1,120  
 General and administrative
    897       799  
  Total operating expenses
    1,448       1,919  
Loss from operations
    (1,448 )     (1,919 )
Interest and other expenses (net)
    (361 )     (235 )
Change in warrant liabilities
    1,940       358  
Loss on early extinguishment of debt
    -       (3,537 )
Income (loss) before income taxes
    131       (5,333 )
Income taxes
    -       (2 )
Net income (loss)
  $ 131     $ (5,335 )
    Deemed dividend on Series A Preferred Stock
    -       (10,193 )
Net income (loss) attributable to common stockholders
  $ 131     $ (15,528 )

Revenue   

We reported no grant or subcontract revenue for the quarter ended December 31, 2013 or 2012. We have successfully completed our Phase I development of AV-101, our prodrug candidate for the treatment of neuropathic pain and, potentially, depression and other neurological conditions. Our NIH grant related to AV-101 expired in its normal course on June 30, 2012 and has not been extended or renewed.  We had drawn the maximum amount available under the grant prior to its expiration.  Revenue associated with our earlier subcontract research arrangement terminated in May 2012.

 
-27-

 
Research and Development Expense

Research and development expense totaled $551,000 for the quarter ended December 31, 2013, a decrease of 51% compared to $1,120,000 for the quarter ended December 31, 2012.  The following table indicates the primary components of research and development for each of the periods (in $000):
 
   
Three Months Ended December 31,
 
   
2013
   
2012
 
Salaries and benefits
  $ 223     $ 202  
Stock-based compensation
    160       575  
UHN research under SRCA
    -       91  
Technology licenses and royalties
    29       8  
Project-related third-party research and supplies:
               
AV-101
    6       127  
All other including CardioSafe and LiverSafe
    68       81  
      74       208  
Rent
    54       29  
Depreciation
    11       7  
Total Research and Development Expense
  $ 551     $ 1,120  
 
The increase in R&D salaries and benefits expense reflects the impact of the addition of a research technician in April 2013, the partial restoration in April 2013 of an earlier voluntary salary reduction to below his contractual pay rate taken by our President and Chief Scientific Officer, and general increases in employee benefits costs. In addition to the ratable amortization of stock-based compensation expense over the requisite service period of the respective grants made in both the current year and in prior years, stock-based compensation expense for the quarter ended December 31, 2013 includes approximately $82,000 as the impact of October 2013 and December 2013 modifications to reduce the exercise price of certain outstanding option grants to $0.40 per share or $0.50 per share, as well as approximately $33,000 attributable to the expense resulting from the March 2013 grant of a warrant to our President and Chief Scientific Officer that vests over three years, subject to certain vesting acceleration events. Stock-based compensation expense for the quarter ended December 2012 includes approximately $558,000 as the impact of October 2012 modifications reducing the exercise price to $0.75 per share and reducing any remaining vesting period to two years for certain option grants having exercise prices between $1.13 per share and $2.58 per share made to certain scientific employees and consultants in prior years. Our 2012/2013 sponsored research project budget under the collaboration agreement with Dr. Gordon Keller’s laboratory at UHN ended on September 30, 2013. We are currently in discussions with Dr. Keller and UHN regarding the scope of our 2013/2014 sponsored research project budget under the agreement, and we anticipate finalizing such budget in the near term.. The expense recorded in 2012 reflects our stem cell research collaboration in accordance with our agreements with UHN made in the third and fourth quarters of our fiscal year ended March 31, 2012 and in a further modification effective beginning in October 2012. Technology license expense increased in 2013 reflecting increased costs for patent prosecution and protection that we are required to fund under the terms of certain of our license agreements. We recognize these costs as they are invoiced to us by the licensors and they do not occur ratably throughout the year or between years. We began Phase 1b clinical trials of AV-101 early in calendar 2012 and completed them by mid-year 2012. AV-101 expenses in the current quarter of calendar 2013 reflect the costs associated with monitoring for and responding to potential feedback related to our final clinical trial and other reports required under the terms of the prior NIH grant, primarily through our contract research collaborator, Cato Research Ltd.  The 2013 increases in rent and depreciation expenses reflect increased rental costs and the amortization of tenant improvements related to our relocation to expanded facilities in late-July 2013.

 
-28-

 
General and Administrative Expense

General and administrative expense was $897,000 for the quarter ended December 31, 2013, an increase of 12% compared with $799,000 for the quarter ended December 31, 2012.  The following table indicates the primary components of general and administrative expenses for each of the periods (in $000):


   
Three Months Ended December 31,