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 June 30, 2015
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 August 12, 2015, 1,594,461 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding. 

 


 
 

 
 
VistaGen Therapeutics, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended June 30, 2015
 
TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
   
 
1
2
3
4
23
30
   
PART II. OTHER INFORMATION
 
 
 
31
31
65
66
66
   
 67

 
 
-i-

 
PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
VISTAGEN THERAPEUTICS
           
Consolidated Balance Sheets
           
(Amounts in Dollars, except share amounts)
           
             
   
June 30,
   
March 31,
 
   
2015
   
2015
 
   
(Unaudited)
   
(Note 2)
 
 ASSETS
           
 Current assets:
           
    Cash and cash equivalents
  $ 121,000     $ 70,000  
    Prepaid expenses and other current assets
    1,473,300       35,700  
     Total current assets
    1,594,300       105,700  
 Property and equipment, net
    102,600       117,100  
 Security deposits and other assets
    46,900       46,900  
     Total assets
  $ 1,743,800     $ 269,700  
                 
 LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
 Current liabilities:
               
    Accounts payable
  $ 1,549,800     $ 2,251,100  
    Accrued expenses
    1,382,200       1,206,500  
    Current maturities of senior secured convertible promissory notes and accrued interest
    -       4,146,100  
    Current portion of notes payable, net of discount of $0 at June 30, 2015 and $474,500 at March
               
        31, 2015, and accrued interest
    345,700       4,117,000  
    Current portion of notes payable to related parties, net of discount of $0 at June 30, 2015 and
               
        $54,500 at March 31, 2015, and accrued interest
    -       1,508,800  
    Convertible promissory notes and accrued interest, net of discount of $0 at June 30, 2015 and
               
            $180,000 at March 31, 2015, respectively
    -       4,157,600  
    Capital lease obligations
    1,000       1,000  
     Total current liabilities
    3,278,700       17,388,100  
                 
 Non-current liabilities:
               
    Senior secured convertible promissory notes and accrued interest
    -       296,200  
    Notes payable
    1,038,500       35,600  
    Warrant liability
    -       3,008,500  
    Accrued dividends on Series B Preferred Stock
    213,300       -  
    Deferred rent liability
    78,300       83,000  
    Capital lease obligations
    900       1,100  
     Total non-current liabilities
    1,331,000       3,424,400  
     Total liabilities
    4,609,700       20,812,500  
                 
 Commitments and contingencies
               
                 
 Stockholders’ deficit:
               
     Preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2015 and March 31, 2015:
               
          Series A Preferred, 500,000 shares authorized and outstanding at June 30, 2015 and March 31, 2015,
               
              respectively
    500       500  
          Series B Preferred, 4,000,000 shares and no shares authorized at June 30, 2015 and March 31, 2015,
               
              respectively; 2,995,579 shares issued and outstanding at June 30, 2015
    3,000       -  
    Common stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2015 and March 31, 2015,
               
       respectively; 1,730,126 shares and 1,677,110 shares issued at June 30, 2015 and March 31,
               
       2015, respectively
    1,700       1,700  
    Additional paid-in capital
    115,143,800       67,945,800  
    Treasury stock, at cost, 135,665 shares of common stock held at June 30, 2015 and March 31, 2015,
               
       respectively
    (3,968,100 )     (3,968,100 )
    Accumulated deficit
    (114,046,800 )     (84,522,700 )
     Total stockholders’ deficit
    (2,865,900 )     (20,542,800 )
     Total liabilities and stockholders’ deficit
  $ 1,743,800     $ 269,700  
 
See accompanying notes to Condensed Consolidated Financial Statements.

 
 
 
-1-

 
 
 
VISTAGEN THERAPEUTICS, INC.
     
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS      
(Unaudited)      
 (Amounts in dollars, except share amounts)      
       
   
Three Months Ended
June 30,
 
   
2015
   
2014
 
             
Operating expenses:
           
  Research and development
  $ 372,600     $ 473,600  
  General and administrative
    1,448,500       797,200  
   Total operating expenses
    1,821,100       1,270,800  
Loss from operations
    (1,821,100 )     (1,270,800 )
Other expenses, net:
               
  Interest expense, net
    (755,100 )     (784,900 )
  Change in warrant liability
    (1,894,700 )     (1,727,200 )
  Loss on extinguishment of debt
    (25,050,900 )     (768,000 )
Loss before income taxes
    (29,521,800 )     (4,550,900 )
Income taxes
    (2,300 )     (2,400 )
                 
Net loss and comprehensive loss
  $ (29,524,100 )   $ (4,553,300 )
  Accrued dividends on Series B Preferred stock
    (213,300 )     -  
  Deemed dividend on Series B Preferred Units
    (256,200 )     -  
                 
Net loss attributable to common stockholders
  $ (29,993,600 )   $ (4,553,300 )
                 
Basic and diluted net loss attributable to common
               
   stockholders per common share
  $ (19.23 )   $ (3.70 )
                 
Weighted average shares used in computing
               
  basic and diluted net loss attributable to common
               
  stockholders per common share
    1,559,483       1,229,488  

See accompanying notes to Condensed Consolidated Financial Statements.

 
 
 
-2-

 
VISTAGEN THERAPEUTICS INC.
           
STATEMENT OF CASH FLOWS
           
(Unaudited)
           
(Amounts in Dollars)
           
             
             
             
             
   
Three Months Ended June 30,
 
   
2015
   
2014
 
 Cash flows from operating activities:
           
  Net loss
  $ (29,524,100 )   $ (4,553,300 )
  Adjustments to reconcile net loss to net cash used in operating activities:
               
    Depreciation and amortization
    14,500       13,100  
    Amortization of discounts on convertible and promissory notes
    550,800       481,900  
    Change in warrant liability
    1,894,700       1,727,200  
    Stock-based compensation
    29,200       203,400  
    Expense related to modification of warrants
    122,300       -  
    Non-cash rent and relocation expense
    (4,700 )     (1,400 )
    Interest income on note receivable for stock purchase
    -       (2,500 )
    Fair value of common stock granted for services
    500,000       134,000  
    Fair value of Series B Preferred stock granted for services
    250,000       -  
    Fair value of warrants granted for services and interest
    -       16,500  
    Foreign currency transaction loss
    10,300       19,800  
    Loss on extinguishment of debt
    25,050,900       767,900  
    Changes in operating assets and liabilities:
               
     Prepaid expenses and other current assets
    (8,200 )     (11,900 )
     Accounts payable and accrued expenses, including accrued interest
    291,000       193,500  
     Net cash used in operating activities
    (823,300 )     (1,011,800 )
                 
 Cash flows from investing activities:
               
  Purchases of equipment, net
    -       -  
     Net cash used in investing activities
    -       -  
                 
 Cash flows from financing activities:
               
   Net proceeds from issuance of common stock and warrants, including Units
    280,000       1,520,000  
   Net proceeds from issuance of Series B Preferred Units
    607,500       -  
   Repayment of capital lease obligations
    (200 )     (2,000 )
   Repayment of notes
    (13,000 )     (105,500 )
     Net cash provided by financing activities
    874,300       1,412,500  
   Net increase in cash and cash equivalents
    51,000       400,700  
   Cash and cash equivalents at beginning of period
    70,000       -  
   Cash and cash equivalents at end of period
  $ 121,000     $ 400,700  
                 
 Supplemental disclosure of non-cash activites:                
   Senior Secured Notes, 2014 Unit Notes, other promissory notes and related accrued interest and accounts
    payable, including conversion premiums, converted into Series B Preferred stock
   $ 17,335,400       $  

See accompanying notes to Condensed Consolidated Financial Statements.

 
 
 
-3-

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

Note 1.  Description of Business

Overview

VistaGen Therapeutics, Inc., a Nevada corporation, is a clinical-stage biopharmaceutical company committed to developing and commercializing innovative product candidates for patients with depression, other diseases and various disorders related to the central nervous system (CNS), as well as cancer. Our principal executive offices are located at 343 Allerton Avenue, South San Francisco, California 94080, and our telephone number is (650) 577-3600. Our website address is www.vistagen.com. Unless the context otherwise requires, the words “VistaGen Therapeutics, Inc.” “VistaGen,” “we,” “the Company,” “us” and “our” refer to VistaGen Therapeutics, Inc., a Nevada corporation.

VistaGen Therapeutics, Inc., a California corporation incorporated on May 26, 1998 (VistaGen California), is our wholly-owned subsidiary. Pursuant to a strategic merger transaction on May 11, 2011, we acquired all outstanding shares of VistaGen California in exchange for 341,823 shares of our common stock (Merger), and assumed all of VistaGen California’s pre-Merger obligations. Our Condensed Consolidated Financial Statements 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.

Effective August 14, 2014, we consummated a 1-for-20 reverse split of our authorized, and issued and outstanding shares of common stock (Stock Consolidation). Each reference to shares of common stock or the price per share of common stock in these financial statements is post-Stock Consolidation, and reflects the 1-for-20 adjustment as a result of the Stock Consolidation.

AV-101 and Major Depressive Disorder
 
The World Health Organization estimates that 350 million people worldwide are affected by depression. According to the U.S. National Institutes of Health (NIH), major depression is one of the most common mental disorders in the U.S. In 2012, the NIH estimated 16 million adults aged 18 or older in the U.S. had at least one major depressive episode. This represented 6.9 percent of all U.S. adults. According to the U.S. Centers for Disease Control and Prevention (CDC), one in ten Americans take an antidepressant medication. Unfortunately, approximately two-thirds of depression sufferers do not benefit from the first round treatment of currently approved antidepressant agents, including selective serotonin reuptake inhibitors (SSRIs) and serotonin-norepinephrine reuptake inhibitors (SNRIs). And, even when they do relieve depressive symptoms and induce remission of a major depressive episode, because of their mechanism of action, SSRIs and SNRIs take many weeks to achieve those therapeutic benefits. During the multiple-week lag before onset of therapeutic benefits, risks of side effects, including suicidal thoughts and behaviors, may be considerable. Ultimately, after as many as four treatment cycles involving several different antidepressant medications, approximately two-thirds of patients may find an antidepressant drug or drug combination that induces remission of depressive symptoms. This trial and error period to find an effective antidepressant medication can take many months to more than a year to achieve, with an increasing rate of potentially significant side effect risks with each successive treatment attempt.
 
Our lead product candidate, AV-101, is an orally available small molecule prodrug in Phase 2 clinical development for Major Depressive Disorder (MDD). AV-101’s mechanism of action (MOA), as an N-methyl-D-aspartate receptor (NMDAR) antagonist binding selectively at the glycine-binding (GlyB) co-agonist site of the NMDAR, is fundamentally different from all antidepressants approved by the U.S. Food and Drug Administration (FDA). In four preclinical studies utilizing well-validated animal models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant antidepressant-like responses, following a single treatment, which were equivalent to responses seen with a control single sub-anesthetic dose of ketamine (an FDA-approved drug sometimes used by clinicians off-label to treat suicidal behavior).  In the same preclinical studies, fluoxetine (Prozac) did not induce rapid onset antidepressant-like responses.  Preclinical studies also support the hypothesis that AV-101 has the potential to treat several additional CNS disorders, including chronic neuropathic pain, epilepsy and neurodegenerative diseases, such as Parkinson’s disease and Huntington’s disease, where modulation of the NMDAR may have therapeutic benefit.

 
 
 
-4-

 
Following two successful randomized, double-blind, placebo-controlled Phase 1 safety studies funded by the NIH, in February 2015, we entered into a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health (NIMH), part of the NIH. Under the CRADA, we are collaborating with the NIMH on the initial Phase 2 clinical efficacy study of AV-101 in subjects with treatment-resistant MDD. Pursuant to the CRADA, the study will be conducted at the NIMH and be fully funded by the NIMH. It is contemplated that this clinical study will begin in the second half of 2015 under the direction of Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
 
In addition to developing AV-101 for MDD and other CNS indications, we are applying our stem cell technology for drug rescue to identify and develop proprietary new chemical entities (NCEs) for our internal drug candidate pipeline and selected regenerative medicine opportunities.  Drug rescue involves (1) using our customized in vitro bioassay systems to predict potential heart and liver toxicity of NCEs, (2) leveraging prior investments by pharmaceutical companies and others related to screening large-scale compound libraries, optimizing and testing for efficacy NCEs that were terminated before FDA approval due to heart or liver toxicity and are now available in the public domain, and (3) applying medicinal chemistry to produce safer proprietary NCEs for our internal development pipeline. Our CardioSafe 3D™ bioassay system uses our human pluripotent stem cell (hPSC)-derived cardiomyocytes, or human heart cells.  We believe CardioSafe 3D is more comprehensive and clinically predictive than the hERG assay, which is currently the only in vitro cardiac safety assay required by FDA guidelines. We use our hPSC-derived hepatocytes, or human liver cells, in our LiverSafe 3D™ bioassay system to predict potential liver toxicity of NCEs, including potential drug metabolism issues and adverse drug-drug interactions. CardioSafe 3D and LiverSafe 3D offer a new paradigm for evaluating and predicting potential heart and liver toxicity of NCEs, including drug rescue NCEs, early in the development process, long before costly, high risk animal studies and human clinical trials.  We intend to develop internally for our pipeline each lead drug rescue NCEs we produce. Our focus in regenerative medicine is on innovative therapeutic opportunities involving blood, cartilage, heart and liver cells. 

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 our interim financial information. The accompanying Condensed Consolidated Balance Sheet at March 31, 2015 has been derived from our audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP.  The operating results for the three months ended June 30, 2015 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2016 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 our audited Consolidated Financial Statements for the fiscal year ended March 31, 2015 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 29, 2015.

The accompanying Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As an entity having not yet achieved sustainable revenues, we have experienced recurring losses and negative cash flows from operations resulting in a deficit of $114.0 million accumulated from inception through June 30, 2015. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further potential development of AV-101, other potential programs involving drug development, drug rescue drug discovery and regenerative medicine.
 
Since our inception in May 1998 through June 30, 2015, we have financed our operations through (1) the issuance and sale of our common stock, preferred stock, warrants for common stock, and promissory notes for aggregate cash proceeds of approximately $30.0 million; (2) issuance of common stock and preferred stock with an approximate value at issuance of $25.2 million as consideration for, among other things, technology license payments, sponsored research, contract research, development, manufacturing and regulatory services, and legal, corporate development and financial advisory services; and, (3) receipt of aggregate non-dilutive cash proceeds of approximately $16.4 million from government research and development grant awards and strategic collaborations.

 
 
 
-5-

 
As described more completely in Note 7, Convertible Promissory Notes and other Notes Payable, and Note 8, Capital Stock, in May 2015, we created a new class of Series B 10% Convertible Preferred Stock (Series B Preferred). Between March 31, 2015 and June 30, 2015, we extinguished the outstanding balances of approximately $15.4 million of promissory notes, other debt obligations and certain adjustments thereto that were either already due and payable or would have otherwise matured prior to March 31, 2016, through conversion into our Series B Preferred and, with respect to a portion of the indebtedness converted, warrants to purchase common stock. More specifically, we have converted the outstanding balances of (i) all Senior Secured Convertible Promissory Notes originally issued to Platinum Long Term Growth VII, LLC (Platinum), (ii) all 2014 Unit Notes outstanding at March 31, 2015 and those issued subsequently, and (iii) other outstanding promissory notes including those issued to Cato Research Ltd., Cato Holding Company, Morrison & Foerster (Note B), University Health Network and others, through the issuance of an aggregate of 2,363,789 shares of our Series B Preferred. Additionally, through June 30, 2015, we sold in self-placed private placement transactions with Platinum and other accredited investors, Series B Preferred Units consisting of an aggregate of 86,790 unregistered shares of Series B Preferred and five year warrants exercisable at $7.00 per share to purchase 86,790 shares of our common stock and we received cash proceeds of $607,500 therefrom. See Note 10, Subsequent Events, regarding disclosure of the conversion of the outstanding balance of additional promissory notes into Series B Preferred and self-placed private placement sales of additional Series B Preferred Units after June 30, 2015.
 
At June 30, 2015, we did not have sufficient cash and cash equivalents to enable us to fund our planned operations over the next twelve months, including expected cash expenditures of approximately $6.0 million. We believe that our participation in potential strategic collaborations, including potential transactions involving AV-101 such as our February 2015 CRADA with the NIH for an NIH-funded and sponsored Phase 2 study of AV-101 in MDD, may provide resources to support a portion of our future cash needs and working capital requirements, however, no assurances can be provided.  When and as necessary, we have and will continue to seek to raise sufficient financing through issuance and sale of our securities, which may include both debt and equity securities, research and development collaborations, technology and drug candidate license fees, and government grant awards and collaboration revenues.  Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of strategic opportunities related to our success and the success of certain other companies in clinical trials, including our future development ofAV-101 as a treatment for MDD and other conditions; our stem cell technology platform, including drug rescue and cell therapy research and development efforts and the success of such programs, our ability to obtain government grant awards and our ability to enter into strategic collaborations with institutions on terms acceptable to us. To further advance the clinical development of AV-101 and potential drug rescue and regenerative medicine applications of our stem cell technology, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including salaries and benefits, regulatory consulting, contract research and development, legal, accounting, public company compliance and other professional services and working capital costs. 
 
Notwithstanding the foregoing, substantial additional financing may not be available to us on a timely basis, on acceptable terms, or at all. If we are unable to obtain substantial additional financing on a timely basis in the near term, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern. The accompanying Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.

Note 3.  Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include those relating to 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.

 
 
 
-6-

 
Revenue Recognition

Although we do not currently have any such arrangements, we have 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.

We recognize 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, we comply 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 we have continuing performance obligations and have no objective and reliable evidence of the fair value of those obligations.  We recognize non-refundable upfront technology access fees under agreements in which we have a continuing performance obligation ratably, on a straight-line basis, over the period in which we are 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 our continuing involvement.

 
Government grants, which have supported our 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 costs associated with clinical and non-clinical development of AV-101, our prodrug candidate entering late-stage clinical development for Major Depressive Disorder, sponsored stem cell research and development costs, and costs related to the application and prosecution of patents related to our stem cell technology platform and AV-101. All such costs are charged to expense as incurred.

Stock-Based Compensation

We recognize compensation cost for all stock-based awards to employees based on the grant date fair value of the award.  Non-cash, 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.  We have no awards with market or performance conditions.  For equity awards to non-employees, we re-measure 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.

 
 
 
-7-

 
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2015 and 2014.
 
   
Three Months Ended
 
   
June 30,
 
   
2015
   
2014
 
             
 Research and development expense:
           
             
 Stock option grants
  $ 15,500     $ 61,500  
 Warrants granted to officer in March 2014
    2,800       36,300  
                 
      18,300       97,800  
                 
 General and administrative expense:
               
                 
 Stock option grants
    7,000       34,800  
 Warrants granted to officers and directors
               
      in March 2014
    3,900       70,800  
                 
      10,900       105,600  
                 
 Total stock-based compensation expense
  $ 29,200     $ 203,400  
                 
 
We did not grant stock options to any of our employees or consultants during the three months ended June 30, 2015 or 2014.  At June 30, 2015, there were stock options outstanding to purchase 206,788 shares of our common stock at a weighted average exercise price of $10.08 per share.

Warrant Liability

Between October 2012 and July 2013, we issued to Platinum warrants to purchase 176,129 unregistered shares of our common stock and, subject to Platinum’s exercise of its rights to exchange shares of our Series A Preferred Stock that it holds, we are obligated to issue to Platinum an additional warrant to purchase 375,000 unregistered shares of common stock (collectively, the “Platinum Warrants”). As originally issued, the Platinum Warrants contained an exercise price adjustment feature that would reduce the exercise price of the warrants and increase the number of shares of our common stock eligible for Platinum’s purchase thereunder in the event we subsequently issued equity instruments at a price lower than the exercise price of the Platinum Warrants. Prior to their amendment in May 2015, as described below, we accounted for the Platinum Warrants as non-cash liabilities and estimated their fair value at the end of each financial reporting period and recorded the change in the fair value as non-cash expense or non-cash income. The key component in determining the fair value of the Platinum Warrants and the related liability was the market price of our common stock, which is subject to significant fluctuation and is not under our control. The resulting change in the fair value of the warrant liability on our net income or loss was therefore also subject to significant fluctuation. Assuming all other fair value inputs remained generally constant, we generally recorded an increase in the warrant liability and non-cash losses when our stock price increased and a decrease in the warrant liability and non-cash gains when our stock price decreased.
 
As described more completely in Note 8, Capital Stock, on May 12, 2015, we entered into an agreement with Platinum pursuant to which Platinum agreed, among other things, to amend the Platinum Warrants to fix the exercise price thereof, eliminate the exercise price reset features and fix the number of shares of our common stock issuable thereunder.  This agreement and the related modifications to the Platinum Warrants resulted in the complete elimination of the warrant liability with respect to the Platinum Warrants during our fiscal quarter ended June 30, 2015.

Comprehensive Loss

We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.

 
 
 
-8-

 
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, we have historically adjusted the numerator for the change in the fair value of the warrant liability attributable to outstanding warrants, only if dilutive, and increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method. The change in the fair value of the warrant liability did not have an impact on the numerator in the quarter ending June 30, 2015 or 2014. As a result of our net loss for the periods presented, potentially dilutive securities were excluded from the computation, as their effect would be antidilutive. For the quarter ended June 30, 2015, the accrual for dividends on our Series B Preferred and the deemed dividend attributable to the issuance of our Series B Preferred Units represent deductions from our net loss to arrive at net loss attributable to common stockholders.

Potentially dilutive securities excluded in determining diluted net loss per common share are as follows:
 
   
As of June 30,
 
   
2015
   
2014
 
             
Series A Preferred stock issued and outstanding (1)
    750,000       750,000  
                 
Series B Preferred stock issued and outstanding (2)
    2,995,579       -  
                 
Warrant shares issuable to Platinum upon exercise of common stock warrants by Platinum
               
    upon exchange of Series A Preferred under the terms of the October 11, 2012 Note
         
    Exchange and Purchase Agreement, as subsequently amended
    535,715       375,000  
                 
Outstanding options under the 2008 and 1999 Stock Incentive Plans
    206,788       211,368  
                 
Outstanding warrants to purchase common stock
    3,735,023       949,075  
                 
10% Senior Secured Convertible Notes issued to Platinum between October 2012 and
               
    July 2013, including accrued interest through June 30, 2014
    -       411,810  
                 
10% convertible notes issued as a component of Unit Private Placements, including
 
    accrued interest through June 30, 2014
    -       258,473  
                 
Total
    8,223,105       2,955,726  
____________
               
(1) Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with Platinum
 
(2) Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015
 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. The amendment in this ASU provides guidance on revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The core principle of this update provides guidance to identify the performance obligations under the contract(s) with a customer and how to allocate the transaction price to the performance obligations in the contract. It further provides guidance to recognize revenue when (or as) the entity satisfies a performance obligation. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016 (the first quarter of our fiscal year ending March 31, 2018).  In April 2015, the FASB proposed to defer for one year the effective date of the new revenue standard, with an option that would permit companies to adopt the standard as early as the original effective date.  Early adoption prior to the original effective date is not permitted. We have not determined the potential effects of adopting this ASU on our consolidated financial statements.

 
 
 
-9-

 
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The amendments in this ASU define when and how an entity is required to disclose going concern uncertainties, which must be evaluated each interim and annual period.  Specifically, the ASU requires management to determine whether substantial doubt exists regarding the entity’s going concern presumption. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable (as defined under ASC 450, Contingencies) that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued or are available to be issued. If substantial doubt exists, certain disclosures are required, the extent of which depends on an evaluation of management’s plans (if any) to mitigate the going concern uncertainty. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, as well as whether it is probable that management's plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. Early application is permitted. In their opinion on our audited financial statements for our fiscal year ended March 31, 2015, our auditors indicated that there was substantial doubt about our ability to continue as a going concern. Although we have not yet adopted ASU 2014-15, as we have indicated in Note 2, Basis of Presentation and Going Concern, we have taken numerous steps that have resulted in the elimination and extinguishment of a substantial portion of our indebtedness and to raise sufficient financing to permit us to continue our operations. Upon our adoption of ASU 2014-15, assuming conditions at such time indicate there is substantial doubt about our ability to continue as a going concern, or that such doubt has been alleviated, we will conform our disclosure to comply with the guidance contained in ASU 2014-15.

Note 4.  Fair Value Measurements

We follow the principles of fair value accounting as they relate to our 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 and classify 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 identical 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.

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 we estimate 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.

 
 
 
-10-

 
We do 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 Platinum Warrants to Platinum between October 2012 and July 2013, and the potential issuance of the Series A Exchange Warrant pursuant to Platinum’s exchange of the Series A Preferred stock that it holds into shares of our common stock, we determined that the Platinum Warrants included certain exercise price adjustment features that required the warrants to be treated as non-cash liabilities and recorded at their estimated fair value. Prior to their amendment in May 2015, as described below, we determined the initial fair value and subsequent fair value measurements 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 included the remaining contractual term of the Platinum Warrants, risk-free interest rates, expected volatility of the price of the underlying common stock, and the probability of a financing transaction or other equity issuance that would trigger a reset in the exercise price of the Platinum Warrants, 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. As described more completely in Note 8, Capital Stock, on May 12, 2015, we entered into an agreement with Platinum pursuant to which we amended the Platinum Warrants to fix the exercise price thereof and eliminate the anti-dilution reset features that had previously required the Platinum Warrants to be treated as liabilities and carried at fair value. As a result of the agreement with Platinum, at May 12, 2015, we adjusted the Platinum Warrants to their fair value, estimated to be $4,903,200, reflecting an increase of $1,894,700 since March 31, 2015, which was recorded as a non-cash charge to other expense, net in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, and subsequently eliminated the warrant liability with respect to the Platinum Warrants, with a corresponding credit to Additional Paid-in Capital.

The fair value hierarchy for the warrant liability which had been measured at fair value on a recurring basis is as follows:
 
 
       
Fair Value Measurements at Reporting Date Using
 
   
Total
Carrying
   
Quoted Prices in
Active Markets for
Identical Assets
   
Significant Other
Observable Inputs
   
Significant
Unobservable
Inputs
 
 
 
Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
June 30, 2015:
                       
 Warrant liability
  $ -     $ -     $ -     $ -  
March 31, 2015:
                               
 Warrant liability
  $ 3,008,500     $ -     $ -     $ 3,008,500  
 
During the three month period ended June 30, 2015, there was no significant change to the valuation models used for purposes of determining the fair value of the Level 3 warrant liability.

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, 2015
  $ 3,008,500  
   Mark to market loss included in net loss
    1,894,700  
   Elimination of liability upon modification of warrants
    (4,903,200 )
Balance at June 30, 2015
  $ -  
         
 
We carried no assets or other liabilities at fair value at June 30, 2015 or March 31, 2015.
 
 
 
 
-11-

 
Note 5.  Prepaid Expenses and Other Current Assets
 
 
Prepaid expenses and other current assets are composed of the following at June 30, 2015 and March 31, 2015:
 
   
June 30,
   
March 31,
 
   
2015
   
2015
 
             
 Insurance
  $ 116,700     $ 27,300  
 Prepaid compensation under financial advisory
               
     and other consulting agreements
    1,350,000       -  
 Legal fees
    3,400       3,400  
 Technology license fees and all other
    3,200       5,000  
                 
    $ 1,473,300     $ 35,700  
 
Note 6.  Accrued Expenses

Accrued expenses are composed of the following at June 30, 2015 and March 31, 2015:

   
June 30,
   
March 31,
 
   
2015
   
2015
 
             
 Accrued professional services
  $ 389,000     $ 213,800  
 Accrued compensation
    990,700       990,700  
 All other
    2,500       2,000  
                 
    $ 1,382,200     $ 1,206,500  
                 

 
 
 
-12-

 
Note 7.  Convertible Promissory Notes and Other Notes Payable
 
The following table summarizes our secured and unsecured convertible promissory notes and other notes payable at June 30, 2015 and March 31, 2015.
 
 
 
June 30, 2015
         
March 31, 2015
       
 
 
Principal
   
Accrued
         
Principal
   
Accrued
       
   
Balance
   
Interest
   
Total
   
Balance
   
Interest
   
Total
 
Senior Secured 10% Convertible Promissory Notes
                                   
    issued to Platinum:
                                   
    Total Senior notes issued between October 11, 2012
                                         
          and July 23, 2013
  $ -     $ -     $ -     $ 3,522,600     $ 919,700     $ 4,442,300  
 less: current portion
    -       -       -       (3,272,600 )     (873,500 )     (4,146,100 )
    Senior notes - non-current portion
  $ -     $ -     $ -     $ 250,000     $ 46,200     $ 296,200  
                                                 
                                                 
                                                 
10% Convertible Promissory Notes (Unit Notes)
                                               
2014 Unit Notes, including amended notes, due 3/31/15
  $ -     $ -     $ -     $ 4,066,900     $ 270,700     $ 4,337,600  
 Note discounts
    -       -       -       (180,000 )     -       (180,000 )
    Net convertible notes (all current)
  $ -     $ -     $ -     $ 3,886,900     $ 270,700     $ 4,157,600  
                                                 
                                                 
Notes Payable to unrelated parties:
                                               
  7.5% Notes payable to service providers for
                                               
accounts payable converted to notes payable:
                                               
     Burr, Pilger, Mayer
  $ -     $ -     $ -     $ 90,400     $ 13,100     $ 103,500  
     Desjardins
    159,800       27,600       187,400       156,300       24,100       180,400  
     McCarthy Tetrault
    -       -       -       319,700       46,000       365,700  
     August 2012 Morrison & Foerster Note A
    918,200       221,100       1,139,300       918,200       193,200       1,111,400  
     August 2012 Morrison & Foerster Note B
    -       -       -       1,379,400       333,100       1,712,500  
     University Health Network
    -       -       -       549,500       101,800       651,300  
      1,078,000       248,700       1,326,700       3,413,500       711,300       4,124,800  
        Note discount
    (136,400 )     -       (136,400 )     (474,500 )     -       (474,500 )
      941,600       248,700       1,190,300       2,939,000       711,300       3,650,300  
 less: current portion (and discount at March 31, 2015)
    (159,800 )     (27,600 )     (187,400 )     (2,939,000 )     (711,300 )     (3,650,300 )
     non-current portion and discount
  $ 781,800     $ 221,100     $ 1,002,900     $ -     $ -     $ -  
                                                 
   5.67%  and 10.25% Notes payable to insurance
                                               
premium financing company (current)
  $ 72,200     $ -     $ 72,200     $ 5,800     $ -     $ 5,800  
                                                 
  10% Notes payable to vendors for accounts
                                               
payable converted to notes payable
  $ 44,400     $ 9,600     $ 54,000     $ 378,300     $ 51,500     $ 429,800  
 less: current portion
    (44,400 )     (9,600 )     (54,000 )     (378,300 )     (51,500 )     (429,800 )
     non-current portion
  $ -     $ -     $ -     $ -     $ -     $ -  
                                                 
  7.0% Note payable (August 2012)
  $ 58,800     $ 8,900     $ 67,700     $ 58,800     $ 7,900     $ 66,700  
 less: current portion
    (23,200 )     (8,900 )     (32,100 )     (23,200 )     (7,900 )     (31,100 )
  7.0% Notes payable - non-current portion
  $ 35,600     $ -     $ 35,600     $ 35,600     $ -     $ 35,600  
                                                 
  Total notes payable to unrelated parties
  $ 1,253,400     $ 267,200     $ 1,520,600     $ 3,381,900     $ 770,700     $ 4,152,600  
 less: current portion
    (299,600 )     (46,100 )     (345,700 )     (3,346,300 )     (770,700 )     (4,117,000 )
     non-current portion (and discount at March 31, 2015)
    953,800       221,100       1,174,900       35,600       -       35,600  
 less: discount (non-current at June 30, 2015)
    (136,400 )     -       (136,400 )     -       -       -  
Net non-current portion
  $ 817,400     $ 221,100     $ 1,038,500     $ 35,600     $ -     $ 35,600  
                                                 
                                                 
Notes payable to related parties:
                                               
  October 2012 7.5% Note to Cato Holding Co.
  $ -     $ -     $ -     $ 293,600     $ 55,900     $ 349,500  
  October 2012 7.5% Note to Cato Research Ltd.
    -       -       -       1,009,000       204,800       1,213,800  
      -       -       -       1,302,600       260,700       1,563,300  
            Note discount
    -       -       -       (54,500 )     -       (54,500 )
     Total notes payable to related parties
    -       -       -       1,248,100       260,700       1,508,800  
 less: current portion
    -       -       -       (1,248,100 )     (260,700 )     (1,508,800 )
    non-current portion and discount
  $ -     $ -     $ -     $ -     $ -     $ -  

 
 
 
-13-

 
Between March 31, 2015 and June 30, 2015, we have eliminated the outstanding balances of approximately $15.4 million of promissory notes, other debt, and certain adjustments thereto, that were either already due and payable or would have otherwise matured prior to March 31, 2016, by converting such balances into shares of our Series B Preferred stock. Significant changes in and conversions of our convertible promissory notes and other promissory notes since March 31, 2015 are described below.

10% Convertible Notes Issued in Connection with 2014 Unit Private Placement

As described more completely in the section entitled 2014 Unit Private Placement in Note 8, Capital Stock, between April 1, 2015 and May 14, 2015, we issued to accredited investors in self-placed private placement transactions 10% convertible notes (the 2014 Unit Notes) in the aggregate face amount of $280,000. The 2014 Unit Notes issued in April and May 2015 represented a continuation of the 2014 Unit Private Placement pursuant to which we had issued an aggregate of $3,113,500 principal amount of substantially similar notes between late-March 2014 and March 31, 2015. The 2014 Unit Notes matured between April 30, 2015 and May 15, 2015 (Maturity) and the outstanding principal of the 2014 Unit Notes and their related accrued interest (the Outstanding Balance) was convertible into shares of our common stock at a conversion price of $10.00 per share at or prior to Maturity, at the option of the investor. In addition, upon our consummation of either (i) an equity or equity-based public financing registered with the SEC, or (ii) an equity or equity-based private placement, or series of private placements, not registered with the SEC, in either case resulting in gross cash proceeds to us of at least $10.0 million prior to Maturity (a Qualified Financing), the Outstanding Balance of the 2014 Unit Notes would automatically convert into securities substantially similar to those sold in the Qualified Financing, based on the following formula: (the Outstanding Balance as of the closing of the Qualified Financing) x 1.25 / (the per security price of the securities sold in the Qualified Financing).

We allocated the proceeds from the sale of the units to the 2014 Unit Notes, the common stock and the warrants comprising the units based on the relative fair value of the individual securities in the unit on the date of the unit sale. Based on the short-duration of the 2014 Unit Notes and their other terms, we determined that the fair value of the 2014 Unit Notes at the date of issuance was equal to their face value. Accordingly, we recorded an initial discount attributable to each 2014 Unit Note for an amount representing the difference between the face value of the 2014 Unit Note and its allocated relative value. Additionally, the 2014 Unit Notes contained an embedded conversion feature having intrinsic value at the issuance date, which value we treated as an additional discount attributable to those 2014 Unit Notes, subject to limitations on the absolute amount of discount attributable to each 2014 Unit Note. We recorded a corresponding credit to additional paid-in capital, an equity account, attributable to the beneficial conversion feature. We amortized the discounts attributable to the 2014 Unit Notes issued in April and May 2015, an aggregate of $277,200, using the effective interest method over the respective term of each 2014 Unit Note. Because the discount on each of these 2014 Unit Notes represented 99% of its initial face value, and because we were required to amortize such discount over the period from issuance to maturity, which was no more than two months for these notes, the calculated effective interest rate is extremely high. Based on the amounts of their respective discounts and the term between issuance and maturity, the effective interest rates attributable to the 2014 Unit Notes issued in April and May 2015 are in excess of 10,000%.

Conversion of Senior Secured 10% Convertible Promissory Notes issued to Platinum into Series B Preferred

As described more completely in Note 8, Capital Stock, effective on May 12, 2015, we entered in to an agreement with Platinum (Platinum Agreement) pursuant to which Platinum agreed, among other things, to convert the $4,489,300 outstanding balance (principal and accrued interest) of the Senior Notes having maturity dates between October 2015 and July 2016 into 641,335 shares of our Series B Preferred. We determined that the conversion of the Senior Notes into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the Senior Note conversion was equal to the market value of a share of our common stock on the Senior Note conversion date. Based on the $10.00 per share fair value of the Series B Preferred at the date the Senior Notes were converted, we issued Series B Preferred having an aggregate fair value of $6,413,300 and recognized a non-cash loss on extinguishment of debt of $1,924,000 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

 
 
 
-14-


Conversion of 2014 Unit Notes into Series B Preferred

Pursuant to the Platinum Agreement, Platinum also agreed to convert the $1,345,700 outstanding balance of the 2014 Unit Notes originally issued by us to Platinum that had matured on March 31, 2015 (Platinum Unit Notes) into shares of our Series B Preferred. Platinum additionally agreed to acquire and convert into our Series B Preferred other 2014 Unit Notes that had matured on March 31, 2015 originally issued to other investors having an aggregate outstanding balance of $1,487,900 (Acquired Unit Notes). Further, effective May 20, 2015, the holders of other 2014 Unit Notes that had matured on March 31, 2015 or shortly thereafter having an aggregate outstanding balance of $1,831,200 (Investor Unit Notes) individually agreed to convert such notes into our Series B Preferred. Consequently, the outstanding balance of all 2014 Unit Notes, including those issued in April and May 2015, totaling $4,664,800, was converted into shares of our Series B Preferred. We determined that the Series B Preferred Unit Offering, as described in Note 8, Capital Stock, would be treated as a Qualified Financing applicable to the 2014 Unit Notes, entitling the 2014 Unit Note holders at the time of conversion to the 25% Qualified Financing conversion premium under the terms of the 2014 Unit Notes.  Accordingly, we issued in a self-placed private placement transaction an aggregate of 833,020 shares of our Series B Preferred and warrants to purchase an aggregate of 833,020 shares of our common stock upon the conversion of the outstanding balance of all 2014 Unit Notes, including an aggregate conversion premium of $1,166,200.

We determined that the conversion of the 2014 Unit Notes into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the 2014 Unit Note conversions was equal to the market value of a share of our common stock on the 2014 Unit Note conversion dates. Based on the $10.00 per share fair value of the Series B Preferred at the date the Platinum Unit Notes and Acquired Unit Notes were converted and the $8.00 per share fair value of the Series B Preferred at the date the Investor Unit Notes were converted, we issued in a self-placed private placement transaction Series B Preferred having an aggregate fair value of $7,676,200 upon the conversions. We valued the warrants issued in connection with the 2014 Unit Note conversions at an aggregate of $5,168,400 using the Black Scholes option pricing model and the following assumptions:

Assumption:
 
Platinum Unit Notes and Acquired Unit Notes
   
Investor Unit Notes
 
Market price per share at conversion date
 
$
10.00
   
$
8.00
 
Exercise price per share
 
$
7.00
   
$
7.00
 
Risk-free interest rate
   
1.58
     
1.57
 
Contractual term in years
   
5.00
     
5.00
 
Volatility
   
76.5%
     
75.7%
 
Dividend rate
   
0.0%
     
0.0%
 
Warrant shares
   
506,004
     
327,016
 
                 
Fair Value per share
 
$
6.89
   
$
5.15
 

Nearly all of the 2014 Unit Notes contained a beneficial conversion feature at the time they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time of the extinguishment and conversion, an aggregate of $2,237,100, as a reduction to the loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss, with a corresponding reduction to additional paid-in capital. In aggregate, we recognized a non-cash loss on extinguishment attributable to the conversion of the 2014 Unit Notes in the amount of $5,942,700 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Promissory Note issued to University Health Network into Series B Preferred

On May 29, 2015, University Health Network (UHN) agreed to convert the entire $656,400 outstanding balance (principal and accrued interest) of our promissory note maturing on March 31, 2016 into 93,775 shares of our Series B Preferred. We determined that the conversion of the UHN note into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the UHN note conversion was equal to the market value of a share of our common stock on the UHN note conversion date. Based on the $10.00 per share fair value of the Series B Preferred at the date the UHN note was converted, we issued Series B Preferred having an aggregate fair value of $937,800 and, after eliminating the remaining $27,500 of unamortized discount on the UHN note, we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the UHN Note of $308,900 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

 
 
 
-15-

 
Conversion of Promissory Notes and Accounts Payable issued to Cato Holding Company (CHC) and Cato Research Ltd. (CRL) into Series B Preferred

On June 10, 2015, CHC, the parent company of CRL and a related party, agreed to convert the entire aggregate outstanding balance (principal and accrued interest) of $1,583,000 of our outstanding promissory notes issued to CHC and CRL and maturing on March 31, 2016 (together, the Cato Notes), plus an additional $171,300 of past due accounts payable to CRL and a strategic adjustment thereto (CRL Payables) into a total of 328,571 shares of our Series B Preferred. We determined that the conversion of the Cato Notes and the CRL Payables into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the Cato Notes and CRL Payables conversions was equal to the market value of a share of our common stock on the conversion date. Based on the $10.00 per share fair value of the Series B Preferred at the date the Cato Notes and CRL Payables were converted, we issued Series B Preferred having an aggregate fair value of $3,285,700. As additional consideration for the conversion of the Cato Notes and the CRL Payables, we amended certain outstanding warrants held by CHC and CRL to purchase 12,500 and 60,691 restricted shares of our common stock, respectively, to reduce the exercise price thereof from $30.00 and $20.00 per share, respectively, to $7.00 per share. We calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $222,700. 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 at modification date
 
$
10.00
   
$
10.00
 
Exercise price per share
 
$
20.00 and $30.00
   
$
7.00
 
Risk-free interest rate
   
0.87%
     
0.87%
 
Contractual term in years
   
2.31
     
2.31
 
Volatility
   
73.9%
     
73.9%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
2.44 and $1.57
   
$
5.33
 

After eliminating the remaining unamortized discount of $46,000 attributable to the Cato Notes, we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the Cato Notes and CRL Payables of $1,800,100 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Promissory Note B issued to Morrison & Foerster into Series B Preferred

On June 12, 2015, Morrison & Foerster (M&F) agreed to convert the entire aggregate outstanding balance (principal and accrued interest) of $1,735,500 of our August 2012 promissory Note B maturing on March 31, 2016 (M&F Note B) plus an agreed strategic adjustment thereto into a total of 257,143 shares of our Series B Preferred. We determined that the conversion of M&F Note B into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the M&F Note B conversion was equal to the market value of a share of our common stock on the conversion date. Based on the $10.00 per share fair value of the Series B Preferred at the date M&F Note B was converted, we issued Series B Preferred having an aggregate fair value of $2,571,400. As additional consideration for the conversion of M&F Note B, we amended two outstanding warrants held by M&F to purchase an aggregate of 110,448 restricted shares of our common stock to reduce the exercise price of one of the warrants from $40.00 per share to $20.00 per share and to extend the term of both warrants from September 15, 2017 to September 15, 2019. We calculated the fair value of the warrants immediately before and after the modifications and determined that the fair value of the warrants increased by $244,200. The warrants subject to the exercise price and term modifications 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
 
$
10.00
   
$
10.00
 
Exercise price per share
 
$
20.00 and $40.00
   
$
20.00
 
Risk-free interest rate
   
0.86%
     
1.57%
 
Contractual term in years
   
2.27
     
4.27
 
Volatility
   
73.8%
     
76.7%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
2.39 and $1.04
   
$
4.35
 

 
 
 
-16-

 
After eliminating the remaining unamortized discount of $225,500 attributable to M&F Note B, we recognized a non-cash loss on extinguishment of debt attributable to the conversion of M&F Note B of $1,305,600 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

In addition to its agreement to convert M&F Note B into Series B Preferred, M&F also agreed to withhold, through the later of (i) December 31, 2016 or (ii) our consummation of a registered public offering or a strategic transaction involving AV-101 in which, in either case, we receive gross proceeds of at least $20.0 million, any and all action to collect amounts due under our past due August 2012 promissory Note A and certain past due amounts owed by us to M&F in connection with professional services previously rendered by M&F.  See Note 10, Subsequent Events, regarding extinguishment of the August 2012 promissory Note A after June 30, 2015.

Conversion of Promissory Note issued to McCarthy Tetrault into Series B Preferred

On June 18, 2015, McCarthy Tetrault (McCarthy) agreed to convert the entire $379,600 outstanding balance (principal and accrued interest) of our past due promissory note issued in May 2011 plus an additional $2,100 of past due accounts payable (together, the McCarthy Note) into 59,230 shares of our Series B Preferred. We determined that the conversion of the McCarthy Note into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the McCarthy Note conversion was equal to the market value of a share of our common stock on the McCarthy Note conversion date. Based on the $14.00 per share fair value of the Series B Preferred at the date the McCarthy Note was converted, we issued Series B Preferred having an aggregate fair value of $829,200 and we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the McCarthy Note of $447,500 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Promissory Note issued to Burr Pilger & Mayer into Series B Preferred

On June 24, 2015, Burr Pilger & Mayer agreed to convert the entire $105,200 outstanding balance (principal and accrued interest) of our past due promissory note issued in May 2011 plus an additional $17,900 of past due accounts payable (together, the Burr Note) into 21,429 shares of our Series B Preferred. We determined that the conversion of the Burr Note into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the Burr Note conversion was equal to the market value of a share of our common stock on the Burr Note conversion date. Based on the $16.50 per share fair value of the Series B Preferred at the date the Burr Note was converted, we issued Series B Preferred having an aggregate fair value of $353,600 and we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the Burr Note of $230,500 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Promissory Note Issued to Icahn School of Medicine at Mount Sinai into Series B Preferred

On June 26, 2015, Icahn School of Medicine at Mount Sinai (ISMMS) agreed to convert the entire $270,400 outstanding balance (principal and accrued interest) of our past due April 2014 promissory note into a total of 40,000 shares of our Series B Preferred. We determined that the conversion of the ISMMS note into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the ISMMS note conversion was equal to the market value of a share of our common stock on the conversion date. Based on the $16.00 per share fair value of the Series B Preferred at the date the ISMMS note was converted, we issued Series B Preferred having an aggregate fair value of $640,000. As additional consideration for the conversion of the ISMMS note, we amended an outstanding warrant held by ISMMS to purchase 15,000 restricted shares of our common stock to reduce the exercise price from $10.00 per share to $7.00 per share. We calculated the fair value of the warrant immediately before and after the modification and determined that the fair value of the warrant increased by $16,600. The warrant subject to the exercise price modification was valued using the Black-Scholes Option Pricing Model and the following assumptions:

Assumption:
 
Pre-modification
   
Post-modification
 
Market price per share at modification date
 
$
16.00
   
$
16.00
 
Exercise price per share
 
$
10.00
   
$
7.00
 
Risk-free interest rate
   
1.34%
     
1.34%
 
Contractual term in years
   
3.76
     
3.76
 
Volatility
   
76.3%
     
76.3%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Weighted Average Fair Value per share
 
$
10.48
   
$
11.60
 

 
 
 
-17-

 
We recognized a non-cash loss on extinguishment of debt attributable to the conversion of ISMMS note of $386,200 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Promissory Note issued to National Jewish Health into Series B Preferred

On June 29, 2015, National Jewish Health (NJH) agreed to convert the entire $115,000 outstanding balance (principal and accrued interest) of our past due promissory note into 17,857 shares of our Series B Preferred. We determined that the conversion of the NJH note into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the NJH note conversion was equal to the market value of a share of our common stock on the NJH note conversion date. Based on the $15.00 per share fair value of the Series B Preferred at the date the NJH note was converted, we issued Series B Preferred having an aggregate fair value of $267,900 and we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the NJH note of $152,900 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Conversion of Accounts Payable to Professional Services Provider into Series B Preferred

On June 8, 2015, one of our professional service providers agreed to convert the entire $432,500 past due balance for prior services (Service Provider Payables) into 71,429 shares of our Series B Preferred. We determined that the conversion of the Service Provider Payables balance into Series B Preferred should be accounted for as an extinguishment of debt. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we also determined that the fair value of a share of Series B Preferred issued pursuant to the Service Provider Payables conversion was equal to the market value of a share of our common stock on the Service Provider Payables conversion date. Based on the $10.00 per share fair value of the Series B Preferred at the date the Service Provider Payables were converted, we issued Series B Preferred having an aggregate fair value of $714,300 and we recognized a non-cash loss on extinguishment of debt attributable to the conversion of the Service Provider Payables $281,800 in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

See Note 10, Subsequent Events, for disclosure of additional notes and payables converted into Series B Preferred after June 30, 2015.

Note 8.  Capital Stock

2014 Unit Private Placement

Between April 1, 2015 and May 14, 2015, we entered into securities purchase agreements with accredited investors  pursuant to which we sold to such accredited investors, in self-placed private placement transactions, Units, for aggregate cash proceeds of $280,000, consisting of (i) 10% convertible notes in the aggregate face amount of $280,000 due between April 30, 2015 and May 15, 2015 or automatically convertible into securities issuable upon our consummation of a Qualified Financing, as defined in the note (ii) an aggregate of 33,000 restricted shares of our common stock; and (iii) warrants exercisable through December 31, 2016 to purchase an aggregate of 24,250 restricted shares of our common stock at an exercise price of $10.00 per share.

We allocated the proceeds from the private sales of the 2014 Units to the various securities based on their relative fair values on the dates of the sales. As described in Note 8, Convertible Promissory Notes and Other Notes Payable, based on the short-term nature of the Unit Notes, we determined that fair value of the 2014 Unit Notes was equal to their face value. We determined the fair value of the 2014 Unit Stock based on the quoted market price of our common stock on the date of the 2014 Unit sale. We calculated the fair value of the 2014 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 2014 Unit sales proceeds based on the relative fair values of the 2014 Unit Stock, 2014 Unit Warrants and 2014 Unit Notes as of their respective 2014 Unit sales dates.

 Unit Warrants
   
Weighted Average Issuance Date Valuation Assumptions
 
Per Share
Fair
Aggregate
Fair Value
 
Aggregate
Proceeds
Aggregate Allocation of Proceeds
Based on Relative Fair Value of:
Warrant
       
Risk free
       
Shares
 
Market
Exercise
Term
Interest
 
Dividend
 
Value of
of Unit
 
of Unit
Unit
Unit   Unit
Issued
 
Price
Price
(Years)
Rate
Volatility
Rate
 
Warrant
Warrants
 
Sales
Stock
Warrant
Note
                               
    24,250
 
 $   10.00
 $   10.00
       1.70
0.45%
73.19%
0.00%
 
 $     3.69
 $  89,600
 
 $ 280,000
 $  128,900
 $ 32,900
 $ 118,200
                               

 
 
 
-18-

 
Between late March 2014 and May 14, 2015, in self-placed private placement transactions, we entered into securities purchase agreements with accredited investors for the 2014 Unit Private Placement pursuant to which we sold Units to such accredited investors for aggregate cash proceeds of $3,393,500, consisting of (i) 10% convertible notes in the aggregate face amount of $3,393,500 due between March 31, 2015 and May 15, 2015 or automatically convertible into securities issuable upon our consummation of a Qualified Financing, as defined in the note (ii) an aggregate of 315,850 restricted shares of our common stock; and (iii) warrants exercisable through December 31, 2016 to purchase an aggregate of 307,100 restricted shares of our common stock at an exercise price of $10.00 per share.

Creation of Series B Preferred Stock
 
On May 7, 2015, we filed a Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Preferred Stock of VistaGen Therapeutics, Inc. (Certificate of Designation) with the Nevada Secretary of State to designate 4.0 million shares of our authorized preferred stock as Series B 10% Convertible Preferred Stock (Series B Preferred).
 
Each share of Series B Preferred is convertible, at the option of the holder (Voluntary Conversion), into one (1) share of our common stock at a fixed conversion price of $7.00 per share (Conversion Price). The Conversion Price is subject to adjustment, but only for customary stock dividends, reclassifications, splits and similar transactions set forth in the Certificate of Designation. All outstanding shares of Series B Preferred are also convertible automatically into shares of our common stock (Automatic Conversion) upon the closing or effective date of any of the following transactions or events: (i) a strategic transaction involving AV-101 with an initial up-front cash payment to us of at least $10.0 million; (ii) a registered public offering of our common stock with aggregate gross proceeds to us of at least $10.0 million; or (iii) for 20 consecutive trading days, our common stock trades at least 20,000 shares per day with a daily closing price of at least $12.00 per share; provided, however, that Automatic Conversion and Voluntary Conversion (collectively, Conversion) are subject to certain beneficial ownership blockers as set forth in the Certificate of Designation and/or securities purchase agreements.
 
Prior to Conversion, shares of Series B Preferred will accrue dividends, payable only in unregistered shares of our common stock, at a rate of 10% per annum (Accrued Dividends).  The Accrued Dividends will be payable on the date of either a Voluntary Conversion or Automatic Conversion solely in that number of shares of common stock equal to the Accrued Dividends, divided by the Conversion Price. At June 30, 2015, we have recognized a liability in the amount of $213,300 for Accrued Dividends in the accompanying Condensed Consolidated Balance Sheet at June 30, 2015, based on the Series B Preferred issued and outstanding through the quarter ended June 30, 2015. This amount is also recognized in arriving at net loss attributable to common stockholders in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended June 30, 2015.  The liquidation value of the Series B Preferred at June 30, 2015 is approximately $21,182,300.

 
 
 
-19-

 
Agreement with Platinum
 
On May 5, 2015, we entered into an Agreement with Platinum, which, as modified by an Acknowledgement and Agreement, became effective on May 12, 2015 (Platinum Agreement) and pursuant to which Platinum:

·     Converted all of the approximately $4.5 million outstanding balance (principal and accrued but unpaid interest) of the Senior Notes we issued to Platinum into 641,335 shares of Series B Preferred, as described previously in Note 7, Convertible Promissory Notes and Other Notes Payable; and

·     Released all of its security interests in our assets and those of our subsidiaries by terminating the Amended and Restated Security Agreement, IP Security Agreement and Negative Covenant, each dated October 11, 2012 between us and Platinum; and

·     Converted all of the approximately $1.3 million outstanding balance (principal and accrued but unpaid interest) of the 2014 Unit Notes that we issued to Platinum into 240,305 shares of Series B Preferred and five-year warrants to purchase 240,305 shares of our common stock at a fixed exercise price of $7.00 per share (Series B Warrants), as described previously in Note 7, Convertible Promissory Notes and Other Notes Payable; and

·     Purchased approximately $1.5 million (including accrued but unpaid interest thereon) of outstanding 2014 Unit Notes we issued to various investors from the respective holders thereof (Acquired Unit Notes) and converted the entire outstanding balance of the Acquired Unit Notes into 265,699 shares of Series B Preferred and Series B Warrants to purchase 265,699 shares of our common stock, as described previously in Note 7, Convertible Promissory Notes and Other Notes Payable; and;

·     Entered into a Securities Purchase Agreement (SPA) to purchase, for $1.0 million, a total of 142,857 shares of Series B Preferred and a Series B Warrant to purchase 142,857 shares of our common stock, on or before June 11, 2015 ($100,000 of which purchase was completed on June 19, 2015 and pursuant to which we issued 14,286 shares of Series B Preferred and a Series B Warrant to purchase 14,286 shares of our common stock.) See Note 10, Subsequent Events, for disclosure regarding Platinum’s consummation of the remainder of this $1.0 million commitment and an agreement for $3.0 million of additional purchases of Series B Preferred and Series B Warrants under the SPA; and
 
·     Amended the Platinum Warrants previously issued by us to Platinum in connection with the Senior Notes and the Series A Exchange Warrant to fix the exercise price thereof, eliminate the exercise price reset features and fix the number of shares of our common stock issuable thereunder, and eliminate the cashless exercise provisions from the Platinum Warrants and the Series A Exchange Warrant; and

·     Agreed to refrain from the sale of any shares of our common stock held by Platinum or its affiliates until the earlier to occur of an effective registration statement relating to resale of certain specified shares of common stock under the Securities Act of 1933, as amended, or the closing price of our common stock is at least $15.00 per share.
 
As additional consideration for the several agreements of Platinum under the Platinum Agreement, we issued to Platinum 400,000 shares of Series B Preferred (Additional Consideration Shares) and Series B Warrants (Additional Consideration Warrants) to purchase 1.2 million shares of our common stock, and exchanged 30,000 shares of our common stock then beneficially owned or controlled by Platinum for 30,000 shares of Series B Preferred. Considering the exchangeability of the Series B Preferred into our common stock, the dividend applicable to the Series B Preferred prior to such exchange and other factors, we determined that the fair value of a share of Series B Preferred issued to Platinum pursuant to the Platinum Agreement was equal to the market value of a share of our common stock on the effective date of the Platinum Agreement. Based on the $10.00 per share fair value of the Series B Preferred at the May 12, 2015 effective date of the Platinum Agreement, we issued Additional Consideration Shares having an aggregate fair value of $4.0 million to Platinum. We valued the Additional Consideration Warrants at an aggregate of $8,270,900 using the Black Scholes option pricing model and the same assumptions used in valuing the Series B Warrants issued to Platinum in connection with the conversion of the Platinum Unit Notes and the Acquired Unit Notes, as described previously in Note 7, Convertible Promissory Notes and Other Notes Payable. We recognized the aggregate fair value of the Additional Consideration Shares and Additional Consideration Warrants as a non-cash component of loss on debt extinguishment in the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

 
 
 
-20-

 
Series B Preferred Unit Offering
 
Between May 26, 2015 and June 30, 2015, in self-placed private placement transactions, we sold to accredited investors an aggregate of $607,500 of units in our Series B Preferred Unit offering, which units consist of Series B Preferred and Series B Warrants (together Series B Preferred Units), including $100,000 to Platinum.  We issued 86,790 shares of Series B Preferred and Series B Warrants to purchase 86,790 shares of our common stock.  Through June 30, 2015, we received an aggregate of $607,500 in cash proceeds from our self-placed private placement and sale of the Series B Preferred Units.

We allocated the proceeds from the sale of the Series B Preferred Units to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. As described in Note 7, Convertible Promissory Notes and Other Notes Payable, we determined that the fair value of a share of Series B Preferred was equal to the quoted market value of a share of our common stock on the date of a Series B Preferred Unit sale. We calculated the fair value of the Series B 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 Series B Preferred Unit sales proceeds based on the relative fair values of the Series B Preferred and the Series B Warrants as of their respective Series B Preferred Unit sales dates.  The difference between the relative fair value per share of the Series B Preferred, approximately $4.05 per share, and its Conversion Price (or stated value) of $7.00 per share represents a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we have recognized a deemed dividend in the aggregate amount of $256,200 in arriving at net loss attributable to common stockholders in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended June 30, 2015.

 Series B Warrants
     
   
Weighted Average Issuance Date Valuation Assumptions
         
Aggregate Allocation of Proceeds
Based on Relative Fair Value of:
Series B
Warrant
       
Risk free
     
Per Share
Fair
Aggregate
Fair Value
 
Aggregate
Proceeds
Shares
 
Market
Exercise
Term
Interest
 
Dividend
 
Value of
of Unit
 
of Unit
Series B
Series B
Issued
 
Price
Price
(Years)
Rate
Volatility
Rate
 
Warrant
Warrants
 
Sales
Preferred
Warrants
                             
    86,790
 
 $   13.22
 $     7.00
       5.00
1.65%
76.22%
0.00%
 
 $     9.77
 $   848,000
 
 $ 607,500
 $         351,100
 $          256,400
 
See Note 10, Subsequent Events, for disclosure regarding additional sales of Series B Preferred Units after June 30, 2015.

Issuance of Securities to Professional Service Providers

In June 2015, we issued in a private placement 25,000 shares of our Series B Preferred having a fair value of $250,000 as compensation for legal services related to our debt restructuring and other corporate finance matters.  Effective on June 30, 2015, we issued an aggregate of 90,000 shares of our Series B Preferred having an aggregate value of $1,350,000 as compensation for financial advisory and corporate development service contracts with two independent contractors for services to be performed through June 30, 2016. The value of the Series B Preferred grants is recorded as a prepaid expense in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015 and will be expensed ratably over the twelve months ending June 30, 2016.  During the quarter ended June 30, 2015, we also issued an aggregate of 50,000 shares of our common stock having an aggregate value of $500,000 as compensation under two corporate development service contracts. The value of the common stock grants has been expensed as a component of general and administrative expense in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended June 30, 2015.

Modification of Warrants

In addition to warrants modified in connection with conversions of certain of our outstanding promissory notes into Series B Preferred as described earlier in Note 7, Convertible Promissory Notes and Other Notes Payable; on June 10, 2015, we modified certain other outstanding warrants to purchase an aggregate of 54,576 shares of our common stock to reduce their exercise price. We calculated the fair value of the modified warrants immediately before and after the modifications and determined that the fair value of the warrants increased by an aggregate of $122,300, which we recognized as a component of general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the quarter ended June 30, 2015, with a corresponding credit to additional paid-in capital. 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
 
$
10.00
   
$
10.00
 
Exercise price per share (weighted average)
 
$
30.23
   
$
11.92
 
Risk-free interest rate (weighted average)
   
0.83%
     
0.83%
 
Remaining contractual term in years (weighted average)
   
2.26
     
2.26
 
Volatility (weighted average)
   
73.7%
     
73.7%
 
Dividend rate
   
0.0%
     
0.0%
 
                 
Fair Value per share (weighted average)
 
$
1.55
   
$
3.79
 

 
 
 
-21-

 
Warrants Outstanding

Following the Series B Warrant issuances and other modifications described above, at June 30, 2015, we had outstanding warrants to purchase shares of our unregistered common stock at a weighted average exercise price of $8.58 per share as follows:
 
Exercise Price
 
Expiration
 
Shares Subject to Purchase at
per Share
 
Date
 
June 30, 2015
         
$7.00
 
9/30/2017 to 6/30/2020
              2,459,618
$10.00
 
1/31/2016 to 1/11/2020
 
                 931,468
$12.80
 
3/3/2023
 
                 147,000
$15.00
 
1/31/2016 to 3/4/2018
 
                   75,389
$20.00
 
7/30/2016 to 9/15/2019
 
                 115,448
$30.00
 
2/13/2016 to 11/20/2017
 
                     6,100
         
       
              3,735,023
 
Note 9.  Related Party Transactions

Cato Holding Company, doing business as Cato BioVentures (CBV), the parent of Cato Research Ltd. (CRL), is one the largest institutional holders of our common stock at June 30, 2015. In October 2012, we issued a 7.5% promissory note (CHC Note) and a warrant (CHC Warrant) to CHC in settlement of prior indebtedness. As disclosed in Note 7, Convertible Promissory Notes and Other Notes Payable, during June 2015, the outstanding balance of the CHC Note was converted into shares of our Series B Preferred and we reduced the exercise price of the CHC Warrant from $30.00 per share to $7.00 per share. Total interest expense, including amortization of note discount, on the CHC Note was $4,700 and $7,600 in the three month periods ended June 30, 2015 and 2014, respectively.

During fiscal year 2007, we entered into a contract research, development and regulatory service arrangement with CRL, a contract research organization (CRO), related to the development of AV-101, our orally available small molecule prodrug candidate currently in Phase 2 clinical development for Major Depressive Disorder, and subsequent other projects under which we incurred expenses of $11,200 and $7,500 in the three month periods ended June 30, 2015 and 2014, respectively.

In October 2012, we issued to CRL (i) a 7.5% promissory note (CRL Note) as payment in full for all contract research, development and regulatory services and advice (CRO Services) rendered by CRL to us through December 31, 2012 with respect to the preclinical and clinical development of AV-101, and (ii) a warrant (CRL Warrant). As disclosed in Note 7, Convertible Promissory Notes and Other Notes Payable, during June 2015, the entire outstanding balance of the CRL Note and all other outstanding amounts owed to CRL for CRO services were converted into shares of our Series B Preferred and we reduced the exercise price of the CRL Warrant from $20.00 per share to $7.00 per share. Total interest expense, including amortization of the note discount, on the CRL Note was $23,500 and $36,800 for the three month periods ended June 30, 2015 and 2014, respectively.

Note 10.  Subsequent Events

Series B Preferred Unit Offering

Between July 1, 2015 and August 11, 2015, in our self-placed private placement of Series B Preferred Units, we entered into securities purchase agreements with accredited investors pursuant to which we sold to such investors Series B Preferred Units consisting of (i) an aggregate of 206,472 shares of our Series B Preferred, including 128,574 Series B Preferred shares to Platinum; and (iii) Series B Warrants to purchase an aggregate of 206,472 shares of our common stock at an exercise price of $7.00 per share, including Series B Warrants to purchase 128,574 shares of our common stock issued to Platinum. We received cash proceeds of $1,445,300 from the private placement and sale of the Series B Preferred Units, including $900,000 from Platinum.

On August 3, 2015, we entered into an agreement with Platinum pursuant to which Platinum has agreed to purchase an additional $3.0 million of our Series B Preferred Units between August 15, 2015 and October 15, 2015 and would receive an aggregate of 458,571 shares of Series B Preferred and Series B Warrants to purchase 458,571 shares of our common stock.
 
Promissory Notes and Accounts Payable Converted into Series B Preferred

Between July 1, 2015 and August 12, 2015, the entire outstanding balance (principal plus accrued interest) of our outstanding promissory note payable to Desjardins Securities, our promissory note and accounts payable due to MicroConstants, our promissory Note A and accounts payable to Morrison & Foerster, and certain other amounts due to technology licensors, professional service providers and others, in the aggregate amount of $1,678,400 were extinguished and converted into an aggregate of 255,128 shares of Series B Preferred.

 
 
 
-22-

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

Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q includes forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q includes forward-looking statements. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward- looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements. We have based these forward- looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Our business is subject to significant risks including, but not limited to, our ability to obtain 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, 2015 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.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 
Business Overview

The World Health Organization estimates that 350 million people worldwide are affected by depression. According to the U.S. National Institutes of Health (NIH), major depression is one of the most common mental disorders in the U.S. In 2012, the NIH estimated 16 million adults aged 18 or older in the U.S. had at least one major depressive episode. This represented 6.9 percent of all U.S. adults. According to the U.S. Centers for Disease Control and Prevention (CDC), one in ten Americans take an antidepressant medication. Unfortunately, approximately two-thirds of depression sufferers do not benefit from the first round treatment of currently approved antidepressant agents, including selective serotonin reuptake inhibitors (SSRIs) and serotonin-norepinephrine reuptake inhibitors (SNRIs). And, even when they do relieve depressive symptoms and induce remission of a major depressive episode, because of their mechanism of action, SSRIs and SNRIs take many weeks to achieve those therapeutic benefits. During the multiple-week lag before onset of therapeutic benefits, risks of side effects, including suicidal thoughts and behaviors, may be considerable. Ultimately, after as many as four treatment cycles involving several different antidepressant medications, approximately two-thirds of patients may find an antidepressant drug or drug combination that induces remission of depressive symptoms. This trial and error period to find an effective antidepressant medication can take many months to more than a year to achieve, with an increasing rate of potentially significant side effect risks with each successive treatment attempt.

 
 
 
-23-

 
Our lead product candidate, AV-101, is an orally available small molecule prodrug in Phase 2 clinical development for Major Depressive Disorder (MDD). AV-101’s mechanism of action (MOA), as an N-methyl-D-aspartate receptor (NMDAR) antagonist binding selectively at the glycine-binding (GlyB) co-agonist site of the NMDAR, is fundamentally different from all antidepressants approved by the U.S. Food and Drug Administration (“FDA”). In four preclinical studies utilizing well-validated animal models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant antidepressant-like responses, following a single treatment, which were equivalent to responses seen with a control single sub-anesthetic dose of ketamine (an FDA-approved drug sometimes used by clinicians off-label to treat suicidal behavior).  In the same preclinical studies, fluoxetine (Prozac) did not induce rapid onset antidepressant-like responses.  Preclinical studies also support the hypothesis that AV-101 has the potential to treat several additional CNS disorders, including chronic neuropathic pain, epilepsy and neurodegenerative diseases, such as Parkinson’s disease and Huntington’s disease, where modulation of the NMDAR may have therapeutic benefit.
 
Following two successful randomized, double-blind, placebo-controlled Phase 1 safety studies funded by the NIH, in February 2015, we entered into a Cooperative Research and Development Agreement (CRADA) with the U.S. National Institute of Mental Health (NIMH), part of the NIH. Under the CRADA, we are collaborating with the NIMH on the initial Phase 2 clinical efficacy study of AV-101 in subjects with treatment-resistant MDD. Pursuant to the CRADA, the study will be conducted at the NIMH and be fully funded by the NIMH. It is contemplated that this clinical study will begin in the second half of 2015 under the direction of Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders.
 
In addition to developing AV-101 for MDD and other CNS indications, we are applying our stem cell technology for drug rescue to identify and develop proprietary new chemical entities (NCEs) for our internal drug candidate pipeline and selected regenerative medicine opportunities.  Drug rescue involves (1) using our customized in vitro bioassay systems to predict potential heart and liver toxicity of NCEs, (2) leveraging prior investments by pharmaceutical companies and others related to screening large-scale compound libraries, optimizing and testing for efficacy NCEs that were terminated before FDA approval due to heart or liver toxicity and are now available in the public domain, and (3) applying medicinal chemistry to produce safer proprietary NCEs for our internal development pipeline. Our CardioSafe 3D™ bioassay system uses our human pluripotent stem cell (hPSC)-derived cardiomyocytes, or human heart cells.  We believe CardioSafe 3D is more comprehensive and clinically predictive than the hERG assay, which is currently the only in vitro cardiac safety assay required by FDA guidelines. We use our hPSC-derived hepatocytes, or human liver cells, in our LiverSafe 3D™ bioassay system to predict potential liver toxicity of NCEs, including potential drug metabolism issues and adverse drug-drug interactions. CardioSafe 3D and LiverSafe 3D offer a new paradigm for evaluating and predicting potential heart and liver toxicity of NCEs, including drug rescue NCEs, early in the development process, long before costly, high risk animal studies and human clinical trials.  We intend to develop internally for our pipeline each lead drug rescue NCEs we produce. Our focus in regenerative medicine is on innovative therapeutic opportunities involving blood, cartilage, heart and liver cells. 

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, 2015, as filed with the SEC on June 29, 2015, 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

Net Loss

We have not yet achieved revenue-generating status from any of our potential products. Since inception, we have devoted substantially all of our time and efforts to development of AV-101 through its Phase 1 clinical trials and preparation for its initial Phase 2 clinical trial, stem cell research and bioassay development, small molecule drug development, and creating, protecting and patenting intellectual property in support of our drug candidate and stem cell technology platform, with the corollary initiatives of recruiting personnel and raising working capital. As of June 30, 2015, we had an accumulated deficit (including cash and non-cash charges) of approximately $114.0 million. Our net loss for the quarters ended June 30, 2015 and 2014 was $29.5 million and $4.6 million, respectively, including a non-cash loss of approximately $25.1 million attributable to converting over $15.4 million of our indebtedness into equity securities during our first quarter ended June 30, 2015. We expect losses to continue for the foreseeable future as we engage in Phase 2 clinical trials of AV-101 and its further development and increase our drug rescue and regenerative medicine activities related to our stem cell technology platform.

 
 
 
-24-

 
Summary of Quarter Ended June 30, 2015

Although our financial resources have been limited, our scientific personnel and collaborators continue to explore the drug rescue opportunities related to our novel, customized bioassay systems, CardioSafe 3D™ and LiverSafe 3D™, and the multiple types of human cells we and our collaborators are able to produce from pluripotent stem cells for drug rescue and regenerative medicine applications. Additionally, as indicated previously, we have entered into a Cooperative Research and Development Agreement with the NIH providing for an NIMH-sponsored Phase 2 clinical study of AV-101 in Major Depressive Disorder that we expect to be launched shortly.

Throughout all of fiscal 2014 and 2015 and the quarter ended June 30, 2015, through self-placed private placement transactions and other corporate finance initiatives, our executive management has been focused on raising sufficient operating capital to continue to advance clinical development of AV-101 and other research and development objectives, while meeting our continuing operational needs.  The most specific focus during the quarter ended June 30, 2015 was on negotiating, extinguishing and converting (in self-placed private placement transactions) a majority of our outstanding indebtedness into our equity securities.

To meet our working capital needs, between April 1, 2015 and May 14, 2015, we completed self-placed private placement transactions involving securities purchase agreements with accredited investors  pursuant to which we sold to such accredited investors 2014 Private Placement Units, for aggregate cash proceeds of $280,000, consisting of (i) 10% convertible notes in the aggregate face amount of $280,000 due between April 30, 2015 and May 15, 2015; (ii) an aggregate of 33,000 restricted shares of our common stock; and (iii) warrants exercisable through December 31, 2016 to purchase an aggregate of 24,250 restricted shares of our common stock at an exercise price of $10.00 per share. Between May 26, 2015 and August 11, 2015, we entered into self-placed private placement transactions involving securities purchase agreements with accredited investors, pursuant to which we sold Series B Preferred Units consisting of an aggregate of (i) 293,262 shares of our Series B 10% Convertible Preferred Stock (Series B Preferred); and (ii) five-year warrants to purchase an aggregate of 293,262 shares of our Common Stock at a fixed exercise price of $7.00 per share. In connection with these self-placed private placement transactions, we received cash proceeds of $2,052,800 which we expect to use for general corporate purposes. The figures reported above include 142,860 shares of Series B Preferred and Series B Warrants to purchase 142,860 shares of our Common Stock sold to Montsant Partners, LLC, an affiliate of Platinum Long Term Growth VII, LLC (Platinum), for cash proceeds of $1.0 million.

Given our working capital constraints, we continue to minimize cash commitments and expenditures for both internal and external research and development and general and administrative services to the greatest extent possible.  The conversion of such a substantial portion of our outstanding debt, much of which was either past due or would have matured within the next twelve months, materially reduces our cash requirement for debt service.

Comparison of Three Months Ended June 30, 2015 and 2014
 
The following table summarizes the results of our operations for the three months ended June 30, 2015 and 2014 (amounts in thousands).
 
   
Three Months Ended June 30,
 
   
2014
   
2014
 
             
Operating expenses:
           
 Research and development
  $ 373     $ 474  
 General and administrative
    1,448       797  
  Total operating expenses
    1,821       1,271  
                 
Loss from operations
    (1,821 )     (1,271 )
                 
Interest expense (net)
    (755 )     (785 )
Change in warrant liabilities
    (1,895 )     (1,727 )
Loss on extinguishment of debt
    (25,051 )     (768 )
                 
Loss before income taxes
    (29,522 )     (4,551 )
Income taxes
    (2 )     (2 )
                 
Net loss
  $ (29,524 )   $ (4,553 )
  Accrued dividend on Series B Preferred Stock
    (213 )     -  
  Deemed dividend on Series B Preferred Stock
    (256 )     -  
Net loss attributable to common stockholders
  $ (29,993 )   $ (4,553 )
                 

 
 
 
-25-


Revenue   

We reported no revenue for the quarters ended June 30, 2015 or 2014. We have successfully completed our Phase 1 clinical development of AV-101, our orally available, new generation prodrug candidate in Phase 2 clinical development for the treatment of Major Depressive Disorder (MDD), with additional therapeutic potential in neuropathic pain, epilepsy, Parkinson’s disease and Huntington’s disease. Additionally, as indicated previously, we have entered into a CRADA with the NIH providing for an NIH-sponsored Phase 2 clinical study of AV-101 in Major Depressive Disorder beginning in 2015. We presently have no revenue generating arrangements.

Research and Development Expense

Research and development expense totaled $373,000 for the quarter ended June 30, 2015, a decrease of 21% compared to $474,000 for the quarter ended June 30, 2014. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
             
Salaries and benefits
  $ 202     $ 228  
Stock-based compensation
    18       98  
Consulting services
    22       24  
Technology licenses and royalties
    53       41  
Project-related research and supplies:
               
AV-101
    11       8  
Stem cell and all other
    2       9  
      13       17  
Rent
    53       55  
Depreciation
    11       11  
All other
    1       -  
                 
Total Research and Development Expense
  $ 373     $ 474  

To conserve cash resources, during 2014, Ralph Snodgrass, Ph.D., our Chief Scientific Officer (CSO), voluntarily accepted a temporary salary reduction to substantially less than his contractual pay rate. During the quarter ended June 30, 2015, Dr. Snodgrass has received cash compensation at his contractual base salary rate.  Offsetting this increase is the impact of the voluntary resignation of one member of our scientific staff at the end of September 2014 and the voluntary reduction of work hours and pay by another member of our scientific staff beginning in the last quarter of calendar 2014.

Stock based compensation expense for both 2015 and 2014 reflects the ratable amortization of option grants made to scientific staff and consultants most recently in March 2014 and October 2013 as well as amortization of grants of warrants made to our CSO in March 2014. Our stock options are generally amortized over a two-year or four-year vesting period, and warrants granted to the CSO are being amortized over a three-year vesting period. Essentially all of the option grants made prior to October 2013 and a warrant grant made to our CSO in March 2013 are now fully-vested and fully-expensed, resulting in the decrease in expense between the periods reported.

Consulting services reflects fees paid or accrued for scientific services rendered to us by third-parties, primarily by members of our scientific and clinical advisory board.

Stem cell technology license expense reflects both recurring annual fees as well as costs for patent prosecution and protection that we are required to fund under the terms of certain of our license agreements. We recognize the latter costs as they are invoiced to us by the licensors and they do not occur ratably throughout the year or between years.

AV-101 expenses in both periods presented reflect the costs associated with monitoring for and responding to potential feedback related to the Phase 1 clinical trial and preparing other reports required under the terms of our prior NIH grant, primarily through our contract research collaborator, Cato Research Ltd. Expenses in the quarter ended June 30, 2015 additionally include costs related to updating AV-101 documentation in preparation for the Phase 2 clinical trial to be conducted by the NIH.

 
 
 
-26-


General and Administrative Expense

General and administrative expense was $1,448,000 for the quarter ended June 30, 2015, an 82% increase from the $797,000 reported for the quarter ended June 30, 2014.  The following table indicates the primary components of general and administrative expenses for each of the periods (amounts in thousands):
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
             
Salaries and benefits
  $ 176     $ 140  
Stock-based compensation
    11       106  
Consulting Services
    28       28  
Legal, accounting and other professional fees
    959       373  
Investor relations
    34       30  
Insurance
    38       38  
Travel and entertainment
    17       15  
Rent and utilities
    37       39  
Warrant modification expense
    122       -  
All other expenses
    26       28  
                 
Total General and Administrative Expense
  $ 1,448     $ 797  
                 

To conserve cash resources, during 2014, each of Shawn Singh, our Chief Executive Officer, and Jerrold Dotson, our Chief Financial Officer, voluntarily accepted a temporary salary reduction to substantially less than his contractual or agreed pay rate. During the quarter ended June 30, 2015, both Messrs. Singh and Dotson have received cash compensation at their respective contractual base salary rate. Pay rates and administrative employee headcount have otherwise remained stable between the periods reported.

Stock based compensation expense for both 2015 and 2014 reflects the ratable amortization of option grants made to administrative employees and consultants most recently in March 2014 and October 2013 as well as amortization of grants of warrants made to our officers and independent members of our Board of Directors in March 2014. Our stock options are generally amortized over a two-year or four-year vesting period, and warrants granted to the officers and Board members are being amortized over a three-year vesting period. Essentially all of the option grants made prior to October 2013 and a warrant grant made to an officer and our Board members in March 2013 are now fully-vested and fully-expensed, resulting in the decrease in expense between the periods reported.

Consulting services primarily includes fees accrued for the services of independent members of our Board of Directors.

The increase in legal, accounting and other professional fees is primarily the result of the grant of an aggregate of 50,000 shares of our common stock having a fair value of $500,000 pursuant to two corporate development contracts initiated during the quarter ended June 30, 2015 and the grant of 25,000 shares of our Series B Preferred having a fair value of $250,000 to legal counsel as compensation for services in connection with our debt restructuring and other corporate finance matters. In both years, professional services fees include the expense related to the annual audit of the prior year financial statements. Expense for 2014 also includes $169,000 attributable to a consulting agreement for strategic advisory and business development services that has now expired.

Outsourced investor relations service expenses are essentially flat between periods.

In both periods, travel expense reflects costs associated with presentations to potential investors in connection with the self-placed private placement offerings of our securities.

Warrant modification expense in 2015 reflects the impact of June 2015 strategic reductions in the exercise price of certain outstanding warrants, generally from $30.00 per share to $10.00 per share.

 
 
 
-27-

 
Other Expenses, Net   

Interest expense, net totaled $755,000 for the quarter ended June 30, 2015, a decrease of 4% compared to the $785,000 reported for the quarter ended June 30, 2014. The following table summarizes the primary components of interest expense for each of the periods (amounts in thousands):
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
             
Interest expense on promissory notes
  $ 193     $ 285  
Amortization of discount on promissory notes
    551       482  
Other interest expense, including on capital leases and premium financing
    1       1  
      745       768  
Effect of foreign currency fluctuations on notes payable
    10       20  
Interest income
    -       (3 )
                 
Interest expense, net
  $ 755     $ 785  

The overall decrease in interest expense on promissory notes and the related amortization of discounts on such notes between the periods primarily reflects the impact of the accrued interest recorded for the issuances between July 2014 and May 2015 of an aggregate of approximately $1.8 million of 10% convertible promissory notes (2014 Unit Notes), offset by the cessation of interest accrual and discount amortization upon the conversion of all outstanding 2014 Unit Notes as well as the Senior Secured Convertible Notes and other outstanding promissory notes into shares of our Series B Preferred in May and June 2015.

Under the terms of the October 2012 Note Exchange and Purchase Agreement we entered with Platinum, we issued certain Senior Secured Convertible Promissory Notes and a related Exchange Warrant and Investment Warrants between October 2012 And July 2013. Upon Platinum’s exchange of the shares of our Series A Preferred Stock held by Platinum into shares of our common stock, we will also be required to issue a Series A Exchange Warrant to Platinum. We determined that the various warrants included certain exercise price adjustment features requiring us to treat the warrants as liabilities. Accordingly, we recorded a non-cash warrant liability at its estimated fair value as of the date of warrant issuance or contract execution. As described in Note 8, Capital Stock, and Note 4, Fair Value Measurements, to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q, on May 12, 2015, we entered into an agreement with Platinum pursuant to which Platinum agreed to amend the warrants to fix the exercise price thereof and eliminate the anti-dilution reset features that had previously required the warrants to be treated as liabilities and carried at fair value. Accordingly, we adjusted the Platinum Warrants to their fair value, estimated to be $4,903,200, reflecting an increase of $1,894,700 since March 31, 2015, resulting primarily from the increase in the market price of our common stock in relation to the exercise price of the warrants, and we subsequently eliminated the entire warrant liability with respect to the warrants. During the quarter ended June 30, 2014, we recognized non-cash expense of $1,727,200 related to the net increase in the estimated fair value of the warrant liabilities since March 31, 2014, which again resulted primarily from the increase in the market price of our common stock in relation to the exercise price of the warrants.

As described more completely in Note 7, Convertible Promissory Notes and other Notes Payable, and Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, between May 12, 2015 and June 30, 2015, we have eliminated the outstanding balances of approximately $15.4 million of promissory notes, including our Senior Secured Notes, our 2014 Unit Notes and other debt and certain adjustments thereto that were either already due and payable or would have otherwise matured prior to March 31, 2016 by converting such balances into shares of our Series B Preferred. We treated the conversion of the debts into Series B Preferred as extinguishments of debt for accounting purposes. Since the fair value of the Series B Preferred we negotiated in settlement of the promissory notes and other debts exceeded the carrying value of the debts, we incurred losses on each of the extinguishments. Additionally, under the terms of the Platinum Agreement, we issued to Platinum 400,000 shares of Series B Preferred having an aggregate fair value of $4.0 million and Series B Warrants to purchase 1.2 million shares of our common stock having an aggregate of fair value of $8,270,900. We recognized this aggregate fair value as an additional non-cash component of loss on debt extinguishment. Many of the 2014 Unit Notes that were converted into Series B Preferred contained a beneficial conversion feature at the time they were originally issued. We have accounted for the repurchase of the beneficial conversion feature at the time the 2014 Unit Notes were extinguished and converted, an aggregate of $2,237,100, as a reduction to the loss on extinguishment of debt. We recorded an aggregate net non-cash loss of $25.1 million attributable to the extinguishment of the debt converted into Series B Preferred.

 
 
 
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During the quarter ended June 30, 2014, we entered into agreements with substantially all holders of our 2013 Unit Notes and 2013 Unit Warrants to amend certain terms of the notes and the warrants to essentially conform them to the 2014 Unit Notes and 2014 Unit Warrants. We treated the amendments as an extinguishment of debt for accounting purposes. Accordingly, since the fair value of the amended notes and warrants exceeded the carrying amount of the original notes, we recognized non-cash losses on the extinguishment of debt in the aggregate amount of $526,200 attributable to the amendments. We also recognized an additional $241,800 as a non-cash loss on extinguishment of debt as a result of the promissory note, shares of our common stock and warrants issued to Icahn School of Medicine at Mount Sinai in settlement of stem cell technology license maintenance fees and reimbursable patent prosecution costs during the quarter ended June 30, 2014.

We allocated the proceeds from the self-placed private placement sales of Series B Preferred Units to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. The difference between the relative fair value per share of the Series B Preferred, approximately $4.05 per share, and its Conversion Price (or stated value) of $7.00 per share represents a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we have recognized a deemed dividend in the aggregate amount of $256,200 in arriving at net loss attributable to common stockholders for the quarter ended June 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss included in Part I of this Report.  Further, we have recognized $213,300 representing the 10% cumulative dividend payable on our Series B Preferred as an additional deduction in arriving at net loss attributable to common stockholders in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss.

Liquidity and Capital Resources
 
Since our inception in May 1998 through June 30, 2015, we have financed our operations through (1) the issuance and sale of our common stock, preferred stock, warrants for common stock, and promissory notes for aggregate cash proceeds of approximately $30.0 million, (2) issuance of common stock and preferred stock with an approximate value at issuance of $25.2 million as consideration for, among other things, technology license payments, sponsored research, contract research, development, manufacturing and regulatory services, and legal, corporate development and financial advisory services; and (3) receipt of aggregate non-dilutive cash proceeds of approximately $16.4 million from government research and development grant awards and strategic collaborations.
 
As described more completely in Note 7, Convertible Promissory Notes and other Notes Payable, and Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, between March 31, 2015 and June 30, 2015, we created our Series B 10% Convertible Preferred Stock (Series B Preferred) and eliminated the outstanding balances of approximately $15.4 million of promissory notes, other debt and certain adjustments thereto that was either already due and payable or would have otherwise matured prior to March 31, 2016, through conversion into our Series B Preferred and, with respect to a portion of the indebtedness converted, warrants to purchase common stock. More specifically, through the date of this report, we have converted the outstanding balances of (i) all of the Senior Secured Convertible Promissory Notes originally issued to Platinum Long Term Growth VII, LLC, our largest investor (Platinum), (ii) all of the 2014 Unit Notes outstanding at March 31, 2015 and those issued subsequently, and (iii) other outstanding promissory notes including those issued to Cato Research Ltd., Cato Holding Company, Morrison & Foerster (Note A and Note B), University Health Network, McCarthy Tetrault, Desjardins Securities, Burr Pilger & Mayer, National Jewish Health, MicroConstants and others, through the issuance of an aggregate of 2,618,917 shares of our Series B Preferred. Additionally, through August 11, 2015, in our self-placed private placement of Series B Units, we have sold additional Series B Preferred Units consisting of an aggregate of 293,262 unregistered shares of Series B Preferred and five year warrants exercisable at $7.00 per share to purchase 293,262 shares of our common stock and we have received cash proceeds of $2,052,800.
 
At June 30, 2015, we did not have sufficient cash and cash equivalents to enable us to fund our planned operations over the next twelve months. We believe that our participation in potential strategic collaborations, including potential transactions involving AV-101 such as our February 2015 CRADA with the NIH for an NIH-funded and sponsored Phase 2 study of AV-101 in MDD, and our self-placed private placement of Series B Units may provide resources to support a portion of our future cash needs and working capital requirements in the near term, however, no assurances can be provided.  When and as necessary, we will seek to raise a material amount of financing through a combination of additional private placements and/or registered public offerings of our securities, which may include both debt and equity securities, research and development collaborations, drug candidate license or sale payments, government grant awards and revenue from collaborations.  Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of strategic opportunities related to our success in clinical trials of AV-101 as a treatment for MDD and other conditions and our drug rescue and cell therapy research and development efforts, our ability to obtain government grant awards and our ability to enter into strategic collaborations with institutions on terms acceptable to us. To further advance the clinical development of AV-101 and potential drug rescue and other applications of our stem cell technology, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including salaries and benefits, regulatory consulting, contract research and development, legal, accounting, public company compliance and other professional services and working capital costs. 

 
 
 
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Notwithstanding the foregoing, substantial additional financing may not be available to us on a timely basis, on acceptable terms, or at all. If we are unable to obtain substantial additional financing on a timely basis in the near term, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern.

Cash and Cash Equivalents
 
The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):
 
   
Three Months Ended June 30,
 
   
2015
   
2014
 
             
Net cash used in operating activities
  $ (823 )   $ (1,012 )
Net cash used in investing activities
    -       -  
Net cash provided by financing activities
    874       1,413