Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K (Report) includes forward-looking statements. All statements contained in this Report other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words “believe,”“may,”“estimate,”“continue,”“anticipate,”“intend,”“expect” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Our business is subject to significant risks including, but not limited to, our ability to obtain substantial additional financing, the results of our research and development efforts, the results of nonclinical and clinical testing, the effect of regulation by the U.S. Food and Drug Administration (FDA) and other domestic and foreign regulatory agencies, the impact of competitive products, product development and technological difficulties, the effect of our accounting policies, and other risks as detailed in the section entitled “Risk Factors” in this Report.Further, even if our product candidates appear promising at various stages of development, our share price may decrease such that we are unable to raise additional capital without significant dilution or other terms that may be unacceptable to our management, Board of Directors (Board) and stockholders.

Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management or Board to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of these forward-looking statements after the date of this Report or to conform these statements to actual results or revised expectations. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

Business Overview

We are a late clinical-stage biopharmaceutical company aiming to transform the treatment landscape for individuals living with anxiety, depression and other CNS disorders. We are advancing therapeutics with the potential to be faster-acting, and with fewer side effects and safety concerns, than those currently available for treating anxiety, depression and multiple CNS disorders. Our pipeline includes six clinical-stage product candidates, including five investigational agents belonging to a new class of neuroactive drugs known as pherines, in addition to AV-101, an oral prodrug of an antagonist of the glycine site of the N-methyl-D-aspartate receptor (NMDAR). Pherines, administered as nasal sprays, are designed with an innovative rapid-onset mechanism of action that activates chemosensory neurons in the nasal cavity and can selectively and beneficially impact key neural circuits in the brain without requiring systemic uptake or direct activity on CNS neurons. AV-101 inhibits the activity of the ion channel of the NMDAR but does not block it, unlike some approved NMDAR antagonists having significant side effects.

Our goal is to develop and commercialize, on our own and with multiple global and regional strategic partners, 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 U.S. and worldwide. First and foremost, we are passionate about transforming mental health care and redefining what is possible in the treatment of anxiety and depression disorders – One Mind at a TimeTM.

Our Product Candidates

Pherine Product Candidates

Five of our product candidates – fasedienol (PH94B), itruvone (PH10), PH15, PH80 and PH284 – belong to a new class of synthetic neuroactive steroids referred to as pherines. Pherines, which are administered in ultra-low microgram level doses as odorless and tasteless nasal sprays, are designed to selectively engage chemosensory neurons in the nasal cavity and induce rapid-onset pharmacologic and behavioral benefits. Specifically, each of our pherine product candidates is a distinct chemical entity that selectively modulates particular areas of the brain, such as the limbic amygdala (the main fear and anxiety center of the brain), the hypothalamus, the hippocampus, the locus ceruleus, and the prefrontal cortex. We believe each of our pherine product candidates has the potential to be a fast-acting therapy for one or more CNS disorders, including social anxiety disorder (fasedienol), major depressive disorder (itruvone), cognitive impairment (PH15), vasomotor syndrome (hot flashes) due to menopause, as well as migraine headaches (PH80) and disorders related to appetite loss (cachexia) (PH284), all without requiring apparent systemic uptake or binding to classic abuse liability receptors or steroidal hormone receptors.

Fasedienol Nasal Spray

Fasedienol (PH94B) is a synthetic investigational pherine from the androstane family in Phase 3 clinical development in the U.S. for treatment of social anxiety disorder (SAD). When administered intranasally in microgram doses, fasedienol activates receptors 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 SAD and potentially other anxiety and mood disorders. Fasedienol is pharmacologically active without requiring apparent systemic uptake and distribution of the compound to the brain to achieve its rapid-onset and short duration of anxiolytic effects.

The proposed MOA of fasedienol 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 the treatment of SAD, are prescribed for treatment of SAD on an off-label basis. Pre-clinical and Phase 2 clinical studies completed to date suggest that fasedienol 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 drug-drug interactions, abuse, misuse and addiction associated with certain other systemic pharmaceuticals that act directly on the CNS and are sometimes prescribed for anxiety disorders.

SAD PALISADE Phase 3 Program

PALISADE-1. In May 2021, we initiated our PALISADE Phase 3 Program for fasedienol in SAD with PALISADE-1, a single-administration assessment Phase 3 public speaking challenge clinical study of fasedienol for the acute treatment of anxiety in adults with SAD. Following discussions with the FDA in mid-2020 during the acute 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 fasedienol, which involved self-administration of only a single dose of fasedienol 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 a SUDS score was determined.

In July 2022, we announced top line results from PALISADE-1. Although the safety and tolerability of fasedienol 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 potential explanations for the unexpected outcome in PALISADE-1: (i) the study was conducted during the acute phase of the COVID-19 pandemic, introducing significant systemic variability in terms of changing social dynamics, subject stress, study site and CRO personnel turnover and mask wearing regulations; (ii) given the foregoing, the public speaking challenge study design may not have been scalable to a large Phase 3 study, particularly during the acute phase of the COVID-19 pandemic; and (iii) some subjects in the study may have had reduced potential to respond to fasedienol due to impaired olfactory cell function potentially caused by the COVID-19 virus, nasal swab testing for COVID-19, RSV or influenza, and/or heavy cannabis use, smoking or vaping.

PALISADE-2.In October 2021, near the end of the acute phase of the COVID-19 pandemic, we initiated PALISADE-2, which involved the same clinic-based, single-administration assessment 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.

Although the results of the interim analysis of PALISADE-2 indicated that continuation of the study would not be futile, after considering the expense, time, and challenges associated with PALISADE-1, as well as the potential methodological complexities involved in resuming PALISADE-2, we closed the PALISADE-2 study. Topline results from the 140 subjects who completed PALISADE-2 are expected in the second half of 2023.

PALISADE Open Label Study. 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 fasedienol in adults with SAD. The PALISADE OLS also evaluated the change from baseline in monthly standard clinical measurements and behavioral assessment scales (LSAS, CGI-I, and PGI-C) in response to anxiety-provoking social situations in daily‐life after the administration of fasedienol. The key exploratory efficacy endpoint in the study included evaluation of the change from baseline on the LSAS, which measures SAD patients’ response to anxiety-provoking social and performance situations experienced in their daily lives. Following the completion of PALISADE-1, we terminated the PALISADE OLS early, solely for strategic business reasons, and not due to any safety concerns with fasedienol.

Safety and tolerability of fasedienol 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 fasedienol. Long-term administration of 3.2 μg of fasedienol, as-needed up to four times per day, was safe and well-tolerated, with no new safety findings or trends identified, regardless of the number of doses administered by each subject (safety population: n=481). Headache was the most common treatment-emergent adverse event (TEAE) (17.0%), and, except for COVID-19 TEAEs (11.4%) which were not considered related to fasedienol, no other TEAE occurred in more than 5.0% of subjects. Over 30,000 doses of fasedienol were administered by patients during the study, with a mean duration of four months and a maximum study duration of over ten months.

The final data set from PALISADE OLS demonstrates clinically meaningful functional improvement, as measured by the LSAS, and total LSAS scores, in both men and women, continued to decline in consecutive months during the study, as follows:

● After 1 month, the mean reduction on the LSAS was 16 points (n=385);

● After 2 months, the mean reduction on the LSAS was 20 points (n=324); and

● After 3 months, the mean reduction on the LSAS was 24 points (n=218).

For subjects who continued in the study, total LSAS scores continued to decline from baseline, with improvements observed each month on the LSAS through nine months. The continued improvement in LSAS scores is indicative of the therapeutic potential of multiple, patient-tailored, as-needed administrations of fasedienol over time to help patients build confidence to engage in anxiety-provoking social and performance situations in their daily lives more frequently and with less fear and anxiety.

In addition, the CGI-I results indicated 43% of the 218 patients assessed after three months were “much” or “very much” improved, and PGI-C results indicated 44% of the 218 patients assessed after three months considered themselves “much” or “very much” improved.

FDA Feedback on Path Forward; FEARLESS-1.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 fasedienol after two weeks of use, as discussed above, demonstrate the potential for fasedienol 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 fasedienol 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 fasedienol in patients with SAD and represent the actual way in which they would use fasedienol, if approved. 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 fasedienol has the potential to demonstrate its efficacy and true impact on patients’ lives.

In the first quarter of calendar 2023, we met with the FDA to discuss next steps in our Phase 3 development plan for fasedienol in SAD, which plan includes, among other things, conducting, on our own or with collaborators, a multiple-assessment, randomized, double-blind, placebo-controlled Phase 3 study of fasedienol in adults in a real-world setting, using the LSAS as the primary efficacy outcome measure to evaluate the efficacy of fasedienol over time in patients with SAD to support a potential fasedienol New Drug Application (NDA). Positive feedback from the FDA at this meeting confirmed the acceptable use of the LSAS as a primary efficacy endpoint. Accordingly, we are positioned to finalize key components of FEARLESS, our potential NDA-enabling Phase 3 development program for fasedienol for treatment of SAD.

Unlike the PALISADE Phase 3 studies, which involved assessment of only a single, self- administered dose of fasedienol in a clinic-based public speaking challenge using the SUDS as the primary outcome measure, our FEARLESS program will assess multiple administrations of fasedienol, on a patient-tailored as-needed basis, up to six 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 three precedent-setting approvals of antidepressants for treatment of SAD. Dr. Michael R. Liebowitz, a Columbia University psychiatrist, former director and founder of the Anxiety Disorders Clinic at the New York State Psychiatric Institute and current Managing Director of The Medical Research Network LLC in New York City, is the innovator of the LSAS and will be the Principal Investigator for our FEARLESS program in SAD.

Exploratory Phase 2A Study in AjDA and Future Development Opportunities. During the acute phase of the COVID-19 pandemic, we conducted a small exploratory Phase 2A clinical study of fasedienol designed to assess its therapeutic potential in adults experiencing adjustment disorder with anxiety (AjDA). Adjustment disorder (AjD) occurs within three months of exposure to a 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. Our small exploratory study in AjDA is believed to be the first ever randomized, double-blind, placebo-controlled Phase 2A study in the U.S. aimed at exploring the pharmacological treatment of AjDA, and the first clinical trial that evaluated the effects of a fixed dosing regimen of fasedienol, involving intranasal administration of 3.2 μg of fasedienol four times per day over four weeks. A total of 71 subjects were screened for the study, 41 were randomized, 7 discontinued, and 34 completed four weeks of treatment. The study, which was not designed to achieve statistical significance, did not demonstrate a clinically significant difference between fasedienol and placebo as measured on the clinician-rated Hamilton Anxiety Scale (HAM-A). Site variances and both a high drug response rate and high placebo response rate were observed, likely related to the various aspects of AjDA that make it a challenging indication to study. The study of AjDA is complicated because the disorder is, by definition, temporary and self-resolving, making it difficult to identify the cause of clinical improvement or whether placebo played a role in any improvement observed. AjDA is a temporary stress reaction. The stress reaction typically starts within three months of an identifiable stressful situation, but because the disorder is directly linked to a stressor, once the stressor ends, the anxiety reaction may also end, with or without treatment.

Fixed dosing of fasedienol four times per day, over four weeks, was well tolerated, with no appreciable differences in TEAEs between fasedienol and placebo. All reported TEAEs were of mild or moderate severity, with no severe or serious TEAEs reported during the study. Headache was the most commonly reported TEAE, reported by 3 subjects (15.8%) on fasedienol and 2 subjects (9.1%) on placebo.

Despite the methodological challenges inherent in the exploratory Phase 2A study in AjDA, we believe fasedienol builds resilience against anxiety and reduces the cognitive and physical paralysis that occurs during moments of heightened anxiety and stressful situations. Results of the AjDA study may provide support for an as-needed fasedienol dosing approach over time as the preferred mode of treatment.

We may also have potential opportunities to explore the development of fasedienol for other anxiety-related disorders, including postpartum anxiety, post-traumatic stress disorder, panic disorder, and procedural anxiety.

Itruvone Nasal Spray

Itruvone (PH10) is an odorless, tasteless synthetic investigational pherine from the pregnane family with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for depression disorders. Itruvone, which is administered as a nasal spray at microgram-level doses, is designed to engage and activate chemosensory neurons in the nasal cavity, which are connected to neural circuits in the brain that produce antidepressant effects. Specifically, in a manner similar to fasedienol, itruvone’s proposed MOA involves the regulation of the olfactory-amygdala 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, including both intravenous ketamine and intranasal ketamine (esketamine), we believe itruvone does not require systemic uptake and distribution of the compound to the brain to produce rapid-onset of antidepressant effects. In all clinical studies completed to date, itruvone has been well-tolerated and has not caused psychological side effects (such as dissociation and hallucinations) or other safety concerns that may be associated with ketamine-based therapy.

In January 2023, we launched a small U.S. single center, randomized, double-blinded, placebo-controlled Phase 1 study to investigate the safety and tolerability of itruvone in healthy adult subjects (n=12). The study was designed to confirm the favorable safety profile of itruvone established in three previous clinical studies conducted in Mexico, as well as facilitate our plans for Phase 2B development of itruvone in the U.S. as a fast-acting stand-alone treatment for MDD. In June 2023, we announced positive data from this study. There were no reported SAEs or discontinuations due to adverse events in the trial. Two AEs were reported during the treatment period, fatigue and headache, which occurred in the same subject. Both AEs resolved without sequelae and were mild in severity. Following itruvone administration, there were no clinically significant findings in ECGs, vital signs, and laboratory parameters. Overall, itruvone was well-tolerated and continued to demonstrate a favorable safety profile.

The FDA has granted Fast Track designation for development of itruvone as a potential adjunctive treatment for MDD.

PH80 Nasal Spray

PH80 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for both vasomotor symptoms (hot flashes) due to menopause and migraine headaches. PH80, which is administered as a nasal spray at microgram-level doses, engages and activates chemosensory neurons in the nasal cavity, which are connected to neural circuits in the brain that modulate neural circuits in the basal forebrain associated with the control of body temperature, as well as premonitory and aura symptoms of migraines. Results from a previously unpublished exploratory randomized, double-blind, placebo-controlled Phase 2A study of PH80 for the acute treatment of vasomotor symptoms (hot flashes) due to menopause demonstrated a statistically significant reduction in the daily number of menopausal hot flashes compared to placebo at the end of the first week of treatment (p<.001), and the improvement was maintained through each treatment week until the end of the four-week treatment period. We are currently preparing, on our own or with collaborators, to submit an U.S. IND for a Phase 2B clinical study of PH80 as a treatment for hot flashes due to menopause.

In addition, PH80 initiates neural impulses in the olfactory bulb transmitted by pathways that rapidly affect the function of multiple structures in the brain, including the amygdala and hypothalamus that have been linked to the pathology of migraine. Due to its MOA and a small proof of concept study, we believe PH80 may have therapeutic potential to relieve premonitory and aura symptoms of migraines.

PH15 Nasal Spray

PH15 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments to improve cognitive impairment caused by mental fatigue and potentially other disorders. Early functional MRI studies in human volunteers at Stanford University revealed that intranasal administration of PH15 induced rapid activation of brain areas related to cognition (Sobel et al, Brain, 1999). In a small double blind, placebo-controlled study Phase 2 study of human subjects who were sleep deprived to induce mental fatigue, intranasal PH15 showed rapid and significant improvement in cognitive and psychomotor performance and improvement of reaction time that was better than the effect of a placebo and 400 mg of oral caffeine. We are currently evaluating the path forward to submitting an U.S. IND for a Phase 2 clinical study, on our own or with collaborators, and the appropriate indication for demonstrating improvement of cognitive function.

PH284 Nasal Spray

PH284 is an odorless, tasteless synthetic investigational pherine with a novel, rapid-onset potential MOA that is fundamentally differentiated from the MOA of all currently approved treatments for the loss of appetite associated with chronic disorders such as cancer. Cachexia is a serious but under recognized consequence of many chronic diseases with body mass loss of >10% and a prevalence of 5 to 15 %. We believe PH284 may have therapeutic potential for improving subjective feelings of hunger in patients with cachexia. We are currently evaluating the path forward to submitting an U.S. IND for cachexia, on our own or with collaborators, and the appropriate patient populations for demonstrating increase in appetite and weight gain in a second Phase 2 study.

AV-101

AV-101 (4-Cl-KYN) is a novel, oral prodrug that targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. The active metabolite of AV-101, 7-chloro-kynurenic acid (7-Cl-KYNA), is a potent and selective full antagonist of the glycine binding 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. In clinical and nonclinical testing completed to date, AV-101 has demonstrated good oral bioavailability and an excellent pharmacokinetic (PK) profile. No binding of AV-101 or 7-Cl-KYNA to off-site targets was identified by an extensive receptor screening study. Moreover, in all clinical trials completed to date, AV-101 has been safe and very well-tolerated with no psychological side effects or safety concerns and no treatment-related serious adverse events that are often observed with classic channel-blocking NMDAR antagonists such as ketamine and amantadine. Nonclinical results also indicate that chronic administration of 4-Cl-KYN induces hippocampal neurogenesis, a hallmark of drugs that have antidepressive effects, and increases endogenous levels of KYNA, which also is a functional NMDAR glycine site antagonist.

Based on observations and findings from preclinical studies, we believe AV-101 has the potential to become a new oral treatment alternative for multiple CNS disorders. We are currently preparing for Phase 2A development of AV-101, on our own or with collaborators, as a treatment for one or more neurological disorders involving the NMDAR receptor. Multiple studies have shown AV-101 to be safe and well-tolerated, and a range of preclinical studies indicate potential in multiple indications, including levodopa-induced dyskinesia, neuropathic pain, seizures, MDD, and suicidal ideation.

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.

Acquisition of Pherin Pharmaceuticals, Inc.

On December 20, 2022, we entered into an Agreement and Plan of Merger (the Merger Agreement) along with VTGN Merger Sub, Inc., our wholly owned subsidiary (Merger Sub), Pherin Pharmaceuticals, Inc. (Pherin), and Kevin McCarthy in his capacity of Stockholder Representative, to acquire Pherin (the Pherin Acquisition). On February 2, 2023 (the Closing Date), we completed the Pherin Acquisition and Pherin is now a wholly owned subsidiary of the Company. Immediately prior to the consummation of the Pherin Acquisition, each of Pherin’s directors and officers resigned, and no employees or other affiliates of Pherin on the Closing Date are serving or will serve in their previous roles or in any other capacity with Pherin or with the Company.

As consideration for the Pherin Acquisition, we (i) issued an aggregate of 413,670 unregistered shares of our common stock to the exchange agent for the Pherin Acquisition, which shares were issued to approximately 96.07% of Pherin stockholders eligible to receive common stock in exchange for their outstanding shares of Pherin common stock (the Stock Consideration), and (ii) paid to the exchange agent for the Pherin Acquisition, an aggregate of approximately $126,100 for the approximately 3.93% remaining Pherin stockholders who were not eligible to receive Stock Consideration in exchange for their outstanding shares of Pherin common stock (the Cash Consideration and, together with the Stock Consideration, the Merger Consideration). We have accounted for the Pherin Acquisition as an asset acquisition.

Following the completion of the Pherin Acquisition, we now have full ownership of intellectual property rights to fasedienol and itruvone, as well as PH15, PH80 and PH284.

Critical Accounting Policies and Estimates

We consider certain accounting policies related to revenue recognition, determination of right-of-use assets under lease transactions and related lease obligations, impairment of long-lived assets, research and development, stock-based compensation, warrant liability and income taxes to be critical accounting policies that require the use of significant judgments and estimates relating to matters that are inherently uncertain and may result in materially different results under different assumptions and conditions. The preparation of financial statements in conformity with United States generally accepted accounting principles (U.S. GAAP) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes to the consolidated financial statements. These estimates include, but are not limited to, those relating to stock-based compensation, revenue recognition, research and development expenses, determination of right-of-use assets under lease transactions and related lease obligations, and the assumptions used to value warrants, warrant modifications, and useful lives for property and equipment and related depreciation calculations. Our actual results could differ from these estimates.

Revenue Recognition

The AffaMed Agreement, involving clinical development and commercialization of fasedienol 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 the basis of our reported revenue for both our fiscal year ending March 31, 20232 (Fiscal 2023) and 2022 (Fiscal 2022). In prior years, we occasionally generated revenue from collaborative research and development arrangements, licensing and technology access fees and government grants. We recognize revenue following the guidance of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments, collectively referred to as ASC (Accounting Standards Codification) Topic 606.

Under ASC Topic 606, we recognize revenue when our customer obtains 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 Topic 606, we consider factors such as the research, manufacturing and commercialization capabilities of the collaboration partner and the availability of the associated expertise in the general marketplace. 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.

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.

Right-of-use Assets and 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 Consolidated Balance Sheets.

Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Short-term leases, defined as leases that have a lease term of 12 months or less at the commencement date, are excluded from this treatment and are recognized on a straight-line basis over the term of the lease. 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.

Impairment of Long-Lived Assets

In accordance with ASC 360-10, Property, Plant & Equipment—Overall, we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of property and equipment may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event such cash flows are not expected to be sufficient to recover the carrying amount of the assets, we write down the assets to their estimated fair values and recognize the loss in the Consolidated Statements of Operations and Comprehensive Loss. We do not carry any capitalized intellectual property or product licenses as assets subject to impairment on our Consolidated Balance Sheets.

Research and Development Expenses

Research and development expenses are composed of both internal and external costs. Internal costs include salaries and employment-related expenses, including stock-based compensation expense, of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with clinical and nonclinical development of fasedienol, itruvone, and 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 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 the clinical trial, including levels of subject enrollment, invoices received and contracted costs when evaluating the adequacy of accrued liabilities. Significant judgments and estimates must be made 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, at acquisition, the product or technology licensed has not achieved regulatory approval or reached technical feasibility and has no alternative future uses. We treated the Pherin Acquisition as an acquisition of assets for accounting purposes. Since, at the date of the acquisition, neither fasedienol, itruvone nor the other three pherines acquired had achieved regulatory approval and each required significant additional development and expense and were without alternative future use, we recorded the costs related to acquiring the assets as research and development expense in our Consolidated Statement of Operations and Comprehensive Loss for our fiscal year ended March 31, 2023.

Stock-Based Compensation

We recognize compensation cost for all stock-based awards to employees and non-employee consultants based on the grant date fair value of the award. We record 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 consultants, nor do we have any awards with market or performance conditions. Noncash expense attributable to compensatory grants 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 expensed ratably over the term of the related service agreement, depending on the terms of the specific agreement.

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards as of the grant date. The Black-Scholes model is complex and dependent upon key data input estimates. The primary data inputs with the greatest degree of judgment are the expected term of the stock options and the estimated volatility of our stock price. The Black-Scholes model is highly sensitive to changes in these two inputs. The expected term of the options represents the period of time that options granted are expected to be outstanding. We use the simplified method in accordance with guidance provided by the Securities and Exchange Commission (SEC) to estimate the expected term as an input into the Black-Scholes option pricing model. We determine expected volatility using the historical method based on the historical daily trading data of the common stock of a peer group of public companies over the expected term of the option, as we do not believe that the historical volatility of our common stock will be indicative of its future performance.

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 Entity’s 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 March 31, 2023 and 2022, we had both investor warrants and share-based compensation warrants outstanding that were classified as equity.

Income Taxes

We account for income taxes using the asset and liability approach promulgated by ASC 740, Income Taxes, for financial reporting purposes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce the deferred tax assets to an amount expected to be realized.

Recent Accounting Pronouncements

See Note 3 to the Consolidated Financial Statements included in Item 8 in this Report (Financial Statements) for information on recent accounting pronouncements.

Financial Operations Overview and Results of Operations

Net Loss

We have not yet achieved recurring revenue-generating status from any of our product candidates or technologies in amounts sufficient to sustain our operations and enable our strategic business plans. Since acquiring our exclusive worldwide licenses in 2018, we have devoted substantial resources to advance initiatives related to research, development, and contract manufacturing of our intranasal investigational product candidates, fasedienol (PH94B) and itruvone (PH10), including initiatives related to manufacturing processes, analytical methods and production programs for drug substance and finished drug product, as well as for preclinical studies and clinical studies focused on potential commercialization of these product candidates for neuropsychiatry indications. During Fiscal 2022 and Fiscal 2023, we allocated significant resources to our PALISADE Phase 3 Program evaluating fasedienol for the acute treatment of anxiety in adults with SAD. We conducted, and are continuing to conduct, various preclinical studies and manufacturing activities that enabled submission of our U.S. IND for itruvone in MDD in late September 2022 and our initiation of a small Phase 1 clinical study of itruvone in December 2022 to facilitate potential Phase 2B clinical development of itruvone in the U.S. as a stand-alone treatment for MDD. With respect to AV-101, our current focus is evaluating AV-101 in combination with probenecid, which may provide opportunities to explore the therapeutic potential of the combination for certain CNS indications involving the NMDAR. We have on-going initiatives for creating, protecting and patenting intellectual property (IP) related to our product candidates and technologies and raising sufficient working capital to fund these studies, initiatives and other activities. At March 31, 2023, we had an accumulated deficit of approximately $326.9 million. Our net loss for Fiscal 2023 and Fiscal 2022 was approximately $59.2 million and $47.8 million, respectively. We expect losses to continue for the foreseeable future as we engage in further research, development and regulatory activities related to fasedienol, itruvone and AV-101 and, potentially, the new pherines acquired in the Pherin Acquisition.

Summary of the Fiscal Year Ended March 31, 2023

Throughout Fiscal 2022 and Fiscal 2023, we have continued to advance our nonclinical and clinical development, manufacturing, and regulatory activities necessary for (i) Phase 3 clinical development of fasedienol as a potential treatment of anxiety in adults with SAD, (ii) advancing our Phase 2A clinical study of fasedienol in adults experiencing AjDA, (iii) submitting our itruvone IND and initiating a small Phase 1 study of itruvone in the U.S. to facilitate potential Phase 2B development as a stand-alone treatment of MDD and (iv) exploratory Phase 1B development of AV-101 in combination with probenecid to assess potential opportunities to develop the combination for treatment of certain CNS indications.

We initiated our PALISADE Phase 3 Program for fasedienol in SAD with PALISADE-1 in May 2021 and PALISADE-2 in August 2021. During Fiscal 2022, we also initiated the PALISADE OLS and advanced our Phase 2A clinical study of fasedienol in adults experiencing AjDA. We achieved last patient out of PALISADE-1 in June 2022 and commenced analysis of the data generated throughout the study. As noted above, in July 2022 we determined that PALISADE-1 did not achieve its primary efficacy endpoint. Accordingly, we have actively investigated, on multiple fronts, potential contributors to that outcome and will apply our learnings to all future clinical studies of fasedienol in SAD and/or other anxiety indications. In July 2022, after receiving the results from PALISADE-1, we paused recruitment and enrollment in PALISADE-2 to allow independent biostatisticians to conduct an interim analysis of available data from 140 subjects randomized in PALISADE-2 up to the date we paused the study and subsequently closed the study. We also ended enrollment in our PALISADE OLS in August 2022. In February 2023, we met with the FDA to discuss our broader Phase 3 development plan for fasedienol, which includes a multiple-assessment, randomized, double-blind, placebo-controlled Phase 3 study of fasedienol in adults, using the LSAS as the primary outcome measure to evaluate the efficacy of fasedienol over time in patients with SAD. FDA feedback confirmed the acceptable use of the LSAS as a primary efficacy endpoint in future fasedienol studies. Near-term, we plan to focus our resources primarily on the planning and preparation for FEARLESS-1, an LSAS-based Phase 3 study of fasedienol for treatment of SAD. We believe data from the earlier Phase 2 study of fasedienol and unpublished preliminary data from PALISADE OLS support continued late-stage clinical development of fasedienol as a potential treatment for SAD when used as-needed, over an extended period of time in an outpatient (real world) setting.

Throughout Fiscal 2022 and Fiscal 2023, we have expanded our employee infrastructure with experienced personnel across multiple functional areas, including clinical operations, clinical research, data management, chemistry, manufacturing and controls (CMC) and quality assurance, biostatistics and clinical analytics, regulatory affairs, medical affairs, translational medicine, legal, contracts and corporate affairs, development operations, and investor and public relations. We have paused further additions to our employee base until we are able to secure additional financial resources and finalize our broader Phase 3 development plan for fasedienol in SAD.

Throughout Fiscal 2022 and during Fiscal 2023, strains of SARS-CoV-2, commonly referred to as COVID-19 and multiple variants of the virus, have spread globally and the outbreak was declared a pandemic by the World Health Organization and a public health emergency in the U.S. by the U.S. Secretary of Health and Human Services. Operations at our headquarters in South San Francisco were significantly curtailed during the first half of Fiscal 2022, and, to some extent, periodically thereafter, while state and local restrictions required remote working conditions. Most of our employee additions during Fiscal 2022 and thereafter are geographically located away from our headquarters facility in South San Francisco and routinely work remotely. Our employees have worked efficiently and productively while remotely located and working from home, whether as a result of the COVID-19 pandemic or otherwise. From time to time during the COVID-19 pandemic, however, the efficiency and productivity of certain preclinical and clinical development programs and our third-party collaborators, including, among others, CROs, CMOs and other third-party service providers have been impacted by surges in the spread of variants of COVID-19, such as spreads induced by the Delta and Omicron variants and their sub-variants during Fiscal 2022 and thereafter, shelter-in-place orders, social distancing measures, travel bans and restrictions, and certain business and government closures or reductions in service. Moreover, during the COVID-19 pandemic, we experienced delays in the delivery of supplies of active pharmaceutical product (API) or other key materials required to continue development of fasedienol and itruvone, as well as temporary disruptions in the availability of third-party personnel and others involved in the conduct of our preclinical and clinical programs. In addition, we believe conditions resulting from the COVID-19 pandemic may have negatively impacted the outcome of at least PALISADE-1. Future unexpected delays may result in a significant, material delay or disruption to our current clinical and nonclinical development plans, programs, and operations.

We did not complete any capital-raising or other significant financing activities during Fiscal 2023. In May 2021, we entered into an Open Market Sale Agreement SM (the Sales Agreement) with Jefferies LLC (Jefferies) as sales agent, with respect to an at-the-market offering program (the ATM) under which we may, at our option, offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. During September and early October 2021, we sold an aggregate of 50,593 shares of our common stock and received gross cash proceeds of approximately $4.45 million under the ATM. We did not sell any shares of our common stock under the ATM during Fiscal 2023. From June 12, 2023 through the date of this Report we sold an aggregate of 561,418 shares of our common stock and received approximately $1.15 million in gross proceeds under the ATM. 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, including under the ATM, from time to time.

Since we received the results of PALISADE-1, we have been carefully monitoring our cash resources and critically evaluating our internal and external research and development and general and administrative expenditures, which has included (i) reassessing our Phase 3 clinical development plan for fasedienol in SAD, (ii) terminating the PALISADE OLS study of fasedienol, (iii) continuing to completion our Phase 2A clinical study of fasedienol in adults experiencing AjDA and (iv) commencing and completing our Phase 1 clinical study of itruvone as a treatment for adults suffering from MDD.

Comparison of Fiscal Years Ended March 31, 2023 and 2022

The following table summarizes the results of our operations for the fiscal years ended March 31, 2023 and 2022 (amounts in thousands).

Fiscal Year Ended March 31,

Operating expenses:

Interest income, net 26 20

Income taxes (6 ) (3 )

Accrued dividend on Series B Preferred Stock - (945 )

Net loss attributable to common stockholders $ (59,248 ) $ (48,707 )

Revenue

We derecognized $227,300 in sublicense revenue pursuant to the AffaMed Agreement during Fiscal 2023 compared to recognizing revenue of $1,108,900 during Fiscal 2022. As described more completely in Note 3 and Note 11 to our Financial Statements in Item 8 of this Report, on June 24, 2020, we entered into the AffaMed Agreement, pursuant to which we received a non-refundable upfront license fee payment of $5.0 million on August 3, 2020, which payment commenced our revenue recognition under the AffaMed Agreement. We recognize revenue on a straight-line basis over the period during which we expect to perform our obligation under the AffaMed Agreement, essentially the development and regulatory approval in the U.S. of fasedienol in adults with SAD. Revenue related to our performance obligation, which is satisfied over time, could be materially impacted because of changes in our estimates of the time or effort necessary to satisfy the performance obligation. Due to the failure of PALISADE-1 to meet its primary efficacy endpoint and the resulting anticipated delays in subsequent clinical and regulatory processes for fasedienol in SAD, at September 30, 2022, we estimated that completion of our performance obligation under the AffaMed Agreement would be delayed until mid-calendar 2027. As a result of the change in our estimate of the time required to complete our performance obligation under the AffaMed Agreement, we recorded a cumulative catch-up adjustment at September 30, 2022 pursuant to which we derecognized previously recorded revenue of $892,500, resulting in negative revenue of $227,300 for Fiscal 2023. Following the cumulative catch-up adjustment, through March 31, 2023, we have recognized an aggregate of $1,971,100 as revenue under the AffaMed Agreement and expect to recognize the remaining $3,028,900 as revenue over the estimated performance period as our obligation is completed. We have not subsequently modified our September 30, 2022 estimate of the timing to complete our performance obligation, however, we will adjust our estimates, as necessary, in subsequent periods should more definitive information on which to base our projections become available. While we may potentially receive additional cash payments and royalties in the future under the AffaMed Agreement in the event certain performance-based milestones and commercial sales are achieved, there can be no assurance that the AffaMed Agreement will provide any additional revenue beyond that noted or cash payments to us in the near term, or at all.

In December 2016, we entered into an Exclusive License and Sublicense Agreement with BlueRock Therapeutics, LP, a regenerative medicine company established in December 2016 by Bayer AG and Versant Ventures (BlueRock Therapeutics), pursuant to which BlueRock Therapeutics received exclusive rights to utilize certain technologies exclusively licensed by us from University Health Network (UHN) for the production of cardiac stem cells for the treatment of heart disease. We recognized $1.25 million in sublicense revenue in our fiscal year ended March 31, 2017, under the agreement. In May 2023, BlueRock Therapeutics notified us that the Exclusive License and Sublicense Agreement would be terminated effective July 10, 2023.

Research and Development Expense

Research and development (R&D) expense increased by approximately $9.0 million, from $35.4 million in Fiscal 2022 to $44.4 million in Fiscal 2023. Activities related to our PALISADE Phase 3 Program for fasedienol, including PALISADE-1, PALISADE-2 and the PALISADE OLS study, and the fasedienol Phase 2 Study in AjDA, as well as nonclinical development, outsourced manufacturing and regulatory activities for both fasedienol and itruvone, accounted for increased expenses of approximately $5.1 million during Fiscal 2023 in comparison to the activities conducted during Fiscal 2022. Additionally, we expensed approximately $3.6 million of costs related to the Pherin Acquisition, including approximately $3.1 million representing the fair market value of the common stock issued in the Pherin Acquisition. In addition to the noncash fair value of the common stock issued in the Pherin Acquisition in Fiscal 2023, other noncash research and development expenses, primarily stock-based compensation and depreciation in both periods, accounted for approximately $1.5 million in both Fiscal 2023 and Fiscal 2022.

The following table indicates the primary components of R&D expense for each of the periods (amounts in thousands):

Fiscal Years Ended March 31,

Consulting and other professional services 817 834

Clinical and nonclinical studies and development expenses:

Cost of Pherin Acquisition as an asset purchase 3,559 -

Total Research and Development Expense $ 44,377 $ 35,408

The increase in salaries and benefits expense in Fiscal 2023 primarily reflects the addition of seven new management and staff positions across multiple functional disciplines, including biostatistics and clinical analytics, clinical operations, chemistry, manufacturing and controls, and regulatory affairs since the end of Fiscal 2022, as well as the impact of salary increases effective in January 2022 granted to our R&D management and staff. These increases are partially offset by the impact of six terminations during Fiscal 2023. Further, there were no payments or accruals of additional compensation expense for R&D officers and employees as a result of the outcome of the PALISADE-1 study and delay or termination of other clinical trials and nonclinical activities related to calendar year 2022 corporate operational objectives, compared to approximately $1,075,800 of expense in Fiscal 2022 related to attainment of calendar year 2021 corporate objectives.

Stock-based compensation expense for Fiscal 2023 reflects the amortization of option grants made to our R&D staff and certain clinical and scientific consultants since May 2019, in addition to grants to new employees as indicated above. All outstanding options granted to R&D employees and consultants prior to May 2019 became fully vested and amortized during or prior to the end of Fiscal 2022 and the May 2019 grants became fully vested during Fiscal 2023. Grants awarded during Fiscal 2023, including those granted to new employees, account for approximately $89,000 of expense during Fiscal 2023, offset by an expense reduction of approximately $294,000 attributable to certain options granted between May 2019 and May December 2020 that became fully vested and amortized prior to or during Fiscal 2023. Grants made during Fiscal 2022 reflected a full twelve months of vesting and amortization during Fiscal 2023, or became fully vested and amortized, decreasing expense for such options by approximately $47,000. FY 2023 expense was reduced by approximately $47,000 as a result of employee terminations noted earlier. The extension of option exercisability by approximately six months for a terminated employee accounted for approximately $109,000 of additional expense during Fiscal 2023. 2019 ESPP expense in Fiscal 2023 decreased by approximately $10,000 compared to Fiscal 2022 expense.

Consulting and other professional services in both periods reflects fees incurred, generally on an as-needed basis, for project-based scientific, CMC, nonclinical and clinical development and regulatory advisory and analytical services rendered to us by third parties, primarily in support of our fasedienol and itruvone development initiatives. Expense in both periods includes contract recruiting services for certain specialized R&D positions.

Fasedienol and itruvone project expenses increased by approximately $5.1 million in Fiscal 2023 compared to Fiscal 2022. Fasedienol expense for Fiscal 2023 reflects (i) the costs associated with conducting and completing the PALISADE-1 study, including data analysis, site closures and root cause investigations, (ii) costs associated with the PALISADE-2 study both during its conduct, for the interim analysis of PALISADE-2 data and during its pause from August 2022 through March 2023, when it was closed, (iii) costs associated with the PALISADE OLS study during its conduct and following its termination, including site closure costs, and (iv) costs for conducting the Phase 2A study of fasedienol in AjDA which was completed late in the third quarter of Fiscal 2023, as well as various other clinical, nonclinical, regulatory and manufacturing activities. The PALISADE OLS study commenced in July 2021, PALISADE-2 commenced in August 2021 and the fasedienol AjDA study commenced in mid-June 2021, and each of those studies was actively enrolling during at least a portion of Fiscal 2022. Throughout both Fiscal 2023 and 2022, manufacturing, formulation, process validation and analysis of sufficient quantities of drug substance and drug product for clinical trials and other developmental requirements were significant initiatives for advancing both fasedienol and itruvone. Additionally, there was significant regulatory activity during the second quarter of Fiscal 2023 leading to the late-September 2022 submission to the FDA of the IND for itruvone in MDD, followed by the small Phase 1 study conducted during the fourth quarter of Fiscal 2023. Due to its later stage of development, costs for fasedienol initiatives have significantly exceeded those for itruvone during both Fiscal 2023 and Fiscal 2022. In both Fiscal 2023 and Fiscal 2022, AV-101 project expense includes costs for certain preclinical and nonclinical studies related to the use of AV-101 with adjunctive probenecid and certain AV-101 manufacturing stability studies. Fiscal 2023 expense also includes the costs of our ongoing exploratory Phase 1B AV-101 and probenecid clinical trial.

Rent expense for both Fiscal 2023 and Fiscal 2022 reflects our implementation of ASC 842 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. As disclosed in Note 14, Commitments and Contingencies, in the Financial Statements in Item 8 of this Report, in October 2021, we entered into an amendment to this lease, 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. We allocate total rent expense for our South San Francisco facility between R&D expense and G&A expense based generally on square footage dedicated to each function. In both periods reported, rent expense includes charges for such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.

General and Administrative Expense

General and administrative (G&A) expense increased by approximately $1.2 million to approximately $14.7 million in Fiscal 2023 compared to approximately $13.5 million in Fiscal 2022. Primary components of the change include:

Noncash general and administrative expenses, approximately $2,065,000 and $2,379,000 in Fiscal 2023 and Fiscal 2022, respectively, primarily reflect stock-based compensation and depreciation in both periods, expense attributable to the modification of an outstanding warrant to purchase our common stock in Fiscal 2023 and the write-off of deferred offering costs in Fiscal 2022.

The following table indicates the primary components of G&A expense for each of the periods (amounts in thousands):

Fiscal Years Ended March 31,

Board fees and other consulting services 678 453

Legal, accounting and other professional fees 2,424 1,791

Investor and public relations 1,160 707

Pre-launch marketing studies and analyses 1,904 2,796

Sublicense contract amortized acquisition expense (21 ) 105

Warrant modification expense 77 -

Write off of deferred offering costs - 232

The increase in salaries and benefits expense for Fiscal 2023 primarily reflects the addition of four additional management and staff positions including our Vice President, Human Resources in January 2022, our Chief Legal Officer in May 2022, our Vice President, Associate General Counsel in August 2022 and an additional administrative employee, as well as the impact of salary increases effective in January 2022 granted to our G&A management and staff. These increases are offset by (i) the absence in Fiscal 2023 of payment or accrual for additional compensation expense for G&A officers and employees as a result of the outcome of the PALISADE-1 study and the delay or conclusion of other clinical trials and nonclinical activities related to calendar year 2022 corporate objectives compared to payment of approximately $938,000 in Fiscal 2022 related to achievement of calendar 2021 corporate objectives, and (ii) the impact of the voluntary resignation in November 2022 of our Chief Commercial Officer, who remains a member of our Board.

Fiscal 2023 stock-based compensation expense reflects the amortization of option grants made to our internal management and administrative staff, independent members of our Board and certain consultants since May 2019, in addition to grants to new senior management and other new employees as indicated above. All outstanding options granted to G&A employees, Board members and consultants prior to May 2019 were fully vested and amortized at the end of Fiscal 2022. Options granted in May 2019, September 2019 and April 2020 became fully vested and amortized in May 2022, September 2022 and April 2022, respectively, so that all outstanding options granted to G&A employees and consultants prior to October 2020 are fully vested and amortized at the end of Fiscal 2023. Grants awarded after March 31, 2022, including those granted to new employees indicated above, account for approximately $78,000 of Fiscal 2023 expense, offset by an expense reduction of approximately $791,000 attributable to certain options granted between May 2019 and June 2020 that became fully vested and amortized in Fiscal 2023. Grants made in March 2022 reflected a full year of expense during Fiscal 2023 increasing Fiscal 2023 expense by approximately $498,000 compared to the expense in Fiscal 2022. Other than the new-hire grant to our Chief Legal Officer, there were no option grants to senior executives or independent members of our Board in Fiscal 2023. Except for grants to new employees, expense attributable to recent option grants is generally being amortized over two-year to three-year vesting periods, with essentially all of the grants made since May 2019, including those made in Fiscal 2023 and Fiscal 2022, being 25% vested and expensed upon grant, in accordance with the terms of the respective grants. Grants to new employees generally vest 25% on the first anniversary of the grant date and ratably monthly over the next three years.

Board fees and other consulting services represents, in both periods, fees paid as consideration for Board and Board Committee services to the independent members of our Board of Directors. We modified our cash compensation policy for our independent Board members at the beginning of Fiscal 2022, increasing payments to reflect current market conditions and we added one new independent Board member in April 2021 and two additional independent members during July 2021. Expenses for Fiscal 2023 also include recruiting fees for certain administrative positions and fees paid to our former Chief Commercial Officer pursuant to a consulting agreement following her voluntary resignation.

Legal, accounting and other professional fees for Fiscal 2023 and Fiscal 2022 includes expense related to routine corporate legal and compliance fees as well as legal counsel and other costs related to patent prosecution and protection pursuant to our stem cell technology license agreements, our AV-101 patents, or patents that we have elected to pursue for commercial purposes, as well as recurring annual license fees. These costs do not necessarily occur ratably throughout the year or between years. In both Fiscal 2023 and Fiscal 2022, this expense includes legal counsel and other costs we have incurred to advance various patent applications in the U.S. and numerous foreign countries, primarily with respect to AV-101 and our stem cell technology platform, but also nominally with respect to our fasedienol and itruvone intellectual property portfolios. Accounting expenses include costs related to the annual audit of our prior year financial statements and the three quarterly reviews of our current year financial statements. Fiscal 2023 and Fiscal 2022 accounting expense also includes the cost of certain outsourced financial and accounting services which commenced at the beginning of Fiscal 2022 and, in Fiscal 2022, implementation of new accounting software. Both years reflect expense related to an expanded service level from our information technology service provider and a contracted head of Information Technology, all of which commenced at the beginning of Fiscal 2022. Both years also reflect certain recruiting fees incurred in connection with searches for certain specialized positions.

Investor and public relations expense in both Fiscal 2023 and Fiscal 2022 includes the fees of our various external service providers for a broad spectrum of investor relations, public relations and social media services, and, particularly in Fiscal 2023, additional market awareness and strategic advisory and support functions and initiatives. During both years, we conducted numerous virtual meetings and other communication activities focused on expanding global market awareness of the Company, our CNS product candidate pipeline and technologies and our research and development programs, including among registered investment professionals and investment advisors, individual and institutional investors, and prospective strategic collaborators for development and commercialization of our product candidates in major pharmaceutical markets worldwide.

Throughout Fiscal 2022 and through the second quarter of Fiscal 2023, we incurred expenses for a number of customary pre-commercialization studies, analyses, projections, strategic modeling and awareness services, primarily attributable to Fasedienol as a potential acute treatment of anxiety in adults with SAD. Given the outcome of PALISADE-1 and the resulting delay to our anticipated commercialization timeline for fasedienol, these activities were significantly reduced during the third and fourth quarters of Fiscal 2023. We have evaluated the extent and timing of such future activities, and anticipate that such expenditures will, for the short term, remain at the modest level similar to that expended during the second half of Fiscal 2023.

The increase in Fiscal 2023 insurance expense is primarily attributable to the increased coverage obtained under our directors’ and officers’ liability insurance upon renewal of our policy in May 2022 and additional coverages, including cybersecurity and employment practices liability, added to our insurance program during Fiscal 2022.

As a result of periodic shelter-in-place restrictions and travel and workplace precautions and restrictions associated with the COVID-19 pandemic during calendar 2020 and 2021, management presentations and historically in-person meetings held in multiple U.S. markets and certain international markets with existing and potential individual and institutional investors, investment professionals and advisors, media, and securities analysts, as well as various investor relations, market awareness and corporate development and partnering initiatives, generally occurred remotely without requiring in-person business travel by our executives. During Fiscal 2023, we incurred modest travel expense for attendance at seminars, and for vendor audits, clinical trial site visits and certain investor-focused events, as conditions have permitted, with in-person travel still reasonably limited.

Rent expense for both Fiscal 2023 and Fiscal 2022 reflects our implementation of ASC 842 and the requirement to recognize, as an operating lease related to our South San Francisco office and laboratory facility, a right-of-use asset and a lease liability, both of which must be amortized over the expected lease term. The underlying lease reflects commercial property rents prevalent in the South San Francisco real estate market at the time of our November 2016 lease amendment extending the lease of our headquarters facilities in South San Francisco by five years from July 31, 2017 to July 31, 2022. As disclosed in Note 14, Commitments and Contingencies, in the Financial Statements included in Item 8 of this Report, in October 2021, we entered into an amendment to this lease, 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. We allocate total rent expense for our South San Francisco facility between R&D expense and G&A expense based generally on square footage dedicated to each function. In both years, rent expense includes charges for such items as common area maintenance fees, taxes and insurance which are generally assessed to us by our landlord.

Beginning in the quarter ended September 30, 2020, we began to amortize the deferred contract acquisition costs related to our acquisition of the AffaMed Agreement, composed of the cash payment of $220,000 for sublicense fees which we were obligated to make pursuant to our PH94B license from Pherin, and the $125,000 cash payment and $125,000 fair value of common stock issued for consulting services, in each case exclusively related to our acquisition of the AffaMed Agreement. The contract acquisition costs are amortized over the expected term of the services to be provided under the AffaMed Agreement. As described above in the section entitled Revenue, the outcome of the PALISADE-1 study resulted in an estimated extension of the period over which we will recognize both revenue under the AffaMed Agreement and the period over which we will amortize the deferred contract acquisition costs. Our extended estimate of the time required to satisfy our performance obligation required a cumulative catch-up adjustment to amortization of the contract acquisition costs at September 30, 2022, pursuant to which we reversed previously recorded expense of approximately $84,000, resulting in negative contract acquisition amortization expense of $21,000 for Fiscal 2023.

In December 2022, we modified outstanding warrants to purchase an aggregate of 33,333 registered shares of our common stock exercisable at $15.00 per share that were due to expire during December 2022 to extend the exercisability of such warrants for a period of two years. No other term of the warrants, including exercise price, was modified. We recognized the incremental fair value of $77,400 resulting from the modification as a noncash warrant modification expense in Fiscal 2023.

In June 2021, we terminated a financing arrangement pursuant to which we had recorded legal, accounting and securities registration filing fees as deferred offering costs. Upon termination of the agreement, we expensed the remaining $232,100 of deferred offering costs related to the agreement as a noncash charge to G&A expense in Fiscal 2022.

Interest and Other Income, Net

Interest income, net totaled $26,200 in Fiscal 2023 compared to $19,900 in Fiscal 2022. The following table indicates the primary components of interest income and expense for each of the periods (amounts in thousands):

Fiscal Years Ended March 31,

Interest income $ 49 $ 20

Interest expense on financing lease and insurance premium financing note (23 ) -

Interest income, net $ 26 $ 20

In both Fiscal 2023 and Fiscal 2022, interest income relates to cash deposits in interest-bearing cash equivalent accounts. Although interest rates increased during Fiscal 2023, our cash deposit balances have declined as we used such amounts to fund our operations. Interest expense for Fiscal 2023 relates to interest paid on the insurance premium financing note executed in May 2022 and, in both periods, on our financing lease of office equipment subject to ASC 842. We did not finance insurance premiums for policies that renewed in May 2021 or February 2022.

We recognized approximately $945,000 during Fiscal 2022 attributable to the 10% cumulative dividend accrued on outstanding shares of our Series B 10% Convertible Preferred Stock (Series B Preferred) prior to its conversion in November 2021 as an additional deduction in arriving at net loss attributable to common stockholders. In November 2021, the custodial holder of 1,131,669 outstanding shares of our Series B Preferred exercised its rights for conversion into common stock under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock (Series B Certificate of Designation) and we issued 37,722 shares of our common stock upon conversion. From initial issuance in May 2015 through the time of conversion in November 2021, the Series B Preferred had accrued 10% dividends aggregating $7,217,800 and, in accordance with the terms of the Series B Certificate of Designation, we issued 109,860 shares of our unregistered common stock in payment of the accrued dividends. Following this conversion there were no additional shares of Series B Preferred outstanding and no further accrual of dividends on the Series B Preferred.

Liquidity and Capital Resources

Since our inception in May 1998 through March 31, 2023 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, intellectual property licensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $41.3million in noncash acquisitions of product licenses, the Pherin Acquisition, and in settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.

We did not complete any capital-raising or other significant financing activities during Fiscal 2023. During Fiscal 2022, holders of outstanding warrants to purchase an aggregate of 243,293 shares of our common stock exercised such warrants, and we received cash proceeds of approximately $6.2 million. Additionally, in May 2021, we entered into an Open Market Sale Agreement SM (the Sales Agreement) with Jefferies LLC (Jefferies) as sales agent, with respect to an at-the-market offering program (the ATM) under which we may, at our option, offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. During September and early October 2021, we sold an aggregate of 50,593 shares of our common stock and received gross cash proceeds of approximately $4.45 million under the ATM. We did not sell any shares of our common stock under the ATM during Fiscal 2023. From June 12, 2023 through the date of this Report we sold an aggregate of 561,418 shares of our common stock and received approximately $1.15 million in gross proceeds under the ATM.

During our fiscal year ended March 31, 2021 (Fiscal 2021), we received approximately $119 million in net cash proceeds primarily from various public sales of our equity securities and $5.0 million gross proceeds from the AffaMed Agreement. These earlier transactions continued to provide necessary capital resources and liquidity throughout Fiscal 2023, during which we also received approximately $167,500 in cash proceeds from the exercise of outstanding stock options and sales under our 2019 Employee Stock Purchase Plan (the 2019ESPP).

We had cash and cash equivalents of approximately $16.6 million at March 31, 2023, which we do not believe will be sufficient to fund our planned operations for the twelve months following the issuance of these 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 the next steps in our development of our product candidates, either on our own or with collaborators, including Phase 3 development of fasedienol for the treatment of SAD, Phase 2B development of itruvone as a potential stand-alone rapid-onset treatment for MDD, IND-enabling and Phase 2B development of PH80 for treatment of vasomotor symptoms (hot flashes) due to menopause, IND-enabling and Phase 2B development of PH15 for cognition improvement, IND-enabling and Phase 2B development of PH284 for treatment of cachexia and Phase 2A development of AV-101 for one or more neurological disorders involving the NMDAR. We are continuing to evaluate the potential implications for the conduct and timing of these and 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.

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 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 and/or under the Sales Agreement, we do not have an obligation to do so.

During the next twelve months, subject to availability of adequate working capital, we plan to (i) continue to advance our FEARLESS Phase 3 Program, on our own or with a collaborator, to develop and commercialize fasedienol as a new acute treatment of anxiety in adults with SAD, (ii) complete preparations, on our own or with a collaborator, for and initiate further Phase 2B clinical development of itruvone as a potential stand-alone treatment for MDD, (iii) complete IND-enabling activities, either on our own with a collaborator, for Phase 2B development of PH80, PH15 and PH284 and Phase 2A development of AV-101 for one or more neurological disorders involving the NMDAR, and (iv) conduct various nonclinical studies involving each of our product candidates.

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 and funding from non-dilutive sources, and continue to carefully manage our operating costs, including, but not limited to, our clinical and nonclinical programs.

100

Cash and Cash Equivalents

The following table summarizes changes in cash and cash equivalents for the fiscal years stated (in thousands):

Fiscal Years Ended March 31,

Net cash used in operating activities $ (49,715 ) $ (45,257 )

Net cash used in investing activities (740 ) (200 )

Net cash provided by (used in) financing activities (1,042 ) 10,484

Net decrease in cash and cash equivalents (51,497 ) (34,973 )

Cash and cash equivalents at beginning of period 68,135 103,108

Cash and cash equivalents at end of period $ 16,638 $ 68,135

As discussed above, the combination of the net proceeds we received from public offerings in Fiscal 2021, from transactions under our ATM in Fiscal 2022 and from warrant exercises in both Fiscal 2021 and Fiscal 2022, have been the primary sources of our available cash during both Fiscal 2022 and Fiscal 2023. The increase in cash used in operations during Fiscal 2023 reflects our conduct, completion, pause or termination of fasedienol clinical trials including PALISADE-1, PALISADE-2, the PALISADE OLS, and the Phase 2 AjDA study, as previously described, as well as ongoing manufacturing and regulatory initiatives and other nonclinical studies of our product candidates. Additionally, during Fiscal 2022, we expanded our internal capabilities with the addition of numerous senior personnel with significant expertise in disciplines critical to the advancement of our product pipeline. In both Fiscal 2023 and Fiscal 2022, but to a much greater extent during the first half of Fiscal 2023, in parallel with our clinical and regulatory initiatives, and in expectation of positive results from the PALISADE Phase 3 Program, we engaged in customary pre-commercialization analyses, modeling, planning and awareness initiatives. Given the outcome of the PALISADE-1 study, we terminated most of such activities.

Cash used in investing activities during Fiscal 2023 reflects laboratory analytical equipment acquired for our internal studies and experiments with both fasedienol and itruvone. Cash used in investing activities during Fiscal 2022 primarily reflects the cost of laboratory analytical equipment acquired for use by our CMO in connection with the development and production of fasedienol drug product. As discussed previously, the Pherin Acquisition was treated as an asset purchase; however, we issued shares of our common stock rather than cash as the primary component of payment for the in-process R&D assets acquired and expensed.

Cash used by financing activities during Fiscal 2023 primarily reflects the proceeds of option exercises and the sales of common stock under our ESPP, net of principal payments on our insurance premium financing note and expenditures related to the Sales Agreement with Jefferies which are recorded as deferred offering costs. Cash provided by financing activities during Fiscal 2022 primarily reflects the proceeds of warrant exercises, net of expenditures related to the Sales Agreement with Jefferies that are recorded as deferred offering costs.

Off-Balance Sheet Arrangements

Other than contractual obligations incurred in the normal course of business, we do not have any off-balance sheet financing arrangements or liabilities, guarantee contracts, retained or contingent interests in transferred assets or any obligation arising out of a material variable interest in an unconsolidated entity. Throughout Fiscal 2022 and for a portion of Fiscal 2023, Vistastem had two inactive, wholly owned subsidiaries, Artemis Neuroscience, a Maryland corporation, and VistaStem Canada, Inc., an Ontario corporation. VistaStem Canada was dissolved in April 2022 and Artemis Neuroscience was dissolved in June 2022.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

The disclosures in this section are not required because we qualify as a smaller reporting company under federal securities laws.

101

Item 8.Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Consolidated Balance Sheets 106

Consolidated Statements of Operations and Comprehensive Loss 107

Consolidated Statements of Cash Flows 108

Consolidated Statements of Stockholders’ Equity 109

Notes to Consolidated Financial Statements 110

102

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Vistagen Therapeutics, Inc.

South San Francisco, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Vistagen Therapeutics, Inc. (the “Company”) as of March 31, 2023 and 2022, the related consolidated statements of operations and comprehensive loss, cash flows, and stockholders’ equity for each of the two years in the period ended March 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt Regarding Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered negative cash flows from operations and recurring losses from operations since inception, resulting in an accumulated deficit of $326.9 million as of March 31, 2023, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

103

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues from Contract with Customers

Description of the Matter

As discussed in Note 11 to the consolidated financial statements, the Company derecognized approximately $0.9 million in revenue under the sublicense agreement with AffaMed Therapeutics. Inc. (“AffaMed”) during the fiscal year ended March 31, 2023.

Auditing management’s timing of revenue recognition attributed to the single combined performance obligation was challenging, as significant judgment is required in the evaluation of the period in which the combined performance obligation is satisfied.

We identified sublicense revenue recognition as a critical audit matter because of the judgments necessary for management to determine the timing of recognition for such revenue. Because of the complexity associated with applying the recognition criteria of Accounting Standards Codification, Topic 606, Revenue Recognition, notably related to the determination of timing of revenue recognition, this required extensive audit effort and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.

How We Addressed the Matter in Our Audit

Our audit procedures related to the recognition of sublicense revenue, included the following, among others:

/s/ WithumSmith+Brown, PC

We have served as the Company's auditor since 2006.

San Francisco, California

June 28, 2023

PCAOB ID Number 100

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VISTAGEN THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS

(Amounts in dollars, except share amounts)

ASSETS

Current assets:

Deferred contract acquisition costs - current portion 67,100 116,900

Deferred contract acquisition costs - non-current portion 217,600 146,400

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Financing lease obligation - current portion 1,700 -

Non-current liabilities:

Financing lease obligation - non-current portion 7,400 -

Commitments and contingencies (Note 14)

Stockholders’ equity:

See accompanying notes to consolidated financial statements, including Note 15, Subsequent Events, for information on reverse split of common stock effective on June 6, 2023.

105

VISTAGEN THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Amounts in dollars, except share amounts)

Fiscal Years Ended

Revenues:

Operating expenses:

Other income, net:

Accrued dividend on Series B Preferred stock - (945,100 )

See accompanying notes to consolidated financial statements, including Note 15, Subsequent Events, for information on reverse split of common stock effective on June 6, 2023.

106

VISTAGEN THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in dollars)

Fiscal Years Ended March 31,

Cash flows from operating activities:

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

Warrant modification expense 77,400 -

Amortization of operating lease right-of-use asset 401,700 557,600

Expense related to write-off of deferred offering costs - 232,000

Changes in operating assets and liabilities:

Security deposits - (53,100 )

Cash flows from investing activities:

Purchases of laboratory and other equipment (212,000 ) (200,400 )

Cash flows from financing activities:

Repayment of financing lease obligations (1,500 ) (3,000 )

Repayment of note payable (1,034,400 ) -

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

See accompanying notes to consolidated financial statements, including Note 15, Subsequent Events, for information on reverse split of common stock effective on June 6, 2023.

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VISTAGEN THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Fiscal Years Ended March 31, 2022 and 2023

(Amounts in dollars, except share amounts)

Additional Total

Stock-based compensation expense - - - - - - - - - - 3,480,700 - - 3,480,700

Stock-based compensation expense - - - - - - - - - - 3,336,400 - - 3,336,400

See accompanying notes to consolidated financial statements, including Note 15, Subsequent Events, for information on reverse split of common stock effective on June 6, 2023.

108

VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

Overview

Vistagen Therapeutics, Inc., a Nevada corporation (which may be referred to as Vistagen, the Company, we, our, or us), late clinical-stage biopharmaceutical company aiming to transform the treatment landscape for individuals living with anxiety, depression and other central nervous system (CNS) disorders. We are advancing therapeutics with the potential to be faster-acting, and with fewer side effects and safety concerns, than those currently available for treating anxiety, depression and multiple CNS disorders. Our pipeline includes six clinical-stage product candidates, including five investigational agents belonging to a new class of neuroactive drugs known as pherines, in addition to AV-101, an oral prodrug of an antagonist of the glycine site of the N-methyl-D-aspartate receptor (NMDAR). Pherines, which are administered as nasal sprays, are designed with an innovative rapid-onset mechanism of action that activates chemosensory neurons in the nasal cavity and can selectively and beneficially impact key neural circuits in the brain without requiring systemic uptake or direct activity on CNS neurons. AV-101 inhibits the activity of the ion channel of the NMDAR but does not block it, unlike some approved NMDAR antagonists having significant side effects. Our goal is to develop and commercialize, on our own and with multiple global and regional strategic partners, 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 U.S. and worldwide.

Our Product Candidates

Pherine Product Candidates

Five of our product candidates – fasedienol (PH94B), itruvone (PH10), PH15,PH80 and PH284 – belong to a new class of synthetic neuroactive steroids referred to as pherines. Pherines, administered in ultra-low microgram level doses as odorless and tasteless nasal sprays, are designed to selectively engage chemosensory neurons in the nasal cavity and induce rapid-onset pharmacologic and behavioral benefits. Specifically, each of our pherine product candidates is a distinct chemical entity that selectively modulates particular areas of the brain, such as the limbic amygdala (the main fear and anxiety center of the brain), the hypothalamus, the hippocampus, the locus ceruleus, and the prefrontal cortex. We believe each of our pherine product candidates has the potential to be a fast-acting therapy for one or more CNS disorders, including social anxiety disorder (fasedienol), major depressive disorder (itruvone), cognitive impairment (PH15), vasomotor syndrome (hot flashes) due to menopause, as well as migraine headaches (PH80) and disorders related to appetite loss (cachexia) (PH284), all without requiring apparent systemic uptake or binding to classic abuse liability receptors or steroidal hormone receptors.

Fasedienol Nasal Spray

SAD PALISADE Phase 3 Program

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In July 2022, we announced top line results from PALISADE-1. Although the safety and tolerability of fasedienol 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 potential explanations for the unexpected outcome in PALISADE-1: (i) the study was conducted during the acute phase of the COVID-19 pandemic, introducing significant systemic variability in terms of changing social dynamics, subject stress, study site and contract research organization (CRO) personnel turnover and mask wearing regulations; (ii) given the foregoing, the public speaking challenge study design may not have been scalable to a large Phase 3 study, particularly during the acute phase of the COVID-19 pandemic; and (iii) some subjects in the study may have had reduced potential to respond to fasedienol due to impaired olfactory cell function potentially caused by the COVID-19 virus, nasal swab testing for COVID-19, respiratory syncytial virus (RSV) or influenza, and/or heavy cannabis use, smoking or vaping.

PALISADE Open Label Study. The PALISADE Open Label Study (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 fasedienol in adults with SAD. The PALISADE OLS also evaluated the change from baseline in monthly standard clinical measurements and various behavioral assessment scales in response to anxiety-provoking social situations in daily‐life after the administration of fasedienol. The final data set from PALISADE OLS demonstrates clinically meaningful functional improvement, as measured by the LSAS, and total LSAS scores, in both men and women, continued to decline in consecutive months during the study. In addition, long-term administration of fasedienol was well-tolerated, with no new safety findings or trends identified, regardless of the number of doses administered by each subject. Following the completion of PALISADE-1, we terminated the PALISADE OLS early, solely for strategic business reasons, and not due to any safety concerns with fasedienol.

FDA Feedback on Path Forward; FEARLESS Program.In the first quarter of calendar 2023, we met with the FDA to discuss next steps in our Phase 3 development plan for fasedienol in SAD, which plan includes, among other things, conducting, on our own or with collaborators, a multiple-assessment, randomized, double-blind, placebo-controlled Phase 3 study of fasedienol in adults in a real-world setting, using the Liebowitz Social Anxiety Scale (LSAS) as the primary efficacy outcome measure to evaluate the efficacy of fasedienol over time in patients with SAD to support a potential fasedienol New Drug Application (NDA). Positive feedback from the FDA at this meeting confirmed the acceptable use of the LSAS as a primary efficacy endpoint. Accordingly, we are positioned to finalize key components of FEARLESS, our potential NDA-enabling Phase 3 development program for fasedienol for treatment of SAD.

Exploratory Phase 2A Development for AjDA.In January 2023, we completed our small exploratory Phase 2A clinical study of fasedienol designed to assess its therapeutic potential in adults experiencing adjustment disorder with anxiety (AjDA). Our small randomized, double-blind, placebo-controlled Phase 2A exploratory study in AjDA was aimed at exploring the pharmacological treatment of AjDA and evaluating the effects of a fixed dosing regimen of fasedienol, involving intranasal administration of 3.2 μg of fasedienol four times per day over four weeks. A total of 71 subjects were screened for the study, 41 were randomized, and 34 completed four weeks of treatment. The study, which was not designed to achieve statistical significance, did not demonstrate a clinically significant difference between fasedienol and placebo as measured on the clinician-rated Hamilton Anxiety Scale (HAM-A). Site variances and both a high drug response rate and high placebo response rate were observed, likely related to the various aspects of AjDA that make it challenging to study. Fixed dosing of fasedienol four times per day over four weeks appeared to be safe and well tolerated.

Despite the methodological challenges inherent in the exploratory Phase 2A study in AjDA, we believe fasedienol builds resilience against anxiety and reduces the cognitive and physical paralysis that occurs during moments of heightened anxiety and stressful situations. The AjDA study’s results may support an as-needed fasedienol dosing approach over time as the preferred mode of treatment.

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Itruvone Nasal Spray

The FDA has granted Fast Track designation for development of itruvone as a potential adjunctive treatment for MDD.

PH80 Nasal Spray

PH15 Nasal Spray

PH284 Nasal Spray

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AV-101

AV-101 (4-Cl-KYN) is a novel, oral prodrug that targets the NMDAR (N-methyl-D-aspartate receptor), an ionotropic glutamate receptor in the brain. Abnormal NMDAR function is associated with numerous CNS diseases and disorders. The active metabolite of AV-101,7-chloro-kynurenic acid (7-Cl-KYNA), is a potent and selective full antagonist of the glycine binding 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. In clinical and nonclinical testing completed to date, AV-101 has demonstrated good oral bioavailability and an excellent pharmacokinetic (PK) profile. No binding of AV-101 or 7-Cl-KYNA to off-site targets was identified by an extensive receptor screening study. Moreover, in all clinical trials completed to date, AV-101 has been safe and very well-tolerated with no psychological side effects or safety concerns and no treatment-related serious adverse events that are often observed with classic channel-blocking NMDAR antagonists such as ketamine and amantadine. Nonclinical results also indicate that chronic administration of 4-Cl-KYN induces hippocampal neurogenesis, a hallmark of drugs that have antidepressive effects, and increases endogenous levels of KYNA, which also is a functional NMDAR glycine site antagonist.

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.

Acquisition of Pherin Pharmaceuticals, Inc.

On December 20, 2022, we entered into an Agreement and Plan of Merger (the Merger Agreement) along with VTGN Merger Sub, Inc., our wholly owned subsidiary (Merger Sub), Pherin Pharmaceuticals, Inc. (Pherin), and Kevin McCarthy in his capacity of Stockholder Representative, to acquire Pherin (the Pherin Acquisition). On February 2, 2023 (the Closing Date), we completed the Pherin Acquisition, and Pherin is now a wholly owned subsidiary of the Company. Immediately prior to the consummation of the Pherin Acquisition, each of Pherin’s directors and officers resigned, and no employees or other affiliates of Pherin on the Closing Date are serving or will serve in their previous roles or in any other capacity with Pherin or with us.

As consideration for the Pherin Acquisition, we (i) issued an aggregate of 413,670 unregistered shares of our common stock having a fair value of approximately $3,076,550 at issuance to the exchange agent for the Pherin Acquisition, which shares were to approximately 96.07% of Pherin stockholders eligible to receive common stock in exchange for their outstanding shares of Pherin common stock (the Stock Consideration), and (ii) paid to the exchange agent for the Pherin Acquisition, an aggregate of approximately $126,100 for the approximately 3.93% remaining Pherin stockholders who were not eligible to receive Stock Consideration in exchange for their outstanding shares of Pherin common stock (the Cash Consideration and, together with the Stock Consideration, the Merger Consideration). In addition to the Cash Consideration, we paid certain transaction related expenses specified under the terms of the Merger Agreement and other expenses associated with the registration of the shares underlying the Stock Consideration, aggregating $402,200. We have accounted for the Pherin Acquisition as an asset acquisition and the associated costs, including the fair value of the Stock Consideration, totaling approximately $3,559,400, were expensed as in-process research and development expense. We charged approximately $45,400 to additional paid-in-capital related to costs of registering the common stock underlying the Stock Consideration.

Subsidiaries

In addition to Pherin, as described above, Vistastem, Inc., a California corporation founded in 1998 (Vistastem), is also our wholly owned subsidiary. For the relevant periods, our Condensed Consolidated Financial Statements in this Annual Report on Form 10-K (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.

2.Basis of Presentation and Going Concern

The accompanying Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) and include the Company’s accounts, as well as those of Vistastem and, for the relevant periods, those of Pherin and of Vistastem’s two wholly owned inactive subsidiaries, Artemis and VistaStem Canada. All material intercompany accounts and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared assuming that we will continue as a going concern.

As discussed more completely in Note 15,Subsequent Events, we completed a stockholder approved 1-for-30 reverse split of our issued and outstanding common stock effective on June 6, 2023 (the Reverse Split). All share and per share data for all periods presented in the accompanying financial statements and related disclosures in this Report have been adjusted retrospectively to reflect the Reverse Split.

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As a late-stage clinical-stage biopharmaceutical company having not yet developed commercial products or achieved sustainable revenues, we have experienced negative cash flows from operations and recurring losses resulting in a deficit of $326.9 million accumulated from inception ( May 1998) through March 31, 2023. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further development of fasedienol, itruvone, AV-101, and the newly-acquired pherine product candidates.

Recent Developments

We did not complete any capital-raising or other significant financing activities during our fiscal year ended March 31, 2023 (Fiscal 2023). During our fiscal year ended March 31, 2022 (Fiscal 2022), holders of outstanding warrants to purchase an aggregate of 243,293 shares of our common stock exercised such warrants, and we received cash proceeds of approximately $6.2 million. Additionally, in May 2021, we entered into an Open Market Sale Agreement SM (the Sales Agreement) with Jefferies LLC (Jefferies) as sales agent, with respect to an at-the-market offering program (the ATM) under which we may, at our option, offer and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Jefferies as our sales agent. During September and early October 2021, we sold an aggregate of 50,593 shares of our common stock and received gross cash proceeds of approximately $4.45 million under the ATM. We did not sell any shares of our common stock under the ATM during Fiscal 2023. As discussed more completely in Note 15,Subsequent Events, from June 12, 2023 through the date of this Report we sold an aggregate of 561,418 shares of our common stock and received approximately $1.15 million in gross proceeds under the ATM.

During our fiscal year ended March 31, 2021 (Fiscal 2021), we received approximately $119 million in net cash proceeds primarily from various public sales of our equity securities and $5.0 million gross proceeds from a strategic licensing and collaboration agreement (the AffaMed Agreement, discussed more completely in Note 11,Licensing, Sublicensing and Collaborative Agreements.) These earlier transactions continued to provide necessary capital resources and liquidity throughout Fiscal 2023, during which we also received approximately $167,500 in cash proceeds from the exercise of outstanding stock options and sales under our 2019 Employee Stock Purchase Plan (the 2019ESPP).

We had cash and cash equivalents of approximately $16.6 million at March 31, 2023, which we do not believe will be sufficient to fund our planned operations for the twelve months following the issuance of these 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 the next steps in our late-stage development of fasedienol for the treatment of SAD, consider clinical and nonclinical requirements to advance Itruvone in potential Phase 2B development, on our own or with a collaborator, as a potential stand-alone rapid-onset treatment for MDD and finalize our Phase 1 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.

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 and/or under the Sales Agreement, we do not have an obligation to do so.

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the next twelve months, subject to availability of adequate working capital, we plan to (i) continue to advance our FEARLESS Phase 3 Program, on our own or with a collaborator, to develop and commercialize fasedienol as a new acute treatment of anxiety in adults with SAD, (ii) complete preparations, on our own or with a collaborator, for and initiate further Phase 2B clinical development of itruvone as a potential stand-alone treatment for MDD, (iii) complete IND-enabling activities, either on our own with a collaborator, for Phase 2B development of PH80,PH15 and PH284 and Phase 2A development of AV-101 for one or more neurological disorders involving the NMDAR, and (iv) conduct various nonclinical studies involving each of our product candidates.

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 potential 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 were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on the Nasdaq Capital Market. At March 6, 2023, the expiration of the initial 180-day period in which to regain compliance, we had not regained compliance with the minimum bid price requirement. Based on our written notification to Nasdaq of our intention to cure the deficiency by implementing a previously stockholder-authorized reverse stock split, if necessary, on March 7, 2023, Nasdaq granted us a second180-day period, through September 5, 2023, in which to regain compliance. To regain compliance with the minimum bid price requirement, our common stock was required to have a closing bid price of at least $1.00 per share for a minimum of 10 consecutive trading days. As a result of the Reverse Split, our common stock has maintained a closing bid price in excess of $1.00 since June 7, 2023. Although the Listing Qualifications Staff of Nasdaq advised us on June 22, 2023 that we regained compliance with the minimum bid price requirement of the Nasdaq Capital Market, there can be no assurance that our common stock will maintain a closing bid price sufficient to remain in compliance with the Minimum Bid Price Requirement or that we will maintain compliance with other continued listing standards for the Nasdaq Capital Market.

3.Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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, but are not limited to, those relating to stock-based compensation, revenue recognition, research and development expenses, determination of right-of-use assets under lease transactions and related lease obligations, and the assumptions used to value warrants, warrant modifications and useful lives for property and equipment and related depreciation calculations.

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.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation. Repairs and maintenance costs are expensed in the period incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of laboratory, information technology and office equipment range from three to seven years; the estimated useful lives of manufacturing equipment ranges from five to ten years. Leasehold improvements are amortized over the shorter of the lease term or the useful life of the improvements.

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VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Impairment of Long-Lived Assets

Our long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that we consider in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. To date, we have not recorded any impairment losses on long-lived assets. We do not carry any capitalized intellectual property or product licenses as assets subject to impairment in our Consolidated Financial Statements.

Deferred Offering Costs

Deferred offering costs include registration expenses related to our current S-3 Registration Statement (the Shelf Registration), which became effective on March 26, 2021, and expenses related to the Sales Agreement for the ATM (as described in Note 8,Capital Stock). These expenses consist primarily of legal, accounting, SEC filing fees, and, as appropriate, Nasdaq filing fees. Upon the completion or partial completion of an applicable equity offering, the deferred expenses are charged to additional paid-in capital. If there are any deferred offering costs remaining at the expiration of the Shelf Registration or the equity financing agreement, such costs are charged to expense. Upon termination of a financing agreement in June 2021, we expensed the remaining $232,100 of deferred offering costs associated with the agreement as a noncash component of our general and administrative expenses in our Consolidated Statement of Operations and Comprehensive Loss for the fiscal year ended March 31, 2022.

Revenue Recognition

The AffaMed Agreement, involving clinical development and commercialization of fasedienol 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 the basis of our reported revenue for both Fiscal 2023 and Fiscal 2022.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.

115

VISTAGEN THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

VTGN US Equity

VTGN · 10-K · period ended 2023-03-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8.Financial Statements and Supplementary Data

VTGN US Equity☆

VTGN · 10-K · period ended 2023-03-31

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Item 8.Financial Statements and Supplementary Data

VTGN US Equity