vtgn20220930_10q.htm
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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, 2022

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

(Registrants 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

  

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 9, 2022, 206,836,345 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, 2022

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

   

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets at September 30, 2022 and March 31, 2022

1

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended September 30, 2022 and 2021

2

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2022 and 2021

3

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the six months ended September 30, 2022 and 2021

4

Notes to the Condensed Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 4. Controls and Procedures

36

 

 

PART II. OTHER INFORMATION

 

           

 

Item 1. Legal Proceedings

36

Item 1A. Risk Factors

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3. Defaults Upon Senior Secured Securities

70

Item 6. Exhibits

71

   

SIGNATURES

72

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Dollars, except share amounts)

 

  

September 30,

  

March 31,

 
  

2022

  

2022

 
  

(unaudited)

  

(Note 2)

 
         

ASSETS

 

Current assets:

        

Cash and cash equivalents

 $35,287,200  $68,135,300 

Prepaid expenses and other current assets

  1,559,600   2,745,800 

Deferred contract acquisition costs - current portion

  67,000   116,900 

Total current assets

  36,913,800   70,998,000 

Property and equipment, net

  558,800   414,300 

Right-of-use asset - operating lease

  2,465,700   2,662,000 

Deferred offering costs

  411,400   321,800 

Deferred contract acquisition costs - non-current portion

  251,100   146,400 

Security deposits

  100,900   100,900 

Total assets

 $40,701,700  $74,643,400 
         

LIABILITIES AND STOCKHOLDERS EQUITY

 

Current liabilities:

        

Accounts payable

 $2,957,800  $2,758,600 

Accrued expenses

  1,188,300   1,329,200 

Notes payable

  730,000   - 

Deferred revenue - current portion

  712,300   1,244,000 

Operating lease obligation - current portion

  455,500   433,300 

Financing lease obligation - current portion

  1,500   - 

Total current liabilities

  6,045,400   5,765,100 
         

Non-current liabilities:

        

Deferred revenue - non-current portion

  2,671,800   1,557,600 

Operating lease obligation - non-current portion

  2,371,200   2,605,400 

Financing lease obligation - non-current portion

  8,300   - 

Total non-current liabilities

  5,051,300   4,163,000 

Total liabilities

  11,096,700   9,928,100 
         

Commitments and contingencies (Note 10)

          
         

Stockholders’ equity:

        

Preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2022 and March 31, 2022: no shares outstanding at September 30, 2022 and March 31, 2022

  -   - 

Common stock, $0.001 par value; 325,000,000 shares authorized at September 30, 2022 and March 31, 2022; 206,972,010 and 206,676,620 shares issued at September 30, 2022 and March 31, 2022, respectively

  207,000   206,700 

Additional paid-in capital

  338,229,600   336,080,700 

Treasury stock, at cost, 135,665 shares of common stock held at September 30, 2022 and March 31, 2022

  (3,968,100)  (3,968,100)

Accumulated deficit

  (304,863,500)  (267,604,000)

Total stockholders’ equity

  29,605,000   64,715,300 

Total liabilities and stockholders’ equity

 $40,701,700  $74,643,400 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in Dollars, except share amounts)

 

   

Three Months Ended

   

Six Months Ended

 
   

September 30,

   

September 30,

 
   

2022

   

2021

   

2022

   

2021

 

Revenues:

                               

Sublicense revenue

  $ (892,500 )   $ 358,000     $ (582,500 )   $ 712,100  

Total revenues

    (892,500 )     358,000       (582,500 )     712,100  

Operating expenses:

                               

Research and development

    12,894,500       9,936,300       28,185,800       15,393,500  

General and administrative

    3,702,300       3,221,200       8,494,100       5,864,300  

Total operating expenses

    16,596,800       13,157,500       36,679,900       21,257,800  

Loss from operations

    (17,489,300 )     (12,799,500 )     (37,262,400 )     (20,545,700 )

Other income, net:

                               

Interest income, net

    6,100       5,100       8,400       10,200  

Loss before income taxes

    (17,483,200 )     (12,794,400 )     (37,254,000 )     (20,535,500 )

Income taxes

    -       -       (5,500 )     (3,400 )

Net loss and comprehensive loss

  $ (17,483,200 )   $ (12,794,400 )     (37,259,500 )     (20,538,900 )
                                 

Accrued dividend on Series B Preferred stock

    -       (375,200 )     -       (737,000 )
                                 

Net loss attributable to common stockholders

  $ (17,483,200 )   $ (13,169,600 )   $ (37,259,500 )   $ (21,275,900 )
                                 

Basic and diluted net loss attributable to common stockholders per common share

  $ (0.08 )   $ (0.07 )   $ (0.18 )   $ (0.11 )

Weighted average shares used in computing basic and diluted net loss attributable to common stockholders per common share

    206,811,249       193,227,841       206,704,573       191,585,026  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Dollars)

 

   

Six Months Ended September 30,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net loss

  $ (37,259,500 )   $ (20,538,900 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    65,600       71,200  

Stock-based compensation

    1,988,600       1,354,900  

Amortization of operating lease right of use asset

    196,300       190,500  

Expense related to write-off of deferred offering costs

    -       232,000  

Changes in operating assets and liabilities:

               

Prepaid expenses and other current assets

    2,431,400       (1,801,100 )

Operating lease liability

    (212,000 )     (174,700 )

Deferred sublicense revenue, net of deferred contract acquisition costs

    527,700       (645,200 )

Accounts payable and accrued expenses

    (47,200 )     3,688,800  

Net cash used in operating activities

    (32,309,100 )     (17,622,500 )
                 

Cash flows from property and investing activities:

               

Purchases of laboratory and other equipment

    (199,500 )     (200,400 )

Net cash used in investing activities

    (199,500 )     (200,400 )
                 

Cash flows from financing activities:

               

Net proceeds from issuance of common stock and warrants, including option exercises

    104,400       58,000  

Net proceeds from exercise of warrants

    -       4,254,800  

Net proceeds (expense) from sale of common stock under At the Market (ATM) facility, net of deferred offering costs

    (89,600 )     3,999,100  

Net proceeds from sale of common stock under Employee Stock Purchase Plan

    56,100       31,600  

Repayment of financing lease obligations

    (700 )     (1,800 )

Repayment of notes payable

    (409,700 )     -  

Net cash (used in) provided by financing activities

    (339,500 )     8,341,700  

Net decrease in cash and cash equivalents

    (32,848,100 )     (9,481,200 )

Cash and cash equivalents at beginning of period

    68,135,300       103,108,300  

Cash and cash equivalents at end of period

  $ 35,287,200     $ 93,627,100  
                 

Supplemental disclosure of noncash activities:

               

Insurance premiums settled by issuing note payable

  $ 1,139,700     $ -  

Accrued dividends on Series B Preferred

  $ -     $ 737,000  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2022 AND 2021

(Unaudited)

(Amounts in Dollars, except share amounts)

 

   

Series A Preferred Stock

   

Series B Preferred Stock

   

Series C Preferred Stock

   

Series D Preferred Stock

   

Common Stock

   

 

Additional

Paid-in

   

Treasury

   

Accumulated

   

 

Total

Stockholders

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

   

Stock

   

Deficit

   

Equity

 
                                                                                                                 
                                                                                                                 

Balances at March 31, 2021

    500,000     $ 500       1,131,669     $ 1,100       2,318,012     $ 2,300       402,149     $ 400       180,751,234     $ 180,800     $ 315,603,100     $ (3,968,100 )   $ (219,841,700 )   $ 91,978,500  

Accrued dividends on Series B Preferred

    -       -       -       -       -       -       -       -       -       -       (361,800 )     -       -       (361,800 )

Stock-based compensation expense (including ESPP)

    -       -       -       -       -       -       -       -       -       -       590,400       -       -       590,400  

Proceeds from exercise of warrants

    -       -       -       -       -       -       -       -       1,516,768       1,500       1,108,200       -       -       1,109,700  

Conversion of Series D Preferred stock into common stock

    -       -       -       -       -       -       (402,149 )     (400 )     9,249,427       9,200       (8,800 )     -       -       -  

Sale of common stock pursuant to 2019 Employee Stock

                                                                                                               

Purchase Plan

    -       -       -       -       -       -       -       -       16,251       -       31,600       -       -       31,600  

Issuance of common stock upon cashless exercise of options

    -       -       -       -       -       -       -       -       82,504       100       -       -       -       100  

Issuance of common stock upon exercise of options for cash

    -       -       -       -       -       -       -       -       15,824       -       12,900       -       -       12,900  
                                                                                                                 

Net loss for quarter ended June 30, 2021

    -       -       -       -       -       -       -       -       -       -       -       -       (7,744,500 )     (7,744,500 )

Balances at June 30, 2021

    500,000       500       1,131,669       1,100       2,318,012       2,300       -       -       191,632,008       191,600       316,975,600       (3,968,100 )     (227,586,200 )     85,616,900  
                                                                                                                 

Accrued dividends on Series B Preferred

    -       -       -       -       -       -       -       -       -       -       (375,200 )     -       -       (375,200 )

Stock-based compensation expense (including ESPP)

    -       -       -       -       -       -       -       -       -       -       764,500       -       -       764,500  

Proceeds from exercise of warrants

    -       -       -       -       -       -       -       -       3,297,777       3,300       3,141,800       -       -       3,145,100  

Net proceeds from issuance of common stock under ATM facility

    -       -       -       -       -       -       -       -       1,502,378       1,500       4,256,300       -       -       4,257,800  

Issuance of common stock upon cashless exercise of options

    -       -       -       -       -       -       -       -       43,622       -             -       -       -  

Issuance of common stock upon exercise of options for cash

    -       -       -       -       -       -       -       -       83,000       100       45,000       -       -       45,100  
                                                                                                                 

Net loss for quarter ended September 30, 2021

    -       -       -       -       -       -       -       -       -       -       -       -       (12,794,400 )     (12,794,400 )
                                                                                                                 

Balances at September 30, 2021

  $ 500,000      $ 500       1,131,669      $ 1,100       2,318,012      $ 2,300       -      $ -       196,558,785      $ 196,500      $ 324,808,000      $ (3,968,100 )    $ (240,380,600 )    $ 80,659,800  
                                                                                                                 
                                                                                                                 

Balances at March 31, 2022

    -     $ -       -     $ -       -     $ -       -     $ -       206,676,620     $ 206,700     $ 336,080,700     $ (3,968,100 )   $ (267,604,000 )   $ 64,715,300  
                                                                                                                 

Stock-based compensation expense

    -       -       -       -       -       -       -       -       -       -       956,900       -       -       956,900  

Issuance of common stock upon exercise of options for cash

    -       -       -       -       -       -       -       -       100,000       100       99,900       -       -       100,000  

Sale of common stock pursuant to 2019 Employee Stock

                                                                                                               

Purchase Plan

    -       -       -       -       -       -       -       -       75,000       100       56,000       -       -       56,100  

Net loss for quarter ended June 30, 2022

    -       -       -       -       -       -       -       -       -       -       -       -       (19,776,300 )     (19,776,300 )
                                                                                                                 

Balances at June 30, 2022

    -       -       -       -       -       -       -       -       206,851,620       206,900       337,193,500       (3,968,100 )     (287,380,300 )     46,052,000  
                                                                                                                 

Stock-based compensation expense

    -       -       -       -       -       -       -       -       -       -       1,031,800       -       -       1,031,800  

Issuance of common stock upon exercise of options for cash

    -       -       -       -       -       -       -       -       11,000       -       4,400       -       -       4,400  

Issuance of common stock upon cashless exercise of options

    -       -       -       -       -       -       -       -       109,390       100       (100 )     -       -       -  

Net loss for quarter ended September 30, 2022

    -       -       -       -       -       -       -       -       -       -       -       -       (17,483,200 )     (17,483,200 )
                                                                                                                 
Balances at September 30, 2022     -     $ -       -     $ -       -     $ -       -     $ -       206,972,010     $ 207,000     $ 338,229,600     $ (3,968,100 )   $ (304,863,500 )   $ 29,605,000  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

 

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 advancing therapeutics with the potential to be faster-acting, and with fewer side effects and safety concerns, than those that are currently available for neuropsychiatric disorders with high unmet need. Our most-advanced clinical-stage candidates, PH94B and PH10, are targeting multiple forms of anxiety and depression. Both PH94B and PH10 belong to a new class of drugs known as pherines. At microgram level doses, these investigational neuroactive steroids are formulated as nasal sprays designed to achieve rapid-onset anti-anxiety (PH94B) or antidepressant (PH10) effects by directly activating chemosensory neurons located in the nasal passages, which neurons then impact olfactory amygdala “fear off” and “fear on” neural circuits in the brain, without requiring systemic uptake or direct activity on CNS neurons in the brain. Our goal is to become a biopharmaceutical company that develops and commercializes innovative therapies for highly prevalent CNS indications where current treatment options are inadequate to meet the needs of millions of patients in the U.S. and worldwide.

 

Our Product Candidates

 

PH94B Nasal Spray

 

PH94B is a first-in-class synthetic investigational pherine nasal spray designed with a novel rapid-onset mechanism of action (MOA) that regulates the neural circuits of fear and anxiety and attenuates the tone of the sympathetic autonomic nervous system. PH94B is administered intranasally in microgram doses directly onto receptors for chemosensory neurons located in the nasal passages, which neurons then impact olfactory amygdala “fear off” neural circuits in the brain. The proposed MOA of PH94B is fundamentally differentiated from all currently approved anti-anxiety medications, including the antidepressants approved by the FDA for the treatment of Social Anxiety Disorder (SAD), as well as all benzodiazepines and beta blockers prescribed for treatment of SAD on an off-label basis. The proposed MOA for PH94B does not involve systemic uptake, direct activation of GABA-A receptors in the brain, or direct activation of CNS neurons in the brain. Rather, when administered intranasally, PH94B activates chemosensory neurons in the nose that activate neural circuits involving olfactory bulb neurons and the limbic amygdala, a region in the brain that is involved in the pathophysiology of SAD and potentially several other anxiety and mood disorders.

 

We are currently evaluating PH94B for the potential treatment of multiple anxiety disorders, including for adults with SAD and for adults experiencing Adjustment Disorder with Anxiety (AjDA).  Both pre-clinical and Phase 2 clinical data to date suggest that PH94B has the potential to achieve rapid-onset anti-anxiety effects without systemic uptake or transport into the brain, significantly reducing the risk of side effects and other safety concerns, such as potential abuse, misuse and addiction associated with certain other pharmaceuticals that act directly on the CNS and are sometimes prescribed for anxiety disorders, including SAD, AjDA and many others.

 

In May 2021, we initiated our PALISADE Phase 3 Program for PH94B in SAD with PALISADE-1, our single-administration assessment Phase 3 clinical study of PH94B for the acute treatment of anxiety in adults with SAD. In July 2022, we announced that PALISADE-1 did not achieve its primary endpoint, as measured by change from baseline using the Subjective Units of Distress Scale (SUDS) as compared to placebo. Although PALISADE-1 did not meet its primary efficacy endpoint, the safety and tolerability of PH94B in PALISADE-1 were favorable and consistent with previously reported results from previous clinical trials.

 

In August 2021, we initiated PALISADE-2, which involves the same study design as PALISADE-1 but primarily involves different clinical sites. In July 2022, after receiving top line results from PALISADE-1, we paused recruitment and enrollment in PALISADE-2 to allow independent third-party biostatisticians to conduct an interim analysis of available data from subjects randomized in PALISADE-2 up to the date we paused the study. In September 2022, based on their review of unblinded data from the 140 subjects who had completed PALISADE-2, the independent third-party biostatisticians recommended that we continue PALISADE-2 as planned. Although we did not and do not have access to any unblinded data from PALISADE-2, based on the outcome of the interim analysis and the recommendation from the independent biostatisticians, we are preparing to restart PALISADE-2 as soon as practicable and continue the study to full targeted enrollment of 208 subjects.  In addition to preparing to restart PALISADE-2, we are planning to meet with the FDA as soon as possible in the near term to discuss and reach consensus with the FDA on the next step in our Phase 3 development program for PH94B as a potential treatment for adults with SAD.

 

PH10 Nasal Spray

 

PH10 is an investigational pherine nasal spray with a potential rapid-onset MOA that is fundamentally differentiated from the MOA of all currently approved treatments for depression disorders. PH10, which is administered at microgram-level doses, engages and activates chemosensory neurons in the nasal passages, connected to neural circuits in the brain that produce antidepressant effects. Specifically, PH10’s proposed MOA involves binding to receptors for chemosensory neurons in the nasal passages to regulate the olfactory amygdala “fear on” neural circuits believed to increase activity of the limbic-hypothalamic sympathetic nervous system and increase the release of catecholamines. Importantly, unlike all currently approved oral antidepressants (Ads) and rapid-onset ketamine-based therapy (KBT), including both intravenous ketamine and intranasal ketamine (esketamine), we believe PH10 does not require systemic uptake to produce rapid-onset of antidepressant effects and does not cause the side effects and safety concerns potentially associated with KBT.

 

In a small (n=30) exploratory randomized, double-blind, placebo-controlled parallel design Phase 2A study in major depressive disorder (MDD) conducted in Mexico, at a 6.4 μg dose administered intranasally twice daily for 8 weeks, PH10 significantly reduced depressive symptoms as early as one week based on the 17-item Hamilton Depression Scale (HAM-D-17) scores compared to placebo (p = 0.022). PH10 was well-tolerated and did not cause psychological side effects (such as dissociation and hallucinations) or other safety concerns that may be associated with KBT. We recently submitted our U.S. Investigational New Drug (IND) application to enable us to initiate a small Phase 1 clinical study of PH10 in the U.S. in healthy volunteers. Should the FDA permit us to proceed with the Phase 1 study, we plan to initiate the study before the end of calendar 2022. This small and brief Phase 1 study is intended to facilitate Phase 2B development of PH10 in the U.S., on our own or with a collaborator, as an innovative potential fast-acting stand-alone rapid-onset treatment of MDD. We may also have potential opportunities to develop PH10 for other several additional depression-related disorders.

 

- 5-

 

AV-101

 

AV-101 is an oral prodrug of 7-chloro-kynurenic acid (7-Cl-KYNA), which is a potent and selective antagonist of the glycine co-agonist site of the NMDAR that inhibits the function of the NMDAR. Unlike ketamine and many other NMDAR antagonists, 7-Cl-KYNA is not an ion channel blocker. At doses administered in the Company’s studies completed to date, AV-101 has been observed to be well tolerated and has not exhibited dissociative or hallucinogenic psychological side effects or safety concerns, unlike KBT and certain other therapies targeting the NMDAR. Based on observations and findings from preclinical studies, we believe that AV-101, in combination with FDA-approved oral probenecid, has the potential to become a new oral treatment alternative for certain CNS indications involving the NMDAR. We are presently conducting an exploratory Phase 1B drug-drug interaction clinical study of AV-101 in combination with probenecid.

 

The FDA has granted Fast Track designation for development of AV-101 as a potential adjunctive treatment for MDD and as a non-opioid treatment for neuropathic pain.

 

Subsidiaries

 

VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem (VistaStem), is our wholly owned subsidiary. For the relevant periods, our 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 (Artemis), which was dissolved in April 2022, and VistaStem Canada, Inc., a corporation organized under the laws of Ontario, Canada (VistaStem Canada), which was dissolved in June 2022.

 

 

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, 2022 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 six months ended September 30, 2022 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2023, 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, 2022 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 23, 2022 (Form 10-K).

 

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 $304.9 million accumulated from inception ( May 1998) through September 30, 2022. 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.

 

Since our inception in May 1998 through September 30, 2022, 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 $208.7 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.

 

Liquidity, Capital Resources and Going Concern

 

During our fiscal year ended March 31, 2022 (Fiscal 2022), holders of outstanding warrants to purchase an aggregate of approximately 7.3 million shares of our common stock exercised such warrants, and we received cash proceeds of approximately $6.2 million. In May 2021, we entered into an Open Market Sale Agreement SM (the Sales Agreement) with respect to an at-the-market offering program (the ATM) under which we may offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through our sales agent. During Fiscal 2022, we sold an aggregate of 1,517,798 shares of our common stock and received net cash proceeds of approximately $4.3 million under the ATM. We have not sold any additional shares of our common stock under the Sales Agreement from October 2, 2021 through the date of this Report. During our fiscal year ended March 31, 2021 (Fiscal 2021), we received approximately $119 million in net cash proceeds, primarily from public offerings conducted in August 2020 and December 2020, the exercise of approximately 6.6 million outstanding warrants and the upfront license payment pursuant to our sublicense and collaboration agreement for PH94B (the AffaMed Agreement), which is described more completely in Note 11, Sublicensing and Collaboration Agreements. The financings and other transactions consummated during Fiscal 2022 and Fiscal 2021 have been the primary sources of our liquidity during Fiscal 2022 and through the date of this Report in our current fiscal year. During the six months ended September 30, 2022, we received approximately $160,500 in proceeds from the exercise of outstanding stock options and sales under our 2019 Employee Stock Purchase Plan (the 2019 ESPP).

 

- 6-

 

 

We had cash and cash equivalents of approximately $35.3 million at September 30, 2022, which we believe is probable not to be sufficient to fund our planned operations for the twelve months following the issuance of these consolidated financial statements, which raises substantial doubt that we can continue as a going concern. We are continuing to evaluate our cash resources given the results of PALISADE-1 and our decisions to (i) resume recruitment and enrollment in PALISADE-2 following the independent third-party interim analysis of data from subjects randomized in PALISADE-2 to date, (ii) end recruitment and enrollment in the PALISADE Open-Label Safety Study (PALISADE OLS), a multiple-use, multiple-assessment long-term safety study of PH94B for the treatment of SAD, (iii) continue our small exploratory Phase 2A clinical study of PH94B in adults experiencing AjDA and (iv) prepare to conduct a small and brief Phase 1 clinical safety study of PH10 to facilitate potential Phase 2B development, on our own or with a collaborator, of PH10 as a potential stand-alone rapid-onset treatment for MDD. We are continuing to evaluate the resulting implications for the conduct and timing of other clinical trials and strategies and opportunities for the development and commercialization, on our own or with collaborators, all of our product candidates. However, as we have not yet developed products that generate recurring revenue and, in the event we successfully complete future clinical and/or nonclinical programs, we will need to invest substantial additional capital resources to develop and commercialize our drug candidates.

 

When necessary and advantageous, we will seek additional financial resources to fund our planned operations through (i) sales of our equity and/or debt securities in one or more public offerings and/or private placements, (ii) non-dilutive government grants and research awards and (iii) non-dilutive strategic collaborations to advance development and commercialization of our product candidates. For example, we may seek to enter research, development and/or commercialization collaborations similar to the AffaMed Agreement, which applies to development of PH94B in certain Pacific-Asian territories, to provide non-dilutive funding for our operations, while also reducing a portion of our future cash outlays and working capital requirements. Although we may seek additional collaborations that could generate revenue and/or provide non-dilutive funding for development and commercialization of our product candidates, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.

 

Subject to certain restrictions, our Registration Statement on Form S-3 (the S-3 Shelf 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 Shelf Registration Statement, we do not have an obligation to do so.

 

Our future working capital requirements will depend on many factors, including, without limitation, potential impacts related to the on-going COVID-19 pandemic, adjustments in the size of our staff, the scope and nature of opportunities related to our success or failure and the success or failure of certain other companies in nonclinical and clinical trials, including the development and commercialization of our current product candidates, and the availability of, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of PH94B, PH10, and AV-101, as well as support our operating activities, we plan to continue to carefully manage our operating costs, including, but not limited to, our clinical and nonclinical programs.

 

Notwithstanding the foregoing, there can be no assurance that future financings will be available to us in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all, or that our current strategic collaboration under the AffaMed Agreement or other strategic collaborations will generate revenue from future potential milestone payments. Further, on September 6, 2022, we received a letter from the Listing Qualifications Staff of The Nasdaq Stock Market, LLC (Nasdaq) indicating that, based upon the closing bid price of our common stock for the previous 30 consecutive business days, we are not currently in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market. While the letter has no immediate effect on the listing of our common stock on the Nasdaq Capital Market, failure to meet applicable Nasdaq continued listing standards could potentially result in a delisting of our common stock, which could materially reduce the liquidity of our common stock, result in a further reduction in the price of our common stock, require us to implement a reverse stock split, and/or impair our ability to raise capital through alternative financing sources on terms acceptable to us, or at all. If we are unable to obtain additional financing on a timely basis when needed, our business, financial condition, and results of operations may be harmed, the price of our common stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities, and we may not be able to continue as a going concern. The Condensed Consolidated Financial Statements included in this Report 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.

 

- 7-

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents are considered to be highly liquid investments with maturities of three months or less at the date of purchase.

 

Revenue Recognition

 

The AffaMed 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, has been our only source of revenue for the six months ended September 30, 2022 and during both Fiscal 2022 and Fiscal 2021. The terms of the AffaMed 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. In prior years, we have occasionally generated revenue from collaborative research and development arrangements, licensing and technology transfer agreements, including strategic licenses or sublicenses, and government grants.

 

Under Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 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.

 

Once a contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract and determine those that are performance obligations. Arrangements that include rights to additional goods or services that are exercisable at a customer’s discretion are generally considered options. We assess whether these options provide a material right to the customer and if so, they are considered performance obligations. The exercise of a material right may be accounted for as a contract modification or as a continuation of the contract for accounting purposes.

 

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 are separable from the other aspects of the contractual relationship. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct) and (ii) our promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the promise to transfer the good or service is distinct within the context of the contract). In assessing whether a promised good or service is distinct in the evaluation of a collaboration arrangement subject to ASC 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. We also consider the intended benefit of the contract in assessing whether a promised good or service is separately identifiable from other promises in the contract. If a promised good or service is not distinct, we are required to combine that good or service with other promised goods or services until we identify a bundle of goods or services that is distinct.

 

The transaction price is then determined and 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. Determining the SSP for performance obligations requires significant judgment. 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. In certain circumstances, we may apply the residual method to determine the SSP of a good or service if the standalone selling price is considered highly variable or uncertain. 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.

 

If the consideration promised in a contract includes a variable amount, we estimate the amount of consideration to which we will be entitled in exchange for transferring the promised goods or services to a customer. We determine the amount of variable consideration by using the expected value method or the most likely amount method. We include the unconstrained amount of estimated variable consideration in the transaction price. The amount included in the transaction price is constrained to the amount for which it is probable that a significant reversal of cumulative revenue recognized will not occur. At the end of each subsequent reporting period, we re-evaluate the estimated variable consideration included in the transaction price and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis in the period of adjustment.

 

- 8-

 

 

If an arrangement includes development and regulatory milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the 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 associated milestone value is included in the transaction price. Milestone payments that are not within our control or the licensee’s control, such as regulatory approvals, are generally not considered probable of being achieved until those approvals are received.

 

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. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied.

 

We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied at a point in time or over time, and if over time, based on the use of an output or input method. For the single combined performance obligation under the AffaMed 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, we recognize revenue on a straight-line basis over the period in which we expect to perform the services. Revenue related to performance obligation satisfied over time could be materially impacted as a result of changes in the estimated time or effort necessary to satisfy the performance obligation.

 

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). As described more completely in Note 11, Sublicensing and Collaborative Agreements, as a result of the outcome of PALISADE-1, we extended our estimate of the time necessary to complete our performance obligation under the AffaMed Agreement. In accordance with the guidance of ASC 606, the extension of the estimated time to complete our performance obligation required recording a cumulative catch-up adjustment in which we derecognized $892,500 and $582,500 of previously recognized revenue during the three and six months ended September 30, 2022, respectively, including $310,000 of revenue that had been recognized in the quarter ended June 30, 2022. Following the cumulative catch-up adjustment, through September 30, 2022, we have recognized an aggregate of $1,615,900 in revenue under the AffaMed Agreement and, at that date, we have recorded $3,384,100 as deferred revenue. The following table presents changes in our contract liabilities for the six months ended September 30, 2022 after giving effect to the cumulative catch-up adjustment:

 

  

Balance at

          

Balance at

 
  

March 31,

2022

  

Additions

  

Deductions

  

September 30,

2022

 

Deferred Revenue - current portion

 $1,244,000  $-  $(531,700) $712,300 

Deferred Revenue - non-current portion

  1,557,600   1,114,200   -   2,671,800 

Total

 $2,801,600  $1,114,200  $(531,700) $3,384,100 

 

During the three and six months ended September 30, 2022, we derecognized $892,500 and $582,500, respectively, resulting in negative revenue related to the AffaMed Agreement following the cumulative catch-up adjustment, compared to recognizing $358,000 and $712,100 of revenue for the three and six-months ended September 30, 2021, respectively.

 

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 agreement with Pherin Pharmaceuticals, Inc. (Pherin), and fees for consulting services exclusively related to the AffaMed 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 related exclusively to the consummation of the AffaMed Agreement. These sublicense fees and consulting payments and the fair value of the common stock issued, aggregating $470,000, were incurred solely to obtain the AffaMed 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 obligation under the AffaMed Agreement and the amortization expense has been included in general and administrative expense in our Condensed Consolidated Statement of Operations and Comprehensive Loss. As described above, we have extended our estimate for the time required to satisfy our performance obligation under the AffaMed Agreement. Accordingly, our amortization of the contract acquisition costs is also subject to a cumulative catch-up adjustment. During the three and six months ended September 30, 2022, we recorded a cumulative catch-up adjustment pursuant to which we reversed previously recorded expense of $83,900 and $54,800, respectively, including $29,100 which had been recognized in the quarter ended June 30, 2022, to general and administrative expense in recognition of the services performed under the arrangement, compared to recording expense of $33,600 and $66,900 for the three and six months ended September 30, 2021, respectively. There has been no impairment loss in relation to the costs capitalized.

 

- 9-

 

 

The following table summarizes our contract acquisition costs for the six months ended September 30, 2022 after giving effect to the cumulative catch-up adjustment.

 

  

Balance at

          

Balance at

 
  

March 31,

2022

  

Additions

  

Deductions

  

September 30,

2022

 

Deferred Contract Acquisition Costs - current portion

 $116,900  $-  $(49,900) $67,000 

Deferred Contract Acquisition Costs - non-current portion

  146,400   104,700   -   251,100 

Total

 $263,300  $104,700  $(49,900) $318,100 

 

Research and Development Expense

 

Research and development expense is composed of both internal and external costs.  Internal costs include salaries and employment-related expense, including stock-based compensation expense, of scientific personnel and direct project costs.  External research and development expense consists primarily of costs associated with clinical and nonclinical development of PH94B, PH10, AV-101. 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 CROs, 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, independent directors and non-employee consultants based on the grant date fair value of the award.  We record 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 or others 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:

 

  

Three Months Ended September 30,

  

Six Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Research and development expense

 $466,100  $313,600  $795,700  $554,400 

General and administrative expense

  565,600   450,900   1,192,900   800,500 

Total stock-based compensation expense

 $1,031,700  $764,500  $1,988,600  $1,354,900 

 

Expense amounts reported above include $9,500 and $25,400 in research and development expense for the three and six months ended September 30, 2022, respectively, and $4,100 and $9,000 in general and administrative expense for the three and six months ended September 30, 2022, respectively, attributable to employee participation in our 2019 ESPP. Expense amounts reported above include $14,400 and $16,700 in research and development expense for the three and six months ended September 30, 2021, respectively, and $5,900 and $8,600 in general and administrative expense for the three and six months ended September 30, 2021, respectively, attributable to employee participation in our 2019 ESPP.

 

- 10-

 

 

During the six months ended September 30, 2022, we granted from our 2019 Omnibus Equity Incentive Plan (the 2019 Plan) options to purchase an aggregate of 1,222,000 shares of our common stock at exercise prices equal to the closing market price of our common stock on the date of grant, primarily to newly-hired employees. The options to newly hired employees vest 25% on the first anniversary of the grant date with the remaining shares vesting ratably monthly over the next three years. Options granted to consultants generally vest 25% on the grant date and ratably monthly over the next twelve months. We valued the options granted during the six months ended September 30, 2022 using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:

 

 

Weighted Average

 

 

Range

Market price per share at grant date

 

 

$

0.82

 

$

0.14 

to 1.51

Exercise price per share

 

 

$

0.82

 

$

0.14 

to 1.51

Risk-free interest rate

 

 

 

3.03%

 

 

2.63%

to3.70%

Expected term in years

 

 

 

5.90

 

 

5.20

to6.08

Volatility

 

 

 

80.23%

 

 

79.14%

to81.83%

Dividend rate

 

 

 

0.0%

 

 

0.0%

 

Shares

   

1,222,000

     

 

 

 

 

 

 

    

Fair Value per share

 

 

$

0.57

 

    

 

On September 12, 2022, the Compensation Committee (the Committee) of our Board of Directors (the Board) modified outstanding options to purchase an aggregate of 1,322,118 shares of our common stock exercisable at prices between $0.398 per share and $1.77 per share previously granted to a terminated employee and otherwise set to expire on September 13, 2022 to extend the exercisability of such options for a period of 90 days. No other term of the options, including exercise price, was modified. We calculated the fair value of the modified options 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 incremental fair value, $108,600, as an additional component of research and development stock compensation expense in our Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended September 30, 2022.

 

Assumption:

 

Pre-modification

  

Post-modification

 

Market price per share

 $0.2052  $0.2052 

Exercise price per share

 $1.27  $1.27 

Risk-free interest rate

  2.62%  3.17%

Remaining contractual term in years

  0.003   0.249 

Volatility

  138.31%  412.67%

Dividend rate

  0.0%  0.0%
         

Number of option shares

  1,322,118   1,322,118 

Weighted average fair value per share

 $0.00  $0.08 

 

During the six months ended September 30, 2022, unvested options to purchase an aggregate of 382,812 shares of our common stock were cancelled due to employee terminations and options to purchase 4,250 shares of our common stock expired unexercised; such options were returned to the 2019 Plan to be available for future issuance. At September 30, 2022, there were stock options outstanding under our 2016 Equity Incentive Plan (the 2016 Plan) and our 2019 Plan to purchase 19,935,327 shares of our common stock at a weighted average exercise price of $1.44 per share. At that date, there were 6,518,829 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 Operating Lease Obligations

 

We account for our leases following the guidance of Accounting Standards Update No. 2016-02,Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 requires that we determine, at the inception of an arrangement, whether the arrangement is or contains a lease, based on the unique facts and circumstances present. Operating lease assets represent our right to use an underlying asset for the lease term (Right-of-use assets) and operating lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and operating lease 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, at inception, that we will exercise that option. The interest rate implicit in lease contracts is typically not readily determinable; accordingly, we use our incremental borrowing rate, which is the rate that would be incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment, based upon the information available at the commencement date. The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation, when determinable, and are recognized in determining our Right-of-use assets. Our operating lease is reflected in the Right-of-use asset – operating lease; Operating lease obligation – current portion; and Operating lease obligation – non-current portion in our Condensed Consolidated Balance Sheets.

 

- 11-

 

 

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. Variable lease payments are amounts owed by us to a lessor that are not fixed, such as reimbursement for common area maintenance costs for our facility lease; and are expensed when incurred.

 

Financing leases, formerly referred to as capitalized leases, are treated similarly to operating leases except that the asset subject to the lease is included in the appropriate fixed asset category, rather than recorded as a Right-of-use asset, and depreciated over its estimated useful life, or lease term, if shorter. Refer to Note 10, Commitments and Contingencies, for additional information regarding ASC 842 and its impact on our Condensed Consolidated Financial Statements.

 

Concentrations of Credit Risk

 

Financial instruments, which potentially subject us to concentrations of credit risk, consist of cash and cash equivalents. Our investment policies limit any such investments to short-term, low-risk instruments. We deposit cash and cash equivalents with quality financial institutions which are insured to the maximum of federal limitations. Balances in these accounts may exceed federally insured limits at times.

 

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.

 

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) prior to its conversion during Fiscal 2022, 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.

 

As a result of our net loss for both 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 September 30,

 
  

2022

  

2021

 
         

Series A Preferred stock issued and outstanding (1)

  -   750,000 
         

Series B Preferred stock issued and outstanding (2)

  -   1,131,669 
         

Series C Preferred stock issued and outstanding (3)

  -   2,318,012 
         

Outstanding options under the Company's Amended and Restated 2016 (formerly 2008) Stock Incentive Plan and 2019 Omnibus Equity Incentive Plan

  19,935,327   15,478,639 
         

Outstanding warrants to purchase common stock

  9,275,858   11,842,104 

Total

  29,211,185   31,520,424 

____________

     

(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. We issued 3,295,778 unregistered shares of our common stock upon conversion of the Series B Preferred in November 2021.

(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. Our only financial assets that are measured on a recurring basis at fair value were $30,116,900 and $65,094,900 held in money market funds and classified as cash equivalents at September 30, 2022 and March 31, 2022, respectively. Our money market funds are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities. We had no financial liabilities that are measured on a recurring basis at fair value at September 30, 2022 or March 31, 2022.

 

Warrants Issued in Connection with Equity Financing

 

We evaluate the appropriate balance sheet classification of warrants we issue as either equity or as a derivative liability. In accordance with ASC 815-40, Derivatives and Hedging-Contracts in the Entitys Own Equity (ASC 815-40), we classify a warrant as equity if it is “indexed to the Company’s equity” and meets several specific conditions for equity classification. A warrant is not considered “indexed to the Company’s equity,” in general, when it contains certain types of exercise contingencies or potential adjustments to its exercise price. If a warrant is not indexed to the Company’s equity or it has net cash settlement that results in the warrants to be accounted for under ASC 480, Distinguishing Liabilities from Equity or ASC 815-40, it is classified as a derivative liability which is carried on the Consolidated Balance Sheet at fair value with any changes in its fair value recognized immediately in the Statement of Operations and Comprehensive Loss. At September 30, 2022 and March 31, 2022, we had both investor warrants and stock-based compensation warrants outstanding that were classified as equity.

 

Recent Accounting Pronouncements

 

We believe the following recent accounting pronouncement is of significance or potential significance to the Company.

 

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 Entitys 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 U.S. GAAP to certain financial instruments with characteristics of liabilities and equity.

 

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 our fiscal year beginning April 1, 2024. 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 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 are not expected to have a material impact on our consolidated financial statements upon adoption.

 

- 13-

 

 

 

Note 4.  Prepaid Expense and Other Current Assets

 

Prepaid expense and other current assets are composed of the following:

 

  

September 30,

  

March 31,

 
  

2022

  

2022

 
         

Clinical and nonclinical materials and contract services

 $413,200  $2,139,600 

Insurance

  879,900   196,500 

Receivable from CRO for cancelled project

  -   337,900 

Receivable from collaboration partner

  154,100   - 

All other

  112,400   71,800 
  $1,559,600  $2,745,800 

 

The amount reported as receivable from CRO for cancelled project at March 31, 2022 represents the amount of prepayments on a cancelled project net of expense incurred by the CRO prior to project cancellation and was refunded to us in July 2022. The amount reported as receivable from collaboration partner at September 30, 2022 represents payments we made to a CRO and another service provider for project and clinical trial services on behalf of our collaboration partner. Our collaboration partner has not reimbursed us for these amounts as of the date of this Report.

 

 

Note 5. Property and Equipment

 

Property and equipment is composed of the following:

 

  

September 30,

  

March 31,

 
  

2022

  

2022

 
         

Laboratory equipment

 $1,380,800  $1,181,300 

Tenant improvements

  214,400   214,400 

Office furniture and equipment

  72,100   76,200 

Manufacturing equipment

  211,200   211,200 
   1,878,500   1,683,100 

Accumulated depreciation and amortization

  (1,319,700)  (1,268,800)

Property and equipment, net

 $558,800  $414,300 

 

We recorded depreciation and amortization expense of $33,300 and $65,600 for the three and six months ended September 30, 2022, respectively, compared to $36,700 and $71,200 for the three and six months ended September 30, 2021, respectively. 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 are as follows:

 

  

September 30,

  

March 31,

 
  

2022

  

2022

 
         

Office equipment subject to financing lease

 $10,600  $14,700 

Accumulated depreciation

  (1,000)  (14,700)

Net book value of office equipment subject to financing lease

 $9,600  $- 

 

The fully-depreciated office equipment reported at March 31, 2022 was subject to a lease that expired in January 2022. That equipment was replaced subject to a new lease in April 2022. The new lease requires a monthly payment of approximately $200 through June 2027.

 

 

Note 6.  Accrued Expense

 

Accrued expense is composed of the following:

 

   

September 30,

   

March 31,

 
   

2022

   

2022

 
                 

Accrued expenses for clinical and nonclinical materials, development and contract services

  $ 821,200     $ 1,070,800  

Accrued compensation

    310,900       66,200  

Accrued professional services

    55,000       159,500  

All other

    1,200       32,700  
    $ 1,188,300     $ 1,329,200  

 

 

- 14-

 

 

 

Note 7. Note Payable

 

The following table summarizes our outstanding notes payable at September 30, 2022 and March 31, 2022.

 

  

September 30, 2022

  

March 31, 2022

 
  

Principal

  

Accrued

      

Principal

  

Accrued

     
  

Balance

  

Interest

  

Total

  

Balance

  

Interest

  

Total

 
                         

3.88% Note payable to insurance premium financing company (current)

 $730,000  $-  $730,000  $-  $-  $- 

 

In May 2022, we executed a 3.88% promissory note in the principal amount of $1,139,700 in connection with certain insurance policy premiums. The note is payable in monthly installments of $105,600, including principal and interest, through April 2023.

 

 

Note 8.  Capital Stock

 

ATM Agreement

 

In May 2021, we entered into an Open Market Sale AgreementSM (the Sales Agreement) with Jefferies LLC, as sales agent (Jefferies), with respect to an at-the-market offering program (the ATM) under which we may, in our sole discretion, offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million (the Shares) through Jefferies. In transactions occurring during September and October 2021, we sold an aggregate of 1,517,798 shares of our common stock and received net cash proceeds of approximately $4.3 million under the ATM. We have not sold any additional shares of our common stock under the ATM from October 2, 2021 through the date of this Report.

 

We record transactions under the Sales Agreement on a settlement date basis. All legal fees and accounting expenses incurred in connection with the Sales Agreement are recorded as Deferred Offering Costs and are amortized to Additional Paid-in Capital as costs of the offering as sales of Shares are made under the Sales Agreement. Between execution of the Sales Agreement in May 2021 and March 31, 2022, we incurred legal fees and accounting expenses aggregating approximately $276,500 in connection with the Sales Agreement. During the six months ended September 30, 2022, we incurred additional legal fees and accounting expenses aggregating $89,600 related to the Sales Agreement. The Sales Agreement will terminate upon the earlier of (i) the sale of all Shares subject to the Sales Agreement or (ii) the termination of the Sales Agreement by Jefferies or by us, as permitted.

 

Stock Option Exercises and Employee Stock Purchase Plan Purchases

 

During the six months ended September 30, 2022, the holders of outstanding stock options exercised such options to purchase an aggregate of 286,000 shares of our common stock and we received cash proceeds of $104,400. Certain of the options were exercised on a net exercise basis and we issued an aggregate of 220,390 shares of our common stock pursuant to the exercises. During the six months ended September 30, 2021, holders of an aggregate of 274,449 shares of our common stock exercised such options and we received cash proceeds of $58,000. Certain of the options were exercised on a net exercise basis and we issued an aggregate of 224,590 shares of our common stock pursuant to the exercises. On June 30, 2022, participants in our 2019 ESPP completed a purchase period pursuant to which we issued 75,000 shares of our registered common stock and received proceeds of $56,100. On June 30, 2021, participants in our 2019 ESPP completed a purchase period pursuant to which we issued 16,251 shares of common stock and received proceeds of $31,600.

 

Warrants Outstanding

 

The following table summarizes warrants outstanding and exercisable as of September 30, 2022 and March 31, 2022. All outstanding warrants are currently exercisable and the weighted average exercise price of such warrants at September 30, 2022 is $1.47 per share.

 

    

Warrants

    

Exercisable and

Exercise

   

Outstanding at

Price

 

Expiration

 

September 30, 2022 

per Share

 

Date 

 

and March 31, 2022

     

$0.50

 

12/9/2022

 

1,000,000

$0.73

 

7/25/2025

 

370,544

$0.805

 

12/31/2022

 

76,859

$1.50

 

12/13/2022

 

6,789,243

$1.70

 

10/5/2022

 

12,162

$1.82

 

3/7/2023

 

880,050

$7.00

 

3/3/2023

 

147,000

     
    

9,275,858

 

 

- 15-

 

 

In May 2020, we filed a Registration Statement on Form S-3 covering the resale of the shares underlying substantially all of the currently outstanding warrants (the Warrant Registration Statement), except those having an exercise price of $7.00 per share. The SEC declared the Warrant Registration Statement effective on May 13, 2020. No outstanding warrant is subject to any down round anti-dilution protection feature. All of the outstanding warrants are exercisable by the holders only by payment in cash of the stated exercise price per share.

 

There have been no warrant exercises during the six months ended September 30, 2022. During the six months ended September 30, 2021, holders of outstanding warrants exercised such warrants to purchase an aggregate of 4,814,545 shares of our common stock and we received cash proceeds of approximately $4,254,800. Unless exercised prior to the expiration dates indicated above, outstanding warrants to purchase an aggregate of 7,878,264 shares of our common stock at a weighted average exercise price of $1.37 will expire on or prior to December 31, 2022.

 

 

Note 9.  Related Party Transactions

 

During the fourth quarter of Fiscal 2022, we entered into a consulting agreement with an independent member of our Board to provide corporate development and public relations advisory services. We recorded expense of $45,000 during the quarter ended March 31, 2022 related to this agreement, all of which was included in accounts payable at that date. The agreement has continued throughout our current fiscal year, during which we recorded expense of $45,000 and $90,000 for the three and six months ended September 30, 2022, respectively, of which $15,000 was included in accrued expense at September 30, 2022. We did not have any related party transactions during the six months ended September 30, 2021.

 

 

Note 10. Commitments and Contingencies

 

We lease our headquarters office and laboratory space in South San Francisco, California under the terms of a lease that was set to expire on July 31, 2022, but which provided an option to renew for an additional five years at then-current market rates. For the purpose of determining the right-of-use asset and associated lease liability, we determined that the renewal of this lease for the period from August 2022 through July 2027 was reasonably probable at the time we adopted ASC 842. On October 14, 2021, we entered into an amendment to the lease (the Lease Amendment), pursuant to which the term of the lease was extended from August 1, 2022 to July 31, 2027 and the base rent under the lease for the five-year extension period was specified. Under the terms of the Lease Amendment, we have the option to renew the lease for an additional five-year term commencing on August 1, 2027. Consistent with our adoption of ASC 842, beginning April 1, 2019, we recorded this lease in our Consolidated Balance Sheet as an operating lease. 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:

 

  

As of

September 30, 2022

  

As of

March 31, 2022

 

Assets

        

Right of use asset – operating lease

 $2,465,700  $2,662,000 
         

Liabilities

        

Current operating lease obligation

 $455,500  $433,300 

Non-current operating lease obligation

  2,371,200   2,605,400 

Total operating lease liability

 $2,826,700  $3,038,700 

 

The following table summarizes the effect of operating lease costs in the Company’s Condensed Consolidated Statements of Operations:

 

  

For the Three Months Ended September 30,

  

For the Six Months Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Operating lease cost

 $213,500  $210,800  $410,700  $446,500 

 

The minimum (base rental) lease payments related to our South San Francisco operating lease are expected to be as follows:

 

Fiscal Years Ending March 31,

    

2023 (remaining six months)

 $338,000 

2024

  689,500 

2025

  710,200 

2026

  731,500 

2027

  753,500 

Thereafter

  253,600 

Total lease expense

  3,476,300 

Less imputed interest

  (649,600

)

Present value of operating lease liabilities

 $2,826,700 

 

- 16-

 

 

The remaining lease term, which does not include the optional five-year extension at the expiration of the lease period ending July 31, 2027, and the discount rate assumption for our South San Francisco operating lease is as follows:

 

  

As of September 30, 2022

 

Assumed remaining lease term in years

  4.83 

Assumed discount rate

  8.54%

 

The interest rate implicit in lease contracts is typically not readily determinable and, as such, we used our estimated incremental borrowing rate based on information available at the adoption of ASC 842, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment.

 

Supplemental disclosure of cash flow information related to our operating lease included in cash flows used by operating activities in the Condensed Consolidated Statements of Cash Flows is as follows:

 

  

For the Six Months Ended

  

For the Six Months Ended

 
  

September 30, 2022

  

September 30, 2021

 

Cash paid for amounts included in the measurement of lease liabilities

 $426,400  $430,700 

 

During the six months ended September 30, 2022, we did not record any new right of use assets arising from new operating lease liabilities.

 

We also lease a small office in the San Francisco Bay Area under a month-to-month arrangement at insignificant cost and have made an accounting policy election not to apply the ASC 842 operating lease recognition requirements to such short-term lease. We recognize the lease payments for this lease in general and administrative expense over the lease term. We recorded rent expense of $3,500 in each of the three-month periods ended September 30, 2022 and 2021 and $7,100 in each of the six-month periods ended September 30, 2022 and 2021, attributable to this lease.

 

 

Note 11. Sublicensing and Collaborative Agreements

 

On June 24, 2020, we entered into a license and collaboration agreement with EverInsight Therapeutics Inc. (EverInsight) Subsequent to entering into this agreement, in October 2020, EverInsight merged with AffaMed Therapeutics, Inc. (AffaMed), which as a combined entity is focusing on developing and commercializing therapeutics to address ophthalmologic and CNS disorders in Greater China (which includes Mainland China, Hong Kong, Macau and Taiwan) and beyond. Accordingly, we are now referring to EverInsight as AffaMed and our June 2020 license and collaboration agreement as the AffaMed Agreement. Under the AffaMed Agreement, we granted AffaMed an exclusive license to develop and commercialize PH94B for SAD and other anxiety-related disorders in Greater China, South Korea and Southeast Asia (which includes Indonesia, Malaysia, Philippines, Thailand and Vietnam) (collectively, the Territory). We retain exclusive development and commercialization rights for PH94B in the U.S. and throughout the rest of the world.

 

Under the terms of the AffaMed Agreement, AffaMed is responsible for all costs related to developing, obtaining regulatory approval of, and commercializing PH94B for treatment of SAD, and potentially other anxiety-related indications, in the Territory. A joint development committee has been established between us and AffaMed to coordinate and review the development and commercialization plans with respect to PH94B in the Territory.

 

We are responsible for pursuing clinical development and regulatory submissions of PH94B for acute treatment of anxiety in adults with SAD, and potentially other anxiety-related indications, in the United States on a “best efforts” basis, with no guarantee of success. AffaMed has the option to participate in a Phase 3 clinical trial of PH94B involving all or a portion of the Territory and will be responsible for a portion of the costs of such a trial, if conducted. We will transfer all development data (nonclinical and clinical data) and our regulatory documentation related to PH94B throughout the term as it is developed or generated or otherwise comes into our control. We will grant to AffaMed a Right of Reference to all of our regulatory documentation and our development data.

 

Under the terms of the AffaMed Agreement, AffaMed agreed to pay us a non-refundable upfront license payment of $5.0 million within 30 business days of the effective date of the AffaMed Agreement, and AffaMed paid the $5.0 million in August 2020. Additionally, upon successful development and commercialization of PH94B in the Territory, we are eligible to receive milestone payments of up to $172.0 million. Further, we are eligible to receive royalty payments on a country-by-country basis on net sales for the later of ten years or the expiration of market or regulatory exclusivity in the jurisdiction, except that payments will be reduced on a country-by-country basis in the event that there is no market exclusivity in the period. Royalty payments may also be reduced if there is generic competitive product in the period.

 

- 17-

 

 

We have determined that we have one combined performance obligation for the license to develop and commercialize PH94B in the Territory and related development and regulatory services. In addition, AffaMed has an option that will create manufacturing obligations for us during development upon exercise by AffaMed. This option for manufacturing services was evaluated and determined not to include a material right.

 

Development and commercialization milestones were not considered probable at inception and therefore were excluded from the initial transaction price. The royalties were excluded from the initial transaction price because they relate to a license of intellectual property and are subject to the royalty constraint.

 

We recognize revenue as the combined performance obligation is satisfied over time using an output method. 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, we recognize revenue on a straight-line basis over the period in which we expect to perform the services.

 

Significant management judgment is required to determine the level of effort attributable to the performance obligation included in the AffaMed Agreement and the period over which we expect to complete our performance obligation under the arrangement. The performance period or measure of progress is estimated at the inception of the arrangement and re-evaluated in subsequent reporting periods. This re-evaluation may shorten or lengthen the period over which we recognize revenue. Due to the failure of PALISADE-1 to meet its primary efficacy endpoint and the resulting anticipated delay in subsequent clinical and regulatory processes for PH94B, at September 30, 2022, we estimated that our performance obligation under the AffaMed Agreement will be completed in mid-calendar 2027 rather than mid-calendar 2024. We will further adjust our estimates, as necessary, in subsequent periods as we obtain additional information on which to base our projections. As described in Note 3, Summary of Significant Accounting Policies, as a result of the change in our estimate of the time required to complete our performance obligation, we recorded a cumulative catch-up adjustment at September 30, 2022 pursuant to which we derecognized $892,500 and $582,500 of previously recognized revenue in the three and six months ended September 30, 2022, respectively, including $310,000 of revenue was recognized in the quarter ended June 30, 2022. Following the cumulative catch-up adjustment, through September 30, 2022, we have recognized an aggregate of $1,615,900 in revenue under the AffaMed Agreement. We recognized $