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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 December 31, 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 February 7, 2023, 219,326,526 shares of the registrant’s common stock, $0.001 par value, were issued and outstanding.

 



 

 

 

 

Vistagen Therapeutics, Inc.

Quarterly Report on Form 10-Q

for the Quarter Ended December 31, 2022

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

   

Item 1. Condensed Consolidated Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022

1

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2022 and 2021

2

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2022 and 2021

3

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended December 31, 2022 and 2021

4

Notes to the Condensed Consolidated Financial Statements

6

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

23

Item 4. Controls and Procedures

45

 

 

PART II. OTHER INFORMATION

 

           

 

Item 1. Legal Proceedings

46

Item 1A. Risk Factors

46

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

81

Item 3. Defaults Upon Senior Secured Securities

81

Item 6. Exhibits

81

   

SIGNATURES

82

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

VISTAGEN THERAPEUTICS, INC.

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Dollars, except share amounts)

 

  

December 31,

  

March 31,

 
  

2022

  

2022

 
  

(unaudited)

  

(Note 2)

 
         

ASSETS

 

Current assets:

        

Cash and cash equivalents

 $25,037,300  $68,135,300 

Prepaid expenses and other current assets

  953,200   2,745,800 

Deferred contract acquisition costs - current portion

  67,000   116,900 

Total current assets

  26,057,500   70,998,000 

Property and equipment, net

  540,700   414,300 

Right-of-use asset - operating lease

  2,364,100   2,662,000 

Deferred offering costs

  411,400   321,800 

Deferred contract acquisition costs - non-current portion

  234,200   146,400 

Security deposits

  100,900   100,900 

Total assets

 $29,708,800  $74,643,400 
         

LIABILITIES AND STOCKHOLDERS EQUITY

 

Current liabilities:

        

Accounts payable

 $1,598,800  $2,758,600 

Accrued expenses

  1,085,200   1,329,200 

Notes payable

  419,100   - 

Deferred revenue - current portion

  712,300   1,244,000 

Operating lease obligation - current portion

  470,400   433,300 

Financing lease obligation - current portion

  1,600   - 

Total current liabilities

  4,287,400   5,765,100 
         

Non-current liabilities:

        

Deferred revenue - non-current portion

  2,492,200   1,557,600 

Operating lease obligation - non-current portion

  2,246,800   2,605,400 

Financing lease obligation - non-current portion

  7,900   - 

Total non-current liabilities

  4,746,900   4,163,000 

Total liabilities

  9,034,300   9,928,100 
         

Commitments and contingencies (Note 10)

          
         

Stockholders’ equity:

        

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

  -   - 

Common stock, $0.001 par value; 325,000,000 shares authorized at December 31, 2022 and March 31, 2022; 207,052,010 and 206,676,620 shares issued at December 31, 2022 and March 31, 2022, respectively

  207,100   206,700 

Additional paid-in capital

  339,060,200   336,080,700 

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

  (3,968,100)  (3,968,100)

Accumulated deficit

  (314,624,700)  (267,604,000)

Total stockholders’ equity

  20,674,500   64,715,300 

Total liabilities and stockholders’ equity

 $29,708,800  $74,643,400 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

 

-1-

 

VISTAGEN THERAPEUTICS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(Amounts in Dollars, except share amounts)

 

   

Three Months Ended

   

Nine Months Ended

 
   

December 31,

   

December 31,

 
   

2022

   

2021

   

2022

   

2021

 

Revenues:

                               

Sublicense revenue

  $ 179,600     $ 357,900     $ (402,900 )   $ 1,070,000  

Total revenues

    179,600       357,900       (402,900 )     1,070,000  

Operating expenses:

                               

Research and development

    6,854,000       7,780,000       35,039,800       23,173,600  

General and administrative

    3,092,100       3,118,100       11,586,200       8,982,300  

Total operating expenses

    9,946,100       10,898,100       46,626,000       32,155,900  

Loss from operations

    (9,766,500 )     (10,540,200 )     (47,028,900 )     (31,085,900 )

Other income, net:

                               

Interest income, net

    5,300       5,100       13,700       15,300  

Loss before income taxes

    (9,761,200 )     (10,535,100 )     (47,015,200 )     (31,070,600 )

Income taxes

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

Net loss and comprehensive loss

    (9,761,200 )     (10,535,100 )     (47,020,700 )     (31,074,000 )
                                 

Accrued dividend on Series B Preferred stock

    -       (208,100 )     -       (945,100 )
                                 

Net loss attributable to common stockholders

  $ (9,761,200 )   $ (10,743,200 )   $ (47,020,700 )   $ (32,019,100 )
                                 

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

  $ (0.05 )   $ (0.05 )   $ (0.23 )   $ (0.16 )

Weighted average shares used in computing

                               

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

    206,838,084       202,328,683       206,749,238       195,179,267  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 

-2-

 

 

VISTAGEN THERAPEUTICS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in Dollars)

 

   

Nine Months Ended December 31,

 
   

2022

   

2021

 

Cash flows from operating activities:

               

Net loss

  $ (47,020,700 )   $ (31,074,000 )

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

               

Depreciation and amortization

    96,200       114,900  

Stock-based compensation

    2,734,900       2,078,700  

Warrant modification expense

    77,400       -  

Amortization of operating lease right-of-use asset

    297,900       462,800  

Expense related to write-off of deferred offering costs

    -       232,000  

Changes in operating assets and liabilities:

               

Prepaid expenses and other current assets

    3,037,900       (2,114,000 )

Operating lease liability

    (321,500 )     (574,300 )

Deferred sublicense revenue, net of deferred contract acquisition costs

    365,000       (969,400 )

Accounts payable and accrued expenses

    (1,509,500 )     2,175,300  

Net cash used in operating activities

    (42,242,400 )     (29,668,000 )
                 

Cash flows from property and investing activities:

               

Purchases of laboratory and other equipment

    (212,000 )     (200,300 )

Net cash used in investing activities

    (212,000 )     (200,300 )
                 

Cash flows from financing activities:

               

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

    104,400       116,000  

Net proceeds from exercise of warrants

    -       6,207,400  

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

    (89,600 )     4,040,100  

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

    63,100       99,500  

Repayment of financing lease obligations

    (1,000 )     (2,800 )

Repayment of note payable

    (720,500 )     -  

Net cash (used in) provided by financing activities

    (643,600 )     10,460,200  

Net decrease in cash and cash equivalents

    (43,098,000 )     (19,408,100 )

Cash and cash equivalents at beginning of period

    68,135,300       103,108,300  

Cash and cash equivalents at end of period

  $ 25,037,300     $ 83,700,200  
                 

Supplemental disclosure of noncash activities:

               

Insurance premiums settled by issuing note payable

  $ 1,139,700     $ -  
Acquisition of office equipment subject to financing lease   $ 10,600     $ -  

Accrued dividends on Series B Preferred

  $ -     $ 945,100  

Accrued dividends on Series B Preferred settled upon conversion by issuance of common stock

  $ -     $ 7,217,800  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

-3-

 

 

VISTAGEN THERAPEUTICS, INC.

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

FOR THE NINE MONTHS ENDED DECEMBER 31, 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  

Accrued dividends on Series B Preferred

    -       -       -       -       -       -       -       -       -       -       (208,100 )     -       -       (208,100 )

Stock-based compensation expense (including ESPP)

    -       -       -       -       -       -       -       -       -       -       723,800       -       -       723,800  

Proceeds from exercise of warrants

    -       -       -       -       -       -       -       -       2,484,246       2,500       1,950,100       -       -       1,952,600  

Net proceeds from issuance of common stock under ATM facility

    -       -       -       -       -       -       -       -       15,420       -       41,300       -       -       41,300  

Conversion of Series C Preferred into common stock

    -       -       -       -       (2,318,012 )     (2,300 )     -       -       2,318,012       2,300       -       -       -       -  

Conversion of Series B Preferred into common stock, including common stock issued in payment of accrued dividends

    -       -       (1,131,669 )     (1,100 )     -       -       -       -       4,427,447       4,400       7,214,500       -       -       7,217,800  

Conversion of Series A Preferred into common stock

    (500,000 )     (500 )     -       -       -       -       -       -       750,000       800       (300 )     -       -       -  

Issuance of common stock upon exercise of options for cash

    -       -       -       -       -       -       -       -       50,000       100       57,900       -       -       58,000  

Sale of common stock pursuant to 2019 Employee Stock

                                                                                                               

Purchase Plan

    -       -       -       -       -       -       -       -       40,960       -       67,800       -       -       67,800  

Net loss for quarter ended December 31, 2021

    -       -       -       -       -       -       -       -       -       -       -       -       (10,535,100 )     (10,535,100 )

Balances at December 31, 2021

    -     $ -       -     $ -       -     $ -       -     $ -       206,644,870     $ 206,600     $ 334,655,000     $ (3,968,100 )   $ (250,915,700 )   $ 79,977,800  

 

 

-4-

 

(Continued)

VISTAGEN THERAPEUTICS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (Continued)

FOR THE NINE MONTHS ENDED DECEMBER 31, 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, 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  

Stock-based compensation expense

    -       -       -       -       -       -       -       -       -       -       746,300       -       -       746,300  

Increase in fair value attributable to warrant modification

    -       -       -       -       -       -       -       -       -       -       77,400       -       -       77,400  

Sale of common stock pursuant to 2019 Employee Stock

                                                                                                               

Purchase Plan

    -       -       -       -       -       -       -       -       80,000       100       6,900       -       -       7,000  

Net loss for quarter ended December 31, 2022

    -       -       -       -       -       -       -       -       -       -       -       -       (9,761,200 )     (9,761,200 )

Balances at December 31, 2022

    -     $ -       -     $ -       -     $ -       -     $ -       207,052,010     $ 207,100     $ 339,060,200     $ (3,968,100 )   $ (314,624,700 )   $ 20,674,500  

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

-5-

 

 

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 the development of therapeutics for certain disorders of the central nervous system (CNS) with the potential to be faster-acting, and with fewer side effects and safety concerns than treatments currently available for those conditions. Our most advanced clinical-stage candidates, PH94B and PH10, may provide relief from multiple forms of anxiety and depression. They belong to a new class of drugs known as pherines. These investigational neuroactive steroids are formulated as nasal sprays at very low concentrations and are designed to achieve rapid-onset anti-anxiety (PH94B) or antidepressant (PH10) effects. We believe these drug candidates directly activate chemosensory neurons located in the nasal passages, which neurons then impact olfactory amygdala “fear off” (anti-anxiety) and “fear on” (antidepressant) 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 anxiety, depression, and other CNS indications where current treatment options are inadequate to meet the needs of millions of patients in the United States (U.S.) and worldwide.

 

Our Product Candidates

 

PH94B Nasal Spray

 

PH94B is a synthetic investigational neuroactive steroid from the androstane family of pherines. When administered intranasally in microgram doses, PH94B activates receptors in the membrane of peripheral nasal chemosensory neurons connected to subsets of neurons in the olfactory bulbs that in turn connect to neurons in the limbic amygdala involved in the pathophysiology of social anxiety disorder (SAD) and potentially other anxiety and mood disorders. PH94B does not exert effects on receptor targets with known abuse potential (e.g., dopamine, nicotinic, and opiate receptors) and has neither agonistic nor antagonistic effects on GABAA α1/β2/γ2 ion channels. PH94B is pharmacologically active without requiring apparent systemic uptake and distribution to achieve its rapid-onset and short duration of anxiolytic effects.  The FDA has designated PH94B as a Fast Track product candidate, and we are currently developing PH94B for the treatment of anxiety symptoms in adult subjects with SAD and for anxiety symptoms in adult subjects with adjustment disorder (AjDA).

 

The proposed MOA of PH94B is fundamentally differentiated from all currently approved anti-anxiety medications, including the three antidepressants approved by the FDA for the treatment of SAD, as well as all benzodiazepines and beta blockers, which, although not FDA-approved for treatment of SAD, are prescribed for treatment of SAD on an off-label basis. 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.

 

PALISADE-1.  In May 2021, we initiated our PALISADE Phase 3 Program for PH94B in SAD with PALISADE-1, a single-administration assessment Phase 3 public speaking challenge clinical study of PH94B for the acute treatment of anxiety in adults with SAD. Following discussions with the FDA in mid-2020 during the early phase of the COVID-19 pandemic, we agreed to design PALISADE-1 in a manner substantially similar to the single-administration assessment Phase 2 public speaking challenge study of PH94B in SAD, which involved self-administration of only a single dose of PH94B by subjects randomized to the treatment arm. All subjects were given an anxiety-provoking public speaking challenge, conducted only in a clinical setting, and their change in Subjective Units of Distress Scale (SUDS) score was determined.

 

In July 2022, we announced top line results from PALISADE-1. Although the safety and tolerability of PH94B in PALISADE-1 were favorable and consistent with previously reported results from previous clinical trials, PALISADE-1 did not achieve its primary efficacy endpoint, as measured by change from baseline using the SUDS as compared to placebo. We believe the following hypotheses are among the potential explanations for the unexpected outcome in PALISADE-1: (i) the study was conducted through surges of the COVID-19 pandemic, introducing significant additional variability in terms of changing social dynamics, subject stress,  study site and CRO personnel turnover, mask wearing, and scheduling and monitoring complexities; (ii) the public speaking challenge study design may not have been scalable to a large Phase 3 study, especially during the pandemic, given the complexities of consistently administering the highly provocative challenge and rigorously adhering to the study protocol across numerous study sites and over an extended time period; and (iii) some subjects in the study may have had reduced potential to respond to PH94B due to impaired olfactory cell function potentially caused by the COVID-19 virus, nasal swab testing for COVID-19 or influenza, and/or heavy cannabis use, smoking or vaping.

 

- 6-

 
 

PALISADE-2.  In October 2021, we initiated PALISADE-2, which involves the same clinic-based public speaking challenge study design and use of the SUDS as the primary efficacy endpoint as PALISADE-1. 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, without revealing the underlying data to us. In addition, we recently submitted to the FDA various adjustments to the PALISADE-2 study protocol. Should we opt to resume PALISADE-2, the proposed amendments address certain methodological issues we believe may have contributed to the unexpected outcome of PALISADE-1.

 

In December 2022, two of our peer biopharmaceutical companies announced that the top line results of their recently completed SAD studies using the single assessment public speaking challenge study design, with SUDS as the primary efficacy endpoint, also did not achieve their primary efficacy endpoint in their respective study.  Upon reviewing the information and data available to us at this time, we believe it is not yet advisable to make a decision about resuming PALISADE-2 before discussing our broader Phase 3 development plan for PH94B with the FDA and further assessing potential impact of the proposed adjustments to the PALISADE-2 protocol in light of the recent results of SAD studies by our peers involving the public speaking challenge methodology. We are currently preparing to meet with the FDA to discuss that plan, which includes, among other things, a multiple-assessment, randomized, double-blind, placebo-controlled Phase 3 study of PH94B in adults, using the LSAS as the primary efficacy outcome measure to evaluate the efficacy of PH94B over time in patients with SAD to support a potential New Drug Application (NDA). We expect to announce our plans for PALISADE-2 concurrently with other updates to our PH94B Phase 3 development plan for SAD.

 

PALISADE Open Label Study.     The long-term administration of 3.2 µg of PH94B up to four times a day as needed in the PALISADE Open Label Study (PALISADE OLS) was safe, well tolerated, and led to improvement in LSAS scores.  The PALISADE OLS was a Phase 3, open-label safety trial designed to evaluate the safety and tolerability of multiple, as-needed administrations (up to four times a day) of PH94B in adults with SAD. This study also evaluated the change from baseline in monthly standard clinical measurements and behavioral assessment scales (LSAS, CGI-S, CGI-I, and PGI-C) in response to anxiety-provoking social situations in daily‑life after the administration of PH94B. Safety and tolerability of PH94B were assessed and summarized during monthly visits from baseline to end of treatment in AEs, laboratory values, 12‑lead electrocardiograms (ECGs), physical examinations, and vital sign assessments following exposure to PH94B. Following the completion of PALISADE-1, PALISADE OLS was terminated early, solely for strategic business reasons, and not due to any safety concerns with PH94B. We believe unpublished preliminary data from the final dataset from PALISADE OLS provide evidence to further support the safety and efficacy of PH94B for treating SAD, as measured by AE frequency and improvement in SAD severity as measured by the LSAS, CGI-I, and PGI-C, respectively.  Overall, we believe the long-term administration of 3.2 µg of PH94B, up to four times a day as needed, appears to be safe and well tolerated in adult subjects with SAD. 

 

Potential Next Steps in SAD Phase 3 Development Plan.  We believe data from approximately 400 subjects in the PALISADE OLS over a period of one month and beyond, combined with the data from the previous Phase 2 randomized, double-blind, placebo-controlled, crossover study of PH94B after two weeks of use, as discussed above, demonstrate the potential for PH94B to achieve robust overall reduction in symptoms of SAD and improvement in severity of the disorder over time, as measured by the LSAS. These data also appear to suggest that studies involving multiple administrations of PH94B over time on an as-needed basis, up to four times per day, when subjects experience daily, real-life, socially stressful situations may most accurately reflect the true efficacy of PH94B in patients with SAD and represent the actual way in which they would use PH94B. Utilizing the LSAS as the primary efficacy outcome measure in our next Phase 3 study is consistent with the pivotal registration trials for all three currently approved treatments for SAD. As those studies indicate, the LSAS is capable of measuring a drug’s efficacy in patients with SAD due to its ability to capture patient feedback on fear and anxiety regarding various social situations, as well avoidance of such situations. Hence, we believe using the LSAS as the primary efficacy endpoint for our further Phase 3 development of PH94B has the potential to demonstrate its efficacy and true impact on patients’ lives.

 

Accordingly, we are preparing to meet with the FDA to discuss our broader Phase 3 development plan for PH94B in SAD, which plan includes, among other things, the possibility of conducting a multiple-assessment, randomized, double-blind, placebo-controlled Phase 3 study of PH94B in adults, using the LSAS as the primary efficacy outcome measure to evaluate the efficacy of PH94B over time in patients with SAD to support a potential PH94B New Drug Application (NDA). Unlike the PALISADE Phase 3 studies, which involved assessment of only a single self-administration of PH94B in a clinic-based public speaking challenge with the SUDS as the primary outcome measure, the Phase 3 study contemplated as part of our broader plan would involve multiple self-administrations of PH94B, on an as-needed basis, up to four times per day, in a real-world setting over a multiple week period, with the LSAS as the primary efficacy endpoint, consistent with the FDA’s precedent-setting approvals of the three antidepressants for treatment of SAD. Given that LSAS measures overall improvement in disease severity by measuring the reduction in fear and anxiety over time, as well as the avoidance of anxiety-provoking social and performance situations, as noted, we believe the LSAS will be appropriate to measure and reflect the true impact of PH94B on patients’ lives.

 

- 7-

 

Exploratory Phase 2A Development for AjDA and Future Development Opportunities.  In January 2023, we completed our small exploratory Phase 2A clinical study of PH94B, designed to assess its therapeutic potential in adults experiencing adjustment disorder with anxiety (AjDA). Adjustment disorder (AjD) refers to a maladaptive emotional or behavioral response to an identifiable stressor. AjD occurs within three months of exposure to the stressor as evidenced by marked distress that is out of proportion to the socially or culturally expected reactions to the stressor, or that represents significant impairment in social, occupational or other important areas of daily functioning. Current pharmacological treatments for AjDA vary widely and include antidepressants (SSRIs and SNRIs), benzodiazepines, buspirone and natural products such as cannabidiol. Our randomized, double-blind, placebo-controlled exploratory Phase 2A study in AjDA involved daily use of PH94B administered four times per day in a real-world outpatient setting for 28 days. We anticipate top line results by the end of the first calendar quarter of 2023. We may also have potential opportunities to develop PH94B for other anxiety-related disorders.

 

PH10

 

PH10 is an investigational pherine nasal spray for the treatment of major depressive disorder (MDD) with a potential rapid-onset MOA that is fundamentally differentiated from the MOA of all currently approved treatments for MDD and other 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 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 December 2022, we announced that the FDA granted Fast Track designation for PH10 as a potential treatment for MDD.

 

In a small (n=30) exploratory randomized, double-blind, placebo-controlled parallel design Phase 2A study 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). Peer-reviewed results of the study published in the British Journal of Pharmaceutical and Medical Research (Monti, et al., Br J Phar Med Res (2019) 4(06):21572168) also showed that 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.

 

Following the submission of a U.S. Investigational New Drug (IND) application for a Phase 1 study of PH10 in the U.S. in healthy volunteers, in December 2022, we were advised by the FDA that we may proceed with the study. The primary objective of this U.S. single center, Phase 1, randomized, double-blinded, placebo-controlled study is to investigate the safety and tolerability of PH10 in healthy adult subjects (n=12). In January 2023, we announced that the first cohort of healthy volunteers had been dosed in the Phase 1 study and we anticipate completion of the study by the end of the first calendar quarter of 2023.

 

AV-101

 

AV-101 (4-chlorokynurenine) 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 NMDA receptor (NMDAR) that inhibits the function of the NMDAR. Unlike ketamine and 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 several other modulators of 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 and expect to complete dosing of the final cohort in the study in the first half of 2023.

 

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.

 

- 8-

 

Subsidiaries

 

VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem (VistaStem), is our wholly owned subsidiary. For the relevant periods, our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report) also include the accounts of VistaStem’s two wholly owned inactive subsidiaries, Artemis Neuroscience, Inc., a Maryland corporation (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 of America (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 three and nine months ended December 31, 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 $314.6 million accumulated from inception ( May 1998) through December 31, 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 December 31, 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 Collaborative Agreements. The financings and other transactions consummated during Fiscal 2022 and Fiscal 2021 have provided the primary sources of our liquidity during Fiscal 2022 and through the date of this Report in our current fiscal year. During the nine months ended December 31, 2022, we have received approximately $167,500 in proceeds from the exercise of outstanding stock options and sales under our 2019 Employee Stock Purchase Plan (the 2019 ESPP).

 

We had cash and cash equivalents of approximately $25.0 million at December 31, 2022, which we believe will not be sufficient to fund our planned operations for the twelve months following the issuance of these Condensed Consolidated Financial Statements, which raises substantial doubt regarding our ability to continue as a going concern. We are continuing to evaluate our cash resources as we prepare for further discussions with the FDA regarding the next steps in our late-stage development of PH94B for the treatment of SAD, collect and analyze topline results from our exploratory Phase 2A clinical study of PH94B in adults experiencing AjDA, conduct the small Phase 1 clinical safety study of PH10 to facilitate potential Phase 2B development, on our own or with a collaborator, as a potential stand-alone rapid-onset treatment for MDD and conduct our Phase 1 safety study of AV-101 in combination with probenecid to facilitate potential exploratory Phase 2A development of AV-101. We are continuing to evaluate the potential  implications for the conduct and timing of other clinical trials and strategies for the development and commercialization, on our own or with collaborators, of 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 obtain and invest substantial additional capital resources to develop and commercialize our drug candidates.

 

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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 partnering 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 only to development and commercialization of PH94B in Greater China, South Korea and Southeast 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 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 financing transactions and research, development and commercialization collaborations on terms acceptable to us. In the future, to further advance the clinical development of our product candidates, as well as support our operating activities, we plan to seek additional financing, including both equity-based capital from non-dilutive sources, and 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 development and commercialization collaboration under the AffaMed Agreement or other strategic partnering collaborations will generate revenue from future potential milestone payments or otherwise. 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 by March 6, 2023, the expiration of the 180-day period in which to regain compliance, unless extended, 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 our stockholder-authorized reverse stock split to maintain our listing, and/or impair our ability to raise capital through alternative financing sources on terms acceptable to us, or at all. If we do not regain compliance by  March 6, 2023, an additional 180 days may be granted to regain compliance, so long as we meet the Nasdaq Capital Market continued listing requirements (except for the bid price requirement) and notify Nasdaq in writing of our intention to cure the deficiency during the second compliance period by implementing a reverse stock split, if necessary. If we do not qualify for the second compliance period or fail to regain compliance during the second 180-day period, then Nasdaq will notify us of its determination to delist our common stock, at which point we will have an opportunity to appeal the delisting determination to a hearings panel. If we are unable to regain timely compliance with the Nasdaq continued listing standards and/or 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.

 

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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 an as needed 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 nine months ended December 31, 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 (ASC) 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 ASC 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 ASC 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.

 

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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. We recognized $179,600 of revenue during the quarter ended December 31, 2022. Following the cumulative catch-up adjustment, through December 31, 2022, we have recognized an aggregate of $1,795,500 in revenue under the AffaMed Agreement and, at that date, we have recorded $3,204,500 as deferred revenue. The following table presents changes in our contract liabilities for the nine months ended December 31, 2022 after giving effect to the cumulative catch-up adjustment:

 

  

Balance at

          

Balance at

 
  

March 31, 2022

  

Additions

  

Deductions

  

December 31, 2022

 

Deferred Revenue - current portion

 $1,244,000  $-  $(531,700) $712,300 

Deferred Revenue - non-current portion

  1,557,600   1,114,200   (179,600)  2,492,200 

Total

 $2,801,600  $1,114,200  $(711,300) $3,204,500 

 

During the three and nine months ended December 31, 2022, we recognized $179,600 of revenue and derecognized $402,900 of revenue, respectively, related to the AffaMed Agreement as a result of the cumulative catch-up adjustment, compared to recognizing $357,900 and $1,070,000 of revenue for the three and nine months ended December 31, 2021, respectively.

 

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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 Sheets. 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 Statements 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. We recognized expense of $16,900 during the quarter ended December 31, 2022, resulting in a net expense reversal of $37,900 for the nine months ended December 31, 2022. We recorded expense of $33,600 and $100,600 for the three and nine months ended December 31, 2021, respectively. There has been no impairment loss in relation to the costs capitalized.

 

The following table summarizes our contract acquisition costs for the nine months ended December 31, 2022 after giving effect to the cumulative catch-up adjustment.

 

  

Balance at

          

Balance at

 
  

March 31,

2022

  

Additions

  

Deductions

  

December 31,

2022

 

Deferred Contract Acquisition Costs - current portion

 $116,900  $-  $(49,900) $67,000 

Deferred Contract Acquisition Costs - non-current portion

  146,400   87,800   -   234,200 

Total

 $263,300  $87,800  $(49,900) $301,200 

 

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.

 

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The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss:

 

  

Three Months Ended December 31,

  

Nine Months Ended December 31,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Research and development expense

 $296,200  $281,800  $1,091,900  $836,200 

General and administrative expense

  450,100   442,000   1,643,000   1,242,500 

Total stock-based compensation expense

 $746,300  $723,800  $2,734,900  $2,078,700 

 

Expense amounts reported above include $9,500 and $34,900 in research and development expense for the three and nine months ended December 31, 2022, respectively, and $4,100 and $13,100 in general and administrative expense for the three and nine months ended December 31, 2022, respectively, attributable to employee participation in our 2019 ESPP. Expense amounts reported above include $14,400 and $31,100 in research and development expense for the three and nine months ended December 31, 2021, respectively, and $6,000 and $14,600 in general and administrative expense for the three and nine months ended December 31, 2021, respectively, attributable to employee participation in our 2019 ESPP.

 

During the nine months ended December 31, 2022, we granted from our 2019 Omnibus Equity Incentive Plan (the 2019 Plan) options to purchase an aggregate of 4,162,000 shares of our common stock, including options to purchase 2,900,000 shares granted to all of our employees except executive officers and members of our Board of Directors (Board) in November 2022, at exercise prices equal to the closing market price of our common stock on the date of grant. 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 th