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 December 31, 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 February 10, 2017, 8,581,471 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding. 
 
 
 
 
VistaGen Therapeutics, Inc.
Quarterly Report on Form 10-Q
for the Quarter Ended December 31, 2016
 
 
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
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61
61
 
 
 
 
 62
 
 
 
-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)
 
 
 
December 31
 
 
 March 31,
 
 
 
 2016
 
 
 2016
 
 
 
(Unaudited)
 
 
 
 
  ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $4,372,000 
 $428,500 
Sublicense fee receivable
  1,250,000 
  - 
Prepaid expenses and other current assets
  146,400 
  426,800 
Total current assets
  5,768,400 
  855,300 
Property and equipment, net
  59,900 
  87,600 
Security deposits and other assets
  47,800 
  46,900 
Total assets
 $5,876,100 
 $989,800 
 
    
    
  LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
    
    
Current liabilities:
    
    
Accounts payable
 $874,400 
 $936,000 
Accrued expenses
  961,800 
  814,000 
Current portion of notes payable and accrued interest
  35,800 
  43,600 
Capital lease obligations
  300 
  1,100 
Total current liabilities
  1,872,300 
  1,794,700 
 
    
    
Non-current liabilities:
    
    
Notes payable
  - 
  27,200 
Accrued dividends on Series B Preferred Stock
  1,339,300 
  2,089,600 
Deferred rent liability
  75,900 
  55,500 
Total non-current liabilities
  1,415,200 
  2,172,300 
Total liabilities
  3,287,500 
  3,967,000 
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders’ equity (deficit):
    
    
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2016 and March 31, 2016:
    
    
Series A Preferred, 500,000 shares authorized and outstanding at December 31, 2016 and March 31, 2016
  500 
  500 
Series B Preferred; 4,000,000 shares authorized at December 31, 2016 and March 31, 2016; 1,160,240 shares and 3,663,077 shares issued and outstanding at December 31, 2016 and March 31, 2016, respectively
  1,200 
  3,700 
Series C Preferred; 3,000,000 shares authorized at December 31, 2016 and March 31, 2016; 2,318,012 shares issued and outstanding at December 31, 2016 and March 31, 2016
  2,300 
  2,300 
Common stock, $0.001 par value; 30,000,000 shares authorized at December 31, 2016 and March 31, 2016; 8,717,136 and 2,623,145 shares issued at December 31, 2016 and March 31, 2016, respectivtly
 8,700
 2,600
Additional paid-in capital
  145,993,900 
  132,725,000 
Treasury stock, at cost, 135,665 shares of common stock held at December 31, 2016 and March 31, 2016
  (3,968,100)
  (3,968,100)
Accumulated deficit
  (139,449,900)
  (131,743,200)
Total stockholders’ equity (deficit)
  2,588,600 
  (2,977,200)
Total liabilities and stockholders’ equity (deficit)
 $5,876,100 
 $989,800 
 
    
    
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
-2-
 
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
(Amounts in dollars, except share amounts)
 
 
 
Three Months Ended December 31,
 
 
 Nine Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Sublicense fees
  1,250,000 
  - 
  1,250,000 
  - 
Total revenues
  1,250,000 
  - 
  1,250,000 
  - 
Operating expenses:
    
    
    
    
Research and development
  1,611,000 
  806,300 
  4,042,800 
  2,835,000 
General and administrative
  2,276,600 
  1,335,500 
  4,907,800 
  6,514,500 
Total operating expenses
  3,887,600 
  2,141,800 
  8,950,600 
  9,349,500 
Loss from operations
  (2,637,600)
  (2,141,800)
  (7,700,600)
  (9,349,500)
Other expenses, net:
    
    
    
    
Interest expense, net
  (900)
  (2,500)
  (3,700)
  (769,800)
Change in warrant liability
  - 
  - 
  - 
  (1,894,700)
Loss on extinguishment of debt
  - 
  - 
  - 
  (26,700,200)
Other income (expense)
  - 
  (2,300)
  - 
  (2,300)
Loss before income taxes
  (2,638,500)
  (2,146,600)
  (7,704,300)
  (38,716,500)
Income taxes
  - 
  - 
  (2,400)
  (2,300)
Net loss
 $(2,638,500)
 $(2,146,600)
 $(7,706,700)
 $(38,718,800)
 
    
    
    
    
Accrued dividend on Series B Preferred stock
  (237,700)
  (631,300)
  (1,018,500)
  (1,459,300)
Deemed dividend on Series B Preferred Units
  - 
  (668,700)
  (111,100)
  (1,811,800)
 
    
    
    
    
Net loss attributable to common stockholders
 $(2,876,200)
 $(3,446,600)
 $(8,836,300)
 $(41,989,900)
 
    
    
    
    
Basic and diluted net loss attributable to common
    
    
    
    
stockholders per common share
 $(0.34)
 $(1.95)
 $(1.23)
 $(25.45)
 
    
    
    
    
Weighted average shares used in computing basic
 and diluted net loss
    
    
    
attributable to common stockholders per common share
  8,381,824 
  1,765,641 
  7,181,307 
  1,650,160 
 
    
    
    
    
Comprehensive loss
 $(2,638,500)
 $(2,146,600)
 $(7,706,700)
 $(38,718,800)
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
-3-
 
 
VISTAGEN THERAPEUTICS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Dollars)
 
 
 
 Nine Months Ended
December 31,
 
 
 
2016
 
 
2015
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(7,706,700)
 $(38,718,800)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  37,600 
  40,800 
Amortization of discounts on convertible and promissory notes
  - 
  564,800 
Change in warrant liability
  - 
  1,894,700 
Stock-based compensation
  573,900 
  3,868,300 
Expense related to modification of warrants, including exchange of warrants  for Series C Preferred and common stock
  427,500 
  614,900 
Amortization of deferred rent
  20,400 
  (19,500)
Fair value of common stock granted for services
  1,217,500 
  606,300 
Fair value of Series B Preferred stock granted for services
  375,000 
  1,045,000 
Fair value of warrants granted for services
  240,300 
  111,200 
Gain on currency fluctuation
  - 
  (6,400)
Loss on disposition of fixed assets
  - 
  2,300 
Changes in operating assets and liabilities:
    
    
Sublicense fee receivable
  (1,250,000)
  - 
Prepaid expenses, security deposit and other current assets
  22,000 
  61,800 
Accounts payable and accrued expenses, including accrued interest
  74,200 
  (264,500)
Net cash used in operating activities
  (5,968,300)
  (3,498,900)
 
    
    
Cash flows from investing activities:
    
    
Purchases of equipment
  (9,900)
  (4,600)
Net cash used in investing activities
  (9,900)
  (4,600)
 
    
    
Cash flows from financing activities:
    
    
Net proceeds from issuance of common stock and warrants, including Units
  9,785,000 
  280,000 
Net proceeds from issuance of Series B Preferred Units
  278,000 
  4,397,800 
Repayment of capital lease obligations
  (800)
  (700)
Repayment of notes
  (140,500)
  (85,200)
Net cash provided by financing activities
  9,921,700 
  4,591,900 
Net increase in cash and cash equivalents
  3,943,500 
  1,088,400 
Cash and cash equivalents at beginning of period
  428,500 
  70,000 
Cash and cash equivalents at end of period
 $4,372,000 
 $1,158,400 
 
    
    
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
 $1,018,500 
 $1,459,300 
    Accrued dividends on Series B Preferred settled upon conversion by issuance
 
    
of common stock
 $1,768,800 
 $43,500 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
-4-
 
 
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 focused on developing new generation medicines for depression and other central nervous system (CNS) disorders. 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.
 
AV-101, our lead CNS product candidate, is a new generation oral antidepressant drug candidate in Phase 2 development, initially as an adjunctive treatment for 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 the potential to treat additional 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 often used adjunctively with standard antidepressants.
 
A Phase 2a clinical study of AV-101 as a monotherapy in subjects with treatment-resistant MDD is being conducted and fully funded by the U.S. National Institute of Mental Health (NIMH), part of the U.S. National Institutes of Health (NIH), under our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIMH (Phase 2a Study). The Principal Investigator of the Phase 2a Study is 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. Previous NIMH studies, including studies conducted by Dr. Zarate, have focused on the antidepressant effects of low dose, intravenous (I.V.) ketamine, a NMDAR antagonist, in patients with treatment-resistant MDD. These NIMH studies, as well as clinical research by Yale University and other academic institutions, have demonstrated robust antidepressant effects in MDD patients 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 currently anticipate that the NIMH will complete the Phase 2a Study by the end of 2017.
 
We are preparing to launch our Phase 2b clinical study of AV-101 as a new generation adjunctive treatment of MDD in adult 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 efficacy and safety study of AV-101 by the end of the second quarter 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 the Phase 2b Study.  Dr. Fava was the co-Principal Investigator with Dr. A. John Rush of the STAR*D study, the largest clinical trial conducted in depression to date, 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 of the Phase 2b Study by the end of 2018.
 
VistaStem Therapeutics (VistaStem) is our wholly owned subsidiary focused on applying human pluripotent stem cell (hPSC) technology, internally or with third-party collaborators, to discover, rescue, develop and commercialize (i) proprietary new chemical entities (NCEs), including small molecule NCEs with regenerative potential, for CNS and other diseases and (ii) cellular therapies involving stem cell-derived blood, cartilage, heart and liver cells.  Our internal small molecule drug rescue programs utilize CardioSafe 3D, our customized cardiac bioassay system, to develop NCEs for our pipeline.  In December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures, rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). VistaStem may also pursue additional potential regenerative medicine (RM) applications, including using blood, cartilage, and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering.  In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, VistaStem may pursue these additional 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 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 a standard, FDA-approved antidepressant.
 
-5-
 
 
 
Most standard, FDA-approved antidepressants target neurotransmitter reuptake inhibition – either serotonin (antidepressants known as SSRIs) or serotonin/norepinephrine (antidepressants known as 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 still do not achieve adequate therapeutic benefits.  Such patients with an inadequate response to standard antidepressants often seek to augment their treatment regimen by adding an atypical antipsychotic (such as, for example, aripiprazole), despite only modest potential therapeutic benefit and the risk of additional side effects from atypical antipsychotics.
 
All standard, FDA-approved antidepressants have risks of significant side effects, including, among others, potential anxiety, metabolic syndrome, sleep disturbance and sexual dysfunction. Adjunctive 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.
 
AV-101
 
AV-101, our oral new generation antidepressant prodrug 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 ketamine, a NMDAR antagonist. In addition, these studies confirmed that the fast-acting antidepressant effects of AV-101 were mediated through the GlyB site and also involved the activation of another key neurological pathway, the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (AMPA) receptor pathway. We believe activation of the AMPA receptor pathway is a key final common pathway feature of new generation antidepressants.
 
Following the completion of our NIH-funded, randomized, double blind, placebo-controlled AV-101 Phase 1a and Phase 1b safety studies, the NIMH initiated and is fully funding the Phase 2a study of AV-101 as a monotherapy in subjects with treatment-resistant MDD under our February 2015 CRADA with the NIMH. Dr. Carlos Zarate Jr. of the NIMH is the Principal Investigator conducting the Phase 2a Study at the NIMH. The trial is expected to enroll up to 25 patients.   We currently anticipate that the NIMH will complete the Phase 2a Study by the end of 2017.
 
We are preparing to launch our approximately 280-patient Phase 2b Study of AV-101 as an 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, by the end of the second quarter of 2017. We currently anticipate top line results of the Phase 2b Study by the end of 2018.  
 
We believe preclinical studies support the hypothesis that AV-101 may also have 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 key active metabolites of AV-101 may achieve therapeutic benefit. However, human clinical studies will be required before this therapeutic potential could be demonstrated. There is no guarantee that human clinical trials would be successful or that the FDA would approve the use of AV-101 for the treatment of one or more of these additional CNS indications.
 
CardioSafe 3D™; NCE Drug Rescue and Regenerative Medicine
 
VistaStem Therapeutics is our wholly owned subsidiary focused on applying hPSC technology to discover, rescue, develop and commercialize proprietary NCEs, including small molecule NCEs with regenerative potential, for CNS and other diseases, as well as potential cellular therapies involving stem cell-derived blood, cartilage, heart and liver cells. 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 internal small molecule NCE drug discovery and drug rescue to expand our proprietary 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. With respect to RM, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures, rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (BlueRock Therapeutics Agreement). We may also pursue additional potential RM applications using blood, cartilage, and/or liver cells derived from hPSCs for (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, and/or liver cells.  In a manner similar to the BlueRock Therapeutics Agreement, we may pursue these additional RM applications in collaboration with third-parties.
 
-6-
 
 
Subsidiaries
 
VistaGen Therapeutics, Inc., a California corporation dba VistaStem Therapeutics (VistaStem), is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Report also include the accounts of VistaStem’s two wholly-owned inactive 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 nine months ended December 31, 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 $139.4 million accumulated from inception through December 31, 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, including conducting clinical trials, and pursue potential drug rescue, drug development and regenerative medicine opportunities.
 
Since our inception in May 1998 through December 31, 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 $44.5 million, as well as from an aggregate of approximately $17.6 million of government research grant awards, strategic collaboration payments, intellectual property sublicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $30.4 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 exercisable at $7.00 per share (Series B Preferred 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. During the quarter ended December 31, 2016, we received aggregate cash proceeds of $247,900 from the sale of an aggregate of 67,000 shares of our unregistered common stock and warrants exercisable through November 30, 2019 to purchase 16,750 unregistered shares of our common stock to two accredited investors in private placement transactions. As described in greater detail in Note 5, Sublicense Fee Receivable and Sublicense Revenue, we received a cash payment of $1.25 million under the BlueRock Therapeutics Agreement in January 2017. We believe that we currently have sufficient financial resources to fund our expected operations at least through the first half of 2017, including preparation for and launch of the Phase 2b Study.  Although our current financial resources are not yet sufficient to fully fund completion of the Phase 2b Study, we anticipate raising sufficient additional capital as and when necessary and advisable to satisfy our key corporate objectives, including conducting and completing the Phase 2b Study in an ordinary course manner. In furtherance of that objective, on January 23, 2017, we filed a Registration Statement on Form S-3 (Registration No. 333-215671) with the Securities and Exchange Commission (the Commission) covering the potential future sale of up to $100 million of our equity and/or debt securities or combinations thereof. 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, funding for development of AV-101 and additional product candidates, as well as additional government grant awards and agreements similar to our current CRADA with the NIMH, which provides for the NIMH to fully fund the ongoing Phase 2a study of AV-101 as a monotherapy for MDD. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. In a manner similar to the BlueRock Therapeutics Agreement, we may also pursue similar arrangements with third-parties covering other of our intellectual property. Although we may seek additional collaborations that could generate revenue and/or non-dilutive funding for development of AV-101 and other product candidates, as well as new government grant awards and/or agreements similar to our CRADA with NIMH, no assurance can be provided that any such collaborations, awards or agreements 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 and commercialization of AV-101 as an adjunctive treatment for MDD and other CNS conditions, and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, 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, intellectual property, accounting, public company compliance and other professional services and working capital costs. 
 
-7-
 
 
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 when needed in 2017 and beyond, 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. With the exception of the $1.25 million of sublicense revenue recorded in the quarter ended December 31, 2016 under the BlueRock Therapeutics Agreement, which agreement is described in greater detail under Note 5, Sublicense Fee Receivable and Sublicense Revenue below, 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 and technology licenses. 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.
 
-8-
 
 
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2016 and 2015.
 
 
 
 Three Months Ended
 
 
 Nine Months Ended
 
 
 
 December 31,
 
 
 December 31,
 
 
 
 2016
 
 
 2015
 
 
 2016
 
 
 2015
 
 Research and development expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock option grants
 $113,900 
 $71,300 
 $239,900 
 $118,700 
Warrants granted to officer in March 2014
  - 
  2,800 
  - 
  8,500 
Warrants granted to officer in September 2015
  - 
  - 
  - 
  852,200 
 
  113,900 
  74,100 
  239,900 
  979,400 
 
    
    
    
    
 General and administrative expense:
    
    
    
    
 
    
    
    
    
Stock option grants
  153,300 
  20,400 
  334,000 
  36,500 
Warrants granted to officers and directors in March 2014
  - 
  3,900 
  - 
  11,700 
Warrants granted to officers, directors and  consultants in September 2015
  - 
  - 
  - 
  2,840,700 
 
  153,300 
  24,300 
  334,000 
  2,888,900 
 
    
    
    
    
 Total stock-based compensation expense
 $267,200 
 $98,400 
 $573,900 
 $3,868,300 
 
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. In November 2016, the Board authorized the grant of stock options to independent members of the Board and to our officers and employees to purchase an aggregate of 560,000 shares of our common stock at an exercise price of $3.80 per share. At December 31, 2016, there were stock options outstanding to purchase 1,659,324 shares of our common stock at a weighted average exercise price of $4.76 per share. We valued the options granted in June, September and November 2016 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
 
Assumption:
 
June
2016
 
 
September
2016
 
 
November
2016
 
Market price per share at grant date
 $3.49 
 $4.27 
 $3.80 
Exercise price per share
 $3.49 
 $4.27 
 $3.80 
Risk-free interest rate
  1.34%
  1.29%
  1.76%
Contractual or estimated term in years
  6.68 
  6.25 
  6.79 
Volatility
  81.69%
  83.26%
  84.38%
Dividend rate
  0.0%
  0.0%
  0.0%
Shares
  655,000 
  125,000 
  560,000 
 
    
    
    
Fair Value per share
 $2.50 
 $3.05 
 $2.81 
 
During September 2015, the 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 the 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 
 
 
-9-
 
 
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.
 
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 nine month periods ended December 31, 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 December 31,
 
 
 
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 
  3,588,863 
 
    
    
Series C Preferred stock issued and outstanding (3)
  2,318,012 
  - 
 
    
    
Outstanding options under the 2016 (formerly 2008) and 1999 Stock Incentive Plans
  1,659,324 
  296,738 
 
    
    
Outstanding warrants to purchase common stock
  4,550,370 
  4,971,497 
 
    
    
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
  10,437,946 
  10,142,813 
____________
    
    
(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 nine months ended December 31, 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.
 
-10-
 
 
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.
 
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. As a result of the Exchange Agreement, all warrants previously issued to PLTG have been cancelled.
 
We carried no assets or liabilities at fair value at December 31, 2016 or March 31, 2016.
 
Note 5. Sublicense Fee Receivable and Sublicense Revenue
 
On December 9, 2016, we entered into an Exclusive License and Sublicense Agreement with BlueRock Therapeutics, LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures (BlueRock Therapeutics), pursuant to which BlueRock received exclusive rights to utilize certain technologies exclusively licensed by us from University Health Network (UHN) for the production of cardiac stem cells for the treatment of heart disease. We retained rights to cardiac stem cell technology licensed from UHN related to small molecule, protein and antibody drug discovery, drug rescue and drug development, including small molecules with cardiac regenerative potential, as well as small molecule, protein and antibody testing involving cardiac cells.
Under the BlueRock Therapeutics Agreement, we are entitled to receive an upfront payment of $1.25 million and we have the potential to receive additional milestone payments and royalties in the future, in the event certain performance-based milestones and commercial sales are achieved. At December 31, 2016, we had no further obligations under the BlueRock Therapeutics Agreement and, accordingly, we recorded a receivable for the $1.25 million upfront payment with a corresponding recognition of the sublicense revenue. We received the $1.25 million cash payment due under the BlueRock Therapeutics Agreement on January 5, 2017.
Also on December 9, 2016, we entered into a series of agreements with UHN pursuant to which we (i) executed two new exclusive patent license agreements related to certain cardiac stem cell technologies discovered by Dr. Gordon Keller, Director of UHN's McEwen Centre for Regenerative Medicine, under our Sponsored Research Agreement with Dr. Keller and UHN, originally executed on September 18, 2007 (the SRA); (ii) amended two exclusive cardiac stem cell technology patent license agreements previously entered into between us and UHN under the SRA; (iii) terminated the SRA to facilitate the BlueRock Therapeutics Agreement; and (iv) agreed to make a sublicense consideration payment to UHN with respect to the upfront payment we received under the BlueRock Therapeutics Agreement. All financial obligations related to the agreements with UHN, aggregating $233,400, were reflected in accounts payable at December 31, 2016.
 
 
-11-
 
 
Note 6.  Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets are composed of the following at December 31, 2016 and March 31, 2016:
 
 
 
  December 31,
2016
 
 
March 31,
2016
 
 
 
 
 
 
 
 
 Insurance
 $58,300 
 $27,000 
 Prepaid AV-101 development expenses
  82,300 
  - 
 Prepaid compensation under financial advisory
    
    
     and other consulting agreements
  - 
  337,500 
 Public offering expenses
  - 
  57,400 
 All other
  5,800 
  4,900 
 
 $146,400 
 $426,800 
 
Note 7.  Accrued Expenses
 
Accrued expenses are composed of the following at December 31, 2016 and March 31, 2016:
 
 
 
 December 31,
 
 
 March 31,
 
 
 
 2016
 
 
 2016
 
 
 
 
 
 
 
 
 Accrued professional services
 $34,700 
 $318,000 
 Accrued AV-101 development expenses
  918,300 
  186,000 
 Accrued compensation
  - 
  310,000 
 All other
  8,800 
  - 
 
 $961,800 
 $814,000 
 
Note 8.  Notes Payable
 
The following table summarizes our unsecured promissory notes at December 31, 2016 and March 31, 2016.
 
 
 
  December 31, 2016        
 
 
  March 31, 2016        
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
 
Balance
 
 
Interest
 
 
Total
 
 
Balance
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5.75% Note payable to insurance premium
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
financing company (current)
 $35,800 
 $- 
 $35,800 
 $- 
 $- 
 $- 
 
    
    
    
    
    
    
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
 $35,800 
 $- 
 $35,800 
 $58,800 
 $12,000 
 $70,800 
less: current portion
  (35,800)
  - 
  (35,800)
  (31,600)
  (12,000)
  (43,600)
Net non-current portion
 $- 
 $- 
 $- 
 $27,200 
 $- 
 $27,200 
 
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 at a Conversion Price (or stated value) of $7.00 per share.
 
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, as reflected in the accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss for the nine months ended December 31, 2015.
 
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.
 
-12-
 
 
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 December 31, 2016 was $35,800.
 
Note 9.  Capital Stock
 
Series B Preferred Unit Offering
 
Prior to the consummation of our May 2016 Public Offering, we sold to accredited investors in self-placed private placement transactions an aggregate of $278,000 of units in our Series B Preferred Unit offering in April and May 2016, which units consisted 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.  From May 2015 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 nine months ended December 31, 2016.
 
Unit Warrants
 
 
 
 
 
 
Weighted Average Issuance Date Valuation Assumptions
 


 

Aggregate Allocation of Proceeds
Warrant
 
 
 
 
Risk free
 
 
 
Per Share
Fair
Aggregate
Fair Value
 
Aggregate
Proceeds
Based on 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
 
May 2016 Public Offering and Listing of our Common Stock on The NASDAQ Capital Market
 
Effective on May 16, 2016, we consummated an underwritten public offering of our securities, pursuant to which we issued units consisting of 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. 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 our 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 Commission pursuant to an effective registration statement (Registration Statement) filed with the Commission 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 Commission on March 14, 2016, and was declared effective on May 10, 2016.
 
In connection with the completion of our May 2016 Public Offering, NASDAQ approved our common stock for listing on The NASDAQ Capital Market. Our common stock began trading on The NASDAQ Capital Market under the symbol “VTGN” on May 11, 2016.
 
Conversion of Series B Preferred into Common Stock
 
During April 2016, prior to the consummation of 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.
 
-13-
 
 
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 on May 19, 2016, 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 of accrued dividends on the Series B Preferred that was automatically converted on June 15, 2016, 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, at the rate of one share of common stock for each $3.25 in accrued dividends.
 
Common Stock and Warrants Issued in Private Placement
 
In December 2016, in self-placed private transactions, we accepted subscription agreements from two individual accredited investors, pursuant to which we sold to such investors units, at a purchase price of $3.70 per unit, consisting of an aggregate of 67,000 unregistered shares of our common stock and warrants, exercisable through November 30, 2019, to purchase an aggregate of 16,750 unregistered shares of our common stock at an exercise price of $6.00 per share. The purchasers of the units have no registration rights with respect to the shares of common stock, warrants or the shares of common stock issuable upon exercise of the warrants comprising the units sold. We received aggregate cash proceeds of $247,900 in connection with this private placement of the units, of which the entire amount was credited to stockholders’ equity.
 
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 as compensation to certain entities previously engaged as 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 was recorded as a prepaid expense at September 30, 2016 and was fully expensed as a component of general and administrative expense during the quarter ended December 31, 2016. In November and December 2016, we issued an aggregate of 135,000 shares of our unregistered common stock having an aggregate fair value on the respective dates of issuance of $479,800 as compensation to professional services providers.
 
Warrant Exchanges and Other Warrant Modifications
 
During the nine months ended December 31, 2016, we entered into Warrant Exchange Agreements with certain holders of outstanding warrants to purchase an aggregate of 224,693 shares of our common stock pursuant to which the holders agreed to cancel such warrants in exchange for the issuance of an aggregate of 156,246 unregistered shares of common stock.
 
We accounted for the exchanges of these warrants as warrant modifications, comparing the fair value of the warrants immediately prior to the exchanges with the fair value of the unregistered common stock issued. We calculated the weighted average fair value of the warrants prior to the respective exchanges using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We determined the post-modification fair value based on the quoted market price of our common stock on the effective date of each exchange and the number of unregistered shares issued in the exchange, as also indicated in the table below. We recognized the amount of the incremental fair value of the unregistered common stock issued in excess of the fair value of the warrants cancelled, $293,300 and $350,700 for the three and nine months ended December 31, 2016, respectively, as warrant modification expense, which is included as a component of general and administrative expenses in our Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended December 31, 2016.
 
-14-
 
 
 
 
April - May 2016
 
 
August 2016
 
 
October 2016
 
 
December 2016
 
 
 
Pre-
 
 
Post-
 
 
Pre-
 
 
Post-
 
 
Pre-
 
 
Post-
 
 
Pre-
 
 
Post-
 
 
 
modification
 
 
modification
 
 
modification
 
 
modification
 
 
modification
 
 
modification
 
 
modification
 
 
modification
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Market Price per share
 $8.44 
 $8.45 
 $3.33 
 $3.33 
 $4.05 
 $4.05 
 $3.73 
 $3.73 
Exercise price per share
 $7.37 
    
 $8.00 
    
 $8.15 
    
 $10.00 
    
Risk-free interest rate
  1.23%
    
  1.10%
    
  0.77%
    
  0.44%
    
Contractual term (years)
  4.77 
    
  4.58 
    
  2.4 
    
  0.003 
    
Volatility
  79.0%
    
  87.0%
    
  93.0%
    
  100.3%
    
Dividend Rate
  0%
    
  0%
    
  0%
    
  0%
    
Weighted average fair value per share
 $5.37 
    
 $1.64 
    
 $1.27 
    
 $- 
    
Warrant shares cancelled and exchanged
  41,649 
    
  20,000 
    
  113,944 
    
  49,100 
    
Common shares issued in exchange
    
   31,238
    
   15,000
    
   85,458
    
   24,550
Fair Value
 $223,700 
 $264,000 
 $32,900 
 $50,000 
 $144,400 
 $346,100 
 $- 
 $91,600 
 
Incremental fair value recognized
 
 $40,300 
    
 $17,100 
    
 $201,700 
    
 $91,600 
 
 
In December 2016, the Board authorized the modification of an outstanding warrant to both alter the exercise terms and increase the number of shares for which the warrant was exercisable. We calculated the fair value of the warrant immediately before and after the modification using the Black Scholes Option Pricing Model and the assumptions indicated in the table below. As indicated, we recognized the additional fair value, $76,900, 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 December 31, 2016.
 
 
 
Pre-
 
 
Post-
 
 
 
modification
 
 
modification
 
 
 
 
 
 
 
 
Market Price per share
 $3.51 
 $3.51 
Exercise price per share
 $8.00 
 $3.51 
Risk-free interest rate
  1.88%
  2.07%
Contractual term (years)
  4.26 
  5.03 
Volatility
  87.1%
  85.8%
Dividend Rate
  0%
  0%
Weighted average fair value per share
 $1.71 
 $2.39 
Number of warrant shares
  25,000 
  50,000 
Fair Value
 $42,700 
 $119,600 
 
Incremental fair value recognized
 
 $76,900 
 
Warrants Outstanding
 
Following the warrant issuances in the May 2016 Public Offering, the Series B Warrant issuances and the warrant exchanges and modification described above, at December 31, 2016, we had outstanding warrants to purchase shares of our common stock at a weighted average exercise price of $6.31 per share as follows:
 
 
-15-
 
 
 
Exercise Price
per Share
 
 
Expiration
Date
 
 
Shares Subject to Purchase at
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 $3.51
 
    12/31/2021
  50,000
 
 $4.50
 
    9/26/2019
  25,000
 
 $5.30
 
    5/16/2021
  2,705,883 
 $6.00 
9/26/2019 to 11/30/2019
  97,750
 
 $7.00
 
12/11/2018 to 3/3/2023
  1,346,931
 
 $8.00
 
   3/25/2021
  185,000
 
 $10.00
 
2/28/2017 to 1/11/2020
  25,758
 
 $20.00
 
    9/15/19
  110,448
 
 $30.00
 
    11/20/2017
  3,600
 
 
    
  4,550,370
 
 
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 issuable upon exercise of our outstanding warrants are unregistered.
 
Note 10.  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 December 31, 2016, holding approximately 7.0% of our outstanding common stock. In October 2012 we issued certain unsecured promissory notes in the aggregate face amount of approximately $1.3 million to CBV and CRL (the Cato Notes) as payment in full for all contract research and development services and regulatory advice previously rendered to us by CRL. 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.
 
Under the terms of our CRO arrangement with CRL related to the development of AV-101, we incurred expenses of $101,900 and $19,400 for the quarters ended December 31, 2016 and 2015, respectively, and $180,100 and $41,500 in the nine month periods ended December 31, 2016 and 2015, respectively. Total interest expense, including amortization of note discount, on the Cato Notes was $28,200 for the three-month period ended June 30, 2015 during which the notes were extinguished.
 
University Health Network (UHN) holds approximately 2.0% of our outstanding common stock at December 31, 2016. As described more completely in Note 5, Sublicense Fee Receivable and Sublicense Revenue, in December 2016, we entered into certain agreements with UHN pursuant to which we acquired two exclusive patent licenses from UHN and became obligated to make a payment to UHN with respect to our sublicense to BlueRock Therapeutics of cardiac stem cell production technology licensed to us by UHN. At December 31, 2016, we had recorded a liability to UHN of $233,400 related to these agreements. In the nine months ended December 31, 2015, we had incurred approximately $153,000 related to the acquisition of three stem cell technology licenses from UHN.
 
Note 11. Lease Extension
 
Effective on November 10, 2016, we executed 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 for the five-year extension period was specified. The lease amendment also provides for a two-month period of rent abatement and an allowance for tenant improvements, which allowance may be disbursed between January 1, 2017 and August 1, 2018. We have recognized the effect of the amendment in the balance reported as Deferred Rent Liability in the accompanying Condensed Consolidated Balance Sheet at December 31, 2016 and in rent expense in the Condensed Consolidated Statement of Operations for the quarter ended December 31, 2016.
 
Note 12.  Subsequent Events
 
We have evaluated subsequent events through February 10, 2017 and have identified no matters requiring disclosure.
 
 
 
-16-
 
 
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 focused on developing new generation medicines for depression and other central nervous system (CNS) disorders. 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.
 
AV-101, our lead CNS product candidate, is a new generation oral antidepressant drug candidate in Phase 2 development, initially as an adjunctive treatment for 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 the potential to treat additional 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 often used adjunctively with standard antidepressants.
 
A Phase 2a clinical study of AV-101 as a monotherapy in subjects with treatment-resistant MDD is being conducted and fully funded by the U.S. National Institute of Mental Health (NIMH), part of the U.S. National Institutes of Health (NIH), under our February 2015 Cooperative Research and Development Agreement (CRADA) with the NIMH (Phase 2a Study). The Principal Investigator of the Phase 2a Study is 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. Previous NIMH studies, including studies conducted by Dr. Zarate, have focused on the antidepressant effects of low dose, intravenous (I.V.) ketamine, a NMDAR antagonist, in patients with treatment-resistant MDD. These NIMH studies, as well as clinical research by Yale University and other academic institutions, have demonstrated robust antidepressant effects in MDD patients 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 currently anticipate that the NIMH will complete the Phase 2a Study by the end of 2017.
 
We are preparing to launch our Phase 2b clinical study of AV-101 as a new generation adjunctive treatment of MDD in adult 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 efficacy and safety study of AV-101 by the end of the second quarter 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 the Phase 2b Study.  Dr. Fava was the co-Principal Investigator with Dr. A. John Rush of the STAR*D study, the largest clinical trial conducted in depression to date, 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 of the Phase 2b Study by the end of 2018.
 
-17-
 
 
 
VistaStem Therapeutics (VistaStem) is our wholly owned subsidiary focused on applying human pluripotent stem cell (hPSC) technology, internally or with third-party collaborators, to discover, rescue, develop and commercialize (i) proprietary new chemical entities (NCEs), including small molecule NCEs with regenerative potential, for CNS and other diseases and (ii) cellular therapies involving stem cell-derived blood, cartilage, heart and liver cells.  Our internal small molecule drug rescue programs utilize CardioSafe 3D, our customized cardiac bioassay system, to develop NCEs for our pipeline.  In December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures, rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). VistaStem may also pursue additional potential regenerative medicine (RM) applications, including using blood, cartilage, and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering.  In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, VistaStem may pursue these additional 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 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 a standard, FDA-approved antidepressant.
 
Most standard, FDA-approved antidepressants target neurotransmitter reuptake inhibition – either serotonin (antidepressants known as SSRIs) or serotonin/norepinephrine (antidepressants known as 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 still do not achieve adequate therapeutic benefits.  Such patients with an inadequate response to standard antidepressants often seek to augment their treatment regimen by adding an atypical antipsychotic (such as, for example, aripiprazole), despite only modest potential therapeutic benefit and the risk of additional side effects from atypical antipsychotics.
 
All standard, FDA-approved antidepressants have risks of significant side effects, including, among others, potential anxiety, metabolic syndrome, sleep disturbance and sexual dysfunction. Adjunctive 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.
 
AV-101
 
AV-101, our oral new generation antidepressant prodrug 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 ketamine, a NMDAR antagonist. In addition, these studies confirmed that the fast-acting antidepressant effects of AV-101 were mediated through the GlyB site and also involved the activation of another key neurological pathway, the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid (AMPA) receptor pathway. We believe activation of the AMPA receptor pathway is a key final common pathway feature of new generation antidepressants.
 
Following the completion of our NIH-funded, randomized, double blind, placebo-controlled AV-101 Phase 1a and Phase 1b safety studies, the NIMH initiated and is fully funding the Phase 2a study of AV-101 as a monotherapy in subjects with treatment-resistant MDD under our February 2015 CRADA with the NIMH. Dr. Carlos Zarate Jr. of the NIMH is the Principal Investigator conducting the Phase 2a Study at the NIMH. The trial is expected to enroll up to 25 patients.   We currently anticipate that the NIMH will complete the Phase 2a Study by the end of 2017.
 
-18-
 
 
 
We are preparing to launch our approximately 280-patient Phase 2b Study of AV-101 as an 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, by the end of the second quarter of 2017. We currently anticipate top line results of the Phase 2b Study by the end of 2018.  
 
We believe preclinical studies support the hypothesis that AV-101 may also have 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 key active metabolites of AV-101 may achieve therapeutic benefit. However, human clinical studies will be required before this therapeutic potential could be demonstrated. There is no guarantee that human clinical trials would be successful or that the FDA would approve the use of AV-101 for the treatment of one or more of these additional CNS indications.
 
CardioSafe 3D™; NCE Drug Rescue and Regenerative Medicine
 
VistaStem Therapeutics is our wholly owned subsidiary focused on applying hPSC technology to discover, rescue, develop and commercialize proprietary NCEs, including small molecule NCEs with regenerative potential, for CNS and other diseases, as well as potential cellular therapies involving stem cell-derived blood, cartilage, heart and liver cells. 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 internal small molecule NCE drug discovery and drug rescue to expand our proprietary 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. With respect to RM, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures, rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (BlueRock Therapeutics Agreement). We may also pursue additional potential RM applications using blood, cartilage, and/or liver cells derived from hPSCs for (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, and/or liver cells.  In a manner similar to the BlueRock Therapeutics Agreement, we may pursue these additional RM applications in collaboration with third-parties.
 
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.
 
Summary
 
Net Loss
 
We have not yet achieved recurring 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 nonclinical studies to our ongoing Phase 2 clinical development program 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 December 31, 2016, we had an accumulated deficit of approximately $139.4 million. Our net loss for the nine months ended December 31, 2016 was approximately $7.7 million. Our net loss for the nine months ended December 31, 2015 was approximately $38.7 million, which amount, however, included a non-recurring, non-cash loss of approximately $26.7 million attributable to extinguishment and conversion of approximately $17.2 million of prior indebtedness into equity securities between May and August 2015 at a Conversion Price (stated value) of $7.00 per share. 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 Nine Months Ended December 31, 2016
 
During the nine months ended December 31, 2016, we have continued to (i) advance nonclinical and clinical development of AV-101 as a potential 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 and development 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.
 
-19-
 
 
 
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 as a monotherapy for treatment-resistant MDD. We currently anticipate that the NIMH will complete the Phase 2a Study by the end of 2017. In addition, we continue to prepare for 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 second quarter 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, our common stock was approved for listing on The NASDAQ Capital Market, 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 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. 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 is primarily concentrating his efforts in expanding awareness of VistaGen across a range of investors, researchers, patients, clinicians and potential partners.
 
In December 2016, we entered into an Exclusive License and Sublicense Agreement (the BlueRock Therapeutics Agreement) with BlueRock Therapeutics, LP, a next generation regenerative medicine company recently established by Bayer AG and Versant Ventures (BlueRock), pursuant to which BlueRock received exclusive rights to utilize certain technologies exclusively licensed by us from University Health Network (UHN) for the production of cardiac stem cells for the treatment of heart disease. We retained rights to technology licensed from UHN related to small molecule, protein and antibody drug discovery, drug rescue and drug development, including small molecules with cardiac regenerative potential, as well as small molecule, protein and antibody testing involving cardiac cells. In January 2017, we received an upfront cash payment of $1.25 million under the BlueRock Therapeutics Agreement and we have the potential to receive additional payments and royalties in the future, in the event certain performance-based milestones and commercial sales are achieved.
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 nonclinical and 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, acquisition and protection of intellectual property, accounting, public company compliance and other professional services and working capital costs. 
 
 
-20-
 
 
Results of Operations
 
Comparison of Three Months Ended December 31, 2016 and 2015
 
The following table summarizes the results of our operations for the three months ended December 31, 2016 and 2015 (amounts in thousands).
 
 
 
 Three Months Ended December 31,
 
 
 
 2016
 
 
 2015
 
 
 
 
 
 
 
 
Sublicense revenue
 $1,250 
 $- 
Operating expenses:
    
    
Research and development
 $1,611 
 $806 
General and administrative
  2,276 
  1,336 
Total operating expenses
  3,887 
  2,142 
 
    
    
Loss from operations
  (2,637)
  (2,142)
Interest expense, net
  (1)
  (3)
Change in warrant liabilities
  - 
  - 
Other expense
  - 
  (2)
Loss before income taxes
  (2,638)
  (2,147)
Income taxes
  - 
  - 
 
    
    
Net loss
 $(2,638)
 $(2,147)
Accrued dividend on Series B Preferred Stock
  (238)
  (631)
Deemed dividend on Series B Preferred Stock
  - 
  (669)
Net loss attributable to common stockholders
 $(2,876)
 $(3,447)
 
Revenue   
 
We recognized $1.25 million in sublicense revenue pursuant to the BlueRock Therapeutics Agreement in the quarter ended December 31, 2016. While we have the potential to receive additional milestone payments and royalties under the BlueRock Therapeutics Agreement in the future, in the event certain performance-based milestones and commercial sales are achieved, the agreement might not provide additional revenue to us in the near term. We reported no other revenue for the quarter ended December 31, 2016 or 2015 and we presently have no revenue generating arrangements with respect to AV-101 or other potential product candidates. However, as indicated previously, our CRADA with the NIH provides for full NIH funding of the Phase 2a clinical study of AV-101 as a monotherapy for treatment resistant MDD.
 
Research and Development Expense
 
Research and development expense totaled $1,611,000 for the quarter ended December 31, 2016, approximately double the $806,300 reported for the quarter ended December 31, 2015. Current period costs reflect the increasing impact of our continued nonclinical and clinical development of AV-101, particularly preparations for launch of the Phase 2b Study of AV-101, which is currently anticipated in the second quarter 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 December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $302 
 $214 
Stock-based compensation
  114 
  74 
Consulting and other professional services
  (139)
  5 
Technology licenses and royalties, including UHN
  293 
  159 
Project-related research and supplies:
    
    
AV-101
  894 
  137 
Stem cell and all other
  50 
  19 
 
  944 
  156 
Rent
  88 
  55 
Depreciation
  8 
  8 
Warrant modification expense
  - 
  135 
All other
  1 
  - 
 
    
    
Total Research and Development Expense
 $1,611 
 $806 
 
The increase in salaries and benefits reflects the impact of the hiring of our Chief Medical Officer (CMO) in June 2016, and salary increases granted to our Chief Scientific Officer (CSO) and the four non-officer members of our scientific staff earlier this fiscal year.
 
-21-
 
 
 
Stock based compensation expense increased in the current period primarily as a result of the routine amortization of a new-hire option grant to our CMO and additional option grants made to our CSO, CMO and scientific staff in November 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 were fully-vested and fully-expensed prior to the quarter ended December 31, 2016.
 
Consulting services reflects fees paid or accrued for scientific, nonclinical and clinical development and regulatory advisory services rendered to us by third-parties, primarily by members of our scientific and CNS clinical and regulatory advisory boards. The reduction in expense in the current period primarily reflects the rationalization of our stem cell-related scientific advisory board and related accruals, including as a result of the BlueRock Therapeutics Agreement.
 
Technology license expense reflects both recurring annual fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to 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 December 31, 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. Technology license-related legal expense for the quarter ended December 31, 2016, also includes $55,000 representing the fair value of a warrant granted to intellectual property counsel as partial compensation for services. Current year expense further includes a net of $158,000 related to the sublicense consideration paid to University Health Network (UHN) pursuant to the BlueRock Therapeutics Agreement plus additional fees and expenses related to two new stem cell technology related licenses acquired from UHN, net of amounts previously accrued in connection with our prior Sponsored Research Collaboration Agreement (SRCA) with UHN.
 
AV-101 project expense for the quarter ended December 31, 2016 includes continuing costs incurred to develop more efficient and cost-effective production methods for AV-101 and for certain pre-production and nonclinical 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. The increase in stem cell and other project related expenses for the quarter ended December 31, 2016 primarily reflects in-house costs associated with our participation in the FDA’s CiPA project.
 
The increase in rent expense in the quarter ended December 31, 2016 reflects the impact of the scheduled rent increase effective August 2016 as well as the impact of accounting for the November 2016 lease amendment extending the lease of our headquarters facilities by five years from July 31, 2017 to July 31, 2022.
 
Warrant modification expense in the quarter ended December 31, 2015 reflects the increase in fair value resulting from the November 2015 modification of outstanding warrants to purchase an aggregate of 315,000 shares of our common stock held by our CSO and a key scientific advisor to reduce the exercise prices thereof from a range of $9.25 to $12.80 per share to $7.00 per share.
 
General and Administrative Expense
 
General and administrative expense increased to $2,276,600 from $1,335,500, for the quarters ended December 31, 2016 and 2015, respectively. This increase was primarily attributable to increased noncash stock compensation expense related to option and warrant grants and grants of equity securities as compensation for certain professional services. The following table indicates the primary components of general and administrative expenses, including noncash stock compensation expense, for each of the periods (amounts in thousands):
 
 
 
Three Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $257 
 $172 
Stock-based compensation
  153 
  24 
Board fees
  36 
  16 
Legal, accounting and other professional fees
  1,017 
  643 
Investor relations
  241 
  4 
Insurance
  38 
  33 
Travel expenses
  54 
  18 
Rent and utilities
  63 
  40 
Warrant modification expense
  370 
  358 
All other expenses
  48 
  28 
 
    
    
Total General and Administrative Expense
 $2,277 
 $1,336 
 
 
-22-
 
 
The increase in salaries and benefits reflects the impact of the hiring of our Vice President of Corporate Development (VP-Corporate Development) in September 2016 and salary increases granted to our Chief Executive Officer (CEO), Chief Financial Officer (CFO) and a non-officer member of our administrative staff and the change in that employee’s status from part-time to full-time earlier this fiscal year.
 
Stock based compensation expense increased in the current period primarily as a result of the routine amortization of a new-hire option grant to our VP-Corporate Development and additional option grants made to independent members of our Board of Directors, our CEO, CFO, VP of Corporate Development and other employees in November 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 were fully-vested and fully-expensed prior to the quarter ended December 31, 2016.
 
Board fees 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 for the quarter ended December 31, 2016 includes noncash expense related to grants of an aggregate of 220,000 unregistered shares of our common stock valued on the respective grant dates at an aggregate of $862,800 plus aggregate cash payments of $80,000 to investment professionals for financial advisory and corporate development services. Such expense for the quarter ended December 31, 2015, primarily included (i) $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 service providers for services to be performed through June 30, 2016; and (ii) $138,000 of noncash expense attributable to the fair value of 15,750 shares of our unregistered common stock and a five-year warrant to purchase 7,500 unregistered shares of our common stock granted in connection with investment banking services. In both years, professional services fees also include expense related to routine legal fees and fees for preparation of our income tax returns for the prior fiscal year and the quarterly review of our current year financial statements.
 
Investor relations expense includes the fees of our external service providers for a significantly expanded and broad spectrum of investor relations and market awareness and support functions and, in the quarter ended December 31, 2016, initiatives that included numerous meetings in multiple U.S. markets and other communication activities focused on expanding market awareness of the Company, including among registered investment professionals and investment advisors, and individual and institutional investors. In the quarter ended December 31, 2016, in addition to cash fees and expenses we incurred, we granted an aggregate of 35,000 unregistered shares of our common stock to two investor relations and investor awareness service providers as partial compensation for their services and recognized noncash expense of $137,800, representing the fair value of the stock at the time of issuance.
 
In both periods, travel expense reflects costs associated with presentations to and meetings in multiple U.S. markets with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development initiatives, in the current year by both our CEO and our VP-Corporate Development.
 
The increase in rent expense in the quarter ended December 31, 2016 reflects the impact of the scheduled rent increase effective August 2016 as well as the impact of accounting for the November 2016 lease amendment extending the lease of our headquarters facilities by five years from July 31, 2017 to July 31, 2022.
 
In October and December 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 163,044 shares of our common stock for an aggregate of 110,008 shares of our unregistered common stock.  As with similar transactions in fiscal year 2016 and in prior quarters of the current fiscal year, we accounted for these transactions as warrant modifications, resulting in our recognition of $293,300 in noncash expense in the quarter ended December 31, 2016. Further, in December 2016, we modified an outstanding warrant to reduce the exercise price from $8.00 per share to $3.51 per share and increase the number of shares exercisable under the warrant from 25,000 shares to 50,000 shares, recognizing $76,900 in expense in the quarter then ended as the incremental fair value attributable to the modification. During the quarter ended December 31, 2015, we modified outstanding warrants to purchase an aggregate of 808,553 shares of our common stock previously granted to our CEO, CFO, and independent members of our Board of Directors to reduce the exercise prices thereof from a range of $9.25 to $12.80 per share to $7.00 per share and recognized $357,500 of noncash expense in the quarter then ended as the incremental fair value attributable to the modifications.
 
Interest and Other Expenses, Net   
 
Interest expense, net totaled $900 for the quarter ended December 31, 2016 compared to $2,500 reported for the quarter ended December 31, 2015. The following table summarizes the primary components of interest expense for each of the periods (amounts in thousands):
 
-23-
 
 
 
 
Three Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Interest expense on promissory notes
 $- 
 $2 
Other interest expense, including on capital leases and premium financing
  1 
  1 
     Total interest expense
  1 
  3 
 
    
    
Interest income
  - 
  - 
 
    
    
Interest expense, net
 $1 
 $3 
 
Interest expense on promissory notes in the quarter ended December 31, 2015 represents the quarterly interest accrued on our outstanding note to University of California at Davis prior to our repayment of such note and accrued interest in January 2016 and our outstanding note to Progressive Medical Research prior to our repayment of such note and accrued interest in June 2016. Other interest expense in both periods relates to interest paid on insurance premium financing and one capital lease of office equipment.
 
We have recognized $237,700 and $631,300 for the quarters ended December 31, 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 and a subsequent voluntary conversion of 87,500 shares of our Series B Preferred in August 2016, as disclosed in Note 9, Capital Stock, to the accompanying Condensed Consolidated Financial Statements in Part I of this Report.
 
Comparison of Nine Months Ended December 31, 2016 and 2015
 
The following table summarizes the results of our operations for the nine months ended December 31, 2016 and 2015 (amounts in thousands).
 
 
 
 Nine Months Ended December 31,
 
 
 
 2016
 
 
 2015
 
 
 
 
 
 
 
 
Sublicense revenue
 $1,250 
 $- 
Operating expenses:
    
    
 Research and development
 $4,043 
 $2,835 
 General and administrative
  4,908 
  6,515 
  Total operating expenses
  8,951 
  9,350 
Loss from operations
  (7,701)
  (9,350)
 
    
    
Interest expense (net)
  (4)
  (770)
Change in warrant liabilities
  - 
  (1,895)
Loss on extinguishment of debt
  - 
  (26,700)
Other expense
  - 
  (2)
Loss before income taxes
  (7,705)
  (38,717)
Income taxes
  (2)
  (2)
 
    
    
Net loss
 $(7,707)
 $(38,719)
 Accrued dividend on Series B Preferred Stock
  (1,018)
  (1,459)
 Deemed dividend on Series B Preferred Stock
  (111)
  (1,812)
Net loss attributable to common stockholders
 $(8,836)
 $(41,990)
 
Revenue   
 
We recognized $1.25 million in sublicense revenue pursuant to the BlueRock Therapeutics Agreement in the quarter ended December 31, 2016. While we may potentially receive additional payments and royalties under the BlueRock Therapeutics Agreement in the future, in the event certain performance-based milestones and commercial sales are achieved, the agreement might not provide recurring revenue to us in the near term. We reported no other revenue for the nine months ended December 31, 2016 or 2015 and we presently have no revenue generating arrangements with respect to AV-101 or other potential product candidates. However, as indicated previously, our CRADA with the NIH provides for the NIH to fully fund and conduct the Phase 2a Study.
 
-24-
 
 
Research and Development Expense
 
Research and development expense totaled $4,042,800 for the nine months ended December 31, 2016, an increase of approximately 43% compared with the $2,835,000 incurred for the nine months ended December 31 2015, demonstrating our increased focus on the continuing nonclinical and clinical development of AV-101 and our preparations to launch the Phase 2b Study of AV-101 as an adjunctive treatment for MDD patients with an inadequate response to standard antidepressants, which we currently anticipate to begin in the second quarter of 2017. The following table indicates the primary components of research and development expense for each of the periods (amounts in thousands):
 
 
 
Nine Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $1,013 
 $628 
Stock-based compensation
  240 
  979 
Consulting and other professional services
  (81)
  51 
Technology licenses and royalties, including UHN
  547 
  646 
Project-related research and supplies:
    
    
AV-101
  1,963 
  161 
Stem cell and all other
  129 
  42 
 
  2,092 
  203 
Rent
  206 
  163 
Depreciation
  25 
  29 
Warrant modification expense
  - 
  135 
All other
  1 
  1 
 
    
    
Total Research and Development Expense
 $4,043 
 $2,835 
 
The increase in salaries and benefits reflects the impact of the hiring of our Chief Medical Officer (CMO) in June 2016, as well as salary increases and bonus payments granted to our President and Chief Scientific Officer (CSO) and to 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, in November 2016, June 2016 (CSO and CMO only) and September 2015. 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 were fully-vested and fully-expensed prior to December 31, 2016.
 
Consulting services reflects fees paid or accrued for scientific, nonclinical and clinical development and regulatory advisory services rendered to us by third-parties, primarily by members of our scientific and CNS clinical and regulatory advisory boards. The reduction in expense in the nine months ended December 31, 2016 primarily reflects the rationalization of our stem cell-related scientific advisory board and related accruals, including as a result of the BlueRock Therapeutics Agreement.
 
Technology license expense reflects both recurring annual fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to 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. Technology license-related legal expense for the nine months ended December 31, 2016, also includes $55,000 representing the fair value of a warrant granted to intellectual property counsel as partial compensation for services. Current year expense further includes a net of $158,000 related to the sublicense consideration paid to University Health Network (UHN) related to the BlueRock Therapeutics Agreement plus additional fees and expenses related to two new stem cell technology related licenses acquired from UHN, net of amounts previously accrued in connection with our prior SRCA with UHN. Expense for the nine months ended December 31, 2015, included approximately $153,000 of fees and expenses related to additional stem cell technology related licenses acquired in connection with our SRCA with UHN as well as $120,000 of noncash expense resulting from the July 2015 grant of an aggregate of 10,000 shares of our Series B Preferred to two intellectual property legal service providers.
 
AV-101 expenses for the nine months ended December 31, 2016 include 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 initiate and 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. The increase in stem cell and other project related expenses in 2016 primarily reflects in-house costs associated with our participation in the FDA’s CiPA project.
 
 
-25-
 
 
The increase in rent expense in the quarter ended December 31, 2016 reflects the impact of the scheduled rent increase effective August 2016 as well as the impact of accounting for the November 2016 lease amendment extending the lease of our headquarters facilities by five years from July 31, 2017 to July 31, 2022.
 
Warrant modification expense in the quarter ended December 31, 2015 reflects the increase in fair value resulting from the November 2015 modification of outstanding warrants to purchase an aggregate of 315,000 shares of our common stock held by our CSO and a key scientific advisor to reduce the exercise prices thereof from a range of $9.25 to $12.80 per share to $7.00 per share.
 
General and Administrative Expense
 
General and administrative expense decreased to $4,907,800 from $6,514,500, for the nine month periods ended December 31, 2016 and 2015, respectively, primarily as a result of the decrease in noncash stock compensation expense attributable to option and warrant grants to employees, officers and independent Board members in 2015, partially offset by an increase in noncash expense related to grants of equity securities in payment of certain professional services during 2016. The following table indicates the primary components of general and administrative expenses for each of the periods (amounts in thousands):
 
 
 
Nine Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Salaries and benefits
 $932 
 $520 
Stock-based compensation
  334 
  2,889 
Board fees
  105 
  72 
Legal, accounting and other professional fees
  1,766 
  2,113 
Investor relations
  820 
  60 
Insurance
  116 
  105 
Travel and entertainment
  126 
  73 
Rent and utilities
  148 
  116 
Warrant modification expense
  427 
  480 
All other expenses
  134 
  87 
Total General and Administrative Expense
 $4,908 
 $6,515 
 
The increase in salaries and benefits reflects the impact of salary increases and bonus payments granted to our Chief Executive Officer (CEO), Chief Financial Officer (CFO), and a member of our administrative staff and the change in that employee’s status from part-time to full-time, as well as the hiring of our VP-Corporate Development in September 2016.
 
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, in November 2016, June 2016 (CEO, CFO and independent Board members only) and September 2015, as well as to our VP-Corporate Development 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 were fully-vested and fully-expensed prior to December 31, 2016.
 
Board fees 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 nine month periods ended December 31, 2016 and 2015, includes $337,500 and $675,000, respectively, of noncash expense recognized pursuant to the June 30, 2015 grant of an aggregate of 90,000 shares of our Series B Preferred having an aggregate fair value at the time of issuance of $1,350,000 as compensation for financial advisory and corporate development service contracts with two independent service providers for services performed between July 1, 2015 and June 30, 2016. During the nine-month period ended December 31, 2016, we 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 partial compensation for services and an aggregate of 220,000 unregistered shares of our common stock having a fair value at the date of issuance of $862,800 as partial compensation for financial advisory, investment banking and business development services. During the nine-month period ended December 31, 2015, we granted (i) an aggregate of 50,000 shares of our common stock having an aggregate fair value of $500,000 pursuant to two corporate development contracts initiated during the quarter ended June 30, 2015; (ii) 25,000 shares of our Series B Preferred having a fair value of $250,000 to legal counsel as compensation for services in connection with our debt restructuring and other corporate finance matters, and (iii) 15,750 shares of our unregistered common stock and a five-year warrant to purchase 7,500 unregistered shares of our common stock having an aggregate fair value of $138,000 in connection with investment banking services. In both years, professional services fees also include routine legal fees and expenses and the expense related to the annual audit of the prior year financial statements, preparation of the prior year income tax returns, and quarterly reviews of current year financials statements.
 
 
-26-
 
 
Investor relations expense includes the fees of our external service providers for a significantly expanded broad spectrum of investor relations and market awareness and support functions and, particularly during the second half of 2016, initiatives that included numerous meetings in multiple U.S. markets 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 nine months ended December 31, 2016, in addition to cash fees and expenses we incurred, we granted an aggregate of 60,000 unregistered shares of our common stock to three investor relations and investor awareness service providers as partial compensation for their services and recognized noncash expense of $246,300, representing the fair value of the stock at the time of issuance. During the same period, we also granted three-year, immediately exercisable warrants to purchase an aggregate of 75,000 shares of our unregistered common stock at exercise prices ranging from $4.50 per share to $6.00 per share to three investor relations service providers and recognized non-cash expense of $172,300 representing the fair value of the warrants at the time of issuance.
 
In both periods, travel expense reflects costs associated with presentations to and meetings in numerous U.S. markets 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, in 2016 by both our CEO and our VP-Corporate Development.
 
Between April 2016 and December 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 224,513 shares of our common stock for an aggregate of 156,246 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 $350,700 in noncash expense attributable to the increase in fair value related to the warrant exchanges during the nine-month period ended December 31, 2016. Further, in December 2016, we modified an outstanding warrant to reduce the exercise price from $8.00 per share to $3.51 per share and increase the number of shares exercisable under the warrant from 25,000 shares to 50,000 shares, recognizing $76,900 in expense in the quarter then ended as the incremental fair value attributable to the modification. Noncash warrant modification expense in 2015 includes (i) a $122,000 increase in the fair value attributable to the June 2015 strategic modification of outstanding warrants to purchase an aggregate of 54,576 shares of our common stock to reduce the exercise prices thereof, generally from $30.00 per share to $10.00 per share; and (ii) a $358,000 increase in the fair value attributable to the November 2015 modification of outstanding warrants to purchase an aggregate of 808,553 shares of our common stock previously granted to our CEO, CFO, and independent members of our Board of Directors to reduce the exercise prices thereof from a range of $9.25 to $12.80 per share to $7.00 per share
 
Interest and Other Expenses, Net   
 
Interest expense, net, totaled $3,700 for the nine months ended December 31, 2016, a significant decrease compared to the $769,800 reported for the nine months ended December 31, 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):
 
 
 
Nine Months Ended December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
Interest expense on promissory notes
 $1 
 $208 
Amortization of discount on promissory notes
  - 
  565 
Other interest expense, including on capital leases and premium financing
  3 
  3 
     Total interest expense
  4 
  776 
Effect of foreign currency fluctuations on notes payable
  - 
  (6)
Interest income
  - 
  - 
 
    
    
Interest expense, net
 $4 
 $770 
 
Interest expense on promiss