DISCUSSION AND ANALYSIS OF THE MANAGEMENT OF VISTAGEN THERAPEUTICS, INC. ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (Report) includes forward-looking statements.
All statements contained in this Report other than statements of historical
fact, including statements regarding our future results of operations and
financial position, our business strategy and plans, and our objectives for
future operations, are forward-looking statements. The words "believe," "may,"
"estimate," "continue," "anticipate," "intend," "expect" and similar expressions
are intended to identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations and projections
about future events and trends that we believe may affect our financial
condition, results of operations, business strategy, short-term and long-term
business operations and objectives and financial needs. These forward-looking
statements are subject to a number of risks, uncertainties and assumptions. Our
business is subject to significant risks including, but not limited to, our
ability to obtain substantial additional financing, the results of our research
and development efforts, the results of nonclinical and clinical testing, the
effect of regulation by the U.S. Food and Drug Administration (FDA) and other
domestic and foreign regulatory agencies, the impact of competitive products,
product development, commercialization and technological difficulties, the
effect of our accounting policies, and other risks as detailed in the section
entitled "Risk Factors" in this Report. Further, even if our product candidates
appear promising at various stages of development, our share price may decrease
such that we are unable to raise additional capital without significant dilution
or other terms that may be unacceptable to our management, Board 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 advancing therapeutics with the potential to be faster-acting, and with
fewer side effects and safety concerns, than those that are currently available.
Our most advanced clinical-stage candidates, PH94B and PH10, are targeting
multiple forms of anxiety and depression. They belong to a new class of drugs
known as pherines. At microgram level doses, these investigational neuroactive
steroids are formulated as nasal sprays designed to achieve rapid-onset
anti-anxiety (PH94B) or antidepressant (PH10) effects by directly activating
chemosensory neurons located in the nasal passages, which neurons then impact
olfactory amygdala "fear off" (anti-anxiety) and "fear on" (antidepressant)
neural circuits in the brain, without requiring systemic uptake or direct
activity on central nervous system (CNS) neurons in the brain. Our goal is to
become a biopharmaceutical company that develops and commercializes innovative
therapies for highly prevalent CNS indications where current treatment options
are inadequate to meet the needs of millions of patients in the U.S. and
worldwide. We are passionate about transforming mental health care and
redefining what is possible in the treatment of anxiety and depression - one
mind at a time.



Our Product Candidates



PH94B Nasal Spray



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



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





                                      -19-

————————————————– ——————————

Table of Contents

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



SAD Phase 1 Studies

Phase 1 Autonomic System Biomarker Study

Pherines such as PH94B appear to modulate the activity of the
limbic-hypothalamic autonomic nervous system. To evaluate the pharmacodynamic
activity of PH94B, a single-blind, randomized study (n =16) was performed to
compare the effect of PH94B and steroidal hormones (estradiol, progesterone,
cortisol, and testosterone) on the electrogram recorded from the mucosal lining
of the vomeronasal organ (VNO) nasal chemosensory epithelium (including the VNO
pit area) and autonomic nervous system function in healthy male (n = 8) and
female (n = 8) subjects.  Intranasal administration of PH94B (400 ng 0.4 µg)
significantly increased the amplitude of the electrogram, decreased cardiac and
respiratory frequency rate (within physiologic range), and
decreased the frequency of electrodermal activity (skin
conductance) events. Local intranasal application of steroidal hormones
estradiol, progesterone, cortisol, and testosterone (400 ng 0.4 µg each) had no
significant effect on the electrical response of the mucosal lining of the nasal
chemosensory epithelium (including the VNO pit area) or the measures of
autonomic nervous system function. Volunteers felt calmer and less tense per
self-report, suggesting an anxiolytic effect. We believe these results
demonstrate the biological activity of PH94B and provide support for evaluating
potential behavioral changes after intranasal PH94B administration.



Phase 1 Dose Response Study



In a Phase 1 dose response pharmacology study, the increased electrical activity
of the nasal chemosensory epithelium electrogram of nasal receptors (EGNR) was
shown to be dose dependent and similar in both male and female healthy
volunteers after receiving ascending doses of PH94B. Maximal EGNR amplitude was
achieved at the 3.2 ?g dose in both men (n=10) and women (n=10), and no
significant increase was seen at higher doses (6.4 ?g and 12.8 ?g).



SAD Phase 2 Studies

Positive Outcomes in Public Speaking and Social Interaction-Induced Stressors in a Clinical Setting

Phase 2 development of PH94B began with a two-part public speaking and social
interaction challenge study. In this randomized, double-blind,
placebo-controlled Phase 2 clinical trial (n=91) conducted at three clinical
sites, 91 adult female subjects diagnosed with SAD underwent a placebo baseline
period followed a week later by a randomized treatment period and intranasal
administration of 1.6 ?g of PH94B. PH94B (1.6 ?g) was administered intranasally
15 minutes prior to both a performance challenge (public speaking) and a social
interaction challenge simulation, which took place at the clinical sites. The
two challenges were separated by a 30-minute rest period. The primary outcome
measure was the Subjective Units of Distress Scale (SUDS). Peer-reviewed results
published in the American Journal of Psychiatry (Monti, et al., Am. J.
Psychiatry (2014) 171:675-682) showed statistically significant results for
reducing anxiety during a public speaking performance and during social
interactions in a clinical setting. During the public speaking challenge,
subjects randomized to treatment with PH94B (n = 45) showed a 26.7-point
improvement in mean SUDS scores following the treatment visit with PH94B as
compared to the SUDS scores during the baseline visit (placebo treatment). In
comparison, subjects randomized to treatment with placebo (n = 46) showed an
improvement of only 14.0 points in mean SUDS scores compared to baseline. The
PH94B treatment group's improvement in the public speaking challenge
significantly exceeded that of the placebo group's improvement (t = 3.16, p =
0.002).

Positive results in outpatients with SAD

PH94B is designed with the potential to lower anxiety acutely, on an as-needed
basis, and to achieve cumulative functional improvement with continued use, such
as less frequent avoidance of stressful or anxiety-provoking situations and
reduced fear and anxiety about such situations. Accordingly, the protocol for a
subsequent randomized, double-blind, placebo-controlled multiple administration
assessment Phase 2 crossover study (n=22) involving both adult males (n =11) and
females (n=11), required subjects to self-administer PH94B or placebo nasal
spray in an outpatient setting (i.e., not in a clinical environment) acutely, on
an as-needed basis, just prior to an anxiety-provoking situation, up to four
times a day, for two weeks. The primary efficacy measure in the study was the
SUDS and the secondary efficacy measure was the Liebowitz Social Anxiety Scale
(LSAS). Dr. Michael Liebowitz, the innovator of the widely used LSAS, was the
Principal Investigator of this study.



                                      -20-

————————————————– ——————————

Table of Contents

The change from baseline SUDS scores was significantly greater for all subjects
while taking PH94B compared with the placebo group. The average change from
baseline SUDS score was 15.6 points for all subjects while on PH94B and was
8.3 points while on placebo (paired t-test = 3.09; p = 0.006; effect size
0.658). During the first two weeks of treatment, subjects who received PH94B
first dropped an average of 23 points in LSAS score, while those who received
placebo first dropped only eight points on average, showing a trend difference
(p = 0.07) with a large effect size of 0.812.



Looking at only the first two weeks of treatment, subjects who received PH94B
first had a significantly greater decrease in their avoidance score on the LSAS
than those who received placebo first (p = 0.02, Cohen's d = 1.078). A large
effect size (0.78) and trend to significance (p = 0.083) in favor of PH94B also
was observed when comparing overall the Clinical Global Impression (CGI) score
means for PH94B and placebo during the first two weeks of treatment. Patient
Global Impression of Change (PGI-C) ratings also showed improvement for PH94B
after two weeks of treatment (p = 0.024).

No drug-related serious adverse events (SAEs) were reported during the study. All adverse events (AEs) were mild or moderate and the frequencies of their occurrence did not differ significantly between active and placebo treatments.

We believe this multiple-administration assessment Phase 2 study conducted
outside a clinical environment indicates the potential for cumulative functional
improvement with longer use of PH94B, while still being used acutely, as-needed,
as subjects are increasingly able to engage in previously difficult social and
performance situations in their daily lives more frequently and with less fear
and anxiety.

SAD PALISADE Phase 3 Program (PALISADE-1, PALISADE-2 and PALISADE Open Study)

In May 2021, we initiated our PALISADE Phase 3 Program for PH94B in SAD with
PALISADE-1, our single-administration assessment Phase 3 clinical study of PH94B
for the acute treatment of anxiety in adults with SAD. Following discussions
with the FDA in mid-2020 during the early phase of the COVID-19 pandemic, we
agreed to design PALISADE-1 in a manner substantially similar to the
single-administration Phase 2 public speaking challenge study of PH94B in SAD,
which study involved self-administration of a single dose of PH94B by subjects
randomized to the treatment arm of the study prior to a public speaking
challenge conducted only in a clinical setting. In July 2022, we announced that
PALISADE-1 did not achieve its primary efficacy endpoint, as measured by change
from baseline using the SUDS as compared to placebo. Although PALISADE-1 did not
meet its primary efficacy endpoint, the safety and tolerability of PH94B in
PALISADE-1 were favorable and consistent with previously reported results from
previous clinical trials.



In October 2021, we initiated PALISADE-2, which involves the same study design
as PALISADE-1 but primarily involves different clinical sites. In July 2022,
after receiving top line results from PALISADE-1, we paused recruitment and
enrollment in PALISADE-2 to allow independent third-party biostatisticians to
conduct an interim analysis of available data from subjects randomized in
PALISADE-2 up to the date we paused the study. In September 2022, based on their
review of unblinded data from the 140 subjects who had completed PALISADE-2, the
independent third-party biostatisticians recommended that we continue PALISADE-2
as planned. Although we did not and do not have access to any unblinded data
from PALISADE-2, based on the outcome of the interim analysis and the
recommendation from the independent biostatisticians, we are preparing to
restart PALISADE-2 as soon as practicable and plan to continue the study to the
targeted enrollment of 208 adult subjects.



We initiated the PALISADE Open Label Study (PALISADE OLS) in October 2021 to
evaluate the safety and tolerability of PH94B in adult subjects with SAD taken
as needed prior to acute anxiety-provoking social and performance situations in
daily life, up to four times per day, over a period of up to 12 months. In
addition to assessing safety and tolerability, we also included several
exploratory objectives, including assessment of PH94B's potential to achieve
overall symptom reduction and improvement in severity of SAD, as measured by the
LSAS, the efficacy endpoint required by the FDA for prior SAD approvals. In
August 2022, we closed recruitment and enrollment in the PALISADE OLS.
Preliminary analysis of nearly 400 subjects in the final data set for the
PALISADE OLS demonstrate robust functional improvement in anxiety-provoking
social and performance situations in daily life, as measured by the LSAS. We now
have two data sets supporting PH94B's ability to improve LSAS scores - the
PALISADE OLS over a period of one month and beyond, and a published
double-blind, placebo-controlled Phase 2 cross-over study after two weeks of
use.  These two studies combined demonstrate the potential for PH94B to achieve
robust overall reduction in symptoms of SAD and improvement in severity over
time as measured by the LSAS.  We believe LSAS measurements over time may be
well suited for a Phase 3 trial to demonstrate efficacy and the true impact of
PH94B on patients' lives given that it measures overall improvement in disease
severity by capturing the reduction in fear and anxiety as well as the avoidance
of social and performance situations. These studies reinforce our belief in the
potential of PH94B, used acutely as-needed in daily life, to provide
rapid-onset, clinically meaningful, and sustained response with a favorable
safety and tolerability profile.



Taking into consideration the results of PALISADE-1, we believe the combination
of data from two positive Phase 2 clinical studies of PH94B in SAD, the results
of the interim analysis of PALISADE-2, preliminary LSAS-related data from our
PALISADE OLS study and the overall safety profile of PH94B in all studies to
date support our confidence in PH94B's therapeutic potential in SAD and several
other anxiety-related indications. Accordingly, in parallel, we are currently
preparing to restart PALISADE-2 and to meet with the FDA to reach consensus with
the FDA on a clearly-defined plan for the next Phase 3 study of PH94B in SAD,
taking into account multiple potential outcomes of PALISADE-2.



                                      -21-

————————————————– ——————————

Table of Contents

Exploratory phase 2A development for AjDA and future development opportunities

We are currently conducting an exploratory Phase 2A clinical study of PH94B to
assess its therapeutic potential in adults experiencing Adjustment Disorder with
Anxiety (AjDA). We recently completed enrollment in the study and anticipate top
line results in the first calendar quarter of 2023. Adjustment Disorder (AjD)
refers to a maladaptive emotional or behavioral response to an identifiable
stressor. AjD occurs within three months of exposure to the stressor as
evidenced by marked distress that is out of proportion to the socially or
culturally expected reactions to the stressor, or that represents significant
impairment in social, occupational or other important areas of daily
functioning. Current pharmacological treatments for AjDA vary widely and include
antidepressants (SSRIs and SNRIs), benzodiazepines, buspirone and natural
products such as cannabidiol.  Our randomized, double-blind, placebo-controlled
exploratory Phase 2A study in AjDA involves daily use of PH94B administered four
times per day in a real-world outpatient setting for 28 days.

We plan to evaluate additional potential development opportunities involving PH94B, both for potential acute and ongoing use in the treatment of other anxiety-related disorders, including procedural anxiety, post-traumatic stress disorder, postpartum anxiety, and panic disorder.

PH10 Nasal Spray



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



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



AV-101



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

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

Subsidiaries



VistaGen Therapeutics, Inc., a California corporation d/b/a VistaStem
(VistaStem), is our wholly owned subsidiary. For the relevant periods, our
Consolidated Financial Statements in this Quarterly Report on Form 10-Q (Report)
also include the accounts of VistaStem's two wholly owned inactive subsidiaries,
Artemis Neuroscience, Inc., a Maryland corporation which was dissolved in April
2022, and VistaStem Canada, Inc., a corporation organized under the laws of
Ontario, Canada which was dissolved in June 2022.



                                      -22-

————————————————– ——————————

  Table of Contents

Summary of financial operations and results of operations

Our critical accounting policies and estimates and recent accounting
pronouncements are disclosed in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2022, as filed with the SEC on June 23, 2022, and in Note 3
to the accompanying unaudited Condensed Consolidated Financial Statements
included in Part 1, Item 1 of this Report.



Summary



Net Loss



We 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 to PH94B and PH10 in 2018, we have devoted
substantial resources to advance initiatives related to research, development,
and contract manufacturing of our intranasal investigational product candidates,
PH94B and 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 calendar 2021 and to date in calendar 2022, we have
allocated significant resources to our PALISADE Phase 3 Program evaluating PH94B
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 PH10 in MDD in late September 2022
and our planned initiation of a small Phase 1 clinical study of PH10 later this
calendar year to facilitate potential Phase 2B clinical development of PH10 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 September 30, 2022, we
had an accumulated deficit of approximately $304.9 million. Our net loss for the
six months ended September 30, 2022 and 2021 was approximately $37.3 million and
$21.3 million, respectively, and was approximately $47.8 million and $17.9
million for the fiscal years ended March 31, 2022 (Fiscal 2022) and 2021 (Fiscal
2021), respectively. We expect losses to continue for the foreseeable future as
we engage in further research, development and regulatory activities related to
PH94B, PH10 and AV-101.

Summary of the six months ended September 30, 2022

Throughout Fiscal 2022 and through the date of this Report, we have continued to
advance our nonclinical and clinical development, manufacturing, and regulatory
activities necessary for (i) Phase 3 clinical development of PH94B as a
potential acute treatment of anxiety in adults with SAD, (ii) advancing our
Phase 2A clinical study of PH94B in adults experiencing AjDA, (iii) submitting
our PH10 IND and initiating a small Phase 1 study of PH10 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 PH94B 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 PH94B 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 the
restart and completion of PALISADE-2 and to future clinical studies of PH94B in
SAD and/or other anxiety indications. As noted above, in July 2022 we paused
recruitment and enrollment of PALISADE-2 while we engaged independent
third-party biostatisticians to conduct an interim assessment of data then
available from randomized subjects in that study. We received the results of
that interim assessment in September 2022 and, as a result, we are preparing to
resume recruitment and enrollment of subjects in PALISADE-2 as soon as
practicable. In addition to pausing enrollment in PALISADE-2, we ended
recruitment and enrollment in our PALISADE OLS in August 2022 and are assessing
preliminary data from the study that we believe supports continued late-stage
clinical development of PH94B as a potential treatment for SAD in a manner
consistent with both data observed in Phase 2 development of PH94B in SAD,
i.e., with multiple assessments of PH94B's potential efficacy, as compared to
placebo, when used acutely, as-needed, over an extended period of time in an
outpatient setting, rather than a single administration assessment in an
anxiety-provoking public speaking challenge conducted in a clinical setting.



                                      -23-

————————————————– ——————————

  Table of Contents





Since the fourth quarter of Fiscal 2021, we have expanded our employee
infrastructure with experienced personnel additions 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, commercial operations, legal, contracts and corporate affairs,
development operations, and investor and public relations. We have paused
further additions to our employee base pending results from the completion of
our PALISADE-2 clinical trial of PH94B.



Throughout Fiscal 2021 and Fiscal 2022 and through the date of this Report,
strains of SARS-CoV-2, commonly referred to as COVID-19 and multiple variants of
the virus, have spread globally and the outbreak has been 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 Fiscal 2021 and 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 since Fiscal 2021 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, contract research and
development organizations (CROs), contract manufacturing organizations (CMOs)
and other third-party service providers have been, and may be in the future,
impacted by prevailing 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 2021, 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. From time to time since the
beginning of the COVID-19 pandemic, we have experienced delays in the delivery
of supplies of active pharmaceutical product (API) or other key materials
required to continue development of PH94B and PH10, as well as temporary
disruptions in the availability of third-party personnel and others involved in
the conduct of our preclinical and clinical programs. Future unexpected delays
may result in a significant, material delay or disruption to our current
clinical and nonclinical development plans, programs, and operations.



We have not completed any capital-raising or other significant financing
activities during the six months ended September 30, 2022. 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 1,517,798 shares of our common
stock and received gross cash proceeds of approximately $4.45 million under the
ATM. We have not sold any shares under the ATM from October 2, 2021 through the
date of this Report.



Given the results of PALISADE-1, we are carefully monitoring our cash resources
and critically evaluating our internal and external research and development and
general and administrative expenditures, which includes (i) resuming recruitment
and enrollment in PALISADE-2 following the independent third-party interim
analysis of data from subjects randomized in PALISADE-2 to date, (ii)
terminating the PALISADE OLS study of PH94B, (iii) continuing our Phase 2A
clinical study of PH94B in adults experiencing AjDA and (iv) preparing for a
Phase 1 clinical study of PH10 as a treatment for adults suffering from MDD.



Results of Operations

Comparison of three months ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021 (figures in thousands).

                                                              Three Months Ended September 30,
                                                                 2022                   2021

Sublicense revenue                                         $           (892 )     $            358
Operating expenses:
Research and development                                             12,895                  9,937
General and administrative                                            3,702                  3,221
Total operating expenses                                             16,597                 13,158

Loss from operations                                                (17,489 )              (12,800 )

Interest income, net                                                      6                      5

Loss before income taxes                                            (17,483 )              (12,795 )
Income taxes                                                              -                      -

Net loss                                                            (17,483 )              (12,795 )
Accrued dividends on Series B Preferred Stock                             -                   (375 )
Net loss attributable to common stockholders               $        (17,483 )     $        (13,170 )






                                      -24-

————————————————– ——————————

  Table of Contents





Revenue



We derecognized $582,500 in sublicense revenue pursuant to the AffaMed Agreement
during the six months ended September 30, 2022, compared to recognizing revenue
of $712,100 during the six months ended September 30, 2021. As described more
completely in Note 3 and Note 11 to our Condensed Consolidated Financial
Statements in Part I 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 permitted
the commencement of our revenue recognition under the AffaMed Agreement. We
recognize revenue on a straight-line basis over the period in which we expect to
perform our obligation under the AffaMed Agreement. Revenue related to our
performance obligation, which is satisfied over time, could be materially
impacted as a result 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 endpoints and the resulting anticipated delay in subsequent
clinical and regulatory processes for PH94B in SAD, at September 30, 2022, we
estimated that we would complete our performance obligation under the AffaMed
Agreement during mid-calendar 2027. As described in Note 3, 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, resulting in negative revenue of $582,500 in the six months
ended September 30, 2022, including $310,000 of revenue that had been recognized
in the quarter ended June 30, 2022. Following the cumulative catch-up
adjustment, through September 30, 2022, we have recognized an aggregate of
$1,615,900 as revenue under the AffaMed Agreement and expect to recognize the
remaining $3,384,100 as revenue over the estimated performance period as our
obligation is completed. 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.

Research and development expenses

Research and development (R&D) expense increased by approximately $12.8 million,
from $15.4 million for the six months ended September 30, 2021 to $28.2 million
for the six months ended September 30, 2022. Activities related to conducting
our PALISADE Phase 3 Program for PH94B, including PALISADE-1, PALISADE-2 and the
PALISADE OLS study, and the PH94B Phase 2 Study in AjDA, as well as nonclinical
development, outsourced manufacturing and regulatory activities for both PH94B
and PH10, accounted for increased expenses of approximately $11.8 million during
the six months ended September 30, 2022 in comparison to the activities
conducted during the six months ended September 30, 2021. We expect R&D project
expense for the remainder of Fiscal 2023 to decrease for PH94B due to completing
the PALISADE-1 study, concluding the PALISADE OLS study and deferring certain
previously projected NDA-enabling nonclinical and clinical development of PH94B,
to be somewhat offset by anticipated costs for commencing the Phase 1 clinical
trial of PH10 in MDD. Salaries and benefits expense for the six months ended
September 30, 2022 increased compared to those of the six months ended September
2021 due to the hiring of additional regulatory, clinical, CMC and data
management personnel during calendar 2021 and earlier in calendar 2022,
partially offset by a reduction in the accrual for estimated additional
compensation expense attributable to calendar 2022 corporate objectives compared
to the estimated achievement of certain corporate objectives during the 2021
calendar year. Noncash research and development expense, primarily stock-based
compensation and depreciation in both periods, accounted for approximately
$851,000 and $606,000 for the six months ended September 30, 2022 and 2021,
respectively. The following table indicates the primary components of research
and development expense for each of the periods (amounts in thousands):



                                                                 Three Months Ended September 30,
                                                                   2022                     2021

Salaries and benefits                                        $           1,744         $         1,897
Stock-based compensation                                                   466                     314
Consulting and other professional services                                 174                     165
Clinical and nonclinical studies and development expenses:
PH94B and PH10                                                           9,815                   7,191
AV-101                                                                     484                      91
All other                                                                   18                      10
                                                                        10,317                   7,292
Rent                                                                       139                     143
Depreciation                                                                27                      22
All other                                                                   28                     104
Total Research and Development Expense                       $          12,895         $         9,937






                                      -25-

————————————————– ——————————

  Table of Contents





The decrease in salaries and benefits expense for the quarter ended September
30, 2022 primarily reflects the addition of ten additional management and staff
positions across multiple functional disciplines, including biostatistics and
clinical analytics, clinical operations, chemistry, manufacturing and controls,
and regulatory affairs subsequent to September 30, 2021, as well as the impact
of salary increases effective in January 2022 granted to our R&D management and
staff. These increases are offset by the elimination during the quarter ended
September 30, 2022 of the accrual for estimated 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 the accrual of approximately $705,000 at September 30, 2021 for
estimated achievement of calendar 2021 objectives. As a result of voluntary
resignations of certain R&D employees subsequent to September 30, 2022, we
expect R&D salaries and benefit expense to further decrease in future periods.



Stock-based compensation expense for the quarter ended September 30, 2022
reflects the amortization of option grants made to our R&D staff and certain
clinical and scientific consultants since August 2020, in addition to grants to
new employees as indicated above. All outstanding options granted to R&D
employees and consultants prior to August 2020 have become fully vested and
amortized prior to the quarter ended September 30, 2022. Grants awarded after
September 30, 2021, including those granted to new employees, account for
approximately $179,000 of expense in the quarter ended September 30, 2022,
offset by an expense reduction of approximately $73,000 attributable to options
that became fully vested and amortized prior to or during the quarter ended
September 30, 2022. The impact of option forfeitures related to Fiscal 2023
terminations reduced expense by approximately $57,000 compared to expense for
the quarter ended September 30, 2021 and the extension of option exercisability
by 90 days for a terminated employee accounted for approximately $109,000 of
additional expense in the quarter ended September 30, 2022. 2019 ESPP expense
for the quarter ended September 30, 2022 was $9,500 compared to $14,400 in the
quarter ended September, 2021.

Consulting and other professional services in both periods reflect fees incurred, generally as needed, for scientific, non-clinical and clinical development and project-based regulatory advisory and analytical services provided to us by third parties primarily in support of of our PH94B and PH10 development initiatives.

PH94B expense for the quarter ended September 30, 2022 reflects (i) the costs
associated with completing PALISADE-1, including data analysis and root cause
investigations, (ii) costs associated with the PALISADE-2 study prior to its
pause and for the interim analysis of data available from PALISADE-2, (iii)
costs associated with the PALISADE OLS study prior to its termination, and (iv)
on-going costs for the Phase 2A study of PH94B in AjDA, 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 PH94B
AjDA study commenced in mid-June 2021. During the quarters ended September 30,
2022 and 2021, 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
PH94B and PH10. Additionally, there was significant regulatory activity during
the quarter ended September 30, 2022 leading to the late-September 2022
submission to the FDA of the IND for PH10 in MDD. Due to its later stage of
development, costs for PH94B initiatives have significantly exceeded those for
PH10 during both Fiscal 2023 and Fiscal 2022. However, as a result of pausing of
PALISADE-2 in July 2022 and terminating the PALISADE OLS study in August 2022,
we expect costs associated with our continued PH94B-related initiatives,
including our Phase 2 AjDA study and other nonclinical studies of PH94B, to
substantially decrease in the near-term and then increase once again as we
resume recruitment and enrollment in PALISADE-2 in the first quarter of calendar
2023. We anticipate increased clinical development expense associated with PH10
in the near term as we anticipate a U.S. Phase 1 clinical trial of PH10 to
facilitate potential U.S. Phase 2B development of PH10 for treatment of MDD. In
both periods, AV-101 project expense includes costs for certain preclinical
studies related to the use of AV-101 with adjunctive probenecid and certain
AV-101 manufacturing stability studies. Expense for the quarter ended September
30, 2022 also includes the impact of our ongoing exploratory Phase 1B AV-101 and
probenecid clinical trial.



Rent expense for both periods 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 10,
Commitments and Contingencies, in the Condensed Consolidated Financial
Statements in Part I 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.



                                      -26-

————————————————– ——————————

  Table of Contents

General and adminsitrative expenses

General and administrative (G&A) expense increased by approximately $0.5 million
to approximately $3.7 million for the quarter ended September 30, 2022, compared
to approximately $3.2 million for the quarter ended September 30, 2021. Primary
components of the increase include:

Yo. Professional services expenses incurred in anticipation of a possible

line of credit offer that we choose to waive as a result of the

PALISADE-1 result;

ii. Insurance coverage limits increased and new coverages added to our insurance

briefcase;

iii. An increase in stock-based compensation expense related to the recent option

subsidies;

IV. Increased public and investor relations and corporate awareness initiatives;

Y

v. The impact of new G&A employees hired since September 30, 2021compensated for

elimination during the fourth ended September 30, 2022 of accumulation

for estimated additional compensation expense for G&A officers and employees

       as a result of the outcome of PALISADE-1 and delay or conclusion of other
       clinical trials and nonclinical activities related to calendar year 2022

corporate operating objectives compared to the accumulation in September 30th,

       2021 for estimated achievement of calendar 2021 objectives.




Noncash general and administrative expense, approximately $491,000 and $501,000
in the quarters ended September 30, 2022 and 2021, respectively, primarily
reflects stock-based compensation and depreciation in both periods and an
adjustment to contract acquisition amortization expense in the quarter ended
September 30, 2022. The following table indicates the primary components of
general and administrative expense for each of the periods (amounts in
thousands):



                                                               Three Months Ended September 30,
                                                                 2022                     2021

Salaries and benefits                                      $          1,010         $          1,235
Stock-based compensation                                                566                      451
Board fees and other consulting services                                167                      135
Legal, accounting and other professional fees                           777                      430
Investor and public relations                                           295                      152
Pre-launch marketing studies and analyses                               426                      475
Insurance                                                               352                      144
Travel expenses                                                          41                        2
Sublicense contract amortized acquisition expense                       (84 )                     34
Rent and utilities                                                      101                      102
All other expenses                                                       51                       61
                                                           $          3,702         $          3,221




The decrease in salaries and benefits expense for the quarter ended September
30, 2022 primarily reflects the addition of six additional management and staff
positions including our Vice President, Medical Affairs in October 2021, our
Vice President, Strategic Insights and Analytics in November 2021, 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 one additional
administrative employee in June 2022, 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 the elimination during the quarter ended September 30,
2022 of the accrual for estimated additional compensation expense for G&A
officers and employees as a result of the outcome of PALISADE-1 and delay or
termination of other clinical trials and nonclinical activities related to
calendar year 2022 corporate operational objectives compared to the accrual of
approximately $537,000 at September 30, 2021 for estimated achievement of
calendar 2021 objectives. As a result of voluntary resignations of certain G&A
employees subsequent to September 30, 2022, including our Chief Commercial
Officer, we expect G&A salaries and benefit expense to further decrease in
future periods.



Stock-based compensation expense for the quarter ended September 30, 2022
reflects the amortization of option grants made to our G&A officers and staff
and certain consultants since September 2019, in addition to grants to new
employees as indicated above. With the exception of options granted in September
2019, which became fully-vested and amortized in September 2022, all outstanding
options granted to G&A employees and consultants prior to October 2020 have
become fully vested and amortized prior to the quarter ended September 30, 2022.
Grants awarded after September 30, 2021, including those granted to new
employees, account for approximately $286,000 of expense in the quarter ended
September 30, 2022, offset by an expense reduction of approximately $260,000
attributable to certain options granted between September 2019 and June 2020
that became fully vested and amortized prior to or during the quarter ended
September 30, 2022. Grants made during the quarter ended September 30, 2021
reflected a full quarter of expense during the quarter ended September 30, 2022,
increasing expense by approximately $69,000 compared to the prior year. 2019
ESPP expense for the quarter ended September 30, 2022 was approximately $4,100
compared to $6,000 for the quarter ended September 30, 2021.



                                      -27-

————————————————– ——————————

  Table of Contents





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 the quarter ended September 30, 2022 also include recruiting
fees for certain administrative positions.



Legal, accounting and other professional fees for both periods include expenses
related to routine and project-based legal services as well as accounting
services related to the audit of our annual financial statements. Expense for
both periods includes the cost of certain outsourced financial and accounting
services and our information technology service provider. Expense in both
periods also includes 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, recurring annual license fees, and 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 PH94B and PH10 intellectual
property portfolios. During the quarter ended September 30, 2022, we expensed
approximately $301,000 of professional services fees incurred in anticipation of
a potential credit facility offering that was terminated as a result of the
outcome of PALISADE-1.



Investor and public relations expense in both periods includes the fees of our
various external service providers for a broad spectrum of investor relations,
public relations and social media services, and, primarily in the quarter ended
September 30, 2022, additional market awareness and strategic advisory and
support functions and initiatives. During both periods, 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.



During both periods, we incurred expenses for a number of pre-commercialization
studies, analyses, projections, strategic modeling and awareness services,
primarily attributable to PH94B as a potential acute treatment of anxiety in
adults with SAD. Given the results of PALISADE-1 and the resulting delay to our
anticipated commercialization timeline for PH94B, we are evaluating the extent
and timing of such future activities, and it is anticipated that such
expenditures will not recur in the short term in excess of the level expended
during the quarter ended September 30, 2022.



The increase in 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 continuing
throughout both Fiscal 2021 and Fiscal 2022, 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. We incurred nominal
travel expense in the quarter ended September 30, 2022 for attendance at
seminars, clinical trial site visits and certain investor-focused events, as
conditions have permitted.



Rent expense for both periods 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 10,
Commitments and Contingencies, in the Condensed Consolidated Financial
Statements in Part I 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.



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 our performance obligation 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. During the quarter ended September 30, 2022, we reversed previously
recorded expense of $83,900, including $29,100 which had been expensed in the
quarter ended June 30, 2022. During the quarter ended September 30, 2021, we
amortized $33,600 of contract acquisition costs.



                                      -28-

————————————————– ——————————

  Table of Contents





Interest and Other Expense



Interest income, net totaled $6,100 for the quarter ended September 30, 2022,
compared to $5,100 for the quarter ended September 30, 2021. The following table
indicates the primary components of interest income and expense for each of the
periods (amounts in thousands):





                                                                 Three Months Ended September 30,
                                                                 2022                        2021
Interest income                                            $             15             $             5
Interest expense on financing lease and insurance
premium financing note                                                   (9 )                         -
Interest income, net                                       $              6             $             5




For the quarters ended September 30, 2022 and 2021, interest income relates to
cash deposits in interest-bearing cash equivalent accounts. Interest expense for
the quarter ended September 30, 2022 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 February 2021, February 2022 or May 2021.



We recognized approximately $375,200 during the quarter ended September 30, 2021
attributable to the 10% cumulative dividend accrued on then-outstanding shares
of our Series B 10% Convertible Preferred Stock (Series B Preferred) as an
additional deduction in arriving at net loss attributable to common stockholders
in the Condensed Consolidated Financial Statements. 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 1,131,669 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 3,295,778
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.

Six months ended comparison September 30, 2022 and 2021

The following table summarizes our results of operations for the six months ended September 30, 2022 and 2021 (figures in thousands).

                                                  Six Months Ended September 30,
                                                    2022                  2021

Sublicense revenue                             $          (582 )     $           712
Operating expenses:
Research and development                                28,186                15,394
General and administrative                               8,494                 5,864
Total operating expenses                                36,680                21,258

Loss from operations                                   (37,262 )             (20,546 )

Interest income, net                                         8                    10

Loss before income taxes                               (37,254 )             (20,536 )
Income taxes                                                (6 )                  (3 )

Net loss                                               (37,260 )             (20,539 )
Accrued dividend on Series B Preferred Stock                 -                  (737 )
Net loss attributable to common stockholders   $       (37,260 )     $       (21,276 )






                                      -29-

————————————————– ——————————

  Table of Contents





Revenue



We derecognized $582,500 in sublicense revenue pursuant to the AffaMed Agreement
during the six months ended September 30, 2022, compared to recognizing revenue
of $712,100 during the six months ended September 30, 2021. As described more
completely in Note 3 and Note 11 to our Condensed Consolidated Financial
Statements in Part I 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 permitted
the commencement of our revenue recognition under the AffaMed Agreement. We
recognize revenue on a straight-line basis over the period in which we expect to
perform our obligation under the AffaMed Agreement. Revenue related to our
performance obligation, which is satisfied over time, could be materially
impacted as a result 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 delay in subsequent
clinical and regulatory processes for PH94B in SAD, at September 30, 2022, we
estimated that we would complete our performance obligation under the AffaMed
Agreement during mid-calendar 2027. As described in Note 3, 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, resulting in negative revenue of $582,500 in the six months
ended September 30, 2022, including $310,000 of revenue that had been recognized
in the quarter ended June 30, 2022. Following the cumulative catch-up
adjustment, through September 30, 2022, we have recognized an aggregate of
$1,615,900 as revenue under the AffaMed Agreement and expect to recognize the
remaining $3,384,100 as revenue over the estimated performance period as our
obligation is completed. 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.

Research and development expenses

Research and development (R&D) expense increased by approximately $12.8 million,
from $15.4 million for the six months ended September 30, 2021 to $28.2 million
for the six months ended September 30, 2022. Activities related to conducting
our PALISADE Phase 3 Program for PH94B, including PALISADE-1, PALISADE-2 and the
PALISADE OLS study, and the PH94B Phase 2 Study in AjDA, as well as nonclinical
development, outsourced manufacturing and regulatory activities for both PH94B
and PH10, accounted for increased expenses of approximately $11.8 million during
the six months ended September 30, 2022 in comparison to the activities
conducted during the six months ended September 30, 2021. We expect R&D project
expense for the remainder of Fiscal 2023 to decrease for PH94B due to completing
the PALISADE-1 study, terminating the PALISADE OLS study and deferring certain
previously projected NDA-enabling nonclinical and clinical development of PH94B,
to be somewhat offset by anticipated costs for commencing the Phase 1 clinical
trial of PH10 in MDD. Salaries and benefits expense for the six months ended
September 30, 2022 increased compared to those of the six months ended September
2021 due to the hiring of additional regulatory, clinical, CMC and data
management personnel during calendar 2021 and earlier in calendar 2022,
partially offset by a reduction in the accrual for estimated additional
compensation expense attributable to calendar 2022 corporate objectives compared
to the estimated achievement of certain corporate objectives during the 2021
calendar year. Noncash research and development expense, primarily stock-based
compensation and depreciation in both periods, accounted for approximately
$851,000 and $606,000 for the six months ended September 30, 2022 and 2021,
respectively. The following table indicates the primary components of research
and development expense for each of the periods (amounts in thousands):



                                                                Six Months Ended September 30,
                                                                  2022                  2021

Salaries and benefits                                        $         3,396       $         3,204
Stock-based compensation                                                 796                   554
Consulting and other professional services                               445                   300
Clinical and nonclinical studies and development expenses:
PH94B and PH10                                                        22,400                10,630
AV-101                                                                   732                   251
All other                                                                 34                    10
                                                                      23,166                10,891
Rent                                                                     269                   296
Depreciation                                                              45                    42
All other                                                                 69                   107
Total Research and Development Expense                       $        28,186       $        15,394






                                      -30-

————————————————– ——————————

  Table of Contents





The increase in salaries and benefits expense for the six months ended September
30, 2022 primarily reflects the addition of ten new management and staff
positions across multiple functional disciplines, including biostatistics and
clinical analytics, clinical operations, chemistry, manufacturing and controls,
and regulatory affairs since September 30, 2021, 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 elimination during the six months
ended September 30, 2022 of the accrual for estimated 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 the accrual of approximately $1,130,000 at September 30,
2021 for estimated achievement of calendar 2021 objectives. As previously noted,
we expect R&D salaries and benefit expense to further decrease in future periods
as a result of voluntary resignations of certain R&D employees subsequent to
September 30, 2022.



Stock-based compensation expense for the six months ended September 30, 2022
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 have become fully vested and amortized prior
to the six months ended September 30, 2022 and the May 2019 grants became fully
vested during the six months then ended. Grants awarded after September 30,
2021, including those granted to new employees, account for approximately
$347,000 of expense for the six months ended September 30, 2022, offset by an
expense reduction of approximately $139,000 attributable to certain options
granted between May 2019 and May 2020 that became fully vested and amortized
prior to or during the six months ended September 30, 2022. Grants made during
the six months ended September 30, 2021 reflected a full six months of vesting
and amortization during the six months ended September 30, 2022, or became fully
vested and amortized, decreasing expense for such options by $68,000. The
extension of option exercisability by 90 days for a terminated employee
accounted for approximately $109,000 of additional expense for the six months
ended September 30, 2022. 2019 ESPP expense for the six months ended September
30, 2022 was $25,400 compared to $16,700 during the six months ended September
30, 2021.



Consulting and other professional services in both periods reflects fees
incurred, generally on an as-needed basis, for project-based scientific,
nonclinical and clinical development and regulatory advisory and analytical
services rendered to us by third parties primarily in support of our PH94B and
PH10 development initiatives. Expense for the six months ended September 30,
2022 also includes nominal contract recruiting services for certain specialized
R&D employee and consultant positions.



PH94B and PH10 project expense increased by approximately $11.8 million in the
six months ended September 2022 compared to the six months ended September 30,
2021. PH94B expense for the six months ended September 30, 2022 reflects (i) the
costs associated with conducting and completing the PALISADE-1 study, including
data analysis and root cause investigations, (ii) costs associated with the
PALISADE-2 study prior to its pause and for the interim analysis of data
available from PALISADE-2, (iii) costs associated with conducting the PALISADE
OLS study prior to its termination, and (iv) on-going costs for conducting the
Phase 2A study of PH94B in AjDA, as well as various other clinical, nonclinical,
regulatory and manufacturing activities. The PALISADE-1 study commenced in May
2021 and we announced the results in July 2022. The PALISADE OLS study commenced
in July 2021, PALISADE-2 commenced in August 2021 and the PH94B AjDA study
commenced in mid-June 2021. Throughout the six months ended September 30, 2022
and 2021, respectively, 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 PH94B and PH10. Additionally, there was
significant regulatory activity during the six months ended September 30, 2022
leading to the late-September 2022 submission to the FDA of the IND for PH10 in
MDD. Due to its later stage of development, costs for PH94B initiatives have
significantly exceeded those for PH10 during both Fiscal 2023 and Fiscal 2022.
However, as a result of pausing PALISADE-2 in July 2022 and terminating the
PALISADE OLS study in August 2022, we expect costs associated with our continued
PH94B-related initiatives, including our Phase 2 AjDA study and other
nonclinical studies of PH94B, to substantially decrease in the near-term and
then increase once again as we resume recruitment and enrollment in PALISADE-2
in the first quarter of calendar 2023. We anticipate increased clinical
development expense associated with PH10 in the near term as we anticipate a
U.S. Phase 1 clinical trial of PH10 to facilitate potential U.S. Phase 2B
development of PH10 for treatment of MDD. In both six-month periods, AV-101
project expense includes costs for certain preclinical studies related to the
use of AV-101 with adjunctive probenecid and certain AV-101 manufacturing
stability studies. Expense in the six months ended September 30, 2022 also
includes the impact of our ongoing exploratory Phase 1B AV-101 and probenecid
clinical trial.



Rent expense for both periods 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 10,
Commitments and Contingencies, in the Condensed Consolidated Financial
Statements in Part I 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.



                                      -31-

————————————————– ——————————

  Table of Contents

General and adminsitrative expenses

General and administrative (G&A) expense increased by approximately $2.6 million
to approximately $8.5 million for the six months ended September 30, 2022,
compared to approximately $5.9 million for the six months ended September 30,
2021. Primary components of the increase include:

(i) Usual studies, analyses, projections, strategic plans prior to commercialization.

modeling and awareness services, primarily for PH94B in SAD, started in

expectation of positive results from PALISADE Phase 3 clinical trials

Program;

(ii) Expenses for professional services incurred in anticipation of a possible

       credit facility offering that we opted to forego as a result of the
       PALISADE-1 outcome;


  (iii) Increased insurance coverage limits and new coverages added to our
        insurance portfolio;

(iv) An increase in stock-based compensation expense related to the recent option

subsidies;

(v) Expansion of business awareness and public and investor relations initiatives;

Y

(vi) The impact of new G&A employees hired since September 30, 2021compensated for

elimination during the fourth ended September 30, 2022 of accumulation

for estimated additional compensation expense for G&A officers and

employees as a result of the PALISADE-1 outcome and delay or completion

of other clinical trials and non-clinical activities related to the calendar

2022 corporate operating targets compared to the build in

September 30, 2021 for the estimated achievement of the objectives of the 2021 calendar.

Noncash general and administrative expense, approximately $1,164,000 and
$1,134,000 for the six months ended September 30, 2022 and 2021, respectively,
primarily reflects stock-based compensation and depreciation in both periods, an
adjustment to contract acquisition amortization expense in the six months ended
September 30, 2022 and a write-off of deferred offering costs in the six months
ended September 30, 2021. The following table indicates the primary components
of general and administrative expense for each of the periods (amounts in
thousands):



                                                               Six Months Ended September 30,
                                                                2022                    2021

Salaries and benefits                                      $         2,102         $         2,186
Stock-based compensation                                             1,193                     801
Board fees and other consulting services                               317                     216
Legal, accounting and other professional fees                        1,470                     905
Investor and public relations                                          696                     288
Pre-launch marketing studies and analyses                            1,727                     577
Insurance                                                              682                     266
Travel expenses                                                         60                       3
Rent and utilities                                                     194                     219
Sublicense contract amortized acquisition expense                      (55 )                    67
Write off of deferred offering costs                                     -                     232
All other expenses                                                     108                     104
                                                           $         8,494         $         5,864




The decrease in salaries and benefits expense for the six months ended September
30, 2022 primarily reflects the addition of six additional management and staff
positions including our Vice President, Medical Affairs in October 2021, our
Vice President, Strategic Insights and Analytics in November 2021, 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 one additional
administrative employee in June 2022, 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 the elimination during the six months ended September
30, 2022 of the accrual for estimated additional compensation expense for G&A
officers and employees as a result of the outcome of the PALISADE-1 study and
delay or conclusion of other clinical trials and nonclinical activities related
to calendar year 2022 corporate operational objectives compared to the accrual
of approximately $862,000 at September 30, 2021 for estimated achievement of
calendar 2021 objectives. As previously noted, we expect G&A salaries and
benefit expense to further decrease in future periods as a result of voluntary
resignations of certain G&A employees subsequent to September 30, 2022.



Stock-based compensation expense for the six months quarter ended September 30,
2022 reflects the amortization of option grants made to our G&A officers and
staff and certain consultants since May 2019, in addition to grants to new
employees as indicated above. With the exception of options granted in May 2019,
September 2019 and April 2020, which became fully vested and amortized in May
2022, September 2022 and April 2022, respectively, all outstanding options
granted to G&A employees and consultants prior to October 2020 have become fully
vested and amortized prior to September 30, 2022. Grants awarded after September
30, 2021, including those granted to new employees, account for approximately
$552,000 of expense during the six months ended September 30, 2022, offset by an
expense reduction of approximately $331,000 attributable to certain options
granted between May 2019 and June 2020 that became fully vested and amortized
prior to or during the six months ended September 30, 2022. Grants made during
the six months ended September 30, 2021 reflected a full six months of expense
during the six months ended September 30, 2022, increasing expense by
approximately $153,000 compared to the prior year. 2019 ESPP expense for the six
months ended September 30, 2022 was approximately $9,000 compared to $8,700 for
the six months ended September 30, 2021.



                                      -32-

————————————————– ——————————

  Table of Contents





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 the six months ended September 30, 2022 also include
recruiting fees for certain administrative positions.



Legal, accounting and other professional fees for both periods include expenses
related to routine and project-based legal services as well as accounting
services related to the annual audit and quarterly review of our financial
statements. Expense for both periods includes the cost of certain outsourced
financial and accounting services and our information technology service
provider. Expense in the six months ended September 30, 2021 also included costs
related to our implementation of new accounting software. Expense in both
periods also includes 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, recurring annual license fees, and 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 PH94B and PH10 intellectual
property portfolios. During the six months ended September 30, 2022, we expensed
approximately $301,000 of professional services fees incurred in anticipation of
a potential credit facility offering that we opted to forego following the
results of PALISADE-1.



Investor and public relations expense in both periods includes the fees of our
various external service providers for a broad spectrum of investor relations,
public relations and social media services, and, primarily in the six months
ended September 30, 2022, additional market awareness and strategic advisory and
support functions and initiatives. During both periods, 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.



During both periods, we incurred expenses for a number of pre-commercialization
studies, analyses, projections, strategic modeling and awareness services,
primarily attributable to PH94B as a potential acute treatment of anxiety in
adults with SAD. Given the results of PALISADE-1 and the resulting delay to our
anticipated commercialization timeline for PH94B in SAD, we have paused or
concluded most of such activities and are evaluating the extent and timing of
such future activities, and it is anticipated that such expenditures will not
recur in the short term in excess of the level expended during the six months
ended September 30, 2022.



The increase in 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 continuing
throughout both Fiscal 2021 and Fiscal 2022, 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. We incurred nominal
travel expense during the six months ended September 30, 2022 for attendance at
seminars, and for vendor audits, clinical trial site visits and certain
investor-focused events, as conditions have permitted.



Rent expense for both periods 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 10,
Commitments and Contingencies, in the Condensed Consolidated Financial
Statements in Part I 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.



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. During
the six months ended September 30, 2022, we reversed previously recorded expense
of $54,800, including $29,100 which had been expensed in the quarter ended June
30, 2022. During the six months ended September 30, 2021, we amortized $66,900
of contract acquisition costs.



In June 2021, we terminated our previous equity line agreement with Lincoln Park
Capital. 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.



                                      -33-

————————————————– ——————————

  Table of Contents





Interest and Other Expense



Interest income, net totaled $8,400 for the six months ended September 30, 2022,
compared to $10,200 for the six months ended September 30, 2021. The following
table indicates the primary components of interest income and expense for each
of the periods (amounts in thousands):





                                                                Six Months Ended September 30,
                                                                2022                      2021
Interest income                                            $            22           $           10
Interest expense on financing lease and insurance
premium financing note                                                 (14 )                      -
Interest income, net                                       $             8           $           10






For the six months ended September 30, 2022 and 2021, interest income relates to
cash deposits in interest-bearing cash equivalent accounts. Although interest
rates have increased during the six months ended September 30, 2022, our cash
deposit balances have declined as we used such amounts to fund our operations.
Interest expense for the six months ended September 30, 2022 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 February 2021,
February 2022 or May 2021.



We recognized approximately $737,000 during the six months ended September 30,
2021 attributable to the 10% cumulative dividend accrued on then-outstanding
shares of our Series B 10% Convertible Preferred Stock (Series B Preferred) as
an additional deduction in arriving at net loss attributable to common
stockholders in the Condensed Consolidated Financial Statements. 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 1,131,669 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 3,295,778
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 September 30, 2022, we have financed our
operations and technology acquisitions primarily through the issuance and sale
of our equity and debt securities for cash proceeds of approximately $208.7
million, as well as from an aggregate of approximately $22.7 million of
government research grant awards (excluding the fair market value of government
sponsored and funded clinical trials), strategic collaboration payments and
intellectual property licensing, and other revenues. Additionally, we have
issued equity securities with an approximate value at issuance of $38.2 million
in noncash acquisitions of product licenses and in settlements of certain
liabilities, including liabilities for professional services rendered to us or
as compensation for such services.



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



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





                                      -34-

————————————————– ——————————

  Table of Contents





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



Subject to certain restrictions, our Registration Statement on Form S-3 (the S-3
Shelf Registration Statement) remains available for future sales of our equity
securities in one or more public offerings from time to time. While we may make
additional sales of our equity securities under the S-3 Shelf Registration
Statement, we do not have an obligation to do so.



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



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



Cash and Cash Equivalents

The following table summarizes the changes in cash and cash equivalents for the periods indicated (in thousands):

                                                              Six Months Ended September 30,
                                                                2022                  2021

Net cash used in operating activities                      $       (32,309 )     $       (17,623 )
Net cash used in investing activities                                 (200 )                (200 )
Net cash provided by (used in) financing activities                   (339 )               8,342

Net decrease in cash and cash equivalents                          (32,848 )              (9,481 )
Cash and cash equivalents at beginning of period                    68,135               103,108
Cash and cash equivalents at end of period                 $        35,287       $        93,627




As described 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 Fiscal 2022 and during the six
months ended September 30, 2022. The increase in cash used in operations during
the six months ended September 30, 2022 reflects our continued conduct,
completion, pause or termination of PH94B 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 periods, but to a much greater extent during
the six months ended September 30, 2022, in parallel with our clinical and
regulatory initiatives, and in expectation of positive results from the PALISADE
Phase 3 Program, we have engaged in customary pre-commercialization analyses,
modeling, planning and awareness initiatives. Given the results of the
PALISADE-1 study, we have paused most of such activities and are evaluating the
extent and timing of such future activities. Cash used in investing activities
during the six months ended September 30, 2022 reflects laboratory analytical
equipment acquired for our internal studies and experiments on both PH94B and
PH10 and cash used during the six months ended September 30, 2021 primarily
reflects the cost of laboratory analytical equipment acquired for use by our CMO
in connection with the development and production of PH94B drug product. Cash
used by financing activities during the six months ended September 30, 2022 is
primarily the result of the proceeds of option exercises and the purchase of
common stock under our ESPP, net of principal payments on our insurance premium
financing note and expenditures related to the ATM transaction with Jefferies
which are recorded as deferred offering costs. Cash provided by financing
activities during the six months ended September 30, 2021 is primarily the
result of warrant exercises, net of expenditures related to the ATM transaction
with Jefferies and recorded as deferred offering costs.



                                      -35-

————————————————– ——————————

  Table of Contents

Off-Balance Arrangements

We have no off-balance sheet deals.

Recent Accounting Pronouncements

For information related to recent accounting pronouncements and the expected impact of such pronouncements on our condensed consolidated financial statements, see Note 3 of the Notes to the Condensed Consolidated Financial Statements included in Part I of this Report.

© Edgar Online, source glimpses