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, 2017
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: 001-37761
 
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]
 
 
Emerging growth company
[  ]
(do not check if a smaller reporting company)
     
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
 
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 9, 2018, 22,902,615 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, 2017
 
 
TABLE OF CONTENTS
 
 
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68
 
 
-i-
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Condensed Consolidated Financial Statements (Unaudited)
 
VISTAGEN THERAPEUTICS, INC.
Condensed Consolidated Balance Sheets
Amounts in Dollars
 
 
 
December 31,
 
 
 March 31,
 
 
 
 2017
 
 
 2017
 
 
 
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $13,031,800 
 $2,921,300 
Prepaid expenses and other current assets
  940,400 
  456,600 
Total current assets
  13,972,200 
  3,377,900 
Property and equipment, net
  222,800 
  286,500 
Security deposits and other assets
  47,800 
  47,800 
Total assets
 $14,242,800 
 $3,712,200 
 
    
    
 LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
Current liabilities:
    
    
Accounts payable
 $509,300 
 $867,300 
Accrued expenses
  770,900 
  443,000 
Current notes payable
  43,700 
  54,800 
Capital lease obligations
  2,600 
  2,400 
Total current liabilities
  1,326,500 
  1,367,500 
 
    
    
Non-current liabilities:
    
    
Accrued dividends on Series B Preferred Stock
  2,344,400 
  1,577,800 
Deferred rent liability
  299,100 
  139,200 
Capital lease obligations
  10,000 
  11,900 
Total non-current liabilities
  2,653,500 
  1,728,900 
Total liabilities
  3,980,000 
  3,096,400 
 
    
    
Commitments and contingencies
    
    
 
    
    
Stockholders’ equity:
    
    
Preferred stock, $0.001 par value; 10,000,000 shares authorized at December 31, 2017 and March 31, 2017:
Series A Preferred, 500,000 shares authorized, issued and outstanding at December 31, 2017
and March 31, 2017
  500
 
  500
 
Series B Preferred; 4,000,000 shares authorized at December 31, 2017 and March 31, 2017;
1,160,240 shares issued and outstanding at December 31, 2017 and March 31, 2017
  1,200 
  1,200 
Series C Preferred; 3,000,000 shares authorized at December 31, 2017 and March 31, 2017;
    
    
2,318,012 shares issued and outstanding at December 31, 2017 and March 31, 2017
  2,300 
  2,300 
Common stock, $0.001 par value; 100,000,000 and 30,000,000 shares authorized at December 31, 2017
    and March 31, 2017, respectively; 22,723,504 and 8,974,386 shares issued and outstanding at
    
    
December 31, 2017 and March 31, 2017, respectively
  22,700 
  9,000 
Additional paid-in capital
  166,669,200 
  146,569,600 
Treasury stock, at cost, 135,665 shares of common stock held at December 31, 2017 and March 31, 2017
  (3,968,100)
  (3,968,100)
Accumulated deficit
  (152,465,000)
  (141,998,700)
Total stockholders’ equity
  10,262,800 
  615,800 
Total liabilities and stockholders’ equity
 $14,242,800 
 $3,712,200 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
-1-
 
 
VISTAGEN THERAPEUTICS, INC.
STATEMENT OF OPERATIONS
Amounts in Dollars, except share amounts
 
UNAUDITED
 
 
 
Three Months Ended December 31,
 
 
 Nine Months Ended December 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Sublicense revenue
 $- 
 $1,250,000 
 $- 
 $1,250,000 
Total revenues
  - 
  1,250,000 
  - 
  1,250,000 
Operating expenses:
    
    
    
    
Research and development
  1,601,800 
  1,611,000 
  5,124,600 
  4,042,800 
General and administrative
  1,266,000 
  2,276,600 
  4,997,400 
  4,907,800 
Total operating expenses
  2,867,800 
  3,887,600 
  10,122,000 
  8,950,600 
Loss from operations
  (2,867,800)
  (2,637,600)
  (10,122,000)
  (7,700,600)
Other expenses, net:
    
    
    
    
Interest expense, net
  (2,000)
  (900)
  (7,700)
  (3,700)
Loss on extinguishment of accounts payable
  (135,000)
  - 
  (135,000)
  - 
 
    
    
    
    
Loss before income taxes
  (3,004,800)
  (2,638,500)
  (10,264,700)
  (7,704,300)
Income taxes
  - 
  - 
  (2,400)
  (2,400)
Net loss and comprehensive loss
  (3,004,800)
  (2,638,500)
  (10,267,100)
  (7,706,700)
 
    
    
    
    
Accrued dividend on Series B Preferred stock
  (263,000)
  (237,700)
  (766,600)
  (1,018,500)
Deemed dividend from trigger of down round
    
    
    
    
provision feature
  (199,200)
  - 
  (199,200)
  - 
Deemed dividend on Series B Preferred Units
  - 
  - 
  - 
  (111,100)
 
    
    
    
    
Net loss attributable to common stockholders
 $(3,467,000)
 $(2,876,200)
 $(11,232,900)
 $(8,836,300)
 
    
    
    
    
Basic and diluted net loss attributable to common
    
    
    
    
stockholders per common share
 $(0.25)
 $(0.34)
 $(1.03)
 $(1.23)
 
    
    
    
    
Weighted average shares used in computing basic
    
    
    
    
and diluted net loss attributable to common
    
    
    
    
stockholders per common share
  13,895,642 
  8,381,824 
  10,947,556 
  7,181,307 
 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
-2-
 

 
VISTAGEN THERAPEUTICS INC.
STATEMENT OF CASH FLOWS
Amounts in Dollars
 UNAUDITED
 
 
 
 Nine Months Ended December 31,
 
 
 
2017
 
 
2016
 
 Cash flows from operating activities:
 
 
 
 
 
 
 Net loss
 $(10,267,100)
 $(7,706,700)
 
Adjustments to reconcile net loss to net cash used in operating activities:
 
    
   Depreciation and amortization
  65,300 
  37,600 
   Stock-based compensation
  1,386,900 
  573,900 
 
 Expense related to modification of warrants, including exchange of warrants
 
    
    for common stock
  292,700 
  427,500 
   Amortization of deferred rent
  159,900 
  20,400 
   Fair value of common stock granted for services
  1,554,800 
  1,217,500 
   Fair value of Series B Preferred stock granted for services
  - 
  375,000 
   Fair value of warrants granted for services
  - 
  240,300 
   Loss on extinguishment of accounts payable
  135,000 
  - 
   Changes in operating assets and liabilities:
    
    
    Sublicense fee receivable
  - 
  (1,250,000)
    Prepaid expenses and other current assets
  259,600 
  22,000 
    Accounts payable and accrued expenses, including accrued interest
  (41,800)
  74,200 
     Net cash used in operating activities
  (6,454,700)
  (5,968,300)
 
    
    
 Cash flows from property and investing activities:
    
    
  Purchases of equipment
  (1,600)
  (9,900)
     Net cash used in investing activities
  (1,600)
  (9,900)
 
    
    
 Cash flows from financing activities:
    
    
  Net proceeds from issuance of common stock and warrants, including Units
  16,721,900 
  9,785,000 
  Net proceeds from issuance of Series B Preferred Units
  - 
  278,000 
  Repayment of capital lease obligations
  (1,700)
  (800)
  Repayment of notes payable
  (153,400)
  (140,500)
     Net cash provided by financing activities
  16,566,800 
  9,921,700 
 Net increase in cash and cash equivalents
  10,110,500 
  3,943,500 
 Cash and cash equivalents at beginning of period
  2,921,300 
  428,500 
 Cash and cash equivalents at end of period
 $13,031,800 
 $4,372,000 
 
    
    
 Supplemental disclosure of noncash activities:
    
    
    Insurance premiums settled by issuing note payable
 $142,400 
 $117,500 
    Accrued dividends on Series B Preferred
 $766,600 
 $780,800 
 
Accrued dividends on Series B Preferred settled upon conversion by issuance
 
    
        of common stock
 $- 
 $1,768,800 
   Deemed dividend from trigger of down round provision feature
 $199,200 
 $- 
 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
 
-3-
 
 
VISTAGEN THERAPEUTICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2017
AMOUNTS IN DOLLARS, except shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Total
 
 
 
Series A Preferred Stock
 
 
Series B Preferred Stock
 
 
Series C Preferred Stock
 
 
 Common Stock
 
 
 Paid-in
 
 
Treasury
 
 
Accumulated
 
 
 Stockholders’
 
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Shares
 
 
 Amount
 
 
 Capital
 
 
Stock
 
 
Deficit
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at March 31, 2017
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  8,974,386 
 $9,000 
 $146,569,600 
 $(3,968,100)
 $(141,998,700)
 $615,800 
Proceeds from sale of common stock and warrants for cash in September
    
    
    
    
    
    
    
    
    
    
    
    
2017 Public Offering, net of underwriting discount and expenses
  - 
  - 
  - 
  - 
  - 
  - 
  1,371,430 
  1,300 
  2,023,200 
  - 
  - 
  2,024,500 
Proceeds from sale of common stock and warrants for cash in December
    
    
    
    
    
    
    
    
    
    
    
    
2017 Public Offering, net of underwriting discount and expenses
  - 
  - 
  - 
  - 
  - 
  - 
  10,000,000 
  10,000 
  13,614,000 
  - 
  - 
  13,624,000 
Proceeds from sale of common stock and warrants for cash in
    
    
    
    
    
    
    
    
    
    
    
    
private placement offerings
  - 
  - 
  - 
  - 
  - 
  - 
  616,323 
  600 
  1,072,600 
  - 
  - 
  1,073,200 
Accrued dividends on Series B Preferred stock
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (766,600)
  - 
  - 
  (766,600)
Stock-based compensation expense
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  1,386,900 
  - 
  - 
  1,386,900 
Fair value of common stock granted for services
  - 
  - 
  - 
  - 
  - 
  - 
  1,072,500 
  1,100 
  1,693,100 
  - 
  - 
  1,694,200 
Fair value of common stock granted in settlement of accounts payable
  - 
  - 
  - 
  - 
  - 
  - 
  500,000 
  500 
  584,500 
  - 
  - 
  585,000 
Increase in fair value attributable to warrant modifications
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  292,700 
  - 
  - 
  292,700 
Deemed dividend from trigger of down round provision feature
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  199,200 
  - 
  (199,200)
  - 
Proceeds from exercise of warrants
  - 
  - 
  - 
  - 
  - 
  - 
  188,865 
  200 
  - 
  - 
  - 
  200 
Net loss for the nine months ended December 31, 2017
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (10,267,100)
  (10,267,100)
 
    
    
    
    
    
    
    
    
    
    
    
    
Balances at December 31, 2017
  500,000 
 $500 
  1,160,240 
 $1,200 
  2,318,012 
 $2,300 
  22,723,504 
 $22,700 
 $166,669,200 
 $(3,968,100)
 $(152,465,000)
 $10,262,800 
 
    
    
    
    
    
    
    
    
    
    
    
    
 
 
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.
 
AV-101 is our oral CNS product candidate in Phase 2 clinical development in the United States, initially as a new generation 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).  AV-101’s mechanism of action (MOA) involves both NMDA (N-methyl-D-aspartate) and AMPA (alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid) receptors in the brain responsible for fast excitatory synaptic activity throughout the CNS.  AV-101’s MOA is fundamentally different from all standard FDA-approved antidepressants, as well as all atypical antipsychotics, such as aripiprazole, often used adjunctively with standard antidepressants. We believe AV-101 also has potential to treat several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including, among others, as a non-opioid alternative for neuropathic pain and for Parkinson’s disease levodopa -induced dyskinesia (PD LID).
 
Clinical studies conducted at the U.S. National Institute of Mental Health (NIMH), part of the U.S. National Institutes of Health (NIH), by Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders, have focused on the antidepressant effects of ketamine hydrochloride injection (ketamine), an ion-channel blocking NMDA receptor antagonist approved by the FDA as an anesthetic, in MDD patients with inadequate responses to multiple standard antidepressants. These NIMH studies, as well as clinical research at Yale University and other academic institutions in the U.S., have demonstrated ketamine’s robust antidepressant effects in treatment-resistant MDD patients within twenty-four hours of a single sub-anesthetic dose administered by intravenous (IV) injection.
 
We believe orally administered AV-101 may have potential to deliver ketamine-like antidepressant effects, without ketamine’s psychological side effects and other safety concerns, and without the need for IV administration. As published in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article titled, 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. In addition, these studies confirmed that the fast-acting antidepressant effects of AV-101 were mediated through both inhibiting the glycine binding (GlyB) site of the NMDA receptor and activating the AMPA receptor pathway in the brain.
 
In October 2017, we received FDA authorization to launch our 180-patient Phase 2 multi-center, multi-dose, double blind, placebo-controlled efficacy and safety study of AV-101 as a new generation adjunctive treatment for MDD patients with an inadequate therapeutic response to standard, FDA-approved antidepressants (the AV-101 MDD Phase 2 Adjunctive Treatment Study , and in December 2017 the FDA granted Fast Track Designation to AV-101 for development as a potential adjunctive treatment for MDD. We intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018 with Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, as the Principal Investigator. 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 expect top line results of the AV-101 MDD Phase 2 Adjunctive Treatment Study to be available in the first half of 2019. In addition, pursuant to our Cooperative Research and Development Agreement (CRADA) with the NIMH, the NIMH is currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, a small Phase 2 clinical study of AV-101 as a monotherapy in subjects with treatment-resistant MDD (the NIMH AV-101 MDD Phase 2 Monotherapy Study).
 
VistaStem Therapeutics (VistaStem) is our wholly owned subsidiary focused on applying human pluripotent stem cell (hPSC) technology to discover, rescue, develop and commercialize (i) proprietary new chemical entities (NCEs) for CNS and other diseases and (ii) regenerative medicine (RM) involving hPSC-derived blood, cartilage, heart and liver cells.  Our internal drug rescue programs are designed to utilize CardioSafe 3D, our customized cardiac bioassay system, to develop small molecule NCEs for our pipeline.  To advance potential RM applications of our cardiac stem cell technology, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, we may pursue additional RM collaborations or out-licensing transactions involving blood, cartilage, and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering.
 
 
-5-
 
 
Subsidiaries
 
As noted above, VistaStem is our wholly-owned subsidiary. Our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report) also include the accounts of VistaStem’s two wholly-owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation, 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, 2017 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, 2017 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2018, or for any other future interim or other 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 our fiscal year ended March 31, 2017 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 29, 2017.
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As a 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 $152.5 million accumulated from inception (May 1998) through December 31, 2017. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of AV-101, initially as an adjunctive treatment for MDD, and subsequently as a potential new treatment alternative for other CNS-related conditions, as well as exploring and potentially executing drug rescue and development opportunities using CardioSafe 3D.
 
From our inception through December 31, 2017, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities for cash proceeds of approximately $61.4 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. We have also issued equity securities with an approximate value at issuance of $33.6 million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services. Additionally, pursuant to our February 2015 CRADA with the NIH, substantial ongoing Phase 2 clinical development activities relating to the NIMH AV-101 MDD Phase 2 Monotherapy Study are being sponsored in full, at no cost to us other than supplying clinical trial material, by the NIMH under the direction of Dr. Carlos Zarate Jr. as Principal Investigator.
 
At December 31, 2017, we had a cash and cash equivalents balance of $13.0 million. We believe this amount is sufficient to enable us to fund our planned operations for at least 12 months following the issuance of the financial statements included in this Report.
 
In December 2017, we completed an underwritten public offering of shares of our common stock and warrants to purchase shares of our common stock at a combined public offering price of $1.50 per share and related warrant under our Registration Statement on Form S-1 (Registration No. 333-221009), resulting in gross proceeds of $15.0 million (the December 2017 Public Offering). In September 2017, we completed an underwritten public offering pursuant to which we offered and sold shares of our common stock and warrants resulting in gross proceeds of approximately $2.4 million (the September 2017 Public Offering) under our Registration Statement on Form S-3 (Registration No. 333-215671) (the S-3 Registration Statement). (See Note 7, Capital Stock, for additional information regarding the December 2017 Public Offering and the September 2017 Public Offering.) Subject to certain restrictions, the S-3 Registration Statement remains available for future sales of our equity securities in one or more public offerings from time to time. While we may make additional sales of our equity securities under the S-3 Registration Statement, we do not have an obligation to do so. As we have been in the past, we expect that, if necessary, we will be successful in raising additional capital from the sale of our equity securities either in one or more public offerings or in one or more private placement transactions with individual accredited investors or institutions.
 
 
 
-6-
 
 
In addition to the sale of our equity securities, we may also seek to enter additional research and development collaborations that could generate revenue or provide substantial funding for development of AV-101 and additional product candidates. We may also seek additional government grant awards or agreements similar to our current CRADA with the NIMH, which provides for the NIMH to fully fund the NIMH AV-101 MDD Phase 2 Monotherapy Study. 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 Agreement, we may also pursue similar arrangements with third-parties covering other of our intellectual property. Although we may seek additional collaborations with the U.S. government or other third-parties that could generate revenue and/or non-dilutive funding for development of AV-101 and other product candidates and technologies, 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, initially as an adjunctive treatment for MDD, and as a potential treatment option for other CNS conditions, as well as various potential 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 opportunities related to 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, acquisition and protection of intellectual property, public company compliance and other professional services and operating costs. 
 
Notwithstanding the foregoing, there can be no assurance that, if needed, future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. If we are unable to obtain substantial additional financing on a timely basis when needed, 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.  As noted above, these Condensed Consolidated Financial Statements do not include any adjustments that might result from the negative 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 historically to value warrants and warrant modifications. With the exception of the $1.25 million of sublicense revenue recorded in the quarter ended December 31, 2016 under the BlueRock Agreement, 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 our 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 MDD, stem cell technology-related research and development costs, and costs related to the filing, maintenance and prosecution of patents and patent applications, technology licenses and protection of other intellectual property. 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 change in value is recognized as an expense during the period over which the services are performed.
 
 
 
-7-
 
 
The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2017 and 2016.
 
 
 
 Three Months Ended
 
 
 Nine Months Ended
 
 
December 31,
December 31,
 
 
 2017
 
 
 2016
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Research and development expense:
 
 
 
 
 
 
 
 
 
 
 
 
 Stock option grants
 $299,100 
 $113,900 
 $627,400 
 $239,900 
 
  299,100 
  113,900 
  627,400 
  239,900 
 General and administrative expense:
    
    
    
    
 Stock option grants
  390,200 
  153,300 
  759,500 
  334,000 
 
  390,200 
  153,300 
  759,500 
  334,000 
 Total stock-based compensation expense
 $689,300 
 $267,200 
 $1,386,900 
 $573,900 
 
In April 2017, our Board approved the grant of options to purchase an aggregate of 880,000 shares of our common stock at an exercise price of $1.96 per share to the independent members of our Board, our officers and our employees. In September 2017, our stockholders approved an amendment to our 2016 Amended and Restated Stock Incentive Plan (the 2016 Plan) to increase the number of shares issuable thereunder from 3.0 million shares to 10.0 million shares. Following that approval, our Board authorized the grant of options to purchase an aggregate of 770,000 shares of our common stock at an exercise price of $1.56 per share to the independent members of our Board, our officers, employees and certain consultants. We valued the options granted in April 2017 and September 2017 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
 
Assumption:
 
April 2017
 
 
September 2017
 
Market price per share at grant date
 $1.96 
 $1.56 
Exercise price per share
 $1.96 
 $1.56 
Risk-free interest rate
  2.02%
  1.99%
Contractual or estimated term in years
  6.48 
  6.70 
Volatility
  83.24%
  92.29%
Dividend rate
  0.0%
  0.0%
Shares
  880,000 
  770,000 
 
    
    
Fair Value per share
 $1.42 
 $1.20 
 
In June 2016, our 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 then-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 then-newly-hired officer. We valued the options granted in June 2016 and September 2016 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:
 
Assumption:
 
June 2016
 
 
September 2016
 
Market price per share at grant date
 $3.49 
 $4.27 
Exercise price per share
 $3.49 
 $4.27 
Risk-free interest rate
  1.34%
  1.29%
Contractual or estimated term in years
  6.68 
  6.25 
Volatility
  81.69%
  83.26%
Dividend rate
  0.0%
  0.0%
Shares
  655,000 
  125,000 
 
    
    
Fair Value per share
 $2.50 
 $3.05 
 
At December 31, 2017, there were stock options outstanding to purchase 3,279,871 shares of our common stock at a weighted average exercise price of $3.23 per share.
 
See Note 9, Subsequent Events, for information regarding option grants made during February 2018.
 
Comprehensive Loss
 
We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.
 
 
 
-8-
 
 
Income (Loss) per Common Share
 
Basic 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.
 
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, 2017 and 2016, the accrual for dividends on our Series B 10% Convertible Preferred Stock (Series B Preferred) is treated as a deduction from our net loss to arrive at net loss attributable to common stockholders for those periods. Additionally, in 2017, the deemed dividend attributable to the trigger of the down round provision feature, and, in 2016, the deemed dividend attributable to our sale and issuance of Series B Preferred Units, each consisting of one share of Series B Preferred and a five-year warrant to purchase one share of our common stock for $7.00, each represent further 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,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Series A Preferred stock issued and outstanding (1)
  750,000 
  750,000 
Series B Preferred stock issued and outstanding (2)
  1,160,240 
  1,160,240 
Series C Preferred stock issued and outstanding (3)
  2,318,012 
  2,318,012 
Outstanding options under the Amended and Restated 2016 (formerly 2008) and 1999 Stock Incentive Plans
  3,279,871 
  1,659,324 
Outstanding warrants to purchase common stock
  16,918,292 
  4,550,370 
Total
  24,426,415 
  10,437,946 
____________
 
 
 
 
(1) Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement, 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
 
Fair Value Measurements
 
We do not use derivative instruments for hedging of market risks or for trading or speculative purposes. We carried no assets or liabilities at fair value at December 31, 2017 or March 31, 2017.
 
 
 
-9-
 
 
Recent Accounting Pronouncements
 
Except as described below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended December 31, 2017, as compared to the recent accounting pronouncements described in our Form 10-K for the fiscal year ended March 31, 2017, that are of significance or potential significance to us.
 
In July 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Part I: Accounting for Certain Financial Instruments with Down Round Features; Part II: Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (ASU 2017-11). Part I of this ASU provides that an entity will no longer have to consider “down round” features (i.e., a provision in an equity-linked financial instrument, such as a free-standing warrant, or an embedded feature, such as a conversion option in a convertible instrument, that reduces the exercise price of such instrument if the entity subsequently sells stock for a lower price or issues an equity-linked instrument with a lower exercise price) when determining whether certain equity-linked financial instruments or embedded features are indexed to its own stock. The definition of a down round feature in ASU 2017-11 excludes standard anti-dilution provisions related to changes in an entity’s capital structure. Accounting Standards Codification Topic 815-40, “Derivatives and Hedging–Contracts in Entity’s Own Equity” (ASC 815-40) requires that a freestanding equity-linked financial instrument be indexed to the issuer’s own stock to be classified as equity. An equity-linked embedded feature that meets the definition of a derivative may avoid bifurcation and derivative accounting if it is indexed to the issuer’s own stock. Under the terms of prior guidance, a freestanding financial instrument or embedded feature was not considered indexed to the issuer’s own stock if it had a down round provision. Consequently, the freestanding financial instrument was classified as a liability (or asset), and if it met the definition of a derivative, was measured at fair value with changes in fair value recorded through earnings. Similarly, an embedded feature was bifurcated and separately accounted for as a derivative if it met all other criteria for bifurcation under ASC 815-40. The bifurcated embedded feature was also measured at fair value through earnings. Under the provisions of ASU 2017-11, an entity that presents earnings per share (EPS) under Accounting Standards Codification Topic 260, “Earnings Per Share” will recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. The new guidance requires new disclosures for financial instruments with down round features and other terms that change conversion or exercise prices. Part I of ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods therein, however early adoption is permitted. We early-adopted ASU 2017-11 effective with our quarter ended September 30, 2017 and applied its guidance to certain of the warrants issued in the September 2017 Public Offering, as described more completely in Note 7, Capital Stock. No retrospective adjustments to our financial statements were required as a result of our adoption of ASU 2017-11.
 
In February 2016, the FASB issued ASU No. 2016-2, “Leases.” This ASU requires substantially all leases, including operating leases, to be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability. This ASU is effective for our interim and annual reporting periods beginning April 1, 2019 and early adoption is permitted. We are currently evaluating the impact that the adoption of this ASU will have on our financial statements.
 
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees’ maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. This ASU became effective for our interim and annual reporting periods beginning April 1, 2017, and the adoption of this standard did not have a material impact on our financial statements. Pursuant to our adoption of this standard, we elected to account for the impact of option forfeitures as they occur.
 
Note 4.  Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets are composed of the following at December 31, 2017 and March 31, 2017:
 
 
 
 December 31,
 
 
 March 31,
 
 
 
 2017
 
 
 2017
 
 
 
 
 
 
 
 
 AV-101 materials and services
 $770,500 
 $352,800 
 Insurance
  72,300 
  85,800 
 Professional services
  48,000 
  - 
 Public offering expenses
  25,900 
  11,600 
 All other
  23,700 
  6,400 
 
 $940,400 
 $456,600 
 
 
 
-10-
 
 
Note 5.  Accrued Expenses
 
Accrued expenses are composed of the following at December 31, 2017 and March 31, 2017:
 
 
 
 December 31,
 
 
 March 31,
 
 
 
 2017
 
 
 2017
 
 
 
 
 
 
 
 
 Accrued AV-101 development and related expenses
 $565,700 
 $402,400 
 Accrued professional services
  97,100 
  37,000 
 Accrued compensation
  105,000 
  - 
 All other
  3,100 
  3,600 
 
 $770,900 
 $443,000 
 
Note 6.  Notes Payable
 
The following table summarizes our unsecured promissory notes at December 31, 2017 and March 31, 2017.
 
 
 
  December 31, 2017
 
 
March 31, 2017
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
Principal
 
 
Accrued
 
 
 
 
 
 
Balance
 
 
Interest
 
 
Total
 
 
Balance
 
 
Interest
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.95% and 8.25% Notes payable to insurance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
premium financing company (current)
 $43,700 
 $- 
 $43,700 
 $54,800 
 $- 
 $54,800 
 
    
    
    
    
    
    
 
    
    
    
    
    
    
 
    
    
    
    
    
    
Total notes payable to unrelated parties
 $43,700 
 $- 
 $43,700 
 $54,800 
 $- 
 $54,800 
less: current portion
  (43,700)
  - 
  (43,700)
  (54,800)
  - 
  (54,800)
Net non-current portion
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 
In May 2017, we executed a 7.95% promissory note in the principal amount of $142,400 in connection with insurance policy premiums. The note is payable in monthly installments of $14,800, including principal and interest, through March 2018, and had a remaining outstanding balance of $43,700 at December 31, 2017. In February 2017, we executed a promissory note in the principal amount of $60,700 in connection with other insurance policy premiums. That note was payable in monthly installments of $6,300, including principal and interest, and was paid in full at December 31, 2017.
 
Note 7.  Capital Stock
 
At our Annual Meeting of Stockholders on September 15, 2017, as approved by and recommended to our stockholders by our Board of Directors, our stockholders approved an amendment to our Restated and Amended Articles of Incorporation to increase the authorized number of shares of common stock that we may issue from 30.0 million shares to 100.0 million shares. The amendment became effective on September 15, 2017, upon our filing of a certificate of amendment with the Nevada Secretary of State.
 
Common Stock and Warrants Issued in December 2017 Underwritten Public Offering
 
On December 13, 2017, we completed the December 2017 Public Offering, resulting in gross proceeds of $15.0 million, pursuant to which we offered and sold shares of our common stock and warrants to purchase shares of our common stock at a combined public offering price of $1.50 per shares and related warrant. We issued an aggregate of 10,000,000 shares of our common stock and warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $1.50 per share (the December 2017 Offering Warrants). The common stock and the shares of common stock underlying the December 2017 Offering Warrants issued in the December 2017 Public Offering were offered, issued and sold pursuant to our Registration Statement on Form S-1 (Registration No. 333-221009) that was declared effective by the Securities and Exchange Commission (the Commission) on December 11, 2017. The December 2017 Offering Warrants are exercisable at any time through December 13, 2022, 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 do not contain any cashless exercise features as long as our Registration Statement on Form S-1 (Registration No. 333-221009) is effective. Accordingly, we have accounted for the December 2017 Offering Warrants as equity warrants. We received net proceeds of approximately $13.6 million from the December 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering.
 
 
 
-11-
 
 
Common Stock and Warrants Issued in September 2017 Underwritten Public Offering
 
On September 6, 2017, we completed the September 2017 Public Offering, resulting in gross proceeds of approximately $2.4 million, pursuant to which we offered and sold shares of our common stock and warrants to two of our existing institutional investors. We issued an aggregate of 1,371,430 shares of our common stock, Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 of common stock (collectively, the Warrants), each exercisable for $1.82 per share in the September 2017 Public Offering. The Series A1 Warrants will be exercisable by the investors for a five-year period commencing on March 7, 2018, and the Series A2 Warrants were immediately exercisable at any time through September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were offered, issued and sold pursuant to our S-3 Registration Statement (Registration No. 333-215671) that had previously been declared effective by the Commission to cover this and potential future sales of our equity securities in one or more public offerings from time to time. We received net proceeds of approximately $2.0 million from the September 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering.
 
The Series A1 Warrants to purchase an aggregate of 1,388,931 shares of our common stock issued in the September 2017 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 Series A2 Warrants to purchase an aggregate of 503,641 shares of our common stock contained anti-dilution protection provisions that became effective upon the issuance of common stock in the December 2017 Public Offering at a price below their then-current $1.82 per share exercise price. The anti-dilution protection provisions in the Series A2 Warrants constituted a down round feature subject to the guidance in ASU 2017-11. Since the Series A2 Warrants contained no other provisions which required their treatment as liability warrants rather than equity warrants, including 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 which are also present in the Series A1 Warrants, we also accounted for the Series A2 Warrants as equity warrants.
 
Our sale of units consisting of common stock and warrants in the December 2017 Public Offering at an offering price of $1.50 per unit triggered the anti-dilution provisions of the Series A2 Warrants. In accordance with the anti-dilution terms and formula contained in the Series A2 warrants, the exercise price of the Series A2 Warrants was reduced to $0.001 per share. In December 2017, certain holders exercised the reset Series A2 warrants to purchase an aggregate of 188,865 shares of our common stock from which we received nominal cash proceeds. In accordance with the guidance in ASU 2017-11, we recognized the effect of triggering the down round feature as a dividend in our Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended December 31, 2017 and as an addition to net loss attributable to common stockholders and in our calculation of basic and fully diluted earnings per share in our Condensed Consolidated Statement of Operations for the three and nine months ended December 31, 2017.
 
We calculated the dividend from the trigger of the down round provision feature, $199,200, using the Black Scholes Option Pricing Model and the assumptions indicated in the table below:
 
Assumption:
 
Pre-reset
 
 
Post-reset
 
Market price per share
 $1.17 
 $1.17 
Exercise price per share
 $1.82 
 $0.001 
Risk-free interest rate
  2.09%
  2.09%
Remaining contractual term in years
  4.73 
  4.73 
Volatility
  97.8%
  97.8%
Dividend rate
  0.0%
  0.0%
 
    
    
Number of warrant shares
  503,641 
  503,641 
Fair value per share
 $0.77 
 $1.17 
 
Common Stock and Warrants Issued in Private Placements
 
During the quarter ended June 30, 2017, in self-placed private placement transactions, we accepted subscription agreements from individual accredited investors, pursuant to which we sold to such investors units, at a weighted average purchase price of $2.00 per unit, consisting of an aggregate of 437,751 unregistered shares of our common stock and warrants, exercisable through April 30, 2021, to purchase an aggregate of 218,875 unregistered shares of our common stock at a weighted average exercise price of $3.99 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. The warrants are not exercisable until six months and one day following the date of issuance. We received aggregate cash proceeds of $873,300 in connection with these self-placed private placement transactions, and the entire amount of the proceeds was credited to stockholders’ equity.
 
 
 
-12-
 
 
During the quarter ended September 30, 2017, in a self-placed private placement transaction, we sold to an accredited investor units consisting of 28,572 shares of our unregistered common stock and warrants exercisable through April 30, 2021 to purchase 28,572 unregistered shares of our common stock at an exercise price of $4.00 per share. The purchaser of the units has 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. The warrants are not exercisable until six months and one day following the date of issuance. We received cash proceeds of $50,000 from this sale of our securities, and the entire amount of the proceeds was credited to stockholders’ equity.
 
During the quarter ended December 31, 2017, in a self-placed private placement transaction, we sold to an accredited investor units consisting of 150,000 shares of our unregistered common stock and warrants exercisable through November 30, 2021 to purchase 150,000 unregistered shares of our common stock at an exercise price of $2.00 per share. The purchaser of the units has 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. The warrants are not exercisable until six months and one day following the date of issuance. We received cash proceeds of $150,000 from this sale of our securities, and the entire amount of the proceeds was credited to stockholders’ equity.
 
Issuance of Common Stock to Professional Services Providers and in Settlement of Accounts Payable
 
During the quarter ended June 30, 2017, we issued 25,000 shares of our unregistered common stock having a fair value on the date of issuance of $49,800 as partial compensation to an investor relations service provider.
 
During the quarter ended September 30, 2017, we issued an aggregate of 927,500 unregistered shares of our common stock, of which 477,500 shares were issued from our 2016 Plan, for various professional services, including contract research, legal, investor relations and financial advisory services. The common stock issued had an aggregate fair value of $1,503,600 on the dates issued, of which all but $139,300 has been recognized as noncash expense through December 31, 2017. The un-expensed portion at December 31, 2017 is being recognized in expense ratably through July 2019 in accordance with the terms of work orders for certain contract research services to be provided through that period.
 
During the quarter ended December 31, 2017, we issued an aggregate of 70,000 unregistered shares of our common stock, all of which were issued from our 2016 Plan for additional investor relations and financial advisory services. The common stock issued had an aggregate fair value of $140,800 on the dates issued.
 
During the quarter ended December 31, 2017, we also issued 500,000 unregistered shares of our common stock having a fair value at the time of issuance of $585,000 and a cash payment of $76,500 to our contract manufacturing organization (CMO) in exchange for and settlement of $526,500 of open accounts payable for services provided by the CMO relating to production of AV-101 drug substance. We recognized a corresponding loss on settlement of accounts payable in the amount of $135,000 for the quarter ended December 31, 2017.
 
Modification of Warrants Issued in Private Placements
 
During the quarter ended September 30, 2017, our Board of Directors (Board) authorized the modification of outstanding warrants issued in private placement transactions between March 2017 and June 2017 to reduce the exercise prices and increase the number of shares issuable thereunder. We calculated the fair value of the warrant immediately before and after the modification using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We recognized the additional fair value, $279,700, 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 September 30, 2017.
 
Assumption:
 
Pre-modification
 
 
Post-modification
 
Market price per share
 $1.54 
 $1.54 
Exercise price per share
 $3.99 
 $2.00 
Risk-free interest rate
  1.62%
  1.62%
Remaining contractual term in years
  3.62 
  3.62 
Volatility
  95.5%
  95.5%
Dividend rate
  0.0%
  0.0%
 
    
    
Number of warrant shares
  247,500 
  495,001 
Weighted average fair value per share
 $0.71 
 $0.92 
 
During the quarter ended December 31, 2017, the Board authorized the modification of outstanding warrants issued in private placement transactions between August 2017 and November 2017 to reduce the exercise prices of the warrants. We calculated the fair value of the warrants immediately before and after the modification using the Black Scholes Option Pricing Model and the weighted average assumptions indicated in the table below. We recognized the additional fair value, $13,000, 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, 2017.
 
 
 
-13-
 
 
 
Assumption:
 
Pre-modification
 
 
Post-modification
 
Market price per share
 $1.14 
 $1.14 
Exercise price per share
 $2.32 
 $1.58 
Risk-free interest rate
  2.12%
  2.12%
Remaining contractual term in years
  3.85 
  3.85 
Volatility
  98.7%
  98.7%
Dividend rate
  0.0%
  0.0%
 
    
    
Number of warrant shares
  178,572 
  178,572 
Weighted average fair value per share
 $0.64 
 $0.71 
 
Warrants Outstanding
 
Following the warrant issuances in the December 2017 Public Offering, the September 2017 Public Offering, and in our self-placed private placement transactions and the warrant modifications and exercises described above, at December 31, 2017, we had outstanding warrants to purchase shares of our common stock at a weighted average exercise price of $2.80 per share as follows:
 
 
Exercise  Price
per Share
 
 
Expiration
Date
 
Warrants Outstanding at December 31, 2017
 
 
 
 
 
 
 
 $0.001 
9/6/2022
  314,776 
 $1.50 
11/30/2021 to 12/13/2022
  10,150,000 
 $1.82 
9/6/2022 to 3/7/2023
  1,388,931 
 $2.00 
4/30/2021
  523,573 
 $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 
11/15/2017 to 1/11/2020
  20,000 
 $20.00 
9/15/2019
  110,448 
 
  16,918,292 
 
Of the warrants outstanding at December 31, 2017, 2,705,883 shares of common stock underlying the warrants exercisable at $5.30 per share issued in our May 2016 public offering, 1,388,931 shares of common stock underlying the warrants exercisable at $1.82 per share issued in our September 2017 Public Offering and 10,000,000 shares of common stock underlying the warrants exercisable at $1.50 per share issued in our December 2017 Public Offering are registered for resale by the warrant holders. At December 31, 2017, warrants to purchase an aggregate of 314,776 registered shares of our common stock remain subject to down round anti-dilution protection features. The common shares issuable upon exercise of our remaining outstanding warrants are unregistered. All of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share.
 
Note 8.  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) recently engaged by us for a wide range of material aspects related to the nonclinical and clinical development and regulatory affairs associated with our efforts to develop and commercialize AV-101 for MDD and other potential CNS indications. CBV is among our largest institutional stockholders at December 31, 2017, holding approximately 4.2% of our outstanding common stock. In October 2012, we issued certain unsecured promissory notes in the aggregate principal 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 for nonclinical and Phase 1 development of AV-101. In June 2015, the Cato Notes and additional amounts payable to CRL for CRO services related to AV-101 were extinguished in exchange for our issuance of an aggregate of 328,571 shares of Series B Preferred stock to CBV, which shares of Series B Preferred stock were automatically converted in accordance with their terms into an equal number of registered shares of our common stock as a result of our May 2016 public offering.
 
 
 
-14-
 
 
In July 2017, we entered into a Master Services Agreement (MSA) with CRL, which replaced a substantially similar May 2007 master services agreement, pursuant to which CRL may assist us in the evaluation, development, commercialization and marketing of our potential product candidates, including AV-101, and provide regulatory and strategic consulting services as requested from time to time. Specific projects or services are and will be delineated in individual work orders negotiated from time-to-time under the MSA. Under the terms of work orders issued pursuant to the July 2017 MSA and our May 2007 master services agreement with CRL, we incurred expenses of $292,700 and $101,900 during the quarters ended December 31, 2017 and 2016, respectively, and $904,900 and $180,100 in the nine-month periods ended December 31, 2017 and 2016, respectively. During the nine months ended December 31, 2017, we have issued an aggregate of 350,000 unregistered shares of our common stock to CRL under the terms of certain work orders for current and future CRO services relating to our development of AV-101 for MDD, the fair value of which represented approximately $443,000 of the reported CRO expense for the nine months then ended. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to, AV-101 and other potential product candidates will increase in future periods. In December 2017, we executed a work order with CRL for CRO services to be performed in conducting the AV-101 MDD Phase 2 Adjunctive Treatment Study and pursuant to which we became immediately obligated for an initial payment of $461,700, which amount is reflected in Accrued liabilities and Prepaid expenses in our Condensed Consolidated Balance Sheet at December 31, 2017.
 
Note 9.  Subsequent Events
 
We have evaluated subsequent events through February 9, 2018 and have identified the following matters requiring disclosure:
 
Exercise of Warrants
 
In January 2018, the holders of Series A2 warrants to purchase an aggregate of 314,774 shares of our common stock exercised all of such warrants at the reset exercise price of $0.001 per share, as described in Note 7, Capital Stock, from which we received nominal cash proceeds. Following these exercises, none of our outstanding warrants have down round anti-dilution protection features.
 
Grant of Options from 2016 Plan
 
On February 2, 2018, the Compensation Committee of the Board approved the grant of options to independent members of the Board, officers and employees and certain professional service providers to purchase an aggregate of 2,150,000 shares of our common stock at an exercise price of $1.16 per share, the quoted closing price of our common stock on the Nasdaq Capital Markets on the date of the grant. The options are vested 25% upon grant with the remaining shares vesting ratably over the next twenty-four months.
 
 
 
-15-
 
 
 
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 (Report) includes forward-looking statements. All statements contained in this 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 substantial additional financing, the results of our research and development efforts, the results of nonclinical and clinical testing, the effect of regulation by the U.S. Food and Drug Administration (FDA) and other 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 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 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 or Board to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
 
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
 
Business Overview
 
We are a 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 Report refer to calendar quarters and calendar years, unless reference is made otherwise.
 
AV-101 is our oral CNS product candidate in Phase 2 clinical development in the United States, initially as a new generation 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).  AV-101’s mechanism of action (MOA) involves both NMDA (N-methyl-D-aspartate) and AMPA (alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionic acid) receptors in the brain responsible for fast excitatory synaptic activity throughout the CNS.  AV-101’s MOA is fundamentally different from all standard FDA-approved antidepressants, as well as all atypical antipsychotics, such as aripiprazole, often used adjunctively with standard antidepressants. We believe AV-101 also has potential to treat several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including, among others, as a non-opioid alternative for neuropathic pain and for Parkinson’s disease levodopa -induced dyskinesia (PD LID).
 
Clinical studies conducted at the U.S. National Institute of Mental Health (NIMH), part of the U.S. National Institutes of Health (NIH), by Dr. Carlos Zarate, Jr., Chief of the NIMH’s Experimental Therapeutics & Pathophysiology Branch and its Section on Neurobiology and Treatment of Mood and Anxiety Disorders, have focused on the antidepressant effects of ketamine hydrochloride injection (ketamine), an ion-channel blocking NMDA receptor antagonist approved by the FDA as an anesthetic, in MDD patients with inadequate responses to multiple standard antidepressants. These NIMH studies, as well as clinical research at Yale University and other academic institutions in the U.S., have demonstrated ketamine’s robust antidepressant effects in treatment-resistant MDD patients within twenty-four hours of a single sub-anesthetic dose administered by intravenous (IV) injection.
 
 
 
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We believe orally administered AV-101 may have potential to deliver ketamine-like antidepressant effects, without ketamine’s psychological side effects and other safety concerns, and without the need for IV administration. As published in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article titled, 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. In addition, these studies confirmed that the fast-acting antidepressant effects of AV-101 were mediated through both inhibiting the glycine binding (GlyB) site of the NMDA receptor and activating the AMPA receptor pathway in the brain.
 
In October 2017, we received FDA authorization to launch our 180-patient Phase 2 multi-center, multi-dose, double blind, placebo-controlled efficacy and safety study of AV-101 as a new generation adjunctive treatment for MDD patients with an inadequate therapeutic response to standard, FDA-approved antidepressants (the AV-101 MDD Phase 2 Adjunctive Treatment Study), and in December 2017 the FDA granted Fast Track Designation to AV-101 for development as a potential adjunctive treatment for MDD. We intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018 with Dr. Maurizio Fava, Professor of Psychiatry at Harvard Medical School and Director, Division of Clinical Research, Massachusetts General Hospital (MGH) Research Institute, as the Principal Investigator. 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 expect top line results of the AV-101 MDD Phase 2 Adjunctive Treatment Study to be available in the first half of 2019. In addition, pursuant to our Cooperative Research and Development Agreement (CRADA) with the NIMH, the NIMH is currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, a small Phase 2 clinical study of AV-101 as a monotherapy in subjects with treatment-resistant MDD (the NIMH AV-101 MDD Phase 2 Monotherapy Study).
 
VistaStem Therapeutics (VistaStem) is our wholly owned subsidiary focused on applying human pluripotent stem cell (hPSC) technology to discover, rescue, develop and commercialize (i) proprietary new chemical entities (NCEs) for CNS and other diseases and (ii) regenerative medicine (RM) involving hPSC-derived blood, cartilage, heart and liver cells.  Our internal drug rescue programs are designed to utilize CardioSafe 3D, our customized cardiac bioassay system, to develop small molecule NCEs for our pipeline.  To advance potential RM applications of our cardiac stem cell technology, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation RM company established by Bayer AG and Versant Ventures (BlueRock Therapeutics), rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease (the BlueRock Agreement). In a manner similar to our exclusive sublicense agreement with BlueRock Therapeutics, we may pursue additional RM collaborations or out-licensing transactions involving blood, cartilage, and/or liver cells derived from hPSCs for (A) cell-based therapy, (B) cell repair therapy, and/or (C) tissue engineering. 
 
AV-101 and Major Depressive Disorder
 
Background
 
The World Health Organization (WHO) estimates that 300 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 2016, approximately 16 million adults in the U.S. had at least one major depressive episode in the past year. According to the U.S. Centers for Disease Control and Prevention (CDC) in an August 2017 report, one in eight Americans over the age of 12 reported taking a standard, FDA-approved antidepressant in the previous month.
 
Most standard antidepressants target chemical imbalances in the brain related to neurotransmitter reuptake inhibition – either serotonin (antidepressants known as SSRIs) or serotonin/norepinephrine (antidepressants known as SNRIs). Nearly two out of every three drug-treated depression patients do not obtain adequate therapeutic benefit from their initial treatment with a standard antidepressant. Even when effective, these standard antidepressants take many weeks to achieve adequate therapeutic effects. After multiple treatment attempts involving many different standard antidepressants, nearly one out of every three drug-treated depression patients still do not achieve adequate therapeutic benefits from their antidepressant medication.  Such patients with an inadequate response to standard antidepressants often seek to augment their treatment regimen by adding an atypical antipsychotic drug (a drug such as aripiprazole), despite only modest potential therapeutic benefit and the significant risk of additional side effects from such adjunctive drugs.
 
All standard antidepressants have risks of side effects, including, among others, anxiety, metabolic syndrome, sleep disturbance and sexual dysfunction. Adjunctive use of atypical antipsychotics to augment inadequately performing standard antidepressants may increase the risk of significant side effects, including, tardive dyskinesia, substantial weight gain, diabetes and heart disease, while offering only a modest potential increase in therapeutic benefit.
 
 
 
-17-
 
 
AV-101
 
AV-101 is our oral CNS product candidate in Phase 2 development in the United States, initially focused as a new generation antidepressant for the adjunctive treatment of MDD patients with an inadequate therapeutic response to standard, FDA-approved antidepressants. As published in the October 2015 issue of the peer-reviewed, Journal of Pharmacology and Experimental Therapeutics, in an article titled, “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 ketamine-like antidepressant effects following a single treatment, responses equivalent to those seen with a single sub-anesthetic control dose of ketamine, but without the negative side effects seen with ketamine. In addition, these studies confirmed that the antidepressant effects of AV-101 were mediated through both inhibition of the GlyB site of NMDA receptors and activation of the AMPA receptor pathway in the brain, a key final common pathway feature of certain new generation antidepressants such as ketamine and AV-101, each with a MOA that is fundamentally different from all standard antidepressants and atypical antipsychotics used adjunctively to augment them.
 
We have completed two NIH-funded, randomized, double blind, placebo-controlled AV-101 Phase 1 safety studies. Currently, pursuant to our CRADA with the NIMH and Dr. Carlos Zarate, Jr., the NIMH is currently funding, and Dr. Zarate, as Principal Investigator, and his team are currently conducting, the NIMH AV-101 MDD Phase 2 Monotherapy Study.
 
In October 2017, we received authorization from the FDA to proceed, under our Investigational New Drug (IND) application, with the AV-101 MDD Phase 2 Adjunctive Treatment Study, which will test the safety, efficacy and tolerability of AV-101 as an adjunctive treatment of MDD in adult patients with an inadequate therapeutic response to standard, FDA-approved antidepressants. We intend to launch the AV-101 MDD Phase 2 Adjunctive Treatment Study in the first quarter of 2018, and expect top line results to be available in the first half of 2019. In connection with our preparation for this study, as well as potential Phase 3 development and commercialization of AV-101, we, together with our CMO, developed a novel process for the production of AV-101 drug substance. We believe our new proprietary production process will significantly improve AV-101 manufacturing efficiency, thereby reducing the current and future cost of manufacturing AV-101 drug substance and improving the yield of AV-101 drug substance manufactured. Additionally, in December 2017 the FDA granted Fast Track Designation to AV-101 for development as a potential adjunctive treatment for MDD. The FDA’s Fast Track Designation is a process designed to facilitate the development and expedite the review of drugs to treat serious conditions and unmet medical needs. With Fast Track Designation, there is an increased possibility for a priority review of AV-101 by the FDA.
 
We believe preclinical studies and Phase 1 safety studies support our hypothesis that AV-101 also has potential as a non-opioid treatment alternative for neuropathic pain, as well as several additional CNS indications where modulation of the NMDA receptors, activation of AMPA pathways and/or key active metabolites of AV-101 may achieve therapeutic benefit, including PD LID, epilepsy, and Huntington’s disease. We are beginning to plan additional Phase 2 clinical studies to further evaluate the therapeutic potential of AV-101 beyond MDD, however we do not intend to initiate such studies in 2018.
 
 
 
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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 small molecule NCEs 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. Potential commercial applications of our stem cell technology platform involve using CardioSafe 3D internally for NCE drug discovery and drug rescue to expand our proprietary drug candidate pipeline. Drug rescue involves leveraging substantial prior research and development investments by pharmaceutical companies and others related to public domain NCE programs terminated before FDA approval due to heart toxicity risks and RM and cellular therapies. To advance potential RM applications of our cardiac stem cell technology, in December 2016, we exclusively sublicensed to BlueRock Therapeutics LP, a next generation regenerative medicine company established 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. In a manner similar to the BlueRock 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.
 
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, 2017, as filed with the SEC on June 29, 2017, and in Note 3 to the accompanying unaudited Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Report.
 
Summary
 
Net Loss
 
We generated $1.25 million of sublicense revenue from the BlueRock Agreement in December 2016. However, we have not yet achieved recurring revenue-generating status from any of our product candidates or technologies. Since our inception in May 1998, 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, 2017, we had an accumulated deficit of approximately $152.5 million. Our net loss for the nine months ended December 31, 2017 and 2016 was approximately $10.3 million and $7.7 million, respectively. We expect losses to continue for the foreseeable future, primarily related to our further development of AV-101 for the adjunctive treatment of MDD and other CNS indications.
 
Summary of the Nine Months Ended December 31, 2017
 
During the nine months ended December 31, 2017, we have continued to (i) advance nonclinical, including manufacturing, and clinical development of AV-101 as a potential new generation antidepressant and as a potential new therapeutic alternative for several other CNS indications with significant unmet medical need, (ii) expand the regulatory and intellectual property foundation to support broad clinical development and, ultimately, commercialization of AV-101 in the U.S. and foreign markets, and (iii) on a limited basis, advance the predictive toxicology capabilities of CardioSafe 3D for small molecule new chemical entity drug rescue and development applications and collaborative regenerative medicine opportunities related to our cardiac stem cell technology platform.
 
Pursuant to our CRADA with the NIH, the NIH continues to fund, and Dr. Carlos Zarate Jr. of the NIMH continues to conduct, the NIMH AV-101 MDD Phase 2 Monotherapy Study at no cost to us other than supplying clinical trial material.
 
We continue to prepare for the launch of our AV-101 MDD Phase 2 Adjunctive Treatment Study with initiatives that have significantly improved the efficiency of our AV-101 manufacturing processes and are making available sufficient quantities of AV-101 to enable a comprehensive initiation of the study. We currently anticipate the launch of the AV-101 MDD Phase 2 Adjunctive Treatment Study, with Dr. Maurizio Fava of Harvard Medical School serving as Principal Investigator, in the first quarter of 2018.
 
 
 
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Additionally, we are pursuing initiatives to secure a broad spectrum of intellectual property protection for AV-101 covering multiple CNS indications. We have filed and are pursuing several patent applications in Europe, the U.S. and other selected regions. Several of these patent applications have already been granted or allowed, on both (i) certain novel therapeutic methods of use of AV-101, including depression, and (ii) certain novel methods of producing AV-101. In Europe, the European Patent Office (EPO) recently granted our patent related to methods of treating depression with AV-101 and certain other neurological indications. In the U.S. and other selected regional markets, we are currently pursuing a counterpart AV-101 patent application similar to the patent granted by the EPO. Although the U.S. Patent and Trademark Office (USPTO) has not yet allowed the counterpart application filed in the U.S., we believe that our counterpart patent applications under review by the USPTO and other countries ultimately will be granted.
 
In the U.S., Europe and other selected regional markets, we are also prosecuting patent applications related to novel methods of producing AV-101. The USPTO recently granted a patent covering our manufacturing process and the Chinese counterpart has also been granted. We have submitted a counterpart application to the EPO, which has not yet been approved. However, given that the USPTO has granted a patent in the U.S., we believe our counterpart patent application at the EPO ultimately will be granted.
 
The USPTO has also recently issued a patent related to methods for producing, from human pluripotent stem cells (hPSCs), hematopoietic precursor stem cells, which are stem cells that give rise to all of the blood cells and most of the bone marrow cells in the body. VistaGen holds an exclusive license to this patent from the University Health Network (UHN). The technology covered by the patent has the potential to impact both direct and supportive therapy for autoimmune disorders and cancer, with CAR-T cell applications, and foundational technology which may provide approaches for producing bone marrow stem cells for bone marrow transfusions.
 
In December 2017, we completed an underwritten public offering, resulting in gross proceeds of $15.0 million, during which we offered and sold shares of our common stock and warrants to purchase shares of our common stock at a combined public offering price of $1.50 per share and related warrant (the December 2017 Public Offering). We issued an aggregate of 10,000,000 shares of our common stock and warrants to purchase up to 10,000,000 shares of our common stock at an exercise price of $1.50 per share (the December 2017 Offering Warrants). The December 2017 Offering Warrants are exercisable at any time through December 13, 2022, and do not contain any cashless exercise features as long as our Registration Statement on Form S-1 (Registration No. 333-221009) (the S-1) is effective. We received net proceeds of approximately $13.6 million from the December 2017 Public Offering, after deducting underwriter’s commission and other expenses related to the offering. The common stock and the shares of common stock underlying the December 2017 Offering Warrants issued in the December 2017 Public Offering were offered, issued and sold pursuant to the S-1.
 
In September 2017, we completed an underwritten public offering, pursuant to which we sold 1,371,430 shares of our common stock and Series A1 Warrants to purchase up to 1,388,931 shares of common stock and Series A2 Warrants to purchase up to 503,641 shares of common stock (collectively, the Warrants), each initially exercisable for $1.82 per share to two of our existing institutional investors, resulting in net proceeds of approximately $2.0 million (the September 2017 Public Offering). The Series A1 Warrants will be exercisable for a five-year period commencing on March 7, 2018, and the Series A2 Warrants are exercisable at any time and expire on September 6, 2022. The common stock and the shares of common stock underlying the Warrants issued in the September 2017 Public Offering were sold pursuant to our effective Registration Statement on Form S-3 (Registration No. 333-215671) to cover this and potential future sales of our equity securities in one or more public offerings from time to time. Consistent with the anti-dilution protection provisions of the Series A2 Warrants, the exercise price of such warrants was reduced upon the closing of the December 2017 Public Offering. At the date of this Report, all of the Series A2 Warrants have been exercised at the reset exercise price as a result of the December 2017 Public Offering. Following these exercises, none of our outstanding warrants have down round anti-dilution protection features.
 
During the nine months ended December 31, 2017, we entered into self-placed private placement transactions with individual accredited investors, pursuant to which we sold units consisting of an aggregate of 616,323 shares of our unregistered common stock and, after adjustments, warrants which are not exercisable until six months and one day following issuance and expire between April 30, 2021 and November 30, 2022, to purchase an aggregate of 616,323 unregistered shares of our common stock at a weighted average fixed exercise price of approximately $2.00 per share. We received aggregate cash proceeds of approximately $1.1 million in these self-placed private placement transactions.
 
In July 2017, we appointed Mark Wallace, M.D., Distinguished Professor of Clinical Anesthesiology at the University of California, San Diego, to our Clinical and Regulatory Advisory Board to assist us in advancing development of AV-101 as a potential non-opioid treatment alternative for neuropathic pain. Dr. Wallace is an internationally recognized leader in the field of multi-modal pain management, with over 30 years of professional experience, board certifications, licensures, honors/awards, grants, articles and abstracts.
 
 
 
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As a matter of course, we continue 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 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, public company compliance and other professional services and internal costs. 
 
Results of Operations
 
Comparison of Three Months Ended December 31, 2017 and 2016
 
The following table summarizes the results of our operations, including both cash and noncash components, for the three months ended December 31, 2017 and 2016 (amounts in thousands).
 
 
 
 Three Months Ended December 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
Sublicense revenue
 $- 
 $1,250 
Operating expenses:
    
    
 Research and development
  1,602 
  1,611 
 General and administrative
  1,266 
  2,276 
  Total operating expenses
  2,868 
  3,887 
 
    
    
Loss from operations
  (2,868)
  (2,637)
 
    
    
Interest expense, net
  (2)
  (1)
Loss on extinguishment of accounts payable
  (135)
  - 
 
    
    
Loss before income taxes
  (3,005)
  (2,638)
Income taxes
  - 
  - 
 
    
    
Net loss
  (3,005)
  (2,638)
  Accrued dividend on Series B Preferred Stock
  (263)
  (238)
  Deemed dividend from trigger of down round
    
    
       provision feature
  (199)
  - 
Net loss attributable to common stockholders
 $(3,467)
 $(2,876)
 
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, we reported no revenue for the quarter ended December 31, 2017 and we presently have no recurring revenue generating arrangements with respect to AV-101 or other potential product candidates. There can be no assurance that the BlueRock Agreement will provide additional revenue to us in the near term or at all.
 
 
 
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Research and Development Expense
 
Research and development expense, including both cash and noncash components, totaled $1.6 million for each of the quarters ended December 31, 2017 and 2016. Noncash expenses, including stock compensation, depreciation and a portion of rent expense in both periods and a portion of AV-101 project expenses in the quarter ended December 31, 2017, totaled approximately $385,000 and $215,000 for the quarters ended December 31, 2017 and 2016, respectively. While total research and development expense remains essentially unchanged, we have continued our focus on nonclinical and clinical development of AV-101, particularly our preparations for the launch of the AV-101 MDD Phase 2 Adjunctive Treatment Study, which is currently anticipated in the first quarter of 2018. 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,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Salaries and benefits
 $347 
 $302 
Stock-based compensation
  299 
  114 
Consulting and other professional services
  7 
  (139)
Technology licenses and royalties, including UHN
  149 
  293 
Project-related research and supplies:
    
    
AV-101
  665 
  894 
Stem cell and all other
  15 
  50 
 
  680 
  944 
Rent
  104 
  88 
Depreciation
  16 
  8 
All other
  - 
  1 
 
    
    
Total Research and Development Expense
 $1,602 
 $1,611 
 
The increase in salaries and benefits expense reflects the impact of modest salary increases granted to our Chief Medical Officer (CMO) and Chief Scientific Officer (CSO) in July 2017 and to the non-officer members of our scientific staff in June 2017 and to bonus payments made to scientific staff members in December 2017, offset by the impact of a staff position terminated in April 2017.
 
Noncash stock-based compensation expense increased in the current period primarily from the routine amortization of option grants made to our CSO, CMO and scientific staff in September 2017, April 2017 and November 2016. Grants awarded after December 2016 account for approximately $199,000 of 2017 expense. Expense attributable to these grants is generally being amortized over two-year to four-year vesting periods, based on the terms of the respective grants. Additionally, substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.
 
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 change in terms of consulting agreements with our stem cell-related scientific advisory board members. Consulting expense in 2016 reflected the impact of the rationalization of the agreements and accruals related to such advisory board members.
 
Technology license expense reflects both recurring annual license fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements or that we have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, this expense includes legal counsel and other costs we have incurred to advance pending patent applications in the U.S. and numerous foreign countries with respect to AV-101 and our stem cell technology platform. Technology license-related expense for 2016 also includes net expense of $158,000 related to the sublicense consideration paid to 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, and $55,000 representing the fair value of a warrant granted to intellectual property counsel as partial compensation for services.
 
 
 
-22-
 
 
AV-101 project expenses for the quarters ended December 31, 2017 and 2016 include continuing costs incurred to develop more efficient and cost-effective proprietary manufacturing methods for AV-101, and to produce clinical trial material for the AV-101 MDD Phase 2 Adjunctive Treatment Study, as well as costs incurred for certain other nonclinical studies to facilitate further clinical development of AV-101 in MDD and potentially for other indications, and to comply with applicable FDA regulations. We expect these expenses to increase materially over the next several quarters as we initiate and conduct the AV-101 MDD Phase 2 Adjunctive Treatment Study. AV-101 expenses in 2016 also included initial costs for preparation of the IND and trial protocol submission to the FDA to obtain approval for the AV-101 MDD Phase 2 Adjunctive Treatment Study. Stem cell and other project related expenses reflects costs associated with our in-house stem cell technology-related initiatives in both years, and, in 2016, our participation in the FDA’s Comprehensive In Vitro Proarrhythmia Assay (CiPA) project.
 
The increase in rent expense for the quarter ended December 31, 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022 and the related accounting for the extension amendment.
 
General and Administrative Expense
 
General and administrative expense, including both cash and noncash components, decreased by 44% to approximately $1.3 million from $2.3 million for the quarters ended December 31, 2017 and 2016, respectively. Noncash expense accounted for approximately $485,000 and $1,486,000 for the quarters ended December 31, 2017 and 2016, respectively, including, in both periods, stock compensation expense, a portion of investor relations and investment banking expenses, warrant modification expense, and a portion of rent expense. The overall decrease in general and administrative expenses resulted primarily from decreased professional services expenses, notably attributable to a decrease in noncash expense attributable to grants of common stock for services, a decrease in noncash warrant modification expense, partially offset by increased salary and benefits and noncash stock compensation expenses. The following table indicates the primary components of general and administrative expenses, including the cash and noncash components, for each of the periods (amounts in thousands):
 
 
 
Three Months Ended December 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Salaries and benefits
 $339 
 $257 
Stock-based compensation
  390 
  153 
Board fees
  39 
  36 
Legal, accounting and other professional fees
  44 
  1,017 
Investor relations
  232 
  241 
Insurance
  60 
  38 
Travel expenses
  33 
  54 
Rent and utilities
  69 
  63 
Warrant modification expense
  13 
  370 
All other expenses
  47 
  47 
 
 $1,266 
 $2,276 
 
The increase in salaries and benefits primarily reflects the impact of modest salary increases granted in July 2017 to our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), and in January 2017 and July 2017 to our Vice President-Corporate Development (VP-Corporate Development) and, in June 2017, to a non-officer member of our administrative staff as well as bonus payments in December 2017 to our VP-Corporate Development and an administrative staff member.
 
Stock based compensation expense increased in the current period primarily as a result of the routine amortization of option grants to independent members of our Board and our CEO, CFO, VP Corporate Development and administrative staff in September 2017, April 2017 and November 2016, plus the new-hire grant made to our VP-Corporate Development in September 2016. Grants awarded after December 2016 account for approximately $274,000 of 2017 expense. Expense attributable to these grants is generally being amortized over a two-year to four-year vesting period, based on the terms of the respective grants. Additionally, substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.
 
Board fees includes fees recognized for the services of independent members of our Board. The Board modified committee assignments effective in April 2017, resulting in the slight increase in current year expense.
 
 
 
-23-
 
 
Legal, accounting and other professional fees for the quarters ended December 31, 2017 and 2016 includes cash expense related to routine legal services as well as accounting expense related to the review of the financial statements for the third quarter of each fiscal year. Other professional fees for the quarter ended December 31, 2016 additionally included 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.
 
Investor relations expense includes the fees of our various external service providers for a broad spectrum of investor relations, market awareness and strategic advisory and support functions, as well as 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 quarters ended December 31, 2017 and 2016, in addition to cash fees and expenses we incurred, we granted an aggregate of 70,000 and 35,000 unregistered shares of our common stock, respectively, to certain investor relations, market awareness and strategic business advisory service providers for their services and recognized noncash expense of $84,000 and $137,800, respectively, representing the fair value of the stock at the time of issuance.
 
In both periods, travel expense reflects costs associated with management 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 and partnering initiatives. Travel expenses for the quarter ended December 31, 2017 were primarily related to advancing the consummation of the December 2017 Public Offering.
 
The increase in rent expense for the quarter ended December 31, 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities by five years from July 31, 2017 to July 31, 2022 and the related accounting for the extension amendment.
 
During the quarter ended December 31, 2017, we modified outstanding warrants issued in private placement transactions between August 2017 and November 2017 to purchase an aggregate of 178,572 shares of our common stock to reduce the exercise prices from a weighted average of $2.32 per share to a weighted average of $1.58 per share. We recognized the calculated increase in the fair value of the warrants, $13,000, as noncash warrant modification expense. During the quarter ended December 31, 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.  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. During that quarter we also 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 noncash expense as the incremental fair value attributable to the modification.
 
Interest and Other Expenses   
 
Interest expense totaled $2,000 for the quarter ended December 31, 2017 compared to $900 reported for the quarter ended December 31, 2016. Interest expense in both periods relates to interest paid on insurance premium financing and on a capital lease of office equipment.
 
During the quarter ended December 31, 2017, we issued 500,000 unregistered shares of our common stock having a fair value at the time of issuance of $585,000 and a cash payment of $76,500 to a contract manufacturing organization in settlement of $526,500 of open accounts payable. We recognized a corresponding loss on settlement of accounts payable in the amount of $135,000 for the quarter.
 
We recognized $263,000 and $237,700 for the quarters ended December 31, 2017 and 2016, 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. There have been no conversions of outstanding shares of our Series B Preferred stock into shares of our common stock since August 2016. 
 
Our sale of units consisting of common stock and warrants in the December 2017 Public Offering at an offering price of $1.50 per unit triggered the anti-dilution provisions of the Series A2 Warrants to purchase an aggregate of 503,641 shares of our common stock issued in the September 2017 Public Offering. In accordance with the anti-dilution terms and formula contained in the Series A2 warrants, the exercise price of the Series A2 Warrants was reduced from the initial exercise price of $1.82 per share to $0.001 per share. We recognized the effect of triggering the down round feature, $199,200, as a further addition to net loss attributable to common stockholders and in our calculation of basic and fully diluted earnings per share in our accompanying Condensed Consolidated Statement of Operations and Comprehensive Loss and as a dividend in our Condensed Consolidated Statement of Stockholders’ Equity included in Part I of this Report.
 
 
 
-24-
 
 
Comparison of Nine Months Ended December 31, 2017 and 2016
 
The following table summarizes the results of our operations, including both cash and noncash components, for the nine months ended December 31, 2017 and 2016 (amounts in thousands).
 
 
 
 Nine Months Ended December 31,
 
 
 
 2017
 
 
 2016
 
 
 
 
 
 
 
 
Sublicense revenue
 $- 
 $1,250 
Operating expenses:
    
    
 Research and development
  5,125 
  4,043 
 General and administrative
  4,997 
  4,908 
  Total operating expenses
  10,122 
  8,951 
 
    
    
Loss from operations
  (10,122)
  (7,701)
 
    
    
Interest expense (net)
  (8)
  (4)
Loss on extinguishment of accounts payable
  (135)
  - 
 
    
    
Loss before income taxes
  (10,265)
  (7,705)
Income taxes
  (2)
  (2)
 
    
    
Net loss
  (10,267)
  (7,707)
  Accrued dividend on Series B Preferred Stock
  (767)
  (1,018)
 
 Deemed dividend from trigger of down round
 
    
       provision feature
  (199)
  - 
  Deemed dividend on Series B Preferred Stock
  - 
  (111)
Net loss attributable to common stockholders
 $(11,233)
 $(8,836)
 
Revenue   
 
We recognized $1.25 million in sublicense revenue pursuant to the BlueRock Therapeutics Agreement in the nine months 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, we reported no revenue for the nine months ended December 31, 2017 and we presently have no recurring revenue generating arrangements with respect to AV-101 or other potential product candidates. There can be no assurance that the BlueRock Agreement will provide additional revenue to us in the near term or at all.
 
 
 
-25-
 
 
Research and Development Expense
 
Research and development expense, including both cash and noncash components, totaled $5.1 million for the nine months ended December 31, 2017, an increase of approximately 27% compared to the $4.0 million reported for the nine months ended December 31, 2016. Noncash expenses totaled approximately $1,228,000 and $346,000 in the nine months ended December 31, 2017 and 2016, respectively, including stock compensation, depreciation and a portion of rent expense in both periods, and a portion of AV-101 project expenses in the nine months ended December 31, 2017. The increase in research and development expense in 2017 reflects our continued focus on nonclinical and clinical development of AV-101, particularly our preparations for the launch of the AV-101 MDD Phase 2 Adjunctive Treatment Study, which is currently anticipated in the first quarter of 2018. The following table indicates the primary cash and noncash components of research and development expense for each of the periods (amounts in thousands):
 
 
 
Nine Months Ended December 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Salaries and benefits
 $1,231 
 $1,013 
Stock-based compensation
  627 
  240 
Consulting and other professional services
  23 
  (81)
Technology licenses and royalties
  309 
  547 
Project-related research and supplies:
    
    
AV-101
  2,465 
  1,963 
Stem cell and all other
  105 
  129 
 
  2,570 
  2,092 
Rent
  308 
  206 
Depreciation
  54 
  25 
All other
  3 
  1 
 
    
    
Total Research and Development Expense
 $5,125 
 $4,043 
 
The increase in salaries and benefits reflects the hiring of our Chief Medical Officer (CMO) in June 2016, and a salary increase granted to our CMO in July 2017, as well as salary increases granted to our Chief Scientific Officer (CSO) and to the non-officer members of our scientific staff in June 2016 and June 2017, offset by the impact of a staff position terminated in April 2017. Additionally, our then-newly-hired CMO did not receive a bonus in July 2016; however, both our CMO and CSO were granted a bonus in September 2017.
 
Stock based compensation expense increased in the current period primarily as a result of the routine amortization of option grants made to our CSO, CMO and scientific staff in September 2017, April 2017 and November 2016, plus the new-hire grant made to our CMO in June 2016. Grants awarded after December 2016 account for approximately $279,000 of 2017 expense. The expense attributable to these grants is generally being amortized over a two-year to four-year vesting period, based on the terms of the respective grants. Substantially all option grants made prior to September 2015 were fully-vested and fully-expensed prior to June 30, 2017.
 
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 2017 primarily reflects the change in terms of consulting agreements with our stem cell-related scientific advisory board members. Consulting expense in 2016 reflected the impact of the rationalization of the agreements and accruals related to such advisory board members.
 
Technology license expense in both periods reflects both recurring annual license fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements or that we have elected to pursue for commercial purposes. We recognize these costs as they are invoiced to us by the licensors or counsel and they do not occur ratably throughout the year or between years. In both periods, this expense also includes legal counsel and other costs we have incurred to advance numerous pending or now-granted patent applications in the U.S. and various foreign countries with respect to AV-101 and our stem cell technology platform. Technology license-related expense for 2016 also includes net expense of $158,000 related to the sublicense consideration paid to 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 SRCA with UHN, and $55,000 representing the fair value of a warrant granted to intellectual property counsel as partial compensation for services.
 
 
 
-26-
 
 
AV-101 project expense for both periods includes costs incurred to develop more efficient and cost-effective proprietary manufacturing methods for AV-101, and to produce clinical trial material enabling the AV-101 MDD Phase 2 Adjunctive Treatment Study, and, primarily in 2017, costs incurred for certain other nonclinical studies to facilitate further clinical development of AV-101 in MDD and potentially for other indications and to comply with applicable FDA regulations. We expect these expenses to increase materially over the next several quarters as we initiate and conduct the AV-101 MDD Phase 2 Adjunctive Treatment Study. Stem cell and other project related expenses reflects costs associated with our in-house stem cell technology-related initiatives, and, to a greater extent in 2016, our participation in the FDA’s CiPA project.
 
The increase in rent expense for 2017 reflects higher commercial property rents prevalent in the South San Francisco real estate market and recognized in our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years, from July 31, 2017 to July 31, 2022, and the related accounting for the extension amendment.
 
General and Administrative Expense
 
General and administrative expense, including both cash and noncash components, increased approximately 2% to $5.0 million for the nine months ended December 31, 2017 from $4.9 million for the nine months ended December 31, 2016. Noncash expense accounted for approximately $2.2 million and $2.5 million for the nine months ended December 31, 2017 and 2016, respectively, including, in both periods, stock compensation expense, a portion of investor relations and professional services expenses, warrant modification expense, and a portion of rent expense. The overall increase in general and administrative expenses was primarily attributable to increased salary and benefits expense and noncash stock compensation and investor relations expenses, offset by reductions in professional services and noncash warrant modification expenses. The following table indicates the primary components of general and administrative expenses, including noncash components, for each of the periods (amounts in thousands):

 
 
Nine Months Ended December 31,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
Salaries and benefits