UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 20549
 
Form 10-Q
(Mark One)
 
 
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
or
 
 
 
 
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 No
 
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 No
 
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 No
 
As of November 11, 2016, 8,379,921 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 September 30, 2016
 
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
1
 
2
 
3
 
4
15
29
 
 
 
 
 
 
 
 
30
30
65
65
66
 
 
 
 67
 
 
 
-i-
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Dollars, except share amounts)
 
 
 
September 30,
 
 
 March 31,
 
 
 
2016
 
 
2016
 
 
 
(Unaudited)
 
 
 
 
 
 ASSETS
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $6,257,100 
 $428,500 
Prepaid expenses and other current assets
  648,900 
  426,800 
Total current assets
  6,906,000 
  855,300 
Property and equipment, net
  69,200 
  87,600 
Security deposits and other assets
  47,800 
  46,900 
Total assets
 $7,023,000 
 $989,800 
 
    
    
 
 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
Current liabilities:
    
    
Accounts payable
 $930,200 
 $936,000 
Accrued expenses
  795,000 
  814,000 
Current portion of notes payable and accrued interest
  71,100 
  43,600 
Capital lease obligations
  600 
  1,100 
Total current liabilities
  1,796,900 
  1,794,700 
 
    
    
Non-current liabilities:
    
    
Notes payable
  - 
  27,200 
Accrued dividends on Series B Preferred Stock
  1,101,600 
  2,089,600 
Deferred rent liability
  37,400 
  55,500 
Total non-current liabilities
  1,139,000 
  2,172,300 
Total liabilities
  2,935,900 
  3,967,000 
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders’ equity (deficit):
    
    
Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2016 and March 31, 2016:
    
    
Series A Preferred, 500,000 shares authorized and outstanding at September 30, 2016 and March 31, 2016
  500 
  500 
Series B Preferred; 4,000,000 shares authorized at September 30, 2016 and March 31, 2016; 1,160,240 shares  and 3,663,077 shares issued and outstanding at September 30, 2016 and March 31, 2016, respectively
  1,200 
  3,700 
Series C Preferred; 3,000,000 shares authorized at September 30, 2016 and March 31, 2016;  2,318,012 shares issued and outstanding at September 30, 2016 and March 31, 2016
  2,300 
  2,300 
Common stock, $0.001 par value; 30,000,000 shares authorized at September 30, 2016 and March 31, 2016;  8,405,128 and 2,623,145 shares issued at September 30, 2016 and March 31, 2016, respectively
  8,400 
  2,600 
Additional paid-in capital
  144,854,200 
  132,725,000 
Treasury stock, at cost, 135,665 shares of common stock held at September 30, 2016 and March 31, 2016
  (3,968,100)
  (3,968,100)
Accumulated deficit
  (136,811,400)
  (131,743,200)
Total stockholders’ equity (deficit)
  4,087,100 
  (2,977,200)
Total liabilities and stockholders’ equity (deficit)
 $7,023,000 
 $989,800 
 
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
September 30,
 
 
 Six Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 $1,606,100 
 $1,656,100 
 2,431,800 
 $2,028,700 
General and administrative
  1,493,600 
  3,730,500 
  2,631,200 
  5,179,000 
Total operating expenses
  3,099,700 
  5,386,600 
  5,063,000 
  7,207,700 
Loss from operations
  (3,099,700)
  (5,386,600)
  (5,063,000)
  (7,207,700)
Other expenses, net:
    
    
    
    
Interest expense, net
  (1,400)
  (12,200)
  (2,800)
  (767,300)
Change in warrant liability
  - 
  - 
  - 
  (1,894,700)
Loss on extinguishment of debt
  - 
  (1,649,300)
  - 
  (26,700,200)
Loss before income taxes
  (3,101,100)
  (7,048,100)
  (5,065,800)
  (36,569,900)
Income taxes
  - 
  - 
  (2,400)
  (2,300)
Net loss
 $(3,101,100)
 $(7,048,100)
 $(5,068,200)
 $(36,572,200)
 
    
    
    
    
Accrued dividend on Series B Preferred stock
  (241,000)
  (614,700)
  (780,800)
  (828,000)
Deemed dividend on Series B Preferred Units
  - 
  (886,900)
  (111,100)
  (1,143,100)
 
    
    
    
    
Net loss attributable to common stockholders
 $(3,342,100)
 $(8,549,700)
 $(5,960,100)
 $(38,543,300)

    
    
    
    
Basic and diluted net loss attributable to common stockholders per common share
 $(0.42)
 $(5.26)
 $(0.91)
 $(24.21)
 
    
    
    
    
Weighted average shares used in computing basic and diluted net loss attributable to common stockholders per common share
  8,041,619 
  1,624,371 
  6,577,769 
  1,592,104 
 
    
    
    
    
Comprehensive loss
 $(3,101,100)
 $(7,048,100)
 $(5,068,200)
 $(36,572,200)
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
-2-
 
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Dollars)
 
 
 
 Six Months Ended September 30,
 
 
 
2016
 
 
2015
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(5,068,200)
 $(36,572,200)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  26,000 
  28,900 
Amortization of discounts on convertible and promissory notes
  - 
  564,800 
Change in warrant liability
  - 
  1,894,700 
Stock-based compensation
  306,700 
  3,769,900 
               Expense related to modification of warrants, including exchange of warrants for Series C Preferred and common stock
  57,400 
  122,300 
Amortization of deferred rent
  (18,100)
  (11,600)
Fair value of common stock granted for services
  217,000 
  500,000 
Fair value of Series B Preferred stock granted for services
  375,000 
  707,500 
Fair value of warrants granted for services
  227,500 
  - 
Gain on currency fluctuation
  - 
  (6,300)
Loss on extinguishment of debt
  - 
  26,700,200 
Changes in operating assets and liabilities:
    
    
Prepaid expenses and other current assets
  40,400 
  24,200 
Accounts payable and accrued expenses, including accrued interest
  (36,800)
  (51,900)
Net cash used in operating activities
  (3,873,100)
  (2,329,500)
 
    
    
Cash flows from investing activities:
    
    
Purchases of equipment
  (7,700)
  - 
Net cash used in investing activities
  (7,700)
  - 
 
    
    
Cash flows from financing activities:
    
    
Net proceeds from issuance of common stock and warrants, including Units
  9,537,100 
  280,000 
Net proceeds from issuance of Series B Preferred Units
  278,000 
  2,722,800 
Repayment of capital lease obligations
  (500)
  (500)
Repayment of notes
  (105,200)
  (48,800)
Net cash provided by financing activities
  9,709,400 
  2,953,500 
Net increase in cash and cash equivalents
  5,828,600 
  624,000 
Cash and cash equivalents at beginning of period
  428,500 
  70,000 
Cash and cash equivalents at end of period
 $6,257,100 
 $694,000 
 
    
    
Supplemental disclosure of noncash activities:
    
    
Conversion of Senior Secured Notes, Subordinate Convertible Notes, Promissory Notes, Accounts payable and other debt into Series B Preferred
 $- 
 $18,891,400 
Insurance premiums settled by issuing note payable
 $117,500 
 $79,400 
Accrued dividends on Series B Preferred
 $780,800 
 $828,000 
Accrued dividends on Series B Preferred settled upon conversion by issuance of common stock  
 $1,768,800
 
 $22,700
 
 
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. (NASDAQ: VTGN), a Nevada corporation, is a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative product candidates for patients with diseases and disorders involving the central nervous system (CNS). 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.
 
Our lead product candidate, AV-101, is a new generation, oral antidepressant drug candidate in Phase 2 development for the adjunctive treatment of Major Depressive Disorder (MDD) in patients with an inadequate response to standard antidepressants approved by the U.S. Food and Drug Administration (FDA).  We believe AV-101 may also have therapeutic potential in chronic neuropathic pain, epilepsy, Huntington’s disease and Parkinson’s disease.
 
AV-101’s mechanism of action, as an N-methyl D aspartate receptor (NMDAR) antagonist binding selectively at the glycine binding (GlyB) co-agonist site of the NMDAR, is fundamentally differentiated from all FDA-approved antidepressants, as well as all atypical antipsychotics used to augment standard antidepressant therapy.
 
Our ongoing Phase 2a clinical study of AV-101 in subjects with treatment-resistant MDD is being fully funded by the U.S. National Institute of Mental Health (NIMH) under our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIMH, and is being conducted by 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. The first patient in this NIMH-sponsored Phase 2a study was dosed in November 2015. Previous NIMH studies, including studies conducted by Dr. Zarate, have focused on the antidepressant effects of low dose, intravenous (I.V.) ketamine in patients with treatment-resistant depression. These NIMH studies, as well as clinical research by others, have demonstrated robust antidepressant effects in patients with treatment-resistant MDD within twenty-four hours of a single low dose of I.V. ketamine. We believe orally administered AV-101 may have potential to deliver ketamine-like fast-acting antidepressant effects without ketamine’s serious side effects.
 
We are preparing to launch our Phase 2b clinical study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants.  We currently anticipate commencement of this multi-center, multi-dose, double blind, placebo-controlled Phase 2b efficacy and safety study in the first half of 2017. Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, will be the Principal Investigator of our Phase 2b study of AV-101 in MDD.  Dr. Fava was the co-Principal Investigator with Dr. A. John Rush of the largest clinical trial conducted in depression to date, the STAR*D study, whose findings were published in journals such as the New England Journal of Medicine (NEJM) and the Journal of the American Medical Association (JAMA). We currently anticipate top line results in this Phase 2b study in the third calendar quarter of 2018.
 
In addition to clinical development of AV-101, we are advancing potential commercial applications of our human pluripotent stem cell (hPSC) technology platform, including drug rescue and regenerative medicine (RM).  Our small molecule drug rescue programs involve using CardioSafe 3D, our customized cardiac bioassay system, to develop new chemical entities (NCEs) for our internal pipeline.  Potential RM applications include using blood, cartilage, heart and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering.  We may pursue these drug rescue and RM applications in collaboration with third-parties.
 
 
 
-4-
 
 
AV-101 and Major Depressive Disorder
 
Background
The World Health Organization (WHO) 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. The NIMH reports that, in 2014, an estimated 15.7 million adults aged 18 or older in the U.S. had at least one major depressive episode in the past year. This represented 6.7 percent of all U.S. adults. According to the U.S. Centers for Disease Control and Prevention (CDC) one in 10 Americans over the age of 12 takes an antidepressant medication.
 
Most standard, FDA-approved antidepressants target neurotransmitter reuptake inhibition – either serotonin (SSRIs) or serotonin/norepinephrine (SNRIs). Even when effective, these standard depression medications take many weeks to achieve adequate antidepressant effects. Nearly two out of every three drug-treated depression patients, including an estimated 6.9 million drug-treated MDD patients in the U.S., obtain inadequate therapeutic benefit from initial treatment with a standard antidepressant. Unfortunately, even after treatment with as many as four different standard antidepressants, nearly one out of every three drug-treated depression patients do not achieve adequate therapeutic benefits.  Such depression patients often seek to treat their depression with non-drug-related approaches, such as Electroconvulsive Therapy (ECT), or to augment their inadequate response to standard antidepressants by adding an atypical antipsychotic (such as, for example, aripiprazole) to their treatment regimen, despite the modest potential therapeutic benefit and significant risk of additional side effects with such augmentation options.
 
All standard antidepressants have risks of significant side effects, including, among others, potentially anxiety, metabolic syndrome, sleep disturbance and sexual dysfunction.  They also have a “Black Box” warning due to risks of worsening depression and suicide in certain groups. Use of atypical antipsychotics to augment inadequately performing standard antidepressants increases the risk of serious side effects, including, potentially, tardive dyskinesia, significant weight gain, diabetes and heart disease, while offering only a modest potential increase in therapeutic benefit. Use of ECT increases the risk of serious side effects, including, headaches, tiredness, disorientation, intense sleepiness, hallucinations and long-term memory loss.
 
AV-101
 
AV-101, our oral new generation antidepressant drug candidate, is in Phase 2 clinical development for the adjunctive treatment of MDD patients with an inadequate response to standard antidepressants. As published in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article entitled, The prodrug 4-chlorokynurenine causes ketamine-like antidepressant effects, but not side effects, by NMDA/glycineB-site inhibition, using well-established preclinical models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant antidepressant-like responses, following a single treatment. These responses were equivalent to those seen with a single, sub-anesthetic control dose of the NMDAR antagonist ketamine. In the same preclinical studies, a standard antidepressant, the SSRI fluoxetine, did not induce rapid onset antidepressant-like responses. In addition, these studies confirmed that the fast-acting antidepressive effects of AV-101 were mediated through the GlyB site and involved the activation of a key neurological pathway, the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (AMPA) receptor pathway. Activation of the AMPA receptor pathway is a common feature of fast-acting antidepressants.
 
Following the completion of our NIH-funded, randomized, double blind, placebo-controlled Phase 1a and Phase 1b safety studies, we are now collaborating with the NIMH in a Phase 2a study. Under our February 2015 CRADA, the NIMH is funding, and Dr. Carlos Zarate Jr. of the NIMH as Principal Investigator is conducting, our ongoing Phase 2a efficacy and safety study of AV-101 in subjects with treatment-resistant MDD. The trial is expected to enroll 20 to 28 patients.  The first patient was dosed in November 2015, and we currently anticipate receiving topline results in the second quarter of 2017.
 
We are preparing to launch our Phase 2b clinical study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants. We anticipate the launch of this Phase 2b study, with Dr. Maurizio Fava of Harvard Medical School serving as Principal Investigator, in the first half of 2017. We anticipate top line results from this Phase 2b study in the third calendar quarter of 2018.  
 
Several preclinical studies support the hypothesis that AV-101 also has the potential to treat multiple CNS disorders and neurodegenerative diseases in addition to depression, including chronic neuropathic pain, epilepsy, Parkinson’s disease and Huntington’s disease, where modulation of the NMDAR, AMPA pathway and/or active metabolites of AV-101 may achieve therapeutic benefit.
 
 
 
-5-
 
 
CardioSafe 3D™; NCE Drug Rescue and Regenerative Medicine
 
CardioSafe 3D™ is our customized in vitro cardiac bioassay system capable of predicting potential human heart toxicity of small molecule NCEs in vitro, long before they are ever tested in animal and human studies. Our current strategic interests involving our stem cell technology platform include (i) advancing current internal efforts focused on CardioSafe 3D drug rescue to expand our drug candidate pipeline with selected proprietary small molecule NCEs, leveraging substantial prior research and development investments by pharmaceutical companies and others related to public domain NCEs terminated before FDA approval due to heart toxicity risks and (ii) establishing collaborative arrangements with qualified third-parties focused on RM applications, including (A) cell-based therapy (injection of stem cell-derived mature organ-specific cells obtained through directed differentiation), (B) cell repair therapy (induction of regeneration by biologically active molecules administered alone or produced by infused genetically engineered cells), or (C) tissue engineering (transplantation of in vitro grown complex tissues), involving hPSC-derived blood, bone, cartilage, heart and/or liver cells. We may collaborate with one or more third-parties in connection with these potential commercial applications of our stem cell technology platform.
 
Subsidiaries
 
VistaGen Therapeutics, Inc., a California corporation (VistaGen California), is our wholly-owned subsidiary. 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.
 
Note 2.  Basis of Presentation
 
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, 2016 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 and six months ended September 30, 2016 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2017 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, 2016 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 24, 2016.
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As a developing-technology company having not yet developed commercial products or achieved sustainable revenues, we have experienced recurring losses and negative cash flows from operations resulting in a deficit of $136.8 million accumulated from inception through September 30, 2016. 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 and launch and execute our drug rescue programs and pursue potential drug development and regenerative medicine opportunities.
 
Since our inception in May 1998 through September 30, 2016, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $44.3 million, as well as from an aggregate of approximately $16.4 million of government research grant awards, strategic collaboration payments and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $30.1 million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
 
Between April 1, 2016 and May 4, 2016, we sold to accredited investors Series B Preferred Units consisting of 39,714 unregistered shares of our Series B Preferred Stock, par value $0.001 per share (Series B Preferred), and five year warrants to purchase 39,714 shares of our common stock, from which we received cash proceeds of $278,000. Further, on May 16, 2016 we consummated an underwritten public offering pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at the public offering price of $4.24 per share and five-year warrants to purchase up to 2,705,883 registered shares of common stock, with an exercise price of $5.30 per share, at the public offering price of $0.01 per warrant, including shares and warrants issued pursuant to the exercise of the underwriters' over-allotment option (the May 2016 Public Offering). We received net cash proceeds of approximately $9.5 million from the May 2016 Public Offering after deducting fees and expenses.  We believe that we currently have sufficient financial resources to fund our expected operations through the first half of 2017, including preparation for and launch of our AV-101 Phase 2b study in MDD.  Although our current financial resources are not yet sufficient to complete our AV-101 Phase 2b study when launched, we anticipate raising sufficient additional capital through sales of our securities in 2017 to satisfy our key corporate objectives, including completion of our AV-101 Phase 2b study in 2018. There can be no assurance, however, that future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. We may also seek research and development collaborations that could generate revenue, as well as government grant awards. Further, strategic collaborations, such as our February 2015 CRADA with the NIMH providing for the NIMH to fund our Phase 2a study of AV-101 in MDD, may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. Although we may seek additional collaborations that could generate revenue, as well as new government grant awards, no assurance can be provided that any such collaborations or awards will occur in the future.  Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of opportunities related to our success and the success of certain other companies in clinical trials, including our development of AV-101 as a treatment for MDD and other CNS conditions, and our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of AV-101 and our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, accounting, public company compliance and other professional services and working capital costs.
 
 
 
-6-
 
 
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.  These unaudited 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 share-based compensation, and assumptions that have been used to value warrants, warrant modifications, warrant liabilities. We do not currently have, nor have we had during the periods covered by this report, any arrangements requiring the recognition of revenue.
 
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 nonclinical and clinical development of AV-101, now in Phase 2 clinical development, initially for Major Depressive Disorder, stem cell technology-related research and development costs, and costs related to the filing, maintenance and prosecution of patents and patent applications. All such costs are charged to expense as incurred.
 
Stock-Based Compensation
 
We recognize compensation cost for all stock-based awards to employees or consultants 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 or consultant 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.
 
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2016 and 2015.
 
 
 
 Three Months Ended
 
 
 Six Months Ended
 
 
 
 September 30,
 
 
 September 30,
 
 
 
 2016
 
 
 2015
 
 
 2016
 
 
 2015
 
 Research and development expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Stock option grants
 $82,000 
 $31,900 
 $126,000 
 $47,400 
 Warrants granted to officer in March 2014
  - 
  2,900 
  - 
  5,700 
 Warrants granted to officer in September 2015
  - 
  852,200 
  - 
  852,200 
 
    
    
    
    
 
  82,000 
  887,000 
  126,000 
  905,300 
 
    
    
    
    
 General and administrative expense:
    
    
    
    
 
    
    
    
    
 Stock option grants
  116,800 
  9,100 
  180,700 
  16,100 
 
 Warrants granted to officers and directors
 
    
    
    
      in March 2014
  - 
  3,900 
  - 
  7,800 
 
 Warrants granted to officers, directors and
 
    
    
    
      consultants in September 2015
  - 
  2,840,700 
  - 
  2,840,700 
 
    
    
    
    
 
  116,800 
  2,853,700 
  180,700 
  2,864,600 
 
    
    
    
    
 Total stock-based compensation expense
 $198,800 
 $3,740,700 
 $306,700 
 $3,769,900 
 
 
 
-7-
 
 
In June 2016, our Board of Directors (the Board) approved the grant of options to purchase an aggregate of 655,000 shares of our common stock at an exercise price of $3.49 per share to the independent members of our Board and to our officers, including our newly-hired Chief Medical Officer. In September 2016, the Board approved the grant of an option to purchase 125,000 shares of our common stock at an exercise price of $4.27 per share to another newly-hired officer. At September 30, 2016, there were stock options outstanding to purchase 1,100,643 shares of our common stock at a weighted average exercise price of $5.26 per share. We valued the options granted in June 2016 and September 2016 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
 
Assumption:
 
June
2016
 
 
September
2016
 
Market price per share at grant date
 $3.49 
 $4.27 
Exercise price per share
 $3.49 
 $4.27 
Risk-free interest rate
  1.34%
  1.29%
Contractual or estimated term in years
  6.68 
  6.25 
Volatility
  81.69%
  83.26%
Dividend rate
  0.0%
  0.0%
Shares
  655,000 
  125,000 
 
    
    
Fair Value per share
 $2.50 
 $3.05 
 
During September 2015, our Board approved the grant of options to purchase an aggregate of 90,000 shares of our common stock at an exercise price of $9.25 per share to our non-officer employees and certain consultants. The Board also granted immediately vested warrants to purchase an aggregate of 650,000 shares of our common stock to our executive officers, independent members of our Board and certain consultants. We valued the warrants and options granted in September 2015 using the Black-Scholes Option Pricing Model and the following assumptions:
 
Assumption:
 
Warrants
 
 
Employee Options
 
 
Non-employee Options
 
Market price per share at grant date
 $9.11 
 $9.11 
 $9.11 
Exercise price per share
 $9.25 
 $9.25 
 $9.25 
Risk-free interest rate
  1.52%
  2.02%
  2.20%
Contractual or estimated term in years
  5.00 
  6.25 
  10.00 
Volatility
  77.19%
  79.48%
  103.42%
Dividend rate
  0.0%
  0.0%
  0.0%
Shares
  650,000 
  60,000 
  30,000 
 
    
    
    
Fair Value per share
 $5.68 
 $6.35 
 $8.27 
 
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.
 
Income (Loss) per Common Share
 
Basic net 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 net 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, which was eliminated in May 2015, had no impact on the diluted net earnings per share calculation in any period included in these unaudited Condensed Consolidated Financial Statements.
 
 
 
-8-
 
 
As a result of our net loss for the periods presented, potentially dilutive securities were excluded from the computation of net loss per share, as their effect would be antidilutive. For the three and six month periods ended September 30, 2016 and 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 for those periods.
 
Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:
 
 
 
As of September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Series A Preferred stock issued and outstanding (1)
  750,000 
  750,000 
 
    
    
Series B Preferred stock issued and outstanding (2)
  1,160,240 
  3,426,523 
 
    
    
Series C Preferred stock issued and outstanding (3)
  2,318,012 
  - 
 
    
    
Outstanding options under the 2008 and 1999 Stock Incentive Plans
  1,100,643 
  296,738 
 
    
    
Outstanding warrants to purchase common stock
  4,678,414 
  4,687,211 
 
    
    
Warrant shares issuable to PLTG upon exchange of Series A Preferred
    
    
    under the terms of the October 11, 2012 Note Exchange and Purchase
    
    
    Agreement, as subsequently amended
  - 
  535,715 
 
    
    
Total
  10,007,309 
  9,696,187 
____________
    
    
(1) Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with PLTG, as amended
(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
(3) Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016
 
Recent Accounting Pronouncements
 
Other than as identified below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended September 30, 2016, as compared to the recent accounting pronouncements described in the Company’s Form 10-K for the fiscal year ended March 31, 2016, that are of significance or potential significance to the Company.
 
In August 2016, the Financial Accounting Standards Board issued guidance to reduce the diversity in the presentation of certain cash receipts and cash payments presented and classified in the statement of cash flows. The guidance addresses the following eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transitions and (8) separately identifiable cash flows and application of predominance principle. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires retrospective adoption. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated financial statements and related disclosures.
 
Note 4.  Fair Value Measurements
 
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes.
 
In conjunction with certain Senior Secured Convertible Promissory Notes that we issued to Platinum Long Term Growth VII, LLC (PLTG) between October 2012 and July 2013 and the related PLTG Warrants, and the contingently issuable Series A Exchange Warrant, we determined that the warrants included certain exercise price and other adjustment features requiring the warrants to be treated as liabilities, which were recorded at their issuance-date estimated fair values and marked to market at each subsequent reporting period. We determined the fair value of the warrant liabilities using Level 3 (unobservable) inputs, since there was minimal comparable external market data available. Inputs used to determine fair value included the remaining contractual term of the warrants, risk-free interest rates, expected volatility of the price of the underlying common stock, and the probability of a financing transaction that would trigger a reset in the warrant exercise price, and, in the case of the Series A Exchange Warrant, the probability of PLTG’s exchange of the shares of Series A Preferred it holds into shares of common stock. The change in the fair value of these warrant liabilities between March 31, 2015 and their subsequent elimination (described below) was recognized as a non-cash expense in the Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended June 30, 2015.
 
 
 
-9-
 
 
On May 12, 2015, we entered into an agreement with PLTG pursuant to which PLTG agreed to amend the PLTG Warrants to (i) fix the exercise price thereof at $7.00 per share, (ii) eliminate the exercise price reset features and (iii) fix the number of shares of our common stock issuable thereunder.  This agreement and the related modification of the PLTG Warrants resulted in the elimination of the warrant liability with respect to the PLTG Warrants during the quarter ended June 30, 2015.
 
In January 2016, we entered into an Exchange Agreement with PLTG pursuant to which PLTG exchanged all outstanding PLTG Warrants plus the shares issuable pursuant to the Series A Preferred Exchange Warrant for unregistered shares of our Series C Convertible Preferred Stock (Series C Preferred) in the ratio of 0.75 share of Series C Preferred for each warrant share cancelled.
 
We carried no assets or liabilities at fair value at September 30, 2016 or March 31, 2016.
 
Note 5.  Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets are composed of the following at September 30, 2016 and March 31, 2016:
 
 
 
 September 30,
 
 
 March 31,
 
 
 
 2016
 
 
 2016
 
 
 
 
 
 
 
 
 Insurance
 $94,900 
 $27,000 
 Prepaid compensation under financial advisory
    
    
     and other consulting agreements
  550,800 
  337,500 
 Public offering expenses
  - 
  57,400 
 Technology license fees and all other
  3,200 
  4,900 
 
    
    
 
 $648,900 
 $426,800 
 
Note 6.  Accrued Expenses
 
Accrued expenses are composed of the following at September 30, 2016 and March 31, 2016:
 
 
 
 September 30,
 
 
 March 31,
 
 
 
 2016
 
 
 2016
 
 
 
 
 
 
 
 
 Accrued professional services
 $133,000 
 $318,000 
 Accrued AV-101 development expenses
  662,000 
  186,000 
 Accrued compensation
  - 
  310,000 
 
    
    
 
 $795,000 
 $814,000 
 
Note 7.  Notes Payable
 
The following table summarizes our unsecured promissory notes at September 30, 2016 and March 31, 2016.
 
 
 
  September 30,
2016
 
 


  March 31,
2016
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
 
Balance
 
 
Interest
 
 
Total
 
 
Balance
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 5.75% Note payable to insurance premium financing company (current)
 $71,100 
 $- 
 $71,100 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
 7.0% Note payable to Progressive Medical Research
 $- 
 $- 
 $- 
 $58,800 
 $12,000 
 $70,800 
 less: current portion
  - 
  - 
  - 
  (31,600)
  (12,000)
  (43,600)
 
    
    
    
    
    
    
 7.0% Notes payable - non-current portion
 $- 
 $- 
 $- 
 $27,200 
 $- 
 $27,200 
 
    
    
    
    
    
    
 Total notes payable to unrelated parties
 $71,100 
 $- 
 $71,100 
 $58,800 
 $12,000 
 $70,800 
 less: current portion
  (71,100)
  - 
  (71,100)
  (31,600)
  (12,000)
  (43,600)
Net non-current portion
 $- 
 $- 
 $- 
 $27,200 
 $- 
 $27,200 
 
 
 
-10-
 
 
Between May 2015 and August 2015, we extinguished the outstanding balances of approximately $17,200,000 of indebtedness, including all senior secured promissory notes and a substantial portion of other indebtedness that was either due and payable or would have become due and payable prior to March 31, 2016, by converting such indebtedness into shares of our Series B Preferred.
 
Evaluating each converted note or debt class separately, we determined that the conversion of each of such notes and other debt instruments into Series B Preferred should be accounted for as an extinguishment of debt. Because the fair value of the Series B Preferred into which the debt instruments were converted in all cases exceeded the carrying value of the debt, we recorded an aggregate non-recurring non-cash loss on extinguishment of debt of $26,700,200, in our fiscal year ended March 31, 2016, of which $25,050,900 was recorded in the quarter ended June 30, 2015, and the remaining $1,649,300 was recorded in the quarter ended September 30, 2015, as reflected in the accompanying Consolidated Statement of Operations and Comprehensive Loss for that period.
 
On January 5, 2016, we paid in full the $33,300 outstanding balance (principal and accrued but unpaid interest) of the promissory note previously issued to the University of California in connection with our collaborative research and development relationship with the University of California at Davis.
 
On June 13, 2016, we paid in full the $71,600 outstanding balance (principal and accrued but unpaid interest) of the promissory note we issued to Progressive Medical Research (PMR) in connection with our clinical development relationship with PMR.
 
In May 2016, we executed a promissory note in the face amount of $117,500 in connection with certain insurance policy premiums. The note is payable in monthly installments of $12,100, including principal and interest, through March 2017, and the remaining balance of such note as of September 30, 2016 was $71,100.
 
Note 8.  Capital Stock
 
Series B Preferred Unit Offering
 
In April and May 2016, in self-placed private placement transactions, we sold to accredited investors an aggregate of $278,000 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). We issued 39,714 shares of Series B Preferred and Series B Warrants to purchase 39,714 shares of our common stock.  Through the termination of the Series B Preferred Unit offering in May 2016, we received an aggregate of $5,303,800 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 during April and May 2016 to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. 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 $4.20 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 $111,100 in arriving at net loss attributable to common stockholders in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the six months ended September 30, 2016.
 
 Unit Warrants
 
 
Aggregate Allocation of
 
 
Weighted Average Issuance Date Valuation Assumptions 
 
Per Share
Aggregate
 
Aggregate
Proceeds Based on
Warrant
 
 
 
 
Risk free
 
 
 
Fair
Fair Value
 
Proceeds
Relative Fair Value of:
Shares
 
Market
Exercise
Term
Interest
 
Dividend
 
Value of
of Unit
 
of Unit
Unit
Unit
Issued
 
Price
Price
(Years)
Rate
Volatility
Rate
 
Warrant
Warrants
 
Sales
Stock
Warrant
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
      39,714
 
 $ 8.45
 $ 7.00
          5.00
1.27%
78.43%
0.0%
 
 $ 5.63
 $ 223,500
 
 $ 278,000
 $ 166,900
 $ 61,100
 
 
 
-11-
 
 
May 2016 Public Offering and NASDAQ Uplisting
 
Effective on May 16, 2016, we consummated an underwritten public offering of our securities, pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at a public sales price of $4.24 per share and five-year warrants exercisable at $5.30 per share to purchase an aggregate of 2,705,883 shares of our common stock at a public sales price of $0.01 per warrant share, including shares and warrants issued in June 2016 pursuant to the exercise of the underwriters’ over-allotment option (the May 2016 Public Offering). We received gross proceeds of approximately $10.9 million and net proceeds of approximately $9.5 million from the May 2016 Public Offering, after deducting underwriters’ commissions and other offering expenses. The warrants issued in the May 2016 Public Offering have no anti-dilution or other exercise price or share reset features, except as is customary with respect to a change in the Company’s capital structure in the event of a stock split or dividend, and, accordingly, we have accounted for them as equity warrants.
 
The securities included in the May 2016 Public Offering Warrants were offered, issued and sold under a prospectus filed with the Securities and Exchange Commission (SEC) pursuant to an effective registration statement (Registration Statement) filed with the SEC on Form S-1 (File No. 333-210152) pursuant to the Securities Act of 1933, as amended (Securities Act). The Registration Statement was first filed with the SEC on March 14, 2016, and was declared effective on May 10, 2016.
 
In connection with the completion of our May 2016 Public Offering, our common stock was approved for listing on The NASDAQ Capital Market, and began trading under the symbol “VTGN” on May 11, 2016.
 
Conversion of Series B Preferred into Common Stock
 
During April 2016, prior to the May 2016 Public Offering, holders of an aggregate of 7,500 shares of Series B Preferred voluntarily converted such shares into an equivalent number of registered shares of our common stock.  In connection with such conversions, we issued an aggregate of 510 shares of our unregistered common stock as payment in full of $4,000 in accrued dividends on the Series B Preferred that was voluntarily converted.
 
On May 19, 2016, upon the consummation of the May 2016 Public Offering, an aggregate of 2,403,051 shares of Series B Preferred were automatically converted into an aggregate of 2,192,847 registered shares of our common stock and an aggregate of 210,204 shares of our unregistered common stock. Additionally, we issued an aggregate of 416,806 shares of our unregistered common stock as payment in full of $1,642,100 in accrued dividends on the Series B Preferred that was automatically converted, at the rate of one share of common stock for each $3.94 of accrued Series B Preferred dividends.  On June 15, 2016, pursuant to the underwriters’ exercise of their over-allotment option, an additional 44,500 shares of Series B Preferred were converted into 44,500 shares of our registered common stock.  We issued an additional 9,580 shares of our unregistered common stock as payment in full of $37,400 in accrued dividends on the Series B Preferred that was automatically converted, at the rate of one share of common stock for each $3.90 in accrued dividends.
 
In August 2016, one of the remaining holders of our Series B Preferred voluntarily converted 87,500 shares of Series B Preferred into an equivalent number of registered shares of our common stock.  In connection with this conversion, we issued 26,258 shares of our unregistered common stock as payment in full of $85,300 in accrued dividends on the Series B Preferred that was voluntarily converted.
 
Issuance of Common Stock to Professional Services Providers
 
In September 2016, we issued an aggregate of 170,000 shares of our unregistered common stock having an aggregate fair value on the date of issuance of $737,800 to various professional services providers. Of that amount, we issued 120,000 shares having a fair value of $520,800 on the date of issuance for services to be rendered from October 2016 to December 2016. The value of these shares has been recorded as a prepaid expense at September 30, 2016 and will be expensed during the quarter ended December 31, 2016.
 
Modification of Warrants
 
Between April 1, 2016 and May 4, 2016, we entered into Warrant Exchange Agreements with certain holders of outstanding warrants to purchase an aggregate of 41,469 shares of our common stock pursuant to which the holders agreed to the cancellation of such warrants in exchange for the issuance of an aggregate of 31,238 shares of our unregistered common stock.
 
 
 
-12-
 
 
We accounted for the exchange of these warrants as warrant modifications, comparing their fair value prior to the exchange with the fair value of the common stock issued. We calculated the weighted average fair value of the warrants prior to the exchange to be $5.37 per share, or $223,700, using the Black Scholes Option Pricing Model and the following weighted average assumptions: market price per share: $8.44; exercise price per share: $7.37; risk-free interest rate: 1.23%; remaining contractual term: 4.77 years; volatility: 79.0%; and expected dividend rate: 0%.  The weighted average fair value of the aggregate of 31,238 shares of common stock issued in the exchange was $8.45 per share or $264,000.  Accordingly, we recognized the additional fair value, $40,300, as warrant modification expense, included as a component of general and administrative expenses in our Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended June 30, 2016.
 
In August 2016, we entered into Warrant Exchange Agreements with holders of outstanding warrants to purchase an aggregate of 20,000 shares of our common stock pursuant to which the holders agreed to the cancellation of such warrants in exchange for the issuance of an aggregate of 15,000 shares of our unregistered common stock. We likewise accounted for the exchange of these warrants as warrant modifications. We calculated the weighted average fair value of the warrants prior to the exchange to be $1.64 per share, or $32,900, using the Black Scholes Option Pricing Model and the following weighted average assumptions: market price per share: $3.33; exercise price per share: $8.00; risk-free interest rate: 1.10%; remaining contractual term: 4.58 years; volatility: 87.0%; and expected dividend rate: 0%.  The weighted average fair value of the aggregate of 15,000 shares of common stock issued in the exchange was $3.33 per share or $50,000.  Accordingly, we recognized the additional fair value, $17,100, as warrant modification expense, included as a component of general and administrative expenses in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the quarter ended September 30, 2016.
 
Warrants Outstanding
 
Following the warrant issuances in the May 2016 Public Offering, the Series B Warrant issuances and the warrant exchanges described above, at September 30, 2016, we had outstanding warrants to purchase shares of our common stock at a weighted average exercise price of $6.44 per share as follows:
 
 
Exercise Price
 
Expiration
 
Shares Subject to Purchase at
 
 
per Share
 
 
Date
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 $4.50 
9/26/2019
  25,000 
 $5.30 
5/16/2021
  2,705,883 
 $6.00 
9/26/2019
  75,000 
 $7.00 
12/11/2018 to 3/3/2023
  1,417,125 
 $8.00 
3/25/2021
  210,000 
 $10.00 
8/31/2016 to 1/11/2020
  131,358 
 $20.00 
9/15/2019
  110,448 
 $30.00 
11/20/2017
  3,600 
 
    
 
  4,678,414 
 
With the exception of 2,705,883 shares of common stock underlying the warrants issued in the May 2016 Public Offering, all of the common shares underlying our outstanding warrants are unregistered.
 
Note 9.  Related Party Transactions
 
Cato Holding Company (CHC), doing business as Cato BioVentures (CBV), is the parent of Cato Research Ltd (CRL) . CRL is a contract research, development and regulatory services organization (CRO) engaged by us for certain aspects of the development of AV-101. CBV is among our largest institutional stockholders at September 30, 2016, holding approximately 7.5% of our outstanding common stock. Shawn Singh, our Chief Executive Officer and member of our Board of Directors, served as Managing Principal of CBV and Chief Business Officer and General Counsel of CRL from February 2001 to August 2009. On October 10, 2012, we issued to CBV an unsecured promissory note in the principal amount of $310,400 (the 2012 CBV Note) and a five-year warrant to purchase 12,500 restricted shares of our common stock at a price of $30.00 per share (the CBV Warrant).  Additionally, on October 10, 2012, we issued to CRL: (i) an unsecured promissory note in the initial principal amount of $1,009,000, payable solely in restricted shares of our common stock and which accrued interest at the rate of 7.5% per annum, compounded monthly (the CRL Note), as payment in full for all contract research and development services and regulatory advice rendered to us by CRL through December 31, 2012 with respect to CRO services, including regulatory strategy and preclinical and clinical development of AV-101, and (ii) a five-year warrant to purchase, at a price of $20.00 per share, 50,450 restricted shares of our common stock, such number of shares to be adjusted in relation to accrued interest on the CRL Note (CRL Warrant). The Cato Notes and additional amounts payable to CRL for CRO services were extinguished in June 2015 in exchange for our issuance of an aggregate of 328,571 shares of Series B Preferred to CBV, which shares of Series B Preferred were automatically converted into an equal number of registered shares of our common stock in connection with the May 2016 Public Offering. CBV also participated in our February 2016 warrant exchange, exchanging the CBV Warrant and the CRL Warrant, as adjusted to reflect accrued interest, for an aggregate of 54,894 shares of our unregistered common stock.
 
Under the terms of our CRO arrangement with CRL related to the development of AV-101, we incurred expenses of $27,800 and $10,900 for the quarters ended September 30, 2016 and 2015, respectively, and $78,200 and $22,100 in the six month periods ended September 30, 2016 and 2015, respectively. Total interest expense, including amortization of note discount, on the notes payable to CBV and CRL was $28,200 for the three-month period ended June 30, 2015 during which the notes were extinguished.
 
 
-13-
 
 
Note 10.  Subsequent Events
 
We have evaluated subsequent events through November 11, 2016 and have identified the following matters requiring disclosure:
Warrants Exchanged for Common Stock
In October 2016, we entered into a Warrant Exchange Agreement with a holder of outstanding warrants to purchase 113,944 shares of our common stock pursuant to which the holder agreed to cancel such warrants in exchange for the issuance of 85,458 restricted shares of our common stock.
Issuance of Common Stock for Professional Services
Effective November 1, 2016, we issued 25,000 shares of our unregistered common stock as partial compensation for investor relations, market awareness and other services.
Stock Option Grants
Effective November 9, 2016, our Board authorized the grant of stock options to purchase an aggregate of 560,000 shares of our common stock pursuant to our Amended and Restated 2016 Stock Incentive Plan.  Options were granted to independent members of our Board and our officers and employees.  The ten-year options are exercisable at $3.80 per share and vest over a period of three years.
Lease Extension
Effective November 10, 2016, we entered into an amendment to the lease of our headquarters facility, pursuant to which the term of the lease was extended from July 31, 2017 to July 31, 2022 and the base rent under the lease for the five-year extension period was specified. A copy of the amended lease is attached to this Quarterly Report on Form 10-Q.
 
 
-14-
 
 
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 (Quarterly Report) includes forward-looking statements. All statements contained in this Quarterly Report 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 this Quarterly Report.  Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, 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 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 or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Business Overview
 
We are a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative product candidates for patients with diseases and disorders involving the central nervous system (CNS). 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. All references to future quarters and years in this Item 2 refer to calendar quarters and calendar years, unless reference is made otherwise.
 
Our lead product candidate, AV-101, is a new generation, oral antidepressant drug candidate in Phase 2 development, initially for the adjunctive treatment of Major Depressive Disorder (MDD) in patients with an inadequate response to standard antidepressants approved by the U.S. Food and Drug Administration (FDA).  We believe AV-101 may also have therapeutic potential in other CNS indications, including chronic neuropathic pain, epilepsy, Huntington’s disease and Parkinson’s disease.
 
AV-101’s mechanism of action, as an N-methyl D aspartate receptor (NMDAR) antagonist binding selectively at the glycine binding (GlyB) co-agonist site of the NMDAR, is fundamentally differentiated from all FDA-approved antidepressants, as well as all atypical antipsychotics used to augment standard antidepressant therapy.
 
 
 
-15-
 
 
We are preparing to launch our Phase 2b clinical study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants (Phase 2b Study).  We currently anticipate commencement of this multi-center, multi-dose, double blind, placebo-controlled Phase 2b efficacy and safety study in the first half of 2017. Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, will be the Principal Investigator of our Phase 2b Study. Dr. Fava was the co-Principal Investigator with Dr. A. John Rush of the largest clinical trial conducted in depression to date, the STAR*D study, whose findings were published in journals such as the New England Journal of Medicine (NEJM) and the Journal of the American Medical Association (JAMA). We currently anticipate top line results in this Phase 2b Study in the third quarter of 2018.
 
In addition to clinical development of AV-101, we are advancing potential commercial applications of our human pluripotent stem cell (hPSC) technology platform, including drug rescue and regenerative medicine (RM).  Our small molecule drug rescue programs involve using CardioSafe 3D, our customized cardiac bioassay system, to develop new chemical entities (NCEs) for our internal pipeline.  Potential RM applications include using blood, cartilage, heart and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering.  We may pursue these drug rescue and RM applications in collaboration with third-parties.
 
AV-101 and Major Depressive Disorder
 
Background
 
The World Health Organization (WHO) 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. The NIMH reports that, in 2014, an estimated 15.7 million adults aged 18 or older in the U.S. had at least one major depressive episode in the past year. This represented 6.7 percent of all U.S. adults. According to the U.S. Centers for Disease Control and Prevention (CDC) one in 10 Americans over the age of 12 takes an antidepressant medication.
 
Most standard, FDA-approved antidepressants target neurotransmitter reuptake inhibition – either serotonin (SSRIs) or serotonin/norepinephrine (SNRIs). Even when effective, these standard depression medications take many weeks to achieve adequate antidepressant effects. Nearly two out of every three drug-treated depression patients, including an estimated 6.9 million drug-treated MDD patients in the U.S., obtain inadequate therapeutic benefit from initial treatment with a standard antidepressant. Unfortunately, even after treatment with as many as four different standard antidepressants, nearly one out of every three drug-treated depression patients do not achieve adequate therapeutic benefits.  Such treatment-resistant depression patients often seek to treat their depression with non-drug-related approaches, such as Electroconvulsive Therapy (ECT), or to augment their inadequate response to standard antidepressants by adding an atypical antipsychotic (such as, for example, aripiprazole) to their treatment regimen, despite only modest potential therapeutic benefit and significant risk of additional side effects from such augmentation options.
 
All standard antidepressants have risks of significant side effects, including, among others, potentially anxiety, metabolic syndrome, sleep disturbance and sexual dysfunction.  They also have a “Black Box” warning due to risks of worsening depression and suicide in certain groups. Use of atypical antipsychotics to augment inadequately performing standard antidepressants increases the risk of serious side effects, including, potentially, tardive dyskinesia, significant weight gain, diabetes and heart disease, while offering only a modest potential increase in therapeutic benefit. Use of ECT increases the risk of serious side effects, including, headaches, tiredness, disorientation, intense sleepiness, hallucinations and long-term memory loss.
 
 
 
-16-
 
 
AV-101
 
AV-101, our oral new generation antidepressant drug candidate, is in Phase 2 clinical development, initially for the adjunctive treatment of MDD patients with an inadequate response to standard antidepressants. As published in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article entitled, The prodrug 4-chlorokynurenine causes ketamine-like antidepressant effects, but not side effects, by NMDA/glycineB-site inhibition, using well-established preclinical models of depression, AV-101 was shown to induce fast-acting, dose-dependent, persistent and statistically significant antidepressant-like responses, following a single treatment. These responses were equivalent to those seen with a single, sub-anesthetic control dose of the NMDAR antagonist ketamine. In the same preclinical studies, a standard antidepressant, the SSRI fluoxetine, did not induce rapid onset antidepressant-like responses. In addition, these studies confirmed that the fast-acting antidepressive effects of AV-101 were mediated through the GlyB site and involved the activation of a key neurological pathway, the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (AMPA) receptor pathway. Activation of the AMPA receptor pathway is a common feature of fast-acting antidepressants.
 
Following the completion of our NIH-funded, randomized, double blind, placebo-controlled AV-101 Phase 1a and Phase 1b safety studies, we are now collaborating with the NIMH in a Phase 2a study. Under our February 2015 CRADA, the NIMH is funding, and Dr. Carlos Zarate Jr. of the NIMH as Principal Investigator is conducting, our ongoing Phase 2a efficacy and safety study of AV-101 in subjects with treatment-resistant MDD. The trial is expected to enroll 20 to 28 patients.  The first patient was dosed in November 2015, and we currently anticipate topline results in the second quarter of 2017.
 
We are preparing to launch our Phase 2b Study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants. We currently anticipate the launch of the Phase 2b Study, with Dr. Maurizio Fava of Harvard Medical School serving as Principal Investigator, in the first half of 2017. We currently anticipate topline results from the Phase 2b Study in the third quarter of 2018. 
 
We believe several preclinical studies support the hypothesis that AV-101 also has the potential to treat multiple CNS disorders and neurodegenerative diseases in addition to MDD, including chronic neuropathic pain, epilepsy, Parkinson’s disease and Huntington’s disease, where modulation of the NMDAR, AMPA pathway and/or active metabolites of AV-101 may achieve therapeutic benefit.
 
CardioSafe 3D™; NCE Drug Rescue and Regenerative Medicine
 
CardioSafe 3D™ is our customized in vitro cardiac bioassay system capable of predicting potential human heart toxicity of small molecule NCEs in vitro, long before they are ever tested in animal and human studies. We are currently focused on potential commercial applications of our stem cell technology platform involving (i)  use of CardioSafe 3D for small molecule NCE drug discovery and drug rescue to expand our drug candidate pipeline, leveraging substantial prior research and development investments by pharmaceutical companies and others related to public domain NCEs terminated before FDA approval due to heart toxicity risks and (ii) RM, including (A) cell-based therapy (injection of stem cell-derived mature organ-specific cells obtained through directed differentiation), (B) cell repair therapy (induction of regeneration by biologically active molecules administered alone or produced by infused genetically engineered cells), or (C) tissue engineering (transplantation of in vitro grown complex tissues) using hPSC-derived blood, bone, cartilage, heart and/or liver cells. We may collaborate with one or more third-parties in connection with these potential commercial applications of our stem cell technology platform.
 
Financial Operations Overview and Results of Operations
 
Our critical accounting policies and estimates and recent accounting pronouncements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, as filed with the SEC on June 24, 2016, 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.
 
 
 
-17-
 
 
Summary
Net Loss
 
We have not yet achieved revenue-generating status from any of our product candidates or technologies. Since inception, we have devoted substantially all of our time and efforts to developing our lead CNS product candidate, AV-101, from early preclinical studies to our ongoing Phase 2 clinical development programs in MDD, as well as stem cell technology research and development, bioassay development, small molecule drug development, and creating, protecting and patenting intellectual property related to our product candidates and technologies, with the corollary initiatives of recruiting and retaining personnel and raising working capital. As of September 30, 2016, we had an accumulated deficit of approximately $136.8 million. Our net loss for the six months ended September 30, 2016 was approximately $5.1 million. Our net loss for the six months ended September 30, 2015 was approximately $36.6 million, which amount included a non-recurring, non-cash loss of approximately $26.7 million attributable to extinguishment and conversion of approximately $17.2 million of our prior indebtedness into equity securities between May and August 2015. We expect losses to continue for the foreseeable future, primarily related to our further clinical development of AV-101 for the adjunctive treatment of MDD, as well as a range of other CNS indications.
 
Summary of Six Months Ended September 30, 2016
 
During the six months ended September 30, 2016, we continued to (i) advance clinical development of AV-101 as a new generation antidepressant, (ii) expand the regulatory foundation to support Phase 2 clinical development of AV-101 in the U.S. both as a new adjunctive treatment for patients with inadequate response to standard, FDA-approved antidepressants and as a new therapeutic alternative for several other CNS indications, and, (iii) on a limited basis, advance both (a) the predictive toxicology capabilities of CardioSafe 3D for drug rescue applications, including our ongoing participation in the FDA’s Comprehensive in-vitro Proarrhythmia Assay (CiPA) initiative designed to change the landscape of preclinical drug development by providing a more complete and accurate assessment of potential drug effects on cardiac risk, and (b) regenerative medicine opportunities related to our stem cell technology platform.
 
Pursuant to our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIH, the NIH continues to fund, and Dr. Carlos Zarate Jr. of the NIMH continues to conduct, a Phase 2a clinical study of AV-101 in treatment-resistant MDD. In addition, we continue preparations for our Phase 2b clinical study of AV-101 for the adjunctive treatment of MDD in patients with an inadequate response to standard, FDA-approved antidepressants (the Phase 2b Study). We currently anticipate the launch of the Phase 2b Study, with Dr. Maurizio Fava of Harvard Medical School serving as Principal Investigator, in the first half of 2017.
 
In May 2016, we consummated an underwritten public offering of our securities, pursuant to which we issued to institutional investors an aggregate of 2,570,040 registered shares of our common stock and five-year warrants exercisable at $5.30 per share to purchase an aggregate of 2,705,883 shares of our common stock and received net proceeds, after deducting underwriters’ commissions and other expenses, of approximately $9.5 million (May 2016 Public Offering). In connection with the May 2016 Public Offering, we also uplisted our common stock to the NASDAQ Capital Markets, where it has traded under the symbol “VTGN” since May 11, 2016. Please see the section titled “Liquidity and Capital Resources” below, for a discussion of our capital needs following the May 2016 Public Offering.
 
In addition to bolstering our Clinical and Regulatory Advisory Board with the appointment of Dr. Maurizio Fava as Chairman and the addition of members Dr. Sanjay Matthew and Dr. Thomas Laughren, all pre-eminent opinion leaders in the field of depression, and the addition of veteran healthcare executive Jerry Gin, Ph.D., MBA to our Board of Directors, we recently enhanced our management team with the addition of Mark A. Smith, MD, Ph.D., as our Chief Medical Officer in June 2016. Dr. Smith has over 20 years of pharmaceutical industry and CNS drug development experience.  He has been a successful project leader in both drug discovery and development on projects resulting in approximately 20 investigational new drugs (INDs).  Dr. Smith has directed clinical trials examining depression, bipolar disorder, anxiety, schizophrenia, Alzheimer’s disease, ADHD and agitation in Phase 1 through Phase 2b. In addition, Dr. Smith has vast knowledge and expertise in translational neuroscience, clinical trial design and regulatory interactions. Further, in September 2016, we appointed Mark A. McPartland as our Vice President of Corporate Development and Investor Relations. Mr. McPartland has over 20 years of experience in corporate development, capital markets, corporate communications and management consulting for companies at varying stage of their corporate evolution, including early- and mid-stage biopharmaceutical companies. Mr. McPartland will concentrate his initial efforts in expanding awareness of VistaGen across a range of investors, researchers, patients, clinicians and potential partners.
 
 
 
-18-
 
 
As a matter of course, we attempt to minimize to the greatest extent possible cash commitments and expenditures for both internal and external research and development and general and administrative services. To further advance the clinical development of AV-101 and our stem cell technology platform, as well as support our operating activities, we will continue to carefully manage our routine operating costs, including our internal employee related expenses, as well as external costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, accounting, public company compliance and other professional services and working capital costs. 
 
Results of Operations
 
Comparison of Three Months Ended September 30, 2016 and 2015
 
The following table summarizes the results of our operations for the three months ended September 30, 2016 and 2015 (amounts in thousands).
 
 
 
 Three Months Ended
September 30,
 
 
 
 2016
 
 
 2015
 
Operating expenses:
 
 
 
 
 
 
 Research and development
 $1,606 
 $1,656 
 General and administrative
  1,494 
  3,731 
  Total operating expenses
  3,100 
  5,387 
 
    
    
Loss from operations
  (3,100)
  (5,387)
 
    
    
Interest expense, net
  (1)
  (12)
Loss on extinguishment of debt
  - 
  (1,649)
 
    
    
Loss before income taxes
  (3,101)
  (7,048)
Income taxes
  - 
  - 
 
    
    
Net loss
 $(3,101)
 $(7,048)
  Accrued dividend on Series B Preferred Stock
  (241)
  (615)
  Deemed dividend on Series B Preferred Stock
  - 
  (887)
Net loss attributable to common stockholders
 $(3,342)
 $(8,550)
 
Revenue   
 
We reported no revenue for the quarters ended September 30, 2016 or 2015 and we presently have no revenue generating arrangements. However, as indicated previously, we have entered into a CRADA with the NIH providing for NIH funding of a Phase 2a clinical study of AV-101 in treatment resistant Major Depressive Disorder. This Phase 2a study, which began in November 2015, is being fully funded by the NIH and conducted at the NIMH by Dr. Carlos Zarate, Jr.
 
 
 
-19-
 
 
Research and Development Expense
 
Research and development expense totaled $1,606,100 for the quarter ended September 30, 2016, a 3% decrease compared with the $1,656,100 reported for the quarter ended September 30, 2015, which included significant noncash stock-based compensation expense. Although the decrease between periods is modest, current period costs reflect the increasing impact of our concentration on continued development of AV-101 and preparations for launch of the Phase 2b Study, which is currently anticipated in the first half of 2017. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
 
 
 
Three Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $461 
 $212 
Stock-based compensation
  82 
  887 
Consulting and other professional services
  31 
  24 
Technology licenses and royalties
  94 
  434 
Project-related research and supplies:
    
    
AV-101
  817 
  13 
Stem cell and all other
  51 
  21 
 
  868 
  34 
Rent
  62 
  55 
Depreciation
  8 
  10 
 
    
    
Total Research and Development Expense
 $1,606 
 $1,656 
 
The increase in salaries and benefits reflects the impact of a bonus payment made to our President and Chief Scientific Officer (CSO), the hiring of Dr. Mark Smith as our Chief Medical Officer (CMO), and salary increases granted to our CSO and the four non-officer members of our scientific staff.
 
The decrease in stock based compensation expense is primarily attributable to the $852,200 fair value, determined using the Black-Scholes Option Pricing Model and the assumptions indicated in Note 2, Summary of Significant Accounting Policies, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, of the September 2015 grant of immediately vested and expensed warrants to purchase 150,000 shares of our common stock granted to our CSO. Stock compensation expense in 2016 reflects the ratable amortization of option grants made to our CSO and CMO, scientific staff and consultants, most recently in June 2016 (CSO and CMO only) and September 2015 (primarily in 2016 expense). Our stock options are generally amortized over a two-year to four-year vesting period. A substantial number of the option grants made in or prior to our fiscal year ended March 31, 2014 became fully-vested and were fully-expensed prior to the quarter ended September 30, 2016.
 
Consulting services reflects fees paid or accrued for scientific, preclinical and clinical development and regulatory advisory services rendered to us by third-parties, primarily by members of our scientific and clinical and regulatory advisory boards.
 
Technology license expense reflects both recurring annual fees as well as legal counsel and other costs related to patent prosecution and protection that we are required to fund under the terms of certain of our stem cell technology license agreements or have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors and they do not occur ratably throughout the year or between years. In both periods, but to a greater extent in the quarter ended September 30, 2015, this expense includes legal counsel and other costs we have incurred to advance in the U.S. and numerous foreign countries numerous pending patent applications with respect to AV-101 and our stem cell technology platform. Expense for the quarter ended September 30, 2015, also included approximately $153,000 of fees and expenses related to stem cell technology related licenses acquired from University Health Network (UHN) in connection with our Sponsored Research Collaboration Agreement with UHN. Further, in July 2015, we granted an aggregate of 10,000 shares of our Series B Preferred having an aggregate fair value on the date of grant of $120,000 to two strategic intellectual property legal service providers.
 
AV-101 project expenses for the quarter ended September 30, 2016 includes continuing costs incurred to develop more efficient and cost-effective production methods for AV-101 and for certain pre-production and preclinical trial analyses and procedures to facilitate Phase 2 clinical development of AV-101, including the Phase 2b Study. AV-101 expense in both periods reflects the costs associated with monitoring for and responding to potential feedback related to the AV-101 Phase 1 clinical trials and addressing other matters required under the terms of our prior NIH grant awards, primarily through our Cato Research Ltd., our CRO for our Phase 1 safety studies. Stem cell and other project related expenses in both periods were nominal.
 
 
 
-20-
 
 
General and Administrative Expense
 
General and administrative expense decreased to $1,493,600 from $3,730,500, for the quarters ended September 30, 2016 and 2015, respectively, primarily as a result of the decrease in noncash stock compensation expense attributable to option and warrant grants to employees and noncash expense related to grants of equity securities in payment of certain professional services. The following table indicates the primary components of general and administrative expenses for each of the periods (amounts in thousands):
 
 
 
Three Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $485 
 $172 
Stock-based compensation
  117 
  2,854 
Consulting Services
  36 
  28 
Legal, accounting and other professional fees
  207 
  511 
Investor relations
  471 
  22 
Insurance
  38 
  34 
Travel expenses
  23 
  38 
Rent and utilities
  45 
  39 
Warrant modification expense
  17 
  - 
All other expenses
  54 
  33 
 
    
    
Total General and Administrative Expense
 $1,493 
 $3,731 
 
The increase in salaries and benefits reflects the impact of bonus payments made to our Chief Executive Officer (CEO) and Chief Financial Officer (CFO); the hiring of Mark McPartland as our Vice President of Corporate Development and Investor Relations; and salary increases granted to our CEO, CFO and a non-officer member of our administrative staff and the change in that employee’s status from part-time to full-time.
 
The decrease in stock based compensation expense is primarily attributable to the $2,841,000 fair value, determined using the Black-Scholes Option Pricing Model and the assumptions indicated in Note 2, Summary of Significant Accounting Policies, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, of the September 2015 grant of immediately vested and expensed warrants to purchase 500,000 shares of our common stock granted to our CEO, CFO, independent members of our Board of Directors and certain consultants. Stock compensation expense in 2016 reflects the ratable amortization of option grants made to our CEO, CFO, independent members of our Board of Directors and administrative staff and consultants, most recently in June 2016 (CEO, CFO and independent Board members only) and September 2015 (primarily in 2016 expense), as well as to Mr. McPartland upon his commencement of employment in September 2016. Our stock options are generally amortized over a two-year to four-year vesting period. A substantial number of the option grants made in or prior to our fiscal year ended March 31, 2014 became fully-vested and were fully-expensed prior to the quarter ended September 30, 2016.
 
Consulting services primarily includes fees recognized for the services of independent members of our Board of Directors. We added an additional independent director to our Board in March 2016.
 
Legal, accounting and other professional fees in the quarter ended September 30, 2015 included $337,500 of noncash expense recognized during the quarter pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B Preferred having an aggregate fair 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. In the quarter ended September 30, 2016, we also granted an aggregate of 25,000 unregistered shares of our common stock having a fair value of $108,500 to a legal services provider as compensation for services. In both years, professional services fees also include the expense related to the annual audit of the prior year financial statements and quarterly reviews of current year financial statements.
 
 
 
-21-
 
 
Investor relations expense includes the fees of our external service providers for a broad spectrum of investor relations and market awareness and support functions and, in the quarter ended September 30, 2016, initiatives that include numerous meetings and other communication activities focused on expanding market awareness of the Company, including among investment professionals and investment advisors, and individual and institutional investors. In the quarter ended September 30, 2016, we granted an aggregate of 25,000 unregistered shares of our common stock having a fair value at the time of issuance of $108,500 to an investor relations service provider as compensation for services, and, as noted in Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, 120,000 unregistered shares of our common stock having a fair value at the time of issuance of $520,800 to a consulting services provider for corporate development and other strategic advisory services to be rendered from October 2016 to December 2016. The value of the latter common stock grant was recorded as a prepaid expense at the date of the grant and will be expensed during the quarter ended December 31, 2016.
 
In both periods, travel expense reflects costs associated with presentations to and meetings with existing and potential individual and institutional investors, investment professionals and investment advisors, media and securities analysts, as well as various investor relations, market awareness and corporate development initiatives.
 
In August 2016, we entered into warrant exchange agreements with certain warrant holders pursuant to which the warrant holders exchanged outstanding warrants to purchase an aggregate of 20,000 shares of our common stock for an aggregate of 15,000 shares of our unregistered common stock.  As with similar transactions during the quarters ended March 31, 2016 and June 30, 2016, we accounted for these transactions as warrant modifications, resulting in our recognition of $17,100 in noncash expense in the quarter ended September 30, 2016.
 
Interest and Other Expenses, Net   
 
Interest expense, net totaled $1,400 for the quarter ended September 30, 2016 compared to $12,200 reported for the quarter ended September 30, 2015, with both quarters reflecting the impact of the extinguishment of a substantial majority of our promissory notes, as well as other indebtedness, between May 2015 and August 2015 by conversion into our Series B Preferred or cash repayment and the related elimination of note interest and discount amortization. The following table summarizes the primary components of interest expense for each of the periods (amounts in thousands):
 
 
 
Three Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Interest expense on promissory notes
 $- 
 $13 
Amortization of discount on promissory notes
  - 
  14 
Other interest expense, including on capital leases and premium financing
  1 
  1 
 
  1 
  28 
Effect of foreign currency fluctuations on notes payable
  - 
  (16)
Interest income
  - 
  - 
 
    
    
Interest expense, net
 $1 
 $12 
 
Interest expense on promissory notes in the quarter ended September 30, 2015 represents the quarterly interest accrued on our outstanding Note A to Morrison & Foerster prior to its conversion into our Series B Preferred in August 2015, our outstanding note to University of California at Davis prior to our repayment of such note in January 2016 and our outstanding note to Progressive Medical Research prior to our repayment of such in June 2016. Discount amortization for the same period was attributable to Note A to Morrison & Foerster. Other interest expense in both periods relates to interest paid on insurance premium financing and one capital lease of office equipment.
 
During the quarter ended September 30, 2015, we eliminated the outstanding balances of an additional approximately $1.8 million of promissory notes and other debt (after having 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, in the quarter ended June 30, 2015) by converting such balances into shares of our Series B Preferred. We treated the conversion of the indebtedness into Series B Preferred as extinguishments of debt for accounting purposes. Because the fair value of the Series B Preferred we negotiated in settlement of the promissory notes and other indebtedness in the both the quarter ended September 30, 2015 and the quarter ended June 30, 2015 exceeded the carrying value of the debts, we incurred non-recurring noncash losses on each of the extinguishments. During the quarter ended September 30, 2015, we recorded an aggregate net noncash loss of $1,649,300 attributable to the extinguishment of debt converted into Series B Preferred.
 
 
 
-22-
 
 
We allocated proceeds from our self-placed private placement sales of Series B Preferred Units during the quarter ended September 30, 2015 to the Series B Preferred and the Series B Warrants based on their relative fair values on the dates of the sales. The difference, for accounting purposes, 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 represented a deemed dividend to the purchasers of the Series B Preferred Units. Accordingly, we recognized a deemed dividend in the aggregate amount of $886,900 in arriving at net loss attributable to common stockholders for the quarter ended September 30, 2015 in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss included in Part I of this Report. Our private placement offering of Series B Preferred Units was completed in May 2016.
 
We have recognized $241,000 and $614,700 for the quarters ended September 30, 2016 and 2015, respectively, 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 included in Part I of this Report. The reduction in the quarterly dividend accrual results from the automatic conversion of an aggregate of 2,403,051 shares of Series B Preferred upon our completion of the May 2016 Public Offering, as disclosed in Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report.
 
Comparison of Six Months Ended September 30, 2016 and 2015
 
The following table summarizes the results of our operations for the six months ended September 30, 2016 and 2015 (amounts in thousands).
 
 
 
 Six Months Ended
September 30,
 
 
 
 2016
 
 
 2015
 
Operating expenses:
    
    
 Research and development
 $2,432 
 $2,029 
 General and administrative
  2,631 
  5,179 
  Total operating expenses
  5,063 
  7,208 
 
    
    
Loss from operations
  (5,063)
  (7,208)
 
    
    
Interest expense (net)
  (3)
  (767)
Change in warrant liabilities
  - 
  (1,895)
Loss on extinguishment of debt
  - 
  (26,700)
 
    
    
Loss before income taxes
  (5,066)
  (36,570)
Income taxes
  (2)
  (2)
 
    
    
Net loss
 $(5,068)
 $(36,572)
  Accrued dividend on Series B Preferred Stock
  (781)
  (828)
  Deemed dividend on Series B Preferred Stock
  (111)
  (1,143)
Net loss attributable to common stockholders
 $(5,960)
 $(38,543)
 
Revenue   
 
We reported no revenue for the six month periods ended September 30, 2016 or 2015 and we presently have no revenue generating arrangements. However, as indicated previously, we have entered into a CRADA with the NIH providing for the NIH to fund and conduct a Phase 2a clinical study of AV-101 in treatment resistant Major Depressive Disorder. This Phase 2a study, which began in November 2015, is being funded by the NIH and conducted at the NIMH by Dr. Carlos Zarate, Jr.
 
 
 
-23-
 
 
Research and Development Expense
 
Research and development expense totaled $2,431,800 for the six months ended September 30, 2016, approximately 20% greater than the $2,028,700 incurred for the six months ended September 30, 2015, reflecting our increasing focus on the continued development of AV-101 and preparations to launch the Phase 2b Study, which we currently anticipate to begin in the first half of 2017, and offset by a reduction in noncash stock compensation expense compared to the prior period. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
 
 
 
Six Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $711 
 $414 
Stock-based compensation
  126 
  905 
Consulting and other professional services
  58 
  46 
Technology licenses and royalties
  254 
  487 
Project-related research and supplies:
    
    
AV-101
  1,069 
  24 
Stem cell and all other
  79 
  23 
 
  1,148 
  47 
Rent
  118 
  108 
Depreciation
  17 
  21 
All other
  - 
  1 
 
    
    
Total Research and Development Expense
 $2,432 
 $2,029 
 
The increase in salaries and benefits reflects the impact of bonus payments made to our President and Chief Scientific Officer (CSO) and to the four non-officer members of our scientific staff, the hiring of Dr. Mark Smith as our Chief Medical Officer (CMO), and salary increases granted to our CSO and members of our scientific staff.
 
The decrease in stock based compensation expense is primarily attributable to the $852,200 fair value, determined using the Black-Scholes Option Pricing Model and the assumptions indicated in Note 2, Summary of Significant Accounting Policies, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, of the September 2015 grant of immediately vested and expensed warrants to purchase 150,000 shares of our common stock granted to our CSO. Stock compensation expense in 2016 reflects the ratable amortization of option grants made to our CSO and CMO, scientific staff and consultants, most recently in June 2016 (CSO and CMO only) and September 2015 (primarily in 2016 expense). Our stock options are generally amortized over a two-year to four-year vesting period. A substantial number of the option grants made in or prior to our fiscal year ended March 31, 2014 became fully-vested and were fully-expensed prior to the quarter ended September 30, 2016.
 
Consulting services reflects fees paid or accrued for scientific, preclinical and clinical development and regulatory advisory services rendered to us by third-parties, primarily by members of our scientific and clinical and regulatory advisory boards.
 
Technology license expense reflects both recurring annual fees as well as legal counsel and other costs related to patent prosecution and protection that we are required to fund under the terms of certain of our stem cell technology license agreements or have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors and they do not occur ratably throughout the year or between years. Additionally, in both periods, this expense includes legal counsel and other costs we have incurred to advance in the U.S. and numerous foreign countries several pending patent applications with respect to AV-101 and our stem cell technology platform. Expense for the six months ended September 30, 2015, also included approximately $153,000 of fees and expenses related to stem cell technology related licenses acquired in connection with our Sponsored Research Collaboration Agreement with UHN. Further, in July 2015, we granted an aggregate of 10,000 shares of our Series
 
 
 
-24-
 
 
B Preferred having an aggregate fair value on the date of grant of $120,000 to two intellectual property legal service providers.
 
AV-101 project expenses for the six months ended September 30, 2016 includes continuing costs incurred to develop more efficient and cost-effective production methods for AV-101 and for certain pre-production and preclinical trial analyses and procedures to facilitate Phase 2 clinical development of AV-101, including the Phase 2b Study. We expect these expenses to increase materially over the next several quarters as we conduct the Phase 2b Study. Additionally, AV-101 expense in both periods reflects the costs associated with monitoring for and responding to potential feedback related to our AV-101 Phase 1 clinical safety program and addressing other matters required under the terms of our prior NIH grant awards, primarily through our CRO for our Phase 1 safety studies, Cato Research Ltd. Stem cell and other project related expenses in both periods were nominal.
 
General and Administrative Expense
 
General and administrative expense decreased to $2,631,200 from $5,179,000, for the six month periods ended September 30, 2016 and 2015, respectively, primarily as a result of the decrease in noncash stock compensation expense attributable to option and warrant grants to employees, officer and independent Board members and noncash expense related to grants of equity securities in payment of certain professional services during 2015. The following table indicates the primary components of general and administrative expenses for each of the periods (amounts in thousands):
 
 
 
Six Months Ended September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $675 
 $348 
Stock-based compensation
  181 
  2,865 
Consulting services
  69 
  56 
Legal, accounting and other professional fees
  749 
  1,470 
Investor relations
  579 
  56 
Insurance
  78 
  72 
Travel and entertainment
  72 
  55 
Rent and utilities
  85 
  76 
Warrant modification expense
  57 
  122 
All other expenses
  86 
  59 
 
    
    
Total General and Administrative Expense
 $2,631 
 $5,179 
 
The increase in salaries and benefits reflects the impact of bonus payments made to our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the hiring of Mark McPartland as our Vice President of Corporate Development and Investor Relations, and salary increases granted to our CEO, CFO and a non-officer member of our administrative staff and the change in that employee’s status from part-time to full-time.
 
The decrease in stock based compensation expense is primarily attributable to the $2,841,000 fair value, determined using the Black-Scholes Option Pricing Model and the assumptions indicated in Note 2, Summary of Significant Accounting Policies, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, of the September 2015 grant of immediately vested and expensed warrants to purchase 500,000 shares of our common stock granted to our CEO, CFO, independent members of our Board of Directors and certain consultants. Stock compensation expense in 2016 reflects the ratable amortization of option grants made to our CEO, CFO, independent members of our Board of Directors and administrative staff and consultants, most recently in June 2016 (CEO, CFO and independent Board members only) and September 2015 (primarily in 2016 expense), as well as to Mr. McPartland upon his commencement of employment in September 2016. Our stock options are generally amortized over a two-year to four-year vesting period. A substantial number of the option grants made in or prior to our fiscal year ended March 31, 2014 became fully-vested and were fully-expensed prior to the quarter ended September 30, 2016.
 
Consulting services primarily includes fees recognized for the services of independent members of our Board of Directors. We added an additional independent director to our Board in March 2016.
 
 
 
-25-
 
 
Legal, accounting and other professional fees in the six month periods ended September 30, 2016 and 2015, each included $337,500 of noncash expense recognized during the respective period pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B Preferred having an aggregate fair value of $1,350,000 as compensation for financial advisory and corporate development service contracts with two independent contractors for services performed between July 1, 2015 and June 30, 2016. During the six-month period ended September 30, 2016, we also granted an aggregate of 25,000 unregistered shares of our common stock having a fair value at the date of issuance of $108,500 to a legal services provider as compensation for services. During the six-month period ended September 30, 2015, we granted an aggregate of 50,000 shares of our common stock having a fair value of $500,000 pursuant to two corporate development contracts and granted 25,000 shares of our Series B Preferred having a fair value at the time of issuance 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 also include the expense related to the annual audit of the prior year financial statements and quarterly reviews of current year financials statements.
 
Investor relations expense includes the fees of our external service providers for a broad spectrum of investor relations and market awareness and support functions and, in the six-month period ended September 30, 2016, initiatives that include meetings and other communication activities focused on expanding market awareness of the Company, including among investment professionals and investment advisors, individual and institutional investors, media and securities analysts. In the six months ended September 30, 2016, we also granted an aggregate of 25,000 unregistered shares of our common stock having a fair value at the time of issuance of $108,500 to an investor relations service provider as compensation for services, and, as disclosed in Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report, in September 2016, 120,000 unregistered shares of our common stock having a fair value at the time of issuance of $520,800 to a consulting services provider for corporate development and strategic advisory services to be rendered from October 2016 to December 2016. The value of the latter common stock grant was recorded as a prepaid expense at the date of the grant and will be expensed during the quarter ended December 31, 2016.
 
In both periods, travel expense reflects costs associated with presentations to and meetings with existing and potential investors and investment professionals and advisors, media and securities analysts, as well as various investor relations, market awareness and corporate development initiatives.
 
Between April 2016 and August 2016, we entered into warrant exchange agreements with certain warrant holders pursuant to which the warrant holders exchanged outstanding warrants to purchase an aggregate of 61,649 shares of our common stock for an aggregate of 46,238 shares of our unregistered common stock.  As with similar transactions during our fiscal year ended March 31, 2016, we accounted for these transactions as warrant modifications, resulting in our recognition of an aggregate of $57,400 in noncash expense during the six-month period ended September 30, 2016. Warrant modification expense in the six-month period ended September 30, 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.
 
Interest and Other Expenses, Net   
 
Interest expense, net, totaled $2,800 for the six months ended September 30, 2016, a significant decrease compared to the $767,300 reported for the six months ended September 30, 2015, resulting from the extinguishment of substantially all of our promissory notes, as well as other indebtedness, between May 2015 and August 2015 by conversion into our Series B Preferred or cash repayment and the related elimination of note interest and discount amortization. The following table summarizes the primary components of interest expense for each of the periods (amounts in thousands):
 
 
 
Six Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Interest expense on promissory notes
 $   1
 $206 
Amortization of discount on promissory notes
     -
  565 
Other interest expense, including on capital leases and premium financing
 2
  2 
 
  3 
  773 
Effect of foreign currency fluctuations on notes payable
  - 
  (6)
Interest income
  - 
  - 
 
    
    
Interest expense, net
 $3 
 $767 
 
 
 
-26-
 
 
Interest expense on promissory notes in the six months ended September 30, 2016 represents only the interest accrued on our promissory note to Progressive Medical Research prior to its repayment in June 2016. The substantial overall decrease in interest expense on promissory notes and the related amortization of discounts on such notes between the periods reflects the cessation of interest accrual and discount amortization upon the extinguishment and conversion of all outstanding Senior Secured Convertible Notes, certain 10% convertible notes (2014 Unit Notes) and other outstanding promissory notes into shares of our Series B Preferred between May 2015 and August 2015.
 
Under the terms of our October 2012 Note Exchange and Purchase Agreement with Platinum Long Term Growth VII, LLC (PLTG), we issued certain Senior Secured Convertible Promissory Notes and a related Exchange Warrant and Investment Warrants between October 2012 and July 2013. Upon PLTG’s exchange of the shares of our Series A Preferred Stock held by PLTG into shares of our common stock, we were also required to issue a Series A Exchange Warrant to PLTG. We determined that the various warrants included certain exercise price and other adjustment features requiring us to treat the warrants as liabilities. Accordingly, we recorded a noncash warrant liability at its estimated fair value as of the date of warrant issuance or contract execution. As described in Note 4, Fair Value Measurements, to the Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report, on May 12, 2015, we entered into an agreement with PLTG pursuant to which we amended the various 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, during the quarter ended June 30, 2015, we adjusted these warrants to their fair value, 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 then subsequently eliminated the entire warrant liability with respect to these warrants. In January 2016, the PLTG warrants were exchanged for shares of our Series C Preferred stock.
 
Between May 2015 and August 2015 we extinguished the outstanding balances of approximately $17,200,000 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 indebtedness 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 indebtedness exceeded the carrying value of the debts, we incurred non-recurring noncash losses on each of the extinguishments. Additionally, under the terms of our May 2015 agreement with PLTG in which they agreed to, among other things, convert the Senior Secured Notes and certain other of our convertible promissory notes into Series B Preferred, we issued to PLTG 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 noncash component of loss on extinguishment of debt. 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 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-recurring noncash loss of $26.7 million attributable to the extinguishment of the indebtedness converted into shares of Series B Preferred.
 
We allocated the proceeds from 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 $4.20 per share and $4.06 per share for the six month periods ended September 30, 2016 and 2015, respectively, 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 recognized a deemed dividend in the aggregate amount of $111,100 and $1,143,100 in arriving at net loss attributable to common stockholders for the six months ended September 30, 2016 and 2015, respectively, in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss included in Part I of this Report. Further, we recognized $780,000 and $828,000 for the six months ended September 30, 2016 and 2015, respectively, 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, included elsewhere in this Report. The reduction in the dividend accrual results from the automatic conversion of an aggregate of 2,403,051 shares of Series B Preferred upon our completion of the May 2016 Public Offering, as disclosed in Note 8, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report.
 
 
 
-27-
 
 
Liquidity and Capital Resources
 
Since our inception in May 1998 through September 30, 2016, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $44.3 million, as well as from an aggregate of approximately $16.4 million of government research grant awards, strategic collaboration payments and other revenues, but not including the fair market value of the NIH-funded AV-101 Phase 2a clinical study in MDD. Additionally, we have issued equity securities with an approximate aggregate value at issuance of $30.1 million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.
 
Between April 1, 2016 and May 4, 2016, we sold to accredited investors Series B Preferred Units consisting of 39,714 unregistered shares of our Series B Preferred Stock, par value $0.001 per share (Series B Preferred), and five year warrants to purchase 39,714 shares of our common stock, and we received cash proceeds of $278,000. Further, on May 16, 2016 we consummated the May 2016 Public Offering, an underwritten public offering pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at the public offering price of $4.24 per share and five-year warrants to purchase up to 2,705,883 registered shares of common stock, with an exercise price of $5.30 per share, at the public offering price of $0.01 per warrant, including shares and warrants issued pursuant to the exercise of the underwriters' over-allotment option. We received net cash proceeds of approximately $9.5 million from the May 2016 Public Offering after deducting fees and expenses. We believe that we currently have sufficient financial resources to fund our expected operations through the first half of 2017, including preparation for and launch of our AV-101 Phase 2b Study in MDD.  Although our current financial resources are not yet sufficient to complete our AV-101 Phase 2b Study when launched, we anticipate raising sufficient additional capital in 2017 to satisfy our key corporate objectives, including completion of our AV-101 Phase 2b Study in 2018. Accordingly, our executive management continues to focus significant efforts on raising additional capital to complete the Phase 2b Study and for other operational requirements through sales of our securities, which may include both debt and equity securities, or from other sources. There can be no assurance, however, that future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all.
 
We may also seek research and development collaborations that could generate revenue, as well as government grant awards. Further, strategic collaborations, such as our February 2015 CRADA which provides for the NIMH to fully fund our Phase 2a study of AV-101 in MDD, may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. Although we may seek additional collaborations that could generate revenue, as well as new government grant awards, no assurance can be provided that any such collaborations or awards will occur in the future.  
 
Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of opportunities related to our success and the success of certain other companies in clinical trials, including our development of AV-101 as a treatment for MDD and other CNS conditions, and our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of AV-101 and our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate 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.  
 
Cash and Cash Equivalents
 
The following table summarizes changes in cash and cash equivalents for the periods stated (in thousands):
 
 
 
Six Months Ended
September 30,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Net cash used in operating activities
 $(3,873)
 $(2,330)
Net cash used in investing activities
  (8)
  - 
Net cash provided by financing activities
  9,709 
  2,954 
 
    
    
 Net increase in cash and cash equivalents
  5,828 
  624 
 Cash and cash equivalents at beginning of period
  429 
  70 
 
    
    
 Cash and cash equivalents at end of period
 $6,257 
 $694 
 
 
 
-28-
 
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements.
 
Item 4.
 
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Report were effective.
 
Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fiscal quarter to which this Report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
-29-
 
 
PART II: OTHER INFORMATION
 
Item 1. Legal Proceedings
 
None.
 
Item 1A. Risk Factors
 
Investing in our securities involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2016 before investing in our securities. The risks described below are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. If any of the following risks are realized, our business, financial condition and results of operations could be materially and adversely affected.
 
Risks Related to Product Development, Regulatory Approval and Commercialization
 
We depend heavily on the success of AV-101. We cannot be certain that we will be able to obtain regulatory approval for, or successfully commercialize AV-101, or any product candidate.
 
We currently have no drug products for sale and may never be able to develop and commercialize marketable drug products. Our business depends heavily on the successful development, regulatory approval and commercialization of AV-101 for depression, including for MDD, and various other diseases and disorders involving the CNS, as well as, but to a more limited extent, our ability to produce, develop and commercialize NCEs from our drug rescue programs. AV-101 will require substantial additional Phase 2 and Phase 3 clinical development, testing and regulatory approval before we are permitted to commence its commercialization and is unlikely to achieve regulatory approval until at least 2021, if at all. Each drug rescue NCE will require substantial non-clinical development, all phases of clinical development, and regulatory approval before we are permitted to commence its commercialization. The non-clinical studies and clinical trials of our product candidates are, and the manufacturing and marketing of our product candidates will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and, if approved, market any product candidate. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through non-clinical studies and clinical trials that the product candidate is safe and effective for use in each target indication. Drug development is a long, expensive and uncertain process, and delay or failure can occur at any stage of any of our non-clinical studies or clinical trials. This process can take many years and may also include post-marketing studies and surveillance, which will require the expenditure of substantial resources beyond the proceeds we have raised to date. Of the large number of drugs in development in the United States, only a small percentage will successfully complete the FDA regulatory approval process and will be commercialized. Accordingly, even if we are able to obtain the requisite financing to continue to fund our non-clinical studies and clinical trials, we cannot assure you that AV-101, any drug rescue NCE, or any other product candidate will be successfully developed or commercialized.
 
We are not permitted to market our product candidates in the United States until we receive approval of a New Drug Application (NDA) from the FDA, or in any foreign countries until we receive the requisite approval from such countries. In late 2015, in collaboration with the NIMH under our CRADA, we began a Phase 2a clinical trial involving AV-101, to study its safety, tolerability and efficacy in patients with MDD. If our Phase 2a clinical trial of AV-101 is successful, we expect the FDA to require us to complete at least two pivotal Phase 3 clinical trials in order to submit an NDA for AV-101 as an adjunctive treatment for MDD patients with an inadequate response to standard, FDA-approved antidepressants. Also, we anticipate that the FDA will require that we conduct additional toxicity studies and additional non-clinical studies before submitting an NDA for AV-101. The results of all of these trials and studies are not known until after the studies are concluded.
 
 
-30-
 
 
Obtaining FDA approval of an NDA is a complex, lengthy, expensive and uncertain process, and the FDA may delay, limit or deny approval of AV-101 or any of our product candidates for many reasons, including, among others:
 
 
if our NDA, if and when submitted, is reviewed by an advisory committee, the FDA may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA require, as a condition of approval, additional non-clinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;
 
 
the FDA may require development of a Risk Evaluation and Mitigation Strategy (REMS) as a condition of approval or post-approval;
 
 
the FDA or the applicable foreign regulatory agency may determine that the manufacturing processes or facilities of third-party contract manufacturers with which we contract do not conform to applicable requirements, including current Good Manufacturing Practices (cGMPs); or
 
   
the FDA or applicable foreign regulatory agency may change its approval policies or adopt new regulations.
 
Any of these factors, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully commercialize AV-101 or any other product candidate we may develop, including drug rescue NCEs. Any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects.
 
We intend to seek a Fast Track designation from the FDA for AV-101 for adjunctive treatment of MDD patients with an inadequate response to standard antidepressants. Even if the FDA approves Fast Track designation for AV-101 for this indication, it may not actually lead to a faster development or regulatory review or approval process.
 
The Fast Track designation is a program offered by the FDA pursuant to certain mandates under the FDA Modernization Act of 1997, designed to facilitate drug development and to expedite the review of new drugs that are intended to treat serious or life threatening conditions. Compounds selected must demonstrate the potential to address unmet medical needs. The Fast Track designation allows for close and frequent interaction with the FDA. A designated Fast Track drug may also be considered for priority review with a shortened review time, rolling submission, and accelerated approval if applicable. The designation does not, however, guarantee approval or expedited approval of any application for the product.
 
We intend to seek FDA Fast Track designation for AV-101 for adjunctive treatment of MDD patients with an inadequate response to standard antidepressants, and we may do so for other product candidates as well. The FDA has broad discretion whether or not to grant this designation, and even if we believe AV-101 and other product candidates are eligible for this designation, we cannot be sure that the review or approval will compare to conventional FDA procedures. Even if granted, the FDA may withdraw Fast Track designation if it believes that the designation is no longer supported by data from our clinical development programs.
 
The number of patients suffering from MDD has not been established with precision. If the actual number of patients with MDD is smaller than we anticipate, we or our collaborators may encounter difficulties in enrolling patients in AV-101 clinical trials, including our NIH-funded Phase 2a clinical study of AV-101 in treatment-resistant MDD, thereby delaying or preventing clinical development.  Further, if AV-101 is approved for adjunctive treatment of MDD patients with an inadequate response to standard antidepressants, and the market for this indication is smaller than we anticipate, our ability to achieve profitability could be limited.
 
Results of earlier clinical trials may not be predictive of the results of later-stage clinical trials.
 
The results of preclinical studies and early clinical trials of AV-101 and other product candidates may not be predictive of the results of later-stage clinical trials. AV-101 or other product candidates in later stages of clinical trials may fail to show the desired safety and efficacy results despite having progressed through preclinical studies and initial clinical trials. Many companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials due to adverse safety profiles or lack of efficacy, notwithstanding promising results in earlier studies. Similarly, our future clinical trial results may not be successful for these or other reasons.
  
 
-31-
 
 
This drug candidate development risk is heightened by any changes in planned clinical trials compared to completed clinical trials. As product candidates are developed through preclinical to early and late stage clinical trials towards approval and commercialization, it is customary that various aspects of the development program, such as manufacturing and methods of administration, are altered along the way in an effort to optimize processes and results. While these types of changes are common and are intended to optimize the product candidates for later stage clinical trials, approval and commercialization, such changes do carry the risk that they will not achieve these intended objectives.
 
For example, the results of planned clinical trials may be adversely affected if we or our collaborator seek to optimize and scale-up production of a product candidate. In such case, we will need to demonstrate comparability between the newly manufactured drug substance and/or drug product relative to the previously manufactured drug substance and/or drug product. Demonstrating comparability may cause us to incur additional costs or delay initiation or completion of our clinical trials, including the need to initiate a dose escalation study and, if unsuccessful, could require us to complete additional preclinical or clinical studies of our product candidates.
   
If serious adverse events or other undesirable side effects are identified during the use of AV-101 in clinical trials, it may adversely affect our development of AV-101 for MDD and other CNS indications.
 
AV-101 is currently being tested in an NIMH-investigator sponsored Phase 2a clinical trial for the treatment of MDD and may be subjected to testing in the future for other CNS indications in additional investigator sponsored clinical trials. If serious adverse events or other undesirable side effects, or unexpected characteristics of AV-101 are observed in investigator sponsored clinical trials of AV-101 or our clinical trials, it may adversely affect or delay our clinical development of AV-101, and the occurrence of these events would have a material adverse effect on our business.
 
Positive results from early preclinical studies and clinical trials of AV-101 or other product candidates are not necessarily predictive of the results of later preclinical studies and clinical trials of such product candidates. If we cannot replicate the positive results from our earlier preclinical studies and clinical trials of AV-101 or other product candidates in our later preclinical studies and clinical trials, we may be unable to successfully develop, obtain regulatory approval for and commercialize our product candidates.
 
Positive results from preclinical studies of our product candidates, and any positive results we may obtain from early clinical trials of our product candidates, may not necessarily be predictive of the results from required later preclinical studies and clinical trials. Similarly, even if we are able to complete our planned preclinical studies or clinical trials of our product candidates according to our current development timeline, the positive results from our preclinical studies and clinical trials of our product candidates may not be replicated in subsequent preclinical studies or clinical trial results. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials after achieving positive results in early-stage development, and we cannot be certain that we will not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials were underway or safety or efficacy observations made in preclinical studies and clinical trials, including previously unreported adverse events. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA approval. We have not yet completed a Phase 2a clinical trial for AV-101, and if we fail to produce positive results in our NIH-sponsored Phase 2a clinical trial of AV-101 in MDD, the development timeline and regulatory approval and commercialization prospects for AV-101 and, correspondingly, our business and financial prospects, could be materially adversely affected.
 
Failures or delays in the commencement or completion of our planned clinical trials and non-clinical studies of our product candidates could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue our business.
 
Under our CRADA, we and the NIH have commenced an NIH-funded Phase 2a clinical trial of AV-101 as a treatment for MDD. We will need to complete at least two additional large clinical trials prior to the submission of an NDA for AV-101 as a treatment for MDD. Successful completion of our clinical trials is a prerequisite to submitting an NDA to the FDA and, consequently, the ultimate approval and commercial marketing of AV-101 for
 
 
-32-
 
 
MDD and any other product candidates we may develop. We do not know whether the NIH-funded Phase 2a study of AV-101 or any of our future-planned clinical trials will be completed on schedule, if at all, as the commencement and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:
 
the FDA may deny permission to proceed with our planned clinical trials or any other clinical trials we may initiate, or may place a clinical trial on hold;
 
 
delays in filing or receiving approvals of additional INDs that may be required;
 
negative results from our ongoing non-clinical studies;
 
 
delays in reaching or failing to reach agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
 
inadequate quantity or quality of a product candidate or other materials necessary to conduct clinical trials, for example delays in the manufacturing of sufficient supply of finished drug product;
 
 
difficulties obtaining Institutional Review Board (IRB) approval to conduct a clinical trial at a prospective site or sites;
 
challenges in recruiting and enrolling patients to participate in clinical trials, including the proximity of patients to trial sites;
 
 
eligibility criteria for the clinical trial, the nature of the clinical trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;
 
severe or unexpected drug-related side effects experienced by patients in a clinical trial;
 
delays in validating any endpoints utilized in a clinical trial;

 
the FDA may disagree with our clinical trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it has reviewed and commented on the design for our clinical trials;
 
reports from non-clinical or clinical testing of other CNS therapies that raise safety or efficacy concerns; and
 
 
difficulties retaining patients who have enrolled in a clinical trial but may be prone to withdraw due to rigors of the clinical trials, lack of efficacy, side effects, personal issues or loss of interest.
 
Clinical trials may also be delayed or terminated as a result of ambiguous or negative interim results. In addition, a clinical trial may be suspended or terminated by us, the FDA, the IRBs at the sites where the IRBs are overseeing a clinical trial, a data and safety monitoring board (DSMB), overseeing the clinical trial at issue or other regulatory authorities due to a number of factors, including, among others
 
 
failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
 
inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical hold;
 
unforeseen safety issues, including any that could be identified in our ongoing non-clinical carcinogenicity studies, adverse side effects or lack of effectiveness;
 
changes in government regulations or administrative actions;
 
 
problems with clinical supply materials; and
 
 
lack of adequate funding to continue clinical trials.
 
 
-33-
 
 
Changes in regulatory requirements, FDA guidance or unanticipated events during our non-clinical studies and clinical trials of our product candidates may occur, which may result in changes to non-clinical studies and clinical trial protocols or additional non-clinical studies and clinical trial requirements, which could result in increased costs to us and could delay our development timeline.
 
Changes in regulatory requirements, FDA guidance or unanticipated events during our non-clinical studies and clinical trials may force us to amend non-clinical studies and clinical trial protocols or the FDA may impose additional non-clinical studies and clinical trial requirements. Amendments or changes to our clinical trial protocols would require resubmission to the FDA and IRBs for review and approval, which may adversely impact the cost, timing or successful completion of clinical trials. Similarly, amendments to our non-clinical studies may adversely impact the cost, timing, or successful completion of those non-clinical studies. If we experience delays completing, or if we terminate, any of our non-clinical studies or clinical trials, or if we are required to conduct additional non-clinical studies or clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenue will be delayed.
 
We rely, and expect that we will continue to rely, on third parties to conduct any clinical trials for our product candidates. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business could be substantially harmed.
 
We do not have the ability to independently conduct clinical trials. We rely on medical institutions, clinical investigators, contract laboratories and other third parties, such as CROs, to conduct clinical trials on our product candidates. We enter into agreements with third-party CROs to provide monitors for and to manage data for our clinical trials, as well as provide other services necessary to prepare for, conduct and complete clinical trials. We rely heavily on these parties for execution of clinical trials for our product candidates and control only certain aspects of their activities. As a result, we have less direct control over the conduct, timing and completion of these clinical trials and the management of data developed through clinical trials than would be the case if we were relying entirely upon our own staff. Communicating with outside parties can also be challenging, potentially leading to mistakes as well as difficulties in coordinating activities. Outside parties may:
 
have staffing difficulties;
 
fail to comply with contractual obligations;
 
 
experience regulatory compliance issues;
 
undergo changes in priorities or become financially distressed; or
 
 
form relationships with other entities, some of which may be our competitors.
 
These factors may materially adversely affect the willingness or ability of third parties to conduct our clinical trials and may subject us to unexpected cost increases that are beyond our control. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific requirements and standards, and our reliance on CROs or the NIH does not relieve us of our regulatory responsibilities. We and our CROs and the NIMH are required to comply with regulations and guidelines, including current cGCPs for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate, and that the trial patients are adequately informed of the potential risks of participating in clinical trials. These regulations are enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for any products in clinical development. The FDA enforces cGCP regulations through periodic inspections of clinical trial sponsors, principal investigators and trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be deemed unreliable and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. We cannot assure you that, upon inspection, the FDA will determine that any of our clinical trials comply with cGCPs. In addition, our clinical trials must be conducted with product candidates produced under cGMPs regulations and will require a large number of test patients. Our failure or the failure of our CROs to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process and could also subject us to enforcement action up to and including civil and criminal penalties.
 
 
-34-
 
 
Although we design our clinical trials for our product candidates, we plan to have CROs, and in the case of our initial AV-101 Phase 2a study in MDD, the NIH, conduct the AV-101 Phase 2 and Phase 3 clinical trials. As a result, many important aspects of our drug development programs are outside of our direct control. In addition, the CROs or the NIH, as the case may be, may not perform all of their obligations under arrangements with us or in compliance with regulatory requirements, but we remain responsible and are subject to enforcement action that may include civil penalties up to and including criminal prosecution for any violations of FDA laws and regulations during the conduct of our clinical trials. If the NIH or CROs do not perform clinical trials in a satisfactory manner, breach their obligations to us or fail to comply with regulatory requirements, the development and commercialization of AV-101 and other product candidates may be delayed or our development program materially and irreversibly harmed. We cannot control the amount and timing of resources these CROs or the NIH devote to our program or our clinical products. If we are unable to rely on clinical data collected by our CROs or the NIH, we could be required to repeat, extend the duration of, or increase the size of our clinical trials and this could significantly delay commercialization and require significantly greater expenditures.
 
If any of our relationships with these third-party CROs or the NIH terminate, we may not be able to enter into arrangements with alternative CROs or collaborators.  If CROs or the NIH do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols, regulatory requirements or for other reasons, any clinical trials that such CROs or the NIH are associated with may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. As a result, we believe that our financial results and the commercial prospects for our product candidates in the subject indication would be harmed, our costs could increase and our ability to generate revenue could be delayed.
 
We rely completely on third-party suppliers to manufacture our clinical drug supplies for our product candidates, and we intend to rely on third parties to produce non-clinical, clinical and commercial supplies of any future product candidate.
 
We do not currently have, nor do we plan to acquire, the infrastructure or capability to internally manufacture our clinical drug supply of AV-101 or any other product candidates for use in the conduct of our nonclinical studies and clinical trials, and we lack the internal resources and the capability to manufacture any product candidates on a clinical or commercial scale.  The facilities used by our contract manufacturers to manufacture the active pharmaceutical ingredient and final drug product must complete a pre-approval inspection by the FDA and other comparable foreign regulatory agencies to assess compliance with applicable requirements, including cGMPs, after we submit our NDA or relevant foreign regulatory submission to the applicable regulatory agency.
 
We do not control the manufacturing process of, and are completely dependent on, our contract manufacturers to comply with cGMPs for manufacture of both active drug substances and finished drug products. If our contract manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or applicable foreign regulatory agencies, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no direct control over our contract manufacturers’ ability to maintain adequate quality control, quality assurance and qualified personnel. Furthermore, all of our contract manufacturers are engaged with other companies to supply and/or manufacture materials or products for such companies, which exposes our third-party contract manufacturers to regulatory risks for the production of such materials and products. As a result, failure to satisfy the regulatory requirements for the production of those materials and products may affect the regulatory clearance of our contract manufacturers’ facilities generally. If the FDA or an applicable foreign regulatory agency determines now or in the future that these facilities for the manufacture of our product candidates are noncompliant, we may need to find alternative manufacturing facilities, which would adversely impact our ability to develop, obtain regulatory approval for or market our product candidates. Our reliance on contract manufacturers also exposes us to the possibility that they, or third parties with access to their facilities, will have access to and may appropriate our trade secrets or other proprietary information.
 
We do not yet have long-term supply agreements in place with our contract manufacturers and each batch of our product candidates are individually contracted under a quality and supply agreement. If we engage new contract manufacturers, such contractors must complete an inspection by the FDA and other applicable foreign regulatory agencies. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners, to manufacture commercial quantities of AV-101 and other product candidates, if approved. Our current scale of manufacturing for AV-101 is adequate to support our currently planned needs for additional non-clinical studies and clinical trial supplies.
 
 
-35-
 
 
Even if we receive marketing approval for our product candidates in the United States, we may never receive regulatory approval to market our product candidates outside of the United States.
 
We have not yet selected any markets outside of the United States where we intend to seek regulatory approval to market our product candidates. In order to market any product outside of the United States, however, we must establish and comply with the numerous and varying safety, efficacy and other regulatory requirements of other countries. Approval procedures vary among countries and can involve additional product candidate testing and additional administrative review periods. The time required to obtain approvals in other countries might differ from that required to obtain FDA approval. The marketing approval processes in other countries may implicate all of the risks detailed above regarding FDA approval in the United States as well as other risks. In particular, in many countries outside of the United States, products must receive pricing and reimbursement approval before the product can be commercialized. Obtaining this approval can result in substantial delays in bringing products to market in such countries. Marketing approval in one country does not ensure marketing approval in another, but a failure or delay in obtaining marketing approval in one country may have a negative effect on the regulatory process in others. Failure to obtain marketing approval in other countries or any delay or other setback in obtaining such approval would impair our ability to market our product candidates in such foreign markets. Any such impairment would reduce the size of our potential market, which could have a material adverse impact on our business, results of operations and prospects.
 
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may not be able to generate any revenue.
 
We do not currently have an infrastructure for the sales, marketing and distribution of pharmaceutical products, nor do we intend to create such capabilities. Therefore, in order to market our product candidates globally, if approved by the FDA or any other regulatory body, we must make contractual arrangements with third parties to perform services related to sales, marketing, managerial and other non-technical capabilities relating to the commercialization of our product candidates. If we are unable to establish adequate contractual arrangements for such sales, marketing and distribution capabilities, or if we are unable to do so on commercially reasonable terms, our business, results of operations, financial condition and prospects will be materially adversely affected.
 
Even if we receive marketing approval for our product candidates, our product candidates may not achieve broad market acceptance, which would limit the revenue that we generate from their sales.
 
The commercial success of our product candidates, if approved by the FDA or other applicable regulatory authorities, will depend upon the awareness and acceptance of our product candidates among the medical community, including physicians, patients and healthcare payors. Market acceptance of our product candidates, if approved, will depend on a number of factors, including, among others:
 
 
the efficacy and safety of our product candidates as demonstrated in clinical trials, and, if required by any applicable regulatory authority in connection with the approval for the applicable indications, to provide patients with incremental health benefits, as compared with other available therapies;
 
 
limitations or warnings contained in the labeling approved for our product candidates by the FDA or other applicable regulatory authorities;
 
the clinical indications for which our product candidates are approved;
 
 
availability of alternative treatments already approved or expected to be commercially launched in the near future;
 
the potential and perceived advantages of our product candidates over current treatment options or alternative treatments, including future alternative treatments;
 
the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
 
 
the strength of marketing and distribution support and timing of market introduction of competitive products;
 
 
publicity concerning our products or competing products and treatments;
 
 
pricing and cost effectiveness;
 
 
the effectiveness of our sales and marketing strategies;
 
 
our ability to increase awareness of our product candidates through marketing efforts;
 
 
our ability to obtain sufficient third-party coverage or reimbursement; or
 
the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
 
 
-36-
 
 
If our product candidates are approved but do not achieve an adequate level of acceptance by patients, physicians and payors, we may not generate sufficient revenue from our product candidates to become or remain profitable. Before granting reimbursement approval, healthcare payors may require us to demonstrate that our product candidates, in addition to treating these target indications, also provide incremental health benefits to patients. Our efforts to educate the medical community and third-party payors about the benefits of our product candidates may require significant resources and may never be successful.
 
Our product candidates may cause undesirable side effects that could delay or prevent their regulatory approval, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.
 
Undesirable side effects caused by our product candidates could cause us or regulatory authorities to interrupt, delay or halt nonclinical studies and clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other regulatory authorities.
 
Further, clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, rare and severe side effects of our product candidates may only be uncovered with a significantly larger number of patients exposed to the product candidate. If our product candidates receive marketing approval and we or others identify undesirable side effects caused by such product candidates (or any other similar products) after such approval, a number of potentially significant negative consequences could result, including: