UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	VTGN	Nasdaq Capital Market

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 every Interactive Data File required to be submitted 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 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	[  ]

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 November 12, 2020, 73,998,057 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding. 

VistaGen Therapeutics, Inc.

Quarterly Report on Form 10-Q

for the Quarter Ended September 30, 2020

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2020 and March 31, 2020	1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2020 and 2019	2
Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2020 and 2019	3
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the three and six months ended September 30, 2020 and 2019	4
Notes to the Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 4. Controls and Procedures	40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	41
Item 1A. Risk Factors	41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	79
Item 3. Defaults Upon Senior Secured Securities	79
Item 6. Exhibits	79
SIGNATURES	80

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

VISTAGEN THERAPEUTICS, INC.

  CONSOLIDATED BALANCE SHEETS

(Amounts in Dollars, except share amounts)

	September 30,	March 31,
	2020	2020
	(Unaudited)	(Note 2)
ASSETS
Current assets:
Cash and cash equivalents	$15,399,500	$1,355,100
Prepaid expenses and other current assets	455,700	225,100
Deferred contract acquisition costs - current portion	116,900	-
Total current assets	15,972,100	1,580,200
Property and equipment, net	257,600	209,600
Right of use asset - operating lease	3,403,000	3,579,600
Deferred offering costs	268,500	355,100
Deferred contract acquisition cost - non-current portion	321,700	-
Security deposits and other assets	47,800	47,800
Total assets	$20,270,700	$5,772,300
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$1,176,400	$1,836,600
Accrued expenses	186,900	561,500
Current notes payable, including accrued interest	352,600	56,500
Deferred revenue - current portion	1,244,000	-
Operating lease obligation - current portion	338,500	313,400
Financing lease obligation - current portion	3,500	3,300
Total current liabilities	3,301,900	2,771,300
Non-current liabilities:
Non-current portion of notes payable	87,300	-
Accrued dividends on Series B Preferred Stock	5,694,700	5,011,800
Deferred revenue - non-current portion	3,422,000	-
Operating lease obligation - non-current portion	3,540,900	3,715,600
Financing lease obligation - non-current portion	1,300	3,000
Total non-current liabilities	12,746,200	8,730,400
Total liabilities	16,048,100	11,501,700
Commitments and contingencies (Note 10)
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2020 and March 31, 2020:
Series A Preferred, 500,000 shares authorized, issued and outstanding at September 30, 2020 and March 31, 2020	500	500
Series B Preferred; 4,000,000 shares authorized at September 30, 2020 and March 31, 2020; 1,160,240 shares
issued and outstanding at September 30, 2020 and March 31, 2020	1,200	1,200
Series C Preferred; 3,000,000 shares authorized at September 30, 2020 and March 31, 2020; 2,318,012 shares
issued and outstanding at September 30, 2020 and March 31, 2020	2,300	2,300
Common stock, $0.001 par value; 175,000,000 shares authorized at September 30, 2020 and March 31, 2020;
74,133,722 and 49,348,707 shares issued and outstanding at September 30, 2020 and March 31, 2020, respectively	74,100	49,300
Additional paid-in capital	216,444,600	200,092,800
Treasury stock, at cost, 135,665 shares of common stock held at September 30, 2020 and March 31, 2020	(3,968,100)	(3,968,100)
Accumulated deficit	(208,332,000)	(201,907,400)
Total stockholders’ equity (deficit)	4,222,600	(5,729,400)
Total liabilities and stockholders’ equity (deficit)	$20,270,700	$5,772,300

See accompanying notes to Condensed Consolidated Financial Statements.

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VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in dollars, except share amounts)

	Three Months Ended September 30,		Six Months Ended September 30,
	2020	2019	2020	2019
Sublicense revenue	$334,000	$-	$334,000	$-
Total revenues	334,000	-	334,000	-
Operating expenses:
Research and development	2,358,200	4,205,200	4,089,400	8,519,100
General and administrative	1,269,500	1,146,100	2,660,100	3,056,200
Total operating expenses	3,627,700	5,351,300	6,749,500	11,575,300
Loss from operations	(3,293,700)	(5,351,300)	(6,415,500)	(11,575,300)
Other income (expenses), net:
Interest income (expense), net	(3,900)	15,400	(7,100)	31,900
Other income	-	-	600	-
Loss before income taxes	(3,297,600)	(5,335,900)	(6,422,000)	(11,543,400)
Income taxes	(200)	-	(2,600)	(2,400)
Net loss and comprehensive loss	$(3,297,800)	$(5,335,900)	$(6,424,600)	$(11,545,800)
Accrued dividends on Series B Preferred stock	(347,200)	(313,800)	(683,000)	(616,300)
Net loss attributable to common stockholders	$(3,645,000)	$(5,649,700)	$(7,107,600)	$(12,162,100)
Basic and diluted net loss attributable to common
stockholders per common share	$(0.05)	$(0.13)	$(0.12)	$(0.29)
Weighted average shares used in computing basic and diluted net loss
attributable to common stockholders per common share	67,082,935	42,622,965	59,245,209	42,622,965

See accompanying notes to Condensed Consolidated Financial Statements.

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VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Dollars)

	Six Months Ended September 30,
	2020	2019
Cash flows from operating activities:
Net loss	$(6,424,600)	$(11,545,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	50,900	52,100
Stock-based compensation	1,085,500	1,456,500
Amortization of fair value of common stock issued for services	-	92,100
Amortization of fair value of warrants issued for services	-	13,800
Changes in operating assets and liabilities:
Receivable from supplier	-	300,000
Prepaid expenses and other current assets	91,500	(229,200)
Right of use asset - operating lease	176,700	164,900
Operating lease liability	(149,700)	(127,100)
Deferred sublicense revenue, net of deferred contract acquisition costs	4,352,400	-
Accounts payable and accrued expenses	(985,700)	924,500
Net cash used in operating activities	(1,803,000)	(8,898,200)
Cash flows from property and investing activities:
Purchases of manufacturing and other equipment	(98,800)	-
Net cash used in investing activities	(98,800)	-
Cash flows from financing activities:
Net proceeds from issuance of common stock and warrants, including Units	12,961,300	-
Net proceeds from exercise of warrants	84,600	-
Net proceeds from sale of common stock under equity line	2,841,600	-
Proceeds from issuance of note under Payroll Protection Plan	224,400	-
Repayment of capital lease obligations	(1,600)	(1,500)
Repayment of notes payable	(164,100)	(128,200)
Net cash provided by (used in) financing activities	15,946,200	(129,700)
Net increase (decrease) in cash and cash equivalents	14,044,400	(9,027,900)
Cash and cash equivalents at beginning of period	1,355,100	13,100,300
Cash and cash equivalents at end of period	$15,399,500	$4,072,400
Supplemental disclosure of noncash activities:
Insurance premiums settled by issuing note payable	$322,200	$230,200
Accrued dividends on Series B Preferred	$683,000	$616,300

See accompanying notes to Condensed Consolidated Financial Statements.

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VISTAGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2019 AND 2020

(Unaudited)

(Amounts in Dollars, except share amounts)

												Total
									Additional			Stockholders’
	Series A Preferred Stock		Series B Preferred Stock		Series C Preferred Stock		Common Stock		Paid-in	Treasury	Accumulated	Equity
	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Stock	Deficit	(Deficit)
Balances at March 31, 2019	500,000	$500	1,160,240	$1,200	2,318,012	$2,300	42,758,630	$42,800	$192,129,900	$(3,968,100)	$(181,133,400)	$7,075,200
Accrued dividends on Series B Preferred stock	-	-	-	-	-	-	-	-	(302,500)	-	-	(302,500)
Stock-based compensation expense	-	-	-	-	-	-	-	-	1,063,000	-	-	1,063,000
Net loss for the quarter ended June 30, 2019	-	-	-	-	-	-	-	-	-	-	(6,209,900)	(6,209,900)
Balances at June 30, 2019	500,000	500	1,160,240	1,200	2,318,012	2,300	42,758,630	42,800	192,890,400	(3,968,100)	(187,343,300)	1,625,800
Accrued dividends on Series B Preferred stock	-	-	-	-	-	-	-	-	(313,800)	-	-	(313,800)
Stock-based compensation expense	-	-	-	-	-	-	-	-	393,500	-	-	393,500
Net loss for the quarter ended September 30, 2019	-	-	-	-	-	-	-	-	-	-	(5,335,900)	(5,335,900)
Balances at September 30, 2019	500,000	$500	1,160,240	$1,200	2,318,012	$2,300	42,758,630	$42,800	$192,970,100	$(3,968,100)	$(192,679,200)	$(3,630,400)
Balances at March 31, 2020	500,000	$500	1,160,240	$1,200	2,318,012	$2,300	49,348,707	$49,300	$200,092,800	$(3,968,100)	$(201,907,400)	$(5,729,400)
Proceeds from sale of units of common stock and warrants for cash in private placement	-	-	-	-	-	-	125,000	200	49,800	-	-	50,000
Net proceeds from sale of common stock under equity line	-	-	-	-	-	-	6,201,995	6,200	2,741,300	-	-	2,747,500
Issuance of common stock at fair value for professional services	-	-	-	-	-	-	233,645	200	124,800	-	-	125,000
Sale of common stock pursuant to 2019 Employee Stock Purchase Plan	-	-	-	-	-	-	28,125	-	12,600	-	-	12,600
Expenses related to S-3 registration statement for shares underlying outstanding warrants	-	-	-	-	-	-	-	-	(29,400)	-	-	(29,400)
Accrued dividends on Series B Preferred stock							-	-	(335,800)	-	-	(335,800)
Stock-based compensation expense	-	-	-	-	-	-	-	-	674,600	-	-	674,600
Net loss for the quarter ended June 30, 2020	-	-	-	-	-	-	-	-	-	-	(3,126,800)	(3,126,800)
Balances at June 30, 2020	500,000	500	1,160,240	1,200	2,318,012	2,300	55,937,472	55,900	203,330,700	(3,968,100)	(205,034,200)	(5,611,700)
Net proceeds from sale of common stock in public offering	-	-	-	-	-	-	17,868,250	17,900	12,887,200	-	-	12,905,100
Net proceeds from exercise of warrants	-	-	-	-	-	-	228,000	200	113,800	-	-	114,000
Net proceeds from sale of common stock under equity line	-	-	-	-	-	-	100,000	100	49,200	-	-	49,300
Accrued dividends on Series B Preferred stock	-	-	-	-	-	-	-	-	(347,200)	-	-	(347,200)
Stock-based compensation expense	-	-	-	-	-	-	-	-	410,900	-	-	410,900
Net loss for the quarter ended September 30, 2020	-	-	-	-	-	-	-	-	-	-	(3,297,800)	(3,297,800)
Balances at September 30, 2020	500,000	$500	1,160,240	$1,200	2,318,012	$2,300	74,133,722	$74,100	$216,444,600	$(3,968,100)	$(208,332,000)	$4,222,600

See accompanying notes to Condensed Consolidated Financial Statements.

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.  Description of Business

VistaGen Therapeutics, Inc., a Nevada corporation (which may be referred to as VistaGen, the Company, we, our, or us), is a clinical-stage biopharmaceutical company committed to developing and commercializing differentiated new generation medications that go beyond the current standard of care for anxiety, depression and other central nervous system (CNS) disorders. Our pipeline includes three CNS drug candidates, each with a differentiated mechanism of action, an exceptional safety profile in all clinical studies to date, and therapeutic potential in multiple CNS markets. Additionally, our subsidiary, VistaStem Therapeutics (VistaStem), has developed CardioSafe 3D™, a customized human heart cell-based cardiac bioassay system, to assess and develop potential small molecule new chemical entities (NCEs) for our CNS pipeline, or for out-licensing. We aim to become a fully-integrated biopharmaceutical company that develops and commercializes innovative CNS therapies for large and growing mental health and neurology markets where we believe current treatments are inadequate to meet the underserved needs of millions of patients and their caregivers worldwide.

Our Product Candidates

PH94B is an innovative synthetic neuroactive pherine nasal spray with therapeutic potential in a wide range of mental health disorders involving anxiety or phobia. Self-administered in microgram-level doses, PH94B produces rapid onset anti-anxiety effects and does not require systemic uptake and distribution to do so. We are currently preparing PH94B for pivotal Phase 3 development as a potential acute treatment of anxiety in adults with Social Anxiety Disorder (SAD). With its rapid-onset pharmacology, lack of systemic exposure and sedation, and its excellent safety profile to date, we believe PH94B has potential to displace benzodiazepines in the drug treatment paradigm for anxiety disorders. In addition to SAD, we believe PH94B also has potential as a novel treatment for adjustment disorder, postpartum anxiety, post-traumatic stress disorder, preprocedural anxiety, panic and many other anxiety-related disorders. The FDA has granted Fast Track designation (FTD) for development of PH94B as a potential acute treatment of anxiety in adults with SAD, which we believe to be the first such FTD granted by the FDA for a drug candidate for treatment of SAD.

PH10 is an innovative synthetic neuroactive pherine delivered intranasally with therapeutic potential in a wide range of neuropsychiatric indications involving depression. Self-administered in microgram-level doses, and in contrast to currently available oral antidepressants, PH10 has potential to produce rapid-onset antidepressant effects without requiring systemic uptake and distribution. Based on its differentiated pharmacology and a successful exploratory Phase 2A study of PH10 in patients with major depressive disorder (MDD), we are initially developing PH10 as a potential new generation rapid-onset stand-alone treatment of MDD. We believe PH10 also has potential as a novel rapid-onset treatment for postpartum depression, treatment-resistant depression and suicidal ideation.

AV-101 is a novel, oral prodrug that targets the NMDAR(N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. AV-101’s active metabolite, 7-chloro-kynurenic acid (7-Cl-KYNA), is a potent and selective full antagonist of the glycine coagonist site of the NMDAR that inhibits the function of the NMDAR, but does not block the NMDAR like ketamine and other NMDAR antagonists. We have demonstrated in clinical trials that AV-101 is orally-available, well-tolerated and does not cause dissociative or hallucinogenic psychological side effects or safety concerns similar to those that may be caused by ketamine or other NMDAR antagonists. With its exceptionally few side effects and excellent safety profile, we believe AV-101 has potential to be an oral, new generation treatment for multiple CNS indications involving abnormal NMDAR function and where current the current standard of care is inadequate to meet underserved patient needs. The FDA has granted FTD for development of AV-101 as both a potential adjunctive treatment for MDD and as a non-opioid treatment for neuropathic pain. Based on successful preclinical studies of AV-101 in combination with probenecid, we are assessing potential Phase 1 development of the combination to enable potential exploratory Phase 2A studies in MDD, neuropathic pain, dyskinesia associated with levodopa therapy for Parkinson’s disease, epilepsy and/or suicidal ideation.

VistaStem is applying pluripotent stem cell (hPSC) technology and CardioSafe 3D, our customized cardiac bioassay system, to discover and develop, novel small molecule NCEs for our CNS pipeline or for out-licensing. To advance potential cell therapy (CT) and regenerative medicine (RM) applications of VistaStem’s hPSC technologies related to heart cells, we have licensed to BlueRock Therapeutics LP, a next generation CT/RM company formed jointly by Bayer AG and Versant Ventures and now a subsidiary of Bayer AG, rights to develop and commercialize certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease. As a result of its acquisition of BlueRock Therapeutics LP in 2019, Bayer AG now holds such rights (the Bayer Agreement). The Bayer Agreement is described more completely in Note 11, Sublicensing and Collaboration Agreements.

Our product candidates are protected through a combination of patents, trade secrets, and proprietary know‑how. If approved, they may also be eligible for periods of regulatory exclusivity. Our intellectual property portfolio includes issued U.S. and foreign patents, as well as U.S. and foreign patent applications.

-5-

Subsidiaries

As noted above, VistaStem Therapeutics, a California corporation, 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 and 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, 2020 has been derived from our audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP.  The operating results for the three and six months ended September 30, 2020 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2021, or for any other future interim or other period.

The accompanying unaudited Condensed Consolidated Financial Statements and notes to the Condensed Consolidated Financial Statements contained in this Report should be read in conjunction with our audited Consolidated Financial Statements for our fiscal year ended March 31, 2020 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 29, 2020.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As a clinical-stage biopharmaceutical 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 approximately $208.3 million accumulated from inception (May 1998) through September 30, 2020. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of PH94B, PH10 and AV-101, execute our drug rescue programs and pursue potential drug development and regenerative medicine opportunities.

Since our inception in May 1998 through September 30, 2020, 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 $99.2 million, as well as from an aggregate of approximately $22.7 million of government research grant awards (excluding the fair market value of government sponsored and funded clinical trials), strategic collaboration payments and intellectual property licensing, and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $38.2 million in noncash acquisitions of product licenses and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.

Recent Developments

At September 30, 2020, we had cash and cash equivalents of approximately $15.4 million. As described more completely in Note 8, Capital Stock, in August 2020, we entered into an underwriting agreement (the Underwriting Agreement) pursuant to which we sold, in an underwritten public offering (the August 2020 Public Offering), an aggregate of 15,625,000 shares (the Shares) of our common stock for a public offering price of $0.80 per Share, resulting in gross proceeds to us of $12,500,000. Under the terms of the Underwriting Agreement, we granted to the underwriter an over-allotment option (the Over-Allotment Option) to purchase up to an additional 2,343,750 Shares (the Option Shares) at a public offering price of $0.80 per Option Share. The underwriter exercised the Over-Allotment Option with respect to 2,243,250 Option Shares (the Exercised Option Shares), resulting in additional gross proceeds to us of $1,794,600. Net proceeds to us from the sale of the Shares and the Exercised Option Shares, after deducting underwriting discounts and commissions and offering expenses payable by us, were approximately $12.9 million.

-6-

As more completely described in Note 11, Sublicensing and Collaboration Agreements, in June 2020, we entered into a strategic licensing and collaboration agreement for the clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD and other potential anxiety-related disorders (the EverInsight Agreement), with EverInsight Therapeutics Inc., (EverInsight), a biopharmaceutical company focused on developing and commercializing transformative pharmaceutical products for patients in Greater China and other parts of Asia, and funded by CBC Group, a global healthcare-focused venture capital firm. In October 2020, it was announced that EverInsight is to merge with AffaMed Therapeutics, also funded by CBC Group, which as a combined, complementary entity will focus on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China and beyond. Under the terms of the EverInsight Agreement, EverInsight agreed to make a non-dilutive upfront license payment of $5.0 million to us, which we received in August 2020. Upon successful development and commercialization of PH94B in EverInsight’s territory, we are eligible to receive up to $172 million in additional development and commercial milestone payments, plus royalties on commercial sales in the licensed territory. The $5.0 million upfront license payment resulted in net cash proceeds to us of approximately $4.655 million after the sublicense payment we agreed to make to Pherin Pharmaceuticals, Inc. (Pherin) pursuant to our PH94B license from Pherin, and payment for consulting services related to the EverInsight Agreement.

As more completely described in Note 8, Capital Stock, on March 24, 2020, we entered into a purchase agreement and a registration rights agreement with Lincoln Park Capital Fund (Lincoln Park) pursuant to which Lincoln Park committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (the LPC Agreement). To satisfy our obligations under the registration rights agreement, we filed a Registration Statement on Form S-1 (the LPC Registration Statement) with the Securities and Exchange Commission (the SEC) on March 31, 2020, which the SEC declared effective on April 14, 2020 (Registration No. 333-237514). Subsequent to the effectiveness of the LPC Registration Statement, through September 30, 2020, we sold 6,301,995 registered shares of our common stock to Lincoln Park and received gross cash proceeds of $2,891,200.

Going Concern

Although the transactions described above have generated approximately $20.0 million in net cash proceeds to us between April 1, 2020 and the date of this Report, we believe it is probable that our cash position at September 30, 2020, which reflects such net proceeds, will not be sufficient to fund our planned operations for the twelve months following the issuance of these financial statements, which raises substantial doubt that we can continue as a going concern. During the next twelve months, subject to securing appropriate and adequate additional financing, we plan to (i) prepare for and launch a pivotal Phase 3 clinical trial of PH94B for acute treatment of anxiety in adult patients with SAD, (ii) prepare for and launch a small exploratory Phase 2A study of PH94B for acute treatment of adult patients with adjustment disorder, (iii) prepare for and potentially launch small exploratory Phase 2A clinical studies of PH94B in postpartum anxiety, post-traumatic stress disorder and/or pre-procedural (i.e. pre-MRI) anxiety, (iv) assess and potentially launch a Phase 1 study of AV-101 in combination with probenecid to enable exploratory Phase 2A development of the combination for treatment of CNS disorders, and (v) conduct several nonclinical studies involving PH94B, PH10 and AV-101. When necessary and advantageous, we plan to raise additional capital through the sale of our equity securities in one or more (i) private placements to accredited investors, (ii) public offerings and/or (iii) in strategic licensing and development collaborations involving one or more of our drug candidates in markets outside the United States, similar to the EverInsight Agreement. Subject to certain restrictions, our Registration Statement on Form S-3 (Registration No. 333-234025) (the S-3 Registration Statement), which became effective on October 7, 2019 and was used to register the Shares and the Exercised Option Shares sold in the August 2020 Public Offering, 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. Further, at September 30, 2020 and through the date of this Report, there are approximately 2.04 million registered shares of our common stock remaining available for sale under the LPC Agreement. We have no obligation to sell any additional shares to LPC under the LPC Agreement.

As we have been in the past, we expect that, when and as 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 and institutions. In addition to the potential sale of our equity securities, we may also seek to enter research, development and/or commercialization collaborations similar to the EverInsight Agreement and the Bayer Agreement that could generate revenue or provide funding, including non-dilutive funding, for development of one or more of our CNS product candidate programs. We may also seek additional government grant awards or agreements similar to our prior agreement with the U.S. National Institutes of Health (NIH), Baylor University and the U.S. Department of Veterans Affairs in connection with certain government-sponsored studies of AV-101. 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. We may also pursue intellectual property arrangements similar to the EverInsight Agreement and the Bayer Agreement with other parties. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development of our product candidates, as well as new government grant awards and/or agreements, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.  

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Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the current COVID-19 pandemic, the scope and nature of opportunities related to our success and the success of certain other companies in nonclinical and clinical trials, including our development and commercialization of our current product candidates and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101 and, to a lesser extent, 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 manufacturing, research and development, investor and public relations, business development, legal, intellectual property acquisition and protection, public company compliance and other professional services and operating costs. 

Notwithstanding the foregoing, there can be no assurance that our current strategic collaborations under the EverInsight Agreement and the Bayer Agreement will generate revenue from future potential milestone payments, or that future financings or government or other strategic collaborations will be available to us 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 in 2021 or thereafter, 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 revenue recognition, share-based compensation, right-of-use assets and lease liabilities and assumptions that have been used historically to value warrants and warrant modifications.

Revenue Recognition

We generate revenue from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants. We expect that our primary source of revenue beginning in the quarter ended September 30, 2020 will be from the EverInsight Agreement involving clinical development and commercialization of PH94B for acute treatment of anxiety in adults with SAD, and potentially other anxiety-related disorders, in Greater China, South Korea, and Southeast Asia.The terms of the EverInsight Agreement include a $5.0 million non-refundable upfront license fee which we received in August 2020, potential payments based upon achievement of certain development and commercial milestones, and royalties on product sales. We also have the Bayer Agreement, pursuant to which we recorded sublicense revenue in the third quarter of our fiscal year ended March 31, 2017, also described in Note 11, Sublicensing and Collaborative Agreements, as a potential revenue generating arrangement.

Under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), we recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services we transfer to a customer.

Performance Obligations

We assess whether each promised good or service is distinct for the purpose of identifying the performance obligations in the contract. This assessment involves subjective determinations and requires judgments about the individual promised goods or services and whether such components are separable from the other aspects of the contractual relationship. In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace.

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Collaboration arrangements can have several promised goods or services including a license for our intellectual property, product supply and development and regulatory services. When the customer could not obtain the intended benefit of the contract from a promised good or service without one or more other promises in the contract, the promise is determined to be not distinct in the context of the contract and is combined with other promises until the combined promises are distinct to identify performance obligations. We have determined that the EverInsight Agreement includes a single combined performance obligation that includes both the license to intellectual property and development and regulatory services.

Arrangements can include promises for optional additional items, which are considered marketing offers and are accounted for as separate contracts when the customer elects such options. Arrangements that include a promise for future supply of product for either clinical development or commercial supply and optional research and development services at the customer’s or the Company’s discretion are generally considered as options. We assess whether these options provide a material right to the customer and if so, such material rights are accounted for as separate performance obligations. When the customer exercises an option, any additional payments related to the option are recorded in revenue when the customer obtains control of the goods or services.

Transaction Price

Arrangements may have both fixed and variable consideration. For collaboration agreements, the non-refundable upfront fees and product supply selling prices are considered fixed, while milestone payments are considered variable consideration when determining the transaction price. At the inception of each arrangement, we evaluate whether the development milestones are considered probable of being achieved and estimate an amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as approvals from regulators, are generally not considered probable of being achieved until such approvals are received.

For sales-based royalties, including commercial milestone payments based on the level of sales, for which the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of when (a) the related sales occur, or (b) the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).

In determining the transaction price, we adjust consideration for the effects of the time value of money if the timing of payments provides us with a significant benefit of financing. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between payment by the licensee and the transfer of the promised goods or services to the licensee will be one year or less.

Allocation of Consideration

As part of the accounting for collaboration arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the contract. The transaction price is allocated to the identified performance obligations in proportion to their standalone selling prices (SSP) on a relative SSP basis. SSP is determined at contract inception and is not updated to reflect changes between contract inception and satisfaction of the performance obligations. In developing the SSP for a performance obligation, we consider applicable market conditions and relevant Company-specific factors, including factors that were contemplated in negotiating the agreement with the customer and estimated costs. We validate the SSP for performance obligations by evaluating whether changes in the key assumptions used to determine the SSP will have a significant effect on the allocation of arrangement consideration between multiple performance obligations. Since the EverInsight Agreement includes a single combined performance obligation that is not distinct, there is no allocation of consideration.

Timing of Recognition

Significant management judgment is required to determine the level of effort required under collaboration arrangements and the period over which we expect to complete our performance obligations under the arrangement. The performance period or measure of progress is estimated at the inception of the arrangement and re-evaluated in each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to these estimates are recorded on a cumulative catch up basis. Revenue is recognized for products at a point in time and for licenses of functional intellectual property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over time using an output or input method. For performance obligations that are a combination of licenses to intellectual property and interdependent services, the nature of the combined performance obligation is considered when determining the method and measure of progress that best represents the satisfaction of the performance obligation. For the single combined performance obligation of the EverInsight Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the license of PH94B.

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The difference between revenue recognized to-date and the consideration invoiced or received to-date is recognized as either a contract asset/unbilled revenue (revenue earned exceeds cash received) or a contract liability/deferred revenue (cash received exceeds revenue earned). At September 30, 2020, we have recorded deferred revenue of $4,666,000. The following table presents changes in our contract liabilities for the six months ended September 30, 2020 (in thousands):

	Balance at			Balance at
	March 31, 2020	Additions	Deductions	September 30, 2020
Deferred Revenue - current portion	$-	$1,244,000	$-	$1,244,000
Deferred Revenue - non-current portion	-	3,756,000	(334,000)	3,422,000
Total	$-	$5,000,000	$(334,000)	$4,666,000

For the single combined performance obligation under the EverInsight Agreement, the measure of progress is stand-ready straight-line over the period in which we expect to perform the services related to the license of PH94B. Accordingly, deferred revenue is being recognized on a straight-line basis over the period in which we expect to perform the services.

During the three and six months ended September 30, 2020 and 2019, we recognized the following revenue:

	Three and Six Months Ended September 30,
	2020	2019
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied	$-	$-
New activities in the period:
Performance obligations satisfied	334,000	-
	$334,000	$-

Contract Acquisition Costs

During the quarter ended September 30, 2020, we made cash payments aggregating $345,000 for sublicense fees which we were obligated to make pursuant to our PH94B license from Pherin, and fees for consulting services exclusively related to the EverInsight Agreement. Additionally, on June 24, 2020, we issued 233,645 unregistered shares of our common stock, valued at $125,000, as partial compensation for consulting services exclusively related to the EverInsight Agreement. These sublicense fees and consulting payments and the fair value of the common stock issued, aggregating $470,000, were incurred solely as a result of obtaining the EverInsight Agreement, and, accordingly, have been capitalized as deferred contract acquisition costs in our Condensed Consolidated Balance Sheet. Capitalized contract acquisition costs are amortized over the period in which we expect to satisfy the performance obligations under the EverInsight Agreement and the amortization expense has been included in general and administrative expenses in our Condensed Consolidated Statement of Operations and Comprehensive Loss. In the quarter and six months ended September 30, 2020, we amortized $31,400 to general and administrative expense in recognition of the services performed under the arrangement. There has been no impairment loss in relation to the costs capitalized.

The following table summarizes our contract acquisition costs for the six months ended September 30, 2020.

	Balance at			Balance at
	March 31, 2020	Additions	Deductions	September 30, 2020
Deferred Contract Acquisition Costs - current portion	$-	$116,900	$-	$116,900
Deferred Contract Acquisition Costs - non-current portion	-	353,100	(31,400)	321,700
Total	$-	$470,000	$(31,400)	$438,600

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Research and Development Expenses

Research and development expenses are composed of both internal and external costs.  Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs.  External research and development expenses consist primarily of costs associated with clinical and nonclinical development of PH94B, PH10, AV-101, and stem cell research and development costs, and costs related to the application and prosecution of patents related to those product candidates and, to a lesser extent, our stem cell technology platform. All such costs are charged to expense as incurred. We also record accruals for estimated ongoing clinical trial costs. Clinical trial costs represent costs incurred by contract research organizations (CROs) and clinical trial sites. Progress payments are generally made to contract research and development organizations, clinical sites, investigators and other professional service providers. We analyze the progress of clinical trials, including levels of subject enrollment, invoices received and contracted costs, when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made and used in determining the clinical trial accrual in any reporting period. Actual results could differ from those estimates under different assumptions. Revisions are charged to research and development expense in the period in which the facts that give rise to the revision become known. Costs incurred in obtaining product or technology licenses are charged immediately to research and development expense if the product or technology licensed has not achieved regulatory approval or reached technical feasibility and has no alternative future uses, as was the case with our acquisition of the exclusive worldwide licenses for PH94B and PH10 from Pherin during our fiscal year ended March 31, 2019.

Stock-Based Compensation

We recognize compensation cost for all stock-based awards to employees and non-employee consultants based on the grant date fair value of the award.  We record non-cash, stock-based compensation expense over the period during which the employee or other grantee is required to perform services in exchange for the award, which generally represents the scheduled vesting period.  We have not granted restricted stock awards to employees nor do we have any awards with market or performance conditions. Non-cash expense attributable to compensatory grants of shares of our common stock to non-employees is determined by the quoted market price of the stock on the date of grant and is either recognized as fully-earned at the time of the grant or amortized ratably over the term of the related service agreement, depending on the terms of the specific agreement.

The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2020.

	Three Months Ended September 30,		Six Months Ended September 30,
	2020	2019	2020	2019
Research and development expense	$122,400	$167,500	$349,000	$558,100
General and administrative expense	288,500	226,000	736,500	898,400
Total stock-based compensation expense	$410,900	$393,500	$1,085,500	$1,456,500

Expense amounts reported above include $1,300 and $3,800 in research and development expense for the three and six months ended September 30, 2020, respectively, and $1,300 and $2,800 in general and administrative expense for the three and six months ended September 30, 2020, respectively, attributable to our 2019 Employee Stock Purchase Plan.

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During the three and six months ended September 30, 2020, we granted from our 2019 Omnibus Equity Incentive Plan (the 2019 Plan) options to purchase an aggregate of 120,000 shares and 2,065,000 shares, respectively, of our common stock at exercise prices at or above the closing market price of our common stock on the date of grant to the independent members of our Board, our officers and employees and certain consultants. The options generally vested 25% upon grant with the remaining shares vesting ratably over two years for independent directors, officers and employees, and over one to three years for consultants. We valued the options granted during the three and six months ended September 30, 2020 using the Black-Scholes Option Pricing Model and the following assumptions:

	Three Months Ended September 30, 2020		Six Months Ended September 30, 2020
Assumption:	Weighted Average	Range	Weighted Average	Range
Market price per share at grant date	$0.67	$0.62 to 0.73	$0.43	$0.40 to 0.73
Exercise price per share	$0.67	$0.62 to 0.73	$0.43	$0.40 to 0.73
Risk-free interest rate	0.31%	0.26% to 0.33%	0.38%	0.35% to 0.44%
Expected term in years	5.49	5.20 to 5.58	5.36	5.20 to 5.94
Volatility	84.71%	84.55% to 85.32%	84.14%	82.93% to 85.85%
Dividend rate	0.0%	0.0%	0.0%	0.0%
Shares	120,000		2,065,000
Fair Value per share	$0.46		$0.29

At September 30, 2020, there were stock options outstanding under our 2016 Equity Incentive Plan (the 2016 Plan) and our 2019 Plan to purchase 12,068,088 shares of our common stock at a weighted average exercise price of $1.20 per share. At that date, there were also 4,665,162 shares of our common stock available for future issuance under the 2019 Plan. There are no additional shares available for issuance under our 2016 Plan.

Leases, Right-of-Use Assets and Lease Liabilities

On April 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases, which replaced the existing guidance in Accounting Standards Codification (ASC) 840, “Leases”, and its subsequent amendments including ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (ASC 842) using the modified transition method.

We determine whether an arrangement is an operating or financing lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. In determining the present value of the lease payments, we use the interest rate implicit in the lease when it is readily determinable and we use our estimated incremental borrowing rate based upon information available at the commencement date when the implicit rate is not readily determinable.

The lease payments used to determine our operating lease assets include lease incentives and stated rent increases and may include escalation or other clauses linked to rates of inflation or other factors when determinable and are recognized in our operating lease assets in our condensed consolidated balance sheets.

Our operating leases are reflected in right of use asset – operating leases, other current liabilities and non-current operating lease liability in our condensed consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease.

Our accounting for financing leases, previously referred to as “capital leases” under earlier guidance, remained substantially unchanged with our adoption of ASC 842. Financing leases are included in property and equipment, net and as current and non-current financing lease liabilities in our condensed consolidated balance sheets. Refer to Note 10, Commitments and Contingencies, for additional information regarding ASC 842 and its impact on our condensed consolidated financial statements.

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.

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Loss per Common Share

Basic net loss attributable to common stockholders per share of common stock excludes the effect of dilution and is computed by dividing net loss increased by the accrual of dividends on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred), by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net loss attributable to common stockholders per share, we have generally not increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method because the result is antidilutive.

As a result of our net loss for all periods presented, potentially dilutive securities were excluded from the computation of diluted net loss per share, as their effect would be antidilutive. Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:

	At September 30,	At March 31,
	2020	2020
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 Company's Amended and Restated 2016 (formerly 2008) Stock Incentive Plan and 2019 Omnibus Equity Incentive Plan	12,068,088	10,003,088
Outstanding warrants to purchase common stock	25,761,834	26,555,281
Total	42,058,174	40,786,621

____________

(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; excludes shares of unregistered common stock issuable in payment of dividends on Series B Preferred upon conversion

(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 that are measured on a recurring basis at fair value at September 30, 2020 or March 31, 2020.

Recent Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity.

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The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives.

In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract.

The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares.

The amendments in ASU 2020-06 are effective for public companies for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. Entities should adopt the guidance as of the beginning of the fiscal year of adoption and cannot adopt the guidance in an interim reporting period. We are evaluating the impact of this new guidance, but do not believe that our adoption of ASU 2020-06 will have a material impact on our consolidated financial statements.

Other than ASU 2020-06 and as described in our Form 10-K for our fiscal year ended March 31, 2020, we do not expect that other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date will have a material impact on our consolidated financial statements upon adoption.

Note 4.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are composed of the following at September 30, 2020 and March 31, 2020:

	September 30,	March 31,
	2020	2020
Clinical and nonclinical materials and contract services	$174,000	$115,200
Insurance	277,800	107,200
All other	3,900	2,700
	$455,700	$225,100

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Note 5. Property and Equipment

Property and equipment is composed of the following at September 30, 2020 and March 31, 2020:

	September 30,	March 31,
	2020	2020
Laboratory equipment	$892,500	$892,500
Tenant improvements	214,400	214,400
Computers and network equipment	57,100	54,600
Office furniture and equipment	84,600	84,600
Construction in progress	96,400	-
	1,345,000	1,246,100
Accumulated depreciation and amortization	(1,087,400)	(1,036,500)
Property and equipment, net	$257,600	$209,600

We recorded depreciation and amortization expense of $50,900 and $52,100 for the six-month periods ended September 30, 2020 and 2019, respectively. The amount reported above as construction in progress at September 30, 2020 reflects the cost of certain process equipment acquired in connection with the manufacture of PH94B drug product. The equipment has not yet been fully validated or placed in service at September 30, 2020. Included in amounts reported above for office furniture and equipment is the right-of-use asset related to a financing lease of certain office equipment. Amounts associated with assets subject to the financing lease at September 30, 2020 and March 31, 2020 are as follows:

	September 30,	March 31,
	2020	2020
Office equipment subject to financing lease	$14,700	$14,700
Accumulated depreciation	(10,900)	(9,400)
Net book value of office equipment subject to
financing lease	$3,800	$5,300

Note 6.  Accrued Expenses

Accrued expenses are composed of the following at September 30, 2020 and March 31, 2020:

	September 30,	March 31,
	2020	2020
Accrued expenses for clinical and nonclinical
materials, development and contract services	$92,300	$462,300
Accrued professional services	78,200	76,500
All other	16,400	22,700
	$186,900	$561,500

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Note 7.  Notes Payable

The following table summarizes our unsecured promissory notes at September 30, 2020 and March 31, 2020:

	September 30, 2020			March 31, 2020
	Principal	Accrued		Principal	Accrued
	Balance	Interest	Total	Balance	Interest	Total
7.30% and 6.30% Notes payable to insurance premium financing company (current)	$214,500	$-	$214,500	$56,500	$-	$56,500
1% Note payable under Paycheck Protection Program	224,400	1,000	225,400	-	-	-
less: current portion	(137,100)	(1,000)	(138,100)	-	-	-
Non-current portion	$87,300	$-	$87,300	$-	$-	$-
Total current notes payable	$351,600	$1,000	$352,600	$56,500	$-	$56,500

In May 2020, we executed a 6.30% promissory note in the principal amount of $322,200 in connection with certain insurance policy premiums. The note is payable in monthly installments of $33,200, including principal and interest, through March 2021, and had an outstanding principal balance of $195,300 at September 30, 2020. In February 2020, we executed a 7.30% promissory note in the principal amount of $62,600 in connection with other insurance policy premiums. That note is payable in monthly installments of $6,500 including principal and interest, through December 2020 and had an outstanding principal balance of $19,200 at September 30, 2020.

In April 2020, we entered into a note payable agreement (the PPP Loan Agreement) with Silicon Valley Bank as lender (the Lender), pursuant to which we received net proceeds of $224,400 from a potentially forgivable loan from the U.S. Small Business Administration (SBA) pursuant to the Paycheck Protection Program (PPP) enacted by Congress under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) administered by the SBA (the PPP Loan). The PPP Loan matures on April 22, 2022. The PPP Loan accrues interest at a rate of 1.00% per annum, and interest will continue to accrue throughout the period the PPP Loan is outstanding, or until it is forgiven. Under the CARES Act (including subsequent guidance issued by SBA and U.S. Department of the Treasury related thereto) and the PPP Loan Agreement, payments of both principal and interest are deferred until such time as the SBA remits our loan forgiveness amount to Lender. The CARES Act provides that all or a portion of the PPP Loan may be forgiven upon our request to the Lender, subject to requirements in the PPP Loan Agreement and the CARES Act. We submitted our request for forgiveness of the PPP Loan on September 23, 2020. While we currently believe that the use of the PPP Loan proceeds will meet the conditions for forgiveness under the PPP, there can be no assurance that we will obtain full or partial forgiveness of the loan.

Note 8.  Capital Stock

Common Stock Purchase Agreement with Lincoln Park Capital Fund

On March 24, 2020, we entered into a purchase agreement and a registration rights agreement with Lincoln Park Capital Fund (LPC) pursuant to which LPC committed to purchase up to $10,250,000 of our common stock at market-based prices over a period of 24 months (the LPC Agreement). On March 24, 2020, we sold 500,000 unregistered shares of our common stock (the Initial Purchase Shares) to LPC under the purchase agreement at a price of $0.50 per share for gross cash proceeds of $250,000 (the Initial Purchase) and we also issued 750,000 unregistered shares of our common stock to LPC under the terms of the LPC Agreement for its purchase commitments under the LPC Agreement (the Commitment Shares). To satisfy our obligations under the registration rights agreement associated with the LPC Agreement, we filed a Registration Statement on Form S-1 (the LPC Registration Statement) with the SEC on March 31, 2020 (Registration No. 333-237514), which the SEC declared effective on April 14, 2020 (the Commencement Date). The LPC Registration Statement included registration of the Initial Purchase Shares and the Commitment Shares. The fair value of the Commitment Shares, $284,400, determined based on the quoted closing market price of our common stock on March 24, 2020, is a component of deferred offering costs attributable to this offering, which costs are amortized ratably to additional paid-in capital as we sell shares of our common stock to LPC under the LPC Agreement. Subsequent to the Commencement Date and through September 30, 2020, we have sold an additional 6,301,995 registered shares of our common stock to LPC and received aggregate gross cash proceeds of $2,891,200. At September 30, 2020, there were approximately 2.04 million registered shares of our common stock remaining available for sale under the LPC Agreement; however, we have no obligation to sell any additional shares under the agreement.

On any business day during the term of the LPC Agreement, we have the right, in our sole discretion, to direct LPC to purchase up to 100,000 shares on such business day (the Regular Purchase) (subject to adjustment under certain circumstances as provided in the LPC Agreement). The purchase price per share for each such Regular Purchase will be based on prevailing market prices of our common stock immediately preceding the time of sale as computed under the LPC Agreement. In each case, LPC’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. In addition to Regular Purchases, provided that we present LPC with a purchase notice for the full amount allowed for a Regular Purchase, we may also direct LPC to make accelerated purchases and additional accelerated purchases as described in the LPC Agreement. Although LPC has no right to require us to sell any shares of our common stock to LPC, LPC is obligated to make purchases as we direct, subject to certain conditions. In all instances, we may not sell shares of our common stock to LPC under the LPC Agreement if such sales would result in LPC beneficially owning more than 9.99% of our common stock. There are no upper limits on the price per share that LPC must pay for shares of our common stock.

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Sale of Common Stock and Warrants in the Spring 2020 Private Placement

In April 2020, in a self-directed private placement, we sold to an accredited investor units to purchase an aggregate of 125,000 unregistered shares of our common stock and four-year warrants to purchase 125,000 shares of our common stock at an exercise price of $0.50 per share and we received cash proceeds of $50,000 (the Spring 2020 Private Placement).

Registration Statement for shares underlying warrants issued in Private Placements

On May 1, 2020, we filed a registration statement on Form S-3 (Registration No. 333-237968) to register approximately 12.1 million shares of common stock underlying outstanding warrants that we had issued in earlier private placement offerings, including the Spring 2020 Private Placement, as well as common stock underlying warrants that had been previously issued to various consultants as full or partial compensation for their services. Included in the registration statement were shares of our common stock underlying approximately 5.8 million outstanding warrants to purchase shares of our common stock that had been modified in December 2019 to temporarily reduce, for a period of two years or, if sooner, until the expiration of the warrant, the exercise price of such warrants to $0.50 per share, in order to more closely align the exercise price of the warrants with the trading price of our common stock at that time (the Winter 2019 Warrant Modification). We also registered approximately 0.8 million shares of unregistered outstanding common stock held by former holders of warrants who had exercised such warrants subsequent to the Winter 2019 Warrant Modification. Further, we registered the 125,000 shares of common stock issued in the Spring 2020 Private Placement. The SEC declared the registration statement effective on May 13, 2020 (the Warrant Registration Statement). As a result of the effectiveness of this registration statement, the shares of common stock underlying essentially all of our outstanding warrants have been registered. During July 2020, holders of warrants to purchase an aggregate of 228,000 shares of our common stock exercised such warrants, and we received aggregate cash proceeds of $114,000. We issued 228,000 registered shares of our common stock upon these exercises pursuant to the effectiveness of the Warrant Registration Statement.

Registered Public Offering of Common Stock

On August 2, 2020, we entered into an underwriting agreement (the Underwriting Agreement) with Maxim Group, LLC as representative of the underwriters named therein (the Underwriter), pursuant to which we sold to the Underwriter, in an underwritten public offering (the August 2020 Public Offering), an aggregate of 15,625,000 shares (the Shares) of our common stock for a public offering price of $0.80 per Share, resulting in gross proceeds to us of $12,500,000. The August 2020 Public Offering closed on August 5, 2020 at which time we sold the Shares to the Underwriter. Under the terms of the Underwriting Agreement, we granted to the Underwriter a 45-day over-allotment option (the Over-Allotment Option) to purchase up to an additional 2,343,750 Shares (the Option Shares) at a public offering price of $0.80 per share. On August 5, 2020, the Underwriter elected to exercise the Over-Allotment Option with respect to an aggregate of 2,243,250 Option Shares (the Exercised Option Shares). We completed the sale of the Exercised Option Shares on August 7, 2020 and received additional gross proceeds of $1,794,600. After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $12.9 million from the sale of the Shares and the Exercised Option Shares.

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Warrants Outstanding

The following table summarizes warrants outstanding and exercisable as of September 30, 2020 including the warrants issued in the Spring 2020 Private Placement described above and excluding certain warrants that expired during the quarter ended September 30, 2020. The weighted average exercise price of both outstanding and exercisable warrants at September 30, 2020 is $1.53 per share.

 

		Warrants	Warrants
Exercise		Outstanding at	Exercisable at
Price	Expiration	September 30,	September 30,
per Share	Date	2020	2020
$0.50	3/25/2021 to 4/30/2024	7,923,312	7,798,312
$0.73	7/25/2025	3,870,077	3,870,077
$0.805	12/31/2022	80,431	80,431
$1.50	12/13/2022	9,596,200	9,596,200
$1.82	3/7/2023	1,388,931	1,388,931
$3.51	12/31/2021	50,000	50,000
$5.30	5/16/2021	2,705,883	2,705,883
$7.00	3/3/2023	147,000	147,000
		25,761,834	25,636,834

At September 30, 2020, with the effectiveness of the Warrant Registration Statement in May 2020, the shares of common stock underlying essentially all of the outstanding warrants except those having an exercise price of $7.00 per share have been registered for resale by the warrant holders. Warrants to purchase 125,000 shares of common stock issued in the Spring 2020 Private Placement are exercisable at $0.50 per share and become exercisable on October 24, 2020. Additionally, no outstanding warrant is subject to any down round anti-dilution protection features and all of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share.

Note 9.  Related Party Transactions

Contract Research and Development Agreement with Cato Research Ltd.

Cato Holding Company (CHC), doing business as Cato BioVentures (CBV), was the parent of Cato Research Ltd. (CRL), now known as Cato Research LLC. CRL is a contract research, development and regulatory services organization (CRO) that we have in the past, and continue to engage for a wide range of material aspects related to the nonclinical and clinical development, manufacturing and regulatory affairs associated with our efforts to develop and commercialize PH94B, PH10, AV-101. In October 2018, CHC completed the sale of CRL to an independent third party. As a result of this transaction, CHC and/or CBV is no longer affiliated with or has any control over CRL. Prior to the sale of CRL, CBV held shares of our common stock and at September 30 2020, CBV held approximately 1.3% of our outstanding common stock.

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, 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, we incurred expenses of $273,700 and $1,610,900 during the quarters ended September 30, 2020 and 2019, respectively and $398,600 and $3,016,000 for the six months ended September 30, 2020 and 2019, respectively. At September 30, 2020 and March 31, 2020, we had recorded accounts payable and accrued expenses related to CRL aggregating $116,100 and $578,800, respectively. We anticipate periodic expenses for CRO services from CRL related to nonclinical and clinical development of, and regulatory affairs related to PH94B, PH10, AV-101 and other potential product candidates will remain significant in future periods.

License and Option Agreements with Pherin Pharmaceuticals, Inc.

During our fiscal year ended March 31, 2019, we issued an aggregate of 2,556,361 shares of our unregistered common stock having an issue-date fair market value of $4,250,000 to Pherin to acquire exclusive worldwide licenses to develop and commercialize PH94B and PH10. We recorded the acquisition of the licenses as research and development expense during our fiscal year ended March 31, 2019. We recorded no expense during the quarter ended September 30, 2020 and $30,000 during the quarter ended September 30, 2019, and $10,000 and $60,000, for the six months ended September 30, 2020 and 2019, respectively, as research and development expense for monthly support payments to Pherin under the terms of the PH94B and PH10 license agreements. Our liability for such monthly support payments terminated in April 2020 under the terms of the PH10 license agreement. During the quarter ended September 30, 2020, under the terms of the PH94B license agreement we made a milestone payment of $220,000 to Pherin related to the upfront payment received under the EverInsight Agreement. The payment is included as a component of Deferred Contract Acquisition Costs on the Condensed Consolidated Balance Sheet at September 30, 2020. We recorded no amounts payable to Pherin at September 30, 2020 or March 31, 2020. At September 30, 2020, Pherin held approximately 1.8% of our outstanding common stock.

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Consulting Agreement

During the quarters ended September 30, 2020 and 2019, we engaged a consulting firm headed by one of the independent members of our Board to provide various market research studies, competitive analyses, and commercial advisory projects for certain of our CNS pipeline candidates pursuant to which we recorded research and development expense of $13,000 and $75,100 for the quarters ended September 30, 2020 and 2019, respectively and $28,000 and $102,800 for the six months ended September 30, 2020 and 2019, respectively. We recorded accounts payable and accrued expenses of $13,000 at September 30, 2020 and no amounts payable at March 31, 2020 related to these projects and services.

Note 10. Commitments and Contingencies

Operating Leases

We lease our headquarters office and laboratory space in South San Francisco, California under the terms of a lease that expires on July 31, 2022 and that provides an option to renew for an additional five years at then-current market rates. Consistent with the guidance in Accounting Standards Codification Topic 842, Leases (ASC 842), beginning April 1, 2019, we recorded this lease in our Condensed Consolidated Balance Sheet as an operating lease. For the purpose of determining the right-of-use asset and associated lease liability, we determined that the renewal of this lease is reasonably probable. The lease of our South San Francisco facilities does not include any restrictions or covenants requiring special treatment under ASC 842.

The following table summarizes the presentation of the operating lease in our Condensed Consolidated Balance Sheet at September 30, 2020 and March 31, 2020:

	As of  September 30, 2020	As of March 31, 2020
Assets
Right of use asset – operating lease	$3,403,000	$3,579,600
Liabilities
Current operating lease obligation	$338,500	$313,400
Non-current operating lease obligation	3,540,900	3,715,600
Total operating lease liability	$3,879,400	$4,029,000