Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
The registrant had 194,515,899 shares of Common Stock, par value
$.001 par value per share, outstanding as of May 20, 2013.
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial
statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information
and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the Securities and Exchange Commission (the “SEC”)
on October 15, 2012. In the opinion of management, this interim information includes all material adjustments, which are of a normal
and recurring nature, necessary for fair presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities
owned and non-readily marketable securities.
The results of operations for the three and nine months ended
March 31, 2013 are not necessarily indicative of the results to be expected for the entire year or for any other period.
2. Business Description and Going Concern
Intellect Neurosciences, Inc. (“Intellect”, “our”,
“us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) a
Delaware corporation, is a biopharmaceutical company, which together with its subsidiary Intellect Neurosciences, USA, Inc. (“Intellect
USA”), is conducting research regarding proprietary drug candidates to treat Alzheimer’s disease (“AD”)
and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related
to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts
and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal
year end is June 30. We have had no product sales through March 31, 2013 though we have received $10,516,667 in up-front and milestone
license fees from inception through March 31, 2013. Our losses from operations have been funded primarily with the proceeds of
equity and debt financings and fees due under license agreements.
We are a development stage company and our core business strategy
is to leverage our intellectual property estate through license arrangements and to develop our proprietary compounds that we have
purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies
or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development
and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development
fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific
therapeutic indications or applications. As of March 31, 2013, we had no self-developed or licensed products approved for sale
by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts
will be successful, that any products developed by any of our licensees will obtain necessary government regulatory approval or
that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology
and are dependent upon the continued services of our current employees, consultants and subcontractors.
We have limited capital resources and operations since inception
have been funded with the proceeds from equity and debt financings and license fee arrangements. As of March 31, 2013, we had cash
and cash equivalents of $85,828. We anticipate that our existing capital resources will enable us to continue operations for the
next two months. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential shareholders
or partners within the next month, we may be forced to cease operations.
Our business will require substantial additional investment
that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies
in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able
to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. If we fail to raise
additional capital or obtain substantial cash inflows from existing or potential partners, we will be unable to successfully develop
and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable terms or
at all. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities
based on the going concern uncertainty.
3. Summary of Significant Accounting Policies
Revenue Recognition
Upfront License Fees
. Consideration that we receive pursuant
to patent license agreements is recognized as income when (a) the licensee obtains a license to one or more of our patents, (b)
the licensee is responsible for all of the development work on the product candidate, (c) the licensee has the technical ability
to perform the development, (d) the licensee requires a license from us to sell the resulting drug product without infringing our
patents, (e) payment due under the license agreement is reasonably assured and (f) we have no future performance obligations under
the license agreement.
Milestones.
We enter into patent license agreements,
which contain milestones related to reaching particular stages in product development. We recognize revenues from milestones when
we have no further obligation with respect to the activities under the agreement and when we have confirmed that the milestone
has been achieved. Where we have continuing involvement obligations in the form of development efforts, we recognize revenues from
milestones ratably over the development period.
Principles of Consolidation
.
The consolidated
financial statements include the accounts of our wholly owned subsidiary, Intellect Israel, and the accounts of Mindgenix, Inc.
(“Mindgenix”), a wholly-owned subsidiary of Mindset Biopharmaceuticals, Inc. (“Mindset”). We consolidate
Mindgenix because we have agreed to absorb certain costs and expenses incurred by Mindgenix that are attributable to its research.
Dr. Chain, our CEO, is a controlling shareholder of Mindset and the President of Mindgenix. All inter-company transactions and
balances have been eliminated in consolidation
Convertible Instruments.
We evaluate and account for
conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of
the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not
re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument
with the same terms as the embedded derivative instrument would be considered a derivative instrument.
We account for convertible instruments (when we have determined
that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary,
discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences
between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated
date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred
shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction
and the effective conversion price embedded in the preferred shares.
Common Stock Purchase Warrants.
We classify as equity
any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement
in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined
in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our
control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine
whether a change in classification between assets and liabilities is required.
Preferred Stock.
We apply the guidance enumerated in
ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred
stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair
value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption
rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely
within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
Derivative Instruments
.
Our derivative financial
instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded
within our convertible debt. The accounting treatment of derivative financial instruments requires that we record the derivatives
and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent
balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date.
If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge.
If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.
During the three month periods ended March 31, 2013, we recognized
other income of $3,972, relating to recording the derivative liabilities at fair value. At March 31, 2013 and June 30, 2012, there
were $177,567 and $3,388,482 of derivative liabilities, respectively.
Our derivative instruments were valued using the Black-Scholes
option pricing model, using the following assumptions during the quarter ended March 31, 2013:
Estimated dividends:
|
None
|
Expected volatility:
|
167 %
|
Risk-free interest rate:
|
1.76 %
|
Expected term (years):
|
0.7 to 5 years
|
4. ViroPharma License Transaction
On and effective as of September 29, 2011, we entered into
an Exclusive License Agreement (the “License Agreement”) with ViroPharma Incorporated, a Delaware corporation (“ViroPharma”),
pursuant to which, among other things, we granted an exclusive license to ViroPharma regarding certain of our licensed patents
and patent applications related to our clinical stage drug candidate, OX1, an antioxidant molecule containing indole-3-propionic
acid. We expect ViroPharma to develop and commercialize OX1 as a treatment of Friedreich’s Ataxia and possibly other diseases
for which OX1 may qualify for orphan drug designation.
Under the terms of the License Agreement, we agreed to transfer
to ViroPharma all of our intellectual property rights, data and know-how related to our OX1 research and development program in
exchange for payment by ViroPharma of a $6.5 million up-front licensing fee which was received in October 2011, and additional
regulatory milestone payments based upon defined events in the United States and the European Union. The aggregate maximum of
these milestone payments assuming successful advancement of the product to market could amount to $120 million. In addition, ViroPharma
will pay us a tiered royalty of up to an aggregate maximum of low double digits based on annual net sales. NYU School of Medicine
and South Alabama Medical Science Foundation, which own certain patents in relation to OX1, are entitled to a portion of the royalties
and revenues received by us from any sale or license of OX1 pursuant to an exclusive license agreement between the universities
and us.
The term of the License Agreement will continue in effect on
a licensed product-by-licensed product and country-by-country basis until the expiration of the last royalty obligation with respect
to a licensed product in such country. Once the royalty obligation has terminated in a particular country, the license will become
non-exclusive and fully paid-up with respect to licensed products in that country.
Either party may terminate the License Agreement upon an uncured
material breach of the other party. In addition, if ViroPharma determines that it is not feasible or desirable to develop or commercialize
licensed products, it may terminate the License Agreement in whole or on a product-by-product basis at any time upon ninety (90)
days prior written notice to us. In the event of a termination of the License Agreement, other than ViroPharma’s termination
of the License Agreement for our uncured material breach, we will have an exclusive, perpetual, irrevocable, worldwide, royalty-bearing
license to exploit the licensed products.
5. Notes Payable
The “
April 2010 Notes”
On April 23, 2010, we issued Convertible Promissory Notes (the
“April 2010 Notes”) with an aggregate principal amount of $580,000. The April 2010 Notes carry interest at 14% annually
(payable in arrears) and mature three years from the date of issuance.
We determined the initial fair value of the Warrants issued
with the April 2010 Notes to be $41,093,377 based on the Black-Scholes option pricing model, which we treated as a
liability with a corresponding decrease in the carrying value of the April 2010 Notes. Under authoritative guidance, the carrying
value of the April 2010 Notes may not be reduced below zero. Accordingly, we recorded the excess of the value of the Warrants
over the face amount of the April 2010 Notes as interest expense incurred at the time of issuance of the April 2010 Notes. The
face amount of the April 2010 Notes will be amortized over the term of the notes as interest expense, calculated using an effective
interest method.
On November 3, 2010, we borrowed an additional $150,000 from
certain holders of the April 2010 Notes and evidenced such borrowing by adding an addendum to the April 2010 Notes whereby the
aggregate principal amount of such holders’ Notes was increased by $150,000. As partial consideration for the loan, we reduced
the conversion price of such holders’ Notes from $1.50 to $0.125 per common share. As a result of the “ratchet”
provisions contained in the April 2010 Notes and outstanding Warrants, the conversion price of the remaining outstanding April
2010 Notes and exercise price of our outstanding Warrants were adjusted to $0.125 per common share. The conversion price of previously
issued and outstanding Series B Convertible Preferred Stock held by holders other than the purchasers is not subject to adjustment
as a result of revisions to the April 2010 Notes.
The December 2010 Notes
On December 15, 2010, we sold investment units for an aggregate
purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “December 2010 Notes”), shares
of Series C Convertible Preferred Stock (“Series C Prefs”) and warrants (the “December 2010 Warrants”).
Total proceeds from the sale of these investment units were $500,000.
The December 2010 Notes have an aggregate face amount of $500,000,
are due on December 15, 2013 and bear interest at 14%, payable at maturity. Principal and accrued interest on the Notes are convertible
into shares of our common stock at an initial conversion price of $.125 per share, subject to customary anti-dilution protection
in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet
protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion
price of the Notes. As a result of the ratchet provisions contained in the Notes, the holders are entitled to purchase up to 10
million shares of our Common Stock.
The December 2010 Warrants initially entitle the holders to
purchase up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share. As a result of
the ratchet provisions contained in the December 2010 Warrants, the holders are entitled to purchase up to 10 million shares of
our Common Stock at an exercise price of $0.01 per share. Also, we issued an aggregate of 10,000 shares of Series C Prefs with
an initial aggregate liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained in the
Certificate of Designation of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at a conversion
price of $0.05 per share.
We allocated the $500,000 of proceeds to the December 2010
Notes and Series C Preferred shares based on their relative fair values at date of issuance, which resulted in an allocation of
$25,000 and $475,000, respectively. We determined the initial fair value of the December 2010 Warrants to be $378,017 based on
the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of
the December 2010 Notes. Under authoritative guidance, the carrying value of the December 2010 Notes may not be reduced below
zero. Accordingly, we recorded the excess of the value of the December 2010 Warrants over the allocated fair value of the December
2010 Notes as interest expense incurred at the time of issuance of the December 2010 Notes in the amount of $353,017. The
discount related to of the December 2010 Notes will be amortized over the term of the notes as interest expense, calculated using
an effective interest method.
The guidance provided in ASC 470-20-30-5 has been applied to
the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to measure the intrinsic
value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible instrument.
The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price and the market
price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial conversion feature
has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the Series C Preferred
stock is immediately convertible upon issuance and has no stated redemption date.
As a result of the “ratchet” provisions contained
in the April 2010 Notes and outstanding Warrants, the conversion price of the remaining outstanding April 2010 Notes and exercise
price of our outstanding Warrants and Series B Convertible Preferred Stock were adjusted to $0.001 per common share. The conversion
price of previously issued and outstanding Series B Convertible Preferred Stock held by holders other than the purchasers of the
April 2010 Notes is not subject to adjustment as a result of the issuance of the December 2010 Notes.
In January 2011, as a result of the “ratchet”
provisions contained in the April 2010 Notes, we issued to purchasers of the April 2010 Notes remaining outstanding an additional
2,000 shares of our Series C Prefs with an initial aggregate liquidation preference equal to $2 million, which are convertible
into 40 million shares of our common stock at an exercise price of $0.001 per share. In addition, in May 2011, we issued 429,000
shares of our Common Stock as additional compensation to certain holders of the April 2010 Notes as a result of the “ratchet”
provisions contained in those Notes.
The “March 2011 Notes”
On March 15, 2011, we sold investment units for an aggregate
purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “March 2011 Notes”), shares
of Series C Prefs and warrants (the “March 2011 Warrants”). Total proceeds from the sale of these investment units
were $500,000. The terms of the March 2011 Notes and Warrants are the same as the terms contained in the December 2010
Notes and Warrants.
The March 2011 Notes have an aggregate face amount of $500,000,
are due on March 15, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on the Notes are convertible
into shares of our common stock at an initial conversion price of $.125 per share, subject to customary anti-dilution protection
in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet
protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion
price of the Notes. As a result of the ratchet provisions contained in the March 2011Notes, the holders are entitled to purchase
up to 10 million shares of our Common Stock.
The March 2011 Warrants initially entitle the holders to purchase
up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share. As a result of the ratchet
provisions contained in the March 2011 Warrants, the holders are entitled to purchase up to 10 million shares of our Common Stock
at an exercise price of $0.001 per share. Also, we issued an aggregate of 10,000 shares of Series C Prefs with an initial aggregate
liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained in the Certificate of Designation
of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at a conversion price of $0.001 per share.
We allocated the $500,000 of proceeds to the March 2011 Notes
and Series C Prefs based on their relative fair values at date of issuance, which resulted in an allocation of $25,000 and $475,000,
respectively. We determined the initial fair value of the March 2011 Warrants to be $378,017 based on the Black-Scholes option
pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the March 2011 Notes. Under
authoritative guidance, the carrying value of the March 2011 Notes may not be reduced below zero. Accordingly, we recorded the
excess of the value of the March 2011Warrants over the allocated fair value of the March 2011 Notes as interest expense incurred
at the time of issuance of the March 2011 Notes in the amount of $353,017. The discount related to of the March 2011
Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method.
The guidance provided in ASC 470-20-30-5 has been applied to
the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to measure the intrinsic
value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible instrument.
The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price and the market
price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial conversion feature
has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the Series C Preferred
stock is immediately convertible upon issuance and has no stated redemption date.
The “June and July 2011 Notes”
On June 30, 2011, we sold investment units (“June 2011
Investment Units”) for an aggregate purchase price of $100,000. Each unit consisted of a Convertible Promissory Note (the
“June 2011 Notes”) and warrants (the “June 2011 Warrants”). Total proceeds from the sale of these investment
units were $100,000.
The June 2011 Notes have an aggregate face amount of $100,000,
are due on June 30, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on the June 2011 Notes
are convertible into shares of our common stock at an initial conversion price of $.05 per share, subject to customary anti-dilution
protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to
full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then
effective conversion price of the June 2011 Notes. The June 2011 Warrants entitle the holders to purchase up to a total of 10
million shares of our Common Stock at an initial exercise price of $0.05 per share.
We determined the initial fair value of the June 2011 Warrants
to be $817,151 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease
in the carrying value of the June 2011 Notes by $100,000 with the excess of $717,151 charged to interest expense. This difference
was amortized over the term of the June 2011 Notes as interest expense, calculated using an effective interest method.
During July and August, 2011, we sold additional investment
units for an aggregate purchase price of $150,000. Each unit consisted of a Convertible Promissory Note (the “July 2011
Notes”) and warrants (the “July 2011 Warrants”). Total proceeds from the sale of these investment units were
$150,000.
The June 2011 Notes issued in July have an aggregate face amount
of $150,000, are due on various dates during July and August, 2014 and bear interest at 14%, payable at maturity. Principal and
accrued interest on the July 2011 Notes are convertible into shares of our common stock at an initial conversion price of $.05
per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations
and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents
by us at a price less than the then effective conversion price of the Notes. The July 2011 Warrants entitle the holders to purchase
up to a total of 20 million shares of our Common Stock at an initial exercise price of $0.05 per share.
We determined the initial fair value of the July 2011 Warrants
to be $1,626,973 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease
in the carrying value of the July 2011 Notes by $150,000 with the excess of $1,476,973 charged to interest expense.
In April 2012, we issued 500,000 shares of our common stock
to one of the holders of July 2011 Notes upon his conversion of $25,000 principal amount due with respect to such Notes (Note
11.)
The “April and May 2012” Financing
During April and May 2012, we sold investment units for an
aggregate purchase price of $201,500. Each unit consisted of a Convertible Promissory Note (the April and May 2012 Notes”)
and warrants (the “April and May 2012 Warrants”). Total proceeds from the sale of these investment units were $201,500.
The April and May 2012 Notes have an aggregate face amount
of $201,500, are due in April and May 2015 and bear interest at 14%, payable at maturity. Principal and accrued interest are convertible
into shares of our common stock at an initial conversion price of $0.05 per share, subject to customary anti-dilution protection
in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet
protection in the case of any sale of common stock or common stock equivalent by us at a price less than the effective conversion
price of the April 2012 Notes. The April and May 2012 Warrants entitle the holders to purchase up to 25,150,000 shares of our
Common Stock at an initial exercise price of $0.05 per share.
We determined the initial fair value of the April and May 2012
warrants to be $1,100,650 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding
decrease in the carrying value of the April and May 2012 Notes by $201,500 with the excess of $899,150 charged to interest expense.
The discount related to the April and May 2012 Notes will be amortized over the term of the notes as interest expense, calculated
using an effective interest method.
During July, August and September 2012, we sold additional
investment units for an aggregate purchase price of $360,000, with the same terms as the April and May 2012 Notes. Each unit consisted
of a Convertible Promissory Note and Warrants. Total proceeds from the sale of these investment units were $360,000.
These additional April and May 2012 Notes have an aggregate
face amount of $360,000, are due in July, August and December 2015 and bear interest at 14%, payable at maturity. Principal and
accrued interest are convertible into shares of our common stock at an initial conversion price of $0.05 per share, subject to
customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations
and subject to full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less
than the effective conversion price of the April 2012 Notes. These additional April and May 2012 Warrants entitle the holders
to purchase up to 23,000,000 shares of our Common Stock at an initial exercise price of $0.05 per share.
During October, November and December 2012, and January 2013
we sold additional investment units for an aggregate purchase price of $310,500, with the same terms as the April and May 2012
Notes. Each unit consisted of a Convertible Promissory Note and Warrants. Total proceeds from the sale of these investment units
were $310,500.
These additional April and May 2012 Notes have an aggregate
face amount of $310,500, are due in October, November and December 2015 and January 2016 and bear interest at 14%, payable at
maturity. Principal and accrued interest are convertible into shares of our common stock at an initial conversion price of $0.05
per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations
and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalent
by us at a price less than the effective conversion price of the April 2012 Notes. These additional April and May 2012 Warrants
entitle the holders to purchase up to 50,150,000 shares of our Common Stock at an initial exercise price of $0.05 per share.
January 2013 Financing
During January, February and March 2013, we sold investment
units for an aggregate purchase price of $250,000. Each unit consisted of a Convertible Promissory Note (the January 2013 Notes”)
and warrants (the “January 2013 Financing Warrants”). Total proceeds from the sale of these investment units were
$250,000.
The January 2013 Notes have an aggregate face amount of $250,000,
are due in January, February and March 2016 and bear interest at 14%, payable at maturity. Principal and accrued interest are
convertible into shares of our common stock at an initial conversion price of $0.01 per share, subject to customary anti-dilution
protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to
full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less than the effective
conversion price of the April 2012 Notes. The April and May 2012 Warrants entitle the holders to purchase up to 125,000,000 shares
of our Common Stock at an initial exercise price of $0.01 per share.
We determined the initial fair value of the January 2013 Financing
warrants to be $1,175,988 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding
decrease in the carrying value of the January 2013 Notes by $250,000 with the excess of $925,988 charged to interest expense.
The discount related to the January 2013 Notes will be amortized over the term of the notes as interest expense, calculated using
an effective interest method.
The following table sets forth a summary of all of the outstanding
convertible promissory notes at March 31, 2013:
Convertible promissory notes issued
|
|
$
|
3,535,000
|
|
Allocated to preferred stock
|
|
|
(376,062
|
)
|
Notes repaid
|
|
|
(400,000
|
)
|
Less amounts converted to common stock
|
|
|
(625,000
|
)
|
|
|
|
2,133,938
|
|
Less debt discount
|
|
|
1,166,790
|
|
Balance March 31, 2013
|
|
$
|
967,148
|
|
6. Convertible Preferred Stock and Derivative Liability
Series B Convertible Preferred Stock
During the fiscal year ended June 30, 2007, we issued 459,309
shares of Series B Convertible Preferred Stock (the “Series B Prefs”). The shares carry a cumulative dividend of 6%
per annum. The initial conversion price is 1.75 per share subject to certain anti-dilution adjustments. Each Series B Preferred
share carries a stated value of $17.50 and is convertible into 10 shares of our Common Stock. We issued 3,046,756 warrants in
connection with the issuance of the Series B Prefs (the “Series B Warrants”).
Based on authoritative guidance, we accounted for the Series
B Prefs and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes option pricing model.
We recorded the amount received in consideration for the Series B Prefs as a liability for the Series B Prefs with an allocation
to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the Series B Prefs
and the Series B Warrants will be marked to market for all future periods they remain outstanding with an offsetting charge to
earnings.
At March 31, 2013, the aggregate liquidation value of the Series
B Prefs was $1,870,380, with a fair value of $172,874. As of March 31, 2013, we have accrued Series B Preferred Stock dividends
payable of $553,435 which has been recognized as interest expense.
As a result of the “ratchet” provisions contained
in the Certificate of Designation of the Series B Prefs, the conversion price of the remaining Series B Prefs, as subsequently
amended by a majority in interest of the holders of the series B Prefs, was reduced to $0.05 per common share as a result of the
December 2010 Financing transaction described above. The conversion price of previously issued and outstanding Series B Prefs
held by holders other than the purchasers of the April 2010 Notes is not subject to adjustment as a result of the issuance of
the December 2010 Notes or March 2011 Notes.
Series C Convertible Preferred Stock
Effective December 15, 2010, our Board of Directors approved
a Certificate of Designation of Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock carries
a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution protection in the
case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection
in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price
of the Series C Preferred Stock. We issued to the purchasers of the December 2010 Notes 12,000 shares of our Series C Convertible
Preferred Stock with an initial aggregate liquidation preference equal to $12 million, which are convertible into 240 million
shares of our common stock.
On March 15, 2011, we issued to certain purchasers of the March
2011 Notes an additional 10,000 shares of our Series C Convertible Preferred Stock with an initial aggregate liquidation preference
equal to $10 million, which are convertible into 200 million shares of our common stock, in exchange for $500,000 (Note 5).
During the nine month period ended March 31, 2013, we issued
24,000,000 shares of our common stock to holders of Series C Preferred upon conversion of their shares.
Series D Convertible Preferred Shares
Effective October 24, 2010, our Board of Directors approved
a Certificate of Designation of Series D Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock carries
a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution protection in the
case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection
in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price
of the Series D Preferred Stock. The Series D Preferred Stock was issued to holders of our warrants in exchange for cancellation
of those warrants. The number of shares of Series D Preferred Stock issued to each warrant holder is an amount equal to the number
of Series D Preferred Shares that would be convertible into an amount of common shares equal to 50% of the number of warrants
held by such holder. Based on this formula, we issued 6,716 shares of Series D Preferred stock, which are convertible into 134,320,000
shares of our common stock.
During the three months ended March 31, 2013, we issued 20,000,000
shares of our common stock to holders of Series D Preferred upon conversion of their shares.
Series E Convertible Preferred Shares
Effective January 2, 2013, our Board of Directors approved
a Certificate of Designation of Series E Convertible Preferred Stock. Each share of Series E Convertible Preferred Stock carries
a stated value of $1,000 and a conversion price of $0.01 per common share, subject to customary anti-dilution protection in the
case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection
in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price
of the Series E Preferred Stock. The Series E Preferred Stock was issued to holders of royalty rights with respect to the Company’s
anti-senilin patent estate (the “Royalty Rights”) in exchange for the Royalty Rights held by them. On January 2, 2013,
we issued 2,000 shares of Series E Preferred stock, which are convertible into 200,000,000 shares of our common stock.
The Company recognized this difference between the fair value
per share of its common stock and the conversion price, multiplied by the number of shares issuable upon conversion. This Beneficial
Conversion Feature of $700,000 was recorded as additional paid-in-capital for common shares, per EITF 98-5 “Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”. The offsetting
amount was amortizable over the period from the issue date to the first conversion date. Since the Series E Preferred Stock is
immediately convertible, a deemed dividend of $700,000 to the Series E Preferred Stock was recorded and immediately amortized.
As the Company is in an accumulated deficit position, the deemed dividend was charged against additional paid-in-capital for common
shares, there being no retained earnings from which to declare a dividend. The net income (loss) attributable to common shareholders
reflects both the net income (loss) and the deemed dividend
7. Outstanding Warrants and Warrant Liability
The “2006 Warrants”
In connection with the sale of the 2006 Notes, we issued warrants
(the “2006 Warrants”), entitling the holders to purchase up to 43,428 shares of our common stock. We issued additional
2006 Warrants upon extension of the maturity date of certain of the 2006 Notes. The 2006 Warrants expire five years from date
of issuance, except for 22,857 of such warrants, which expire in 2013. The number of shares underlying each 2006 Warrant is the
quotient of the face amount of the related 2006 Note divided by 50% of the price per equity security issued in the Next Equity
Financing, which occurred on May 12, 2006. The 2006 Warrant exercise price is 50% of the price per equity security issued in the
Next Equity Financing. The maximum number of shares available for purchase by an investor is equal to the principal amount of
such holder's 2006 Note divided by the warrant exercise price.
As of October 26, 2012, a total of 22,857 warrants were exchanged
for Series D Preferred Shares.
The “Convertible Note Warrants”
In connection with the sale of the 2007 and 2008 Notes, we
issued 76,751 and 3,714 warrants, respectively. In addition, we issued 7,429 warrants in connection with a Convertible
Note issued during fiscal year ended June 30, 2009 (the “Convertible Note Warrants”).
The Convertible Note Warrants expire five years from
date of issuance. The number of shares underlying each Convertible Note Warrant is the quotient of the face amount of the related
Note divided by 87.5. The exercise price of each warrant is $87.50 per share, subject to anti-dilution adjustments. These warrants
provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying
the Warrants in the event that we decide to register any of our common stock either for our own account or the account of a security
holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the Warrants
fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would
be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted
for the Convertible Note Warrants as liabilities. The liability for the Convertible Note
Warrants, measured at fair
value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes.
These warrants expired without being exercised in February 2012.
In connection with the Convertible Note Financing, we issued
28,464 warrants to the placement agent. Based on authoritative guidance, we have accounted for these warrants as liabilities.
The liability, measured at fair value on the date of issuance using a Black-Scholes option pricing model, will be marked to market
for each future period the warrants remain outstanding. As of March 31, 2013, all of these warrants remain outstanding, with an
exercise price of $0.05 per share.
The “Royalty Warrants”.
In connection with the issuance of the Royalty Notes, we issued
warrants to purchase up to 65,429 of our common shares (the “Royalty Warrants”). We issued approximately
7,429 warrants to the lender who advanced to us new funds of $650,000 and issued the remaining 58,000 warrants to the other lenders
who exchanged their notes for Royalty Notes. The Royalty Warrants contain the same terms as the Convertible Note Warrants described
above.
Based on authoritative guidance, we accounted for the 7,429
Royalty Warrants issued to the unrelated lender as a liability. We valued these warrants on the date of issuance based on a Black-Scholes
option pricing model and the resulting liability is marked to market for each future period these warrants remain outstanding,
with the resulting gain or loss being recorded in the statement of operations. We accounted for the 58,000 Royalty Warrants issued
to the other lenders as interest expense incurred in exchange for an extension of the maturity dates of the Royalty Notes exchanged
in the transaction.
As of June 30, 2010, all of the holders of the Royalty Notes
accepted common stock in repayment of their notes and agreed to the cancellation of their Royalty Warrants.
The “Purchaser Warrants”.
In connection with the sale of the August
Note, we agreed, at maturity or early repayment of the note, to issue either common shares or warrants to purchase up
to 60,000 of our common shares (the Purchaser Warrants). The Purchaser Warrants were to contain the same terms as the Convertible
Note Warrants described above. Based on authoritative guidance, we accounted for the Purchaser Warrants as a liability as of the
date of issuance and reduced the carrying value of the August Note by the initial fair value of these Warrants.
On April 23, 2010, we agreed to issue to the holder of the August
2009 Note 15 million shares of our common stock in lieu of the Purchaser Warrants.
The “Series B Warrants”
In connection with the issuance of the Series B Preferred, we
issued Series B warrants to purchase up to 75,939 shares of our common stock. The initial exercise price of the Series B Warrants
was $2.50 per common share, subject to anti-dilution adjustments. The strike price of the Series B Warrants was subsequently reduced
to $1.75 per common share pursuant the anti-dilution adjustment. The Series B Warrants have a 5 year term.
The Series B Warrants provide for cashless exercise under certain
circumstances. Accordingly, the amount of additional shares underlying potential future issuances of Series B Warrants is indeterminate.
There is no specified cash payment obligation related to the Series B Warrants and there is no obligation to register the common
shares underlying the Series B Warrants except in the event that we decide to register any of our common stock for cash (“piggyback
registration rights”). Presumably, we would be obligated to make a cash payment to the holder if we failed to satisfy our
obligations under these piggyback registration rights. Based on authoritative guidance, we have accounted for the Series B Warrants
as liabilities. As of March 31, 2013, a total of 2,857 Series B Warrants remain outstanding, with a strike price of $0.05 per share.
The “April 2010 Warrants”.
In connection with the April 2010 Financing, we issued a total
of 1,546,667 Class A, 1,546,667 Class B and 1,546,667 Class C Warrants (collectively, the “April 2010 Warrants”). The
Class A Warrants have a 5 year term, an initial exercise price of $1.50 per common share, subject to anti-dilution adjustments
and contain a “cashless exercise feature”. The Class B Warrants have a 9 month term and an initial exercise price of
$1.50 per common share, subject to anti-dilution adjustments. The Class C Warrants have a 5 year and 9 month term, an initial exercise
price of $1.50 per common share, subject to anti-dilution adjustments and contain a “cashless exercise feature”. The
April 2010
Warrants provide the holder with “piggyback registration rights” as described above. Based on
authoritative guidance, we have accounted for the April 2010
Warrants as liabilities. The liability, measured at fair
value on the date of issuance using a Black-Scholes option pricing model has been offset by a reduction in the carrying value of
the April 2010 Notes and will be marked to market for each future period they remain outstanding.
On June 28, 2010, holders of 1,013,333 Class A Warrants exercised
their Warrants through the cashless exercise feature and received a total of 11,000 shares of Company common stock.
As a result of the “ratchet” provisions contained
in the April 2010 Warrants, the number of warrants and the exercise price of the warrants are subject to adjustment as a result
of the December 2010 Notes described above.
On March 15, 2011 holders of 4 million Class B Warrants exercised
their Warrants for cash and received a total of 4 million shares of our Common Stock. The remaining Class B Warrants
expired in January 2011.
As of October 26, 2012, a total of 53,733,333 April 2010 A warrants
were exchanged for Series D Preferred shares.
“Consultant Warrants”
In connection with the April 2010 financing, we issued 700,000
warrants to various consultants (the “Consultant Warrants”) with terms that are the same as those contained in the
Class A Warrants. Based on authoritative guidance, we have accounted for the Consultant
Warrants as liabilities.
On June 28, 2010, holders of all of the outstanding Consultant
Warrants exercised their Warrants through the cashless exercise feature and received a total of 11,000 shares of Company common
stock.
In August and October 2010, we issued an additional 6,000,000
warrants to consultants for investor relations and legal services. These warrants expire five years from the date of issuance.
The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide the holder
with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the
event that we decide to register any of our common stock either for our own account or the account of a security holder (other
than with respect to registration of securities covered by certain employee option plans. The terms of the warrants fail to specify
a penalty if we fail to satisfy our obligation under these piggyback registration rights. Presumably we would be obligated to make
a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for these consultant
warrants as liabilities, measured at fair value, based on a Black-Scholes option pricing model.
As of October 26, 2012, 6,000,000 Consultant Warrants were exchanged
for Series D Preferred shares.
“The December 2010 and March 2011 Warrants”
In connection with the sale of the December 2010 Notes and March
2011 Notes, we issued warrants, we issued a total of 20,000,000 warrants (the “December 2010 and March 2011 Warrants”).
These warrants expire five years from the date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution
adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register
the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account
or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans.
The terms of the warrants fail to specify a penalty if we fail to satisfy our obligation under these piggyback registration rights.
Presumably we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance,
we have accounted for these consultant warrants as liabilities, measured at fair value, based on a Black-Scholes option pricing
model.
As of October 26, 2012, 9,800,000 of December 2010 and March
2011 Warrants, were exchanged for Series D Preferred shares.
The “June and July 2011 Warrants”
In connection with the sale of the June Notes, we issued a total
of 30 million warrants (the “June and July 2011 Warrants”). The June and July 2011 Warrants expire five years from
date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide
the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants
in the event that we decide to register any of our common stock either for our own account or the account of a security holder
(other than with respect to registration of securities covered by certain employee option plans). The terms of the June and July
Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably,
we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we
have accounted for the June and July 2011 Warrants as liabilities. The liability for the June and July 2011 Warrants, measured
at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related
Notes.
As of October 26, 2012 30 million “June and July 2011”
warrants were exchanged for Series D Preferred shares.
The “2011 Director Warrants”
In October 2011, we issued warrants to purchase 2,881,680 shares
of our common stock to our former independent directors in partial satisfaction of outstanding fees owed to such directors (the
“2011 Director Warrants”). The 2011 Director Warrants have a 5 year term, an initial exercise price of $0.05 per common
share, subject to anti-dilution adjustments, and contain a “cashless exercise feature”. The 2011 Director Warrants
provide the holder with “piggyback registration rights” as described above. Based on authoritative guidance, we have
accounted for the 2011 Director Warrants as liabilities. The liability, measured at fair value on the date of issuance using a
Black-Scholes option pricing model will be marked to market for each future period they remain outstanding. As of March 31, 2013
2,881,680 warrants are outstanding
The “April and May 2012” Warrants
In connection with the sale of the April and May 2012 Notes,
we issued a total of 109,400,000 warrants (the “April and May 2012 Warrants”). The April and May 2012 Warrants expire
five years from date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments.
These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares
underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account
of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms
of the April and May 2012 Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration
rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative
guidance, we have accounted for the April and May 2012 Warrants as liabilities. The liability for the April and May 2012 Warrants,
measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of
the related Notes.
As of October 26, 2012, 76,150,000 “April and May 2011”
warrants were exchanged for Series D Preferred shares, an additional 19,900,000 warrants were issued with the notes issued in January
2013, while 33,250,000 warrants were outstanding as of December 31, 2012. On March 13, 2013, all of the outstanding warrants were
exchanged for common stock in a cashless exercise and 29,525,879 shares of common stock were issued.
The MRCT Warrants
In September 2012, we issued warrants to purchase 11,200,000
shares of our common stock to MRC Technology in consideration for fees owed to them by the Company for their work on a project
to humanize one of our beta-amyloid specific, monoclonal antibodies for the treatment of Alzheimer’s Disease. The 2012 MRCT
Warrants have a 5 year term, an initial exercise price of $0.0625 per common share, subject to anti-dilution adjustments, and contain
a “cashless exercise feature”. The 2012 MRCT Warrants provide the holder with “piggyback registration rights”
as described above. Based on authoritative guidance, we have accounted for the 2012 MRCT Warrants as liabilities. The liability,
measured at fair value on the date of issuance using a Black-Scholes option pricing model will be marked to market for each future
period they remain outstanding.
As of March 31, 2013, 11,200,000 warrants remain outstanding.
The January Consulting Warrants
In January 2013, we issued warrants to purchase 2,500,000 shares
of our common stock to three consultants in consideration for fees owed to them by the Company. The warrants have a 5 year term,
an initial exercise price of $0.01 per common share, subject to anti-dilution adjustments, and contain a “cashless exercise
feature”. The January Consulting Warrants provide the holder with “piggyback registration rights” as described
above. Based on authoritative guidance, we have accounted for the January Consulting Warrants as liabilities. The liability, measured
at fair value on the date of issuance using a Black-Scholes option pricing model will be marked to market for each future period
they remain outstanding.
As of March 31, 2013, 2,500,000 warrants remain outstanding.
The January 2013 Financing
Warrants
In connection with the
sale of the January 2013 Notes, we issued a total of 125,000,000 warrants. The January 2013 Financing Warrants expire five years
from date of issuance. The exercise price of each warrant is $0.01 per share, subject to anti-dilution adjustments. These warrants
provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying
the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security
holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the January
2013 Financing Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights.
Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance,
we have accounted for the January 2013 Financing Warrants as liabilities. The liability for the January 2013 Financing Warrants,
measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of
the related Notes.
As of March 31, 2013,
125,000,000 warrants remain outstanding.
8. Capital Deficiency
Common stock
In July 2012, we issued 2,000,000 shares of our common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In August 2012, we issued 1,000,000 shares of our common stock
in consideration for services rendered to the Company.
In September 2012, we issued 1,750,000 shares of our common
stock in consideration for services rendered to the Company.
In September 2012, we issued 3,000,000 shares of our common
stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In January 2013, we issued 5,000,000 shares of our common stock
in consideration for services rendered to the Company.
In January 2013, we issued 2,000,000 shares of our common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In February 2013, we issued 20,000,000 shares of our common
stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In February 2013, we issued 8,000,000 shares of our common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In March 2013, we issued 8,000,000 shares of our common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
In March 2013, we issued 29,525,879 shares of our common stock
to holders of 45,850,000 warrants upon their cashless exercise of the conversion feature contained in those securities.
9. Per Share Data
The following table sets forth the information needed to compute
basic and diluted earnings per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
Restated
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, basic
|
|
$
|
(5,685,025
|
)
|
|
$
|
(7,488,030
|
)
|
|
$
|
(5,968,218
|
)
|
|
$
|
7,707,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
132,672,974
|
|
|
|
83,687,853
|
|
|
|
114,635,115
|
|
|
|
76,293,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income earnings per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, basic
|
|
$
|
(5,685,025
|
)
|
|
$
|
(7,488,030
|
)
|
|
$
|
(5,268,218
|
)
|
|
$
|
7,707,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
658,964
|
|
|
|
534,986
|
|
|
|
1,847,665
|
|
|
|
1,710,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes
|
|
|
75,869
|
|
|
|
69,131
|
|
|
|
135,405
|
|
|
|
164,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, diluted
|
|
$
|
(4,950,192
|
)
|
|
$
|
(6,883,913
|
)
|
|
$
|
(3,285,148
|
)
|
|
$
|
9,581,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
132,672,974
|
|
|
|
83,687,853
|
|
|
|
114,635,115
|
|
|
|
76,293,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
37,169,640
|
|
|
|
106,294,004
|
|
|
|
81,361,288
|
|
|
|
102,063,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series B preferred shares
|
|
|
4,593,090
|
|
|
|
4,593,090
|
|
|
|
4,593,090
|
|
|
|
4,593,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series C preferred shares
|
|
|
421,343,478
|
|
|
|
425,560,440
|
|
|
|
415,223,358
|
|
|
|
431,283,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series D preferred shares
|
|
|
114,320,000
|
|
|
|
-
|
|
|
|
76,594,400
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series E preferred shares
|
|
|
195,555,556
|
|
|
|
|
|
|
|
66,671,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible notes
|
|
|
70,200,000
|
|
|
|
27,050,000
|
|
|
|
70,200,000
|
|
|
|
27,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
975,854,738
|
|
|
|
647,185,387
|
|
|
|
829,278,418
|
|
|
|
641,283,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
0.01
|
|
10. Income Taxes
No provision for income taxes has been recorded due to the utilization
of net operating losses for which a 100% valuation allowance had been provided.
11. Subsequent Events
Management has evaluated events occurring after the date of
these financial statements through the date these financial statements were issued. There were no material subsequent events as
of that date other than disclosed below.
On April 2, 2013, we issued 5 million shares of common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
On April 16, 2013, we issued 2 million shares of common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
On April 18, 2013, we issued 2 million shares of common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
On April 22, 2013, we issued 5 million shares of common stock
to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
Effective May 3, 2013, Dr. Daniel Chain resigned as Chief Executive
Officer and Chairman of the Board of Directors of the Company.
ITEM 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition
and results of operations contains information that management believes is relevant to an assessment and understanding of our results
of operations. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this
report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended
June 30, 2011 and Risk Factors contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the
“SEC”) on October 15, 2012. Certain statements set forth below constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. See “Special Note Regarding Forward-Looking Statements”. References to “Intellect,” the
“Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and its
subsidiaries.
General
We are a biopharmaceutical company developing and advancing
a patent portfolio related to specific therapeutic approaches for treating Alzheimer’s disease (“AD”). In addition,
we are developing proprietary drug candidates to treat AD and other diseases associated with oxidative stress.
Since our inception in 2005, we have devoted substantially all
of our efforts and resources to advancing our intellectual property portfolio and research and development activities. We have
entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we
nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate
under a single segment. Our fiscal year end is June 30.
Our core business strategy is the licensing of our intellectual
property and development of innovative therapeutics that we have purchased, developed internally or in-licensed from universities
and others. We seek to complete human proof of concept (Phase II) studies and then enter into collaboration agreements, licenses
or sales to complete product development and commercialize the resulting drug products. We intend to obtain revenues from licensing
fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property
for specific therapeutic indications or applications.
Our most advanced drug candidate, OX1 (OX1), is a chemically
synthesized form of a small, potent, dual mode of action, naturally occurring molecule. In September 2011, we granted an exclusive
license to ViroPharma Incorporated (“ViroPharma”) regarding certain of our licensed patents and patent applications
related to OX1 and transferred to ViroPharma all of our data and know-how related to OX1 in exchange for payment by ViroPharma
of a $6.5 million up-front licensing fee, which we received in October, 2011, and additional regulatory milestone payments based
upon future defined events in the United States and the European Union. ViroPharma expects to develop and commercialize OX1 as
a treatment of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
Our pipeline includes drugs based on our immunotherapy platform
technologies, ANTISENILIN and RECALL-VAX. These immunotherapy programs are based on monoclonal antibodies and therapeutic vaccines,
respectively, to prevent the accumulation and toxicity of the amyloid beta toxin. Both are in pre-clinical development. Our lead
product candidate in our immunotherapy programs is IN-N01, a monoclonal antibody that has undergone certain procedures in the humanization
process at MRCT in the UK.
Our current business is focused on granting licenses to our
patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the treatment of AD
through outsourcing and other arrangements with third parties. We expect research and development, including patent related costs,
to continue to be the most significant expense of our business for the foreseeable future. Our research and development activity
is subject to change as we develop a better understanding of our projects and their prospects. Total research and development costs
from inception through March 31, 2012 were $14,642,151
Results of Operations
Three Months Ended March 31, 2013 Compared to Three Months
Ended March 31, 2012:
|
|
Quarter Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Research and Development Costs
|
|
|
25,380
|
|
|
|
33,348
|
|
|
|
7,968
|
|
General and Administrative
|
|
|
3,017,254
|
|
|
|
919,302
|
|
|
|
(2,097,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(3,042,634
|
)
|
|
$
|
(952,650
|
)
|
|
$
|
(2,089,984
|
)
|
|
|
Quarter Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Loss from operations
|
|
|
(3,042,634
|
)
|
|
|
(952,650
|
)
|
|
|
(2,089,984
|
)
|
Other expenses:
|
|
|
(1,942,391
|
)
|
|
|
(6,535,380
|
)
|
|
|
4,592,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,985,025
|
)
|
|
$
|
(7,488,030
|
)
|
|
$
|
2,503,005
|
|
Our operating loss increased $2,089,984 to a loss of $3,042,634
for the three months ended March 31, 2013 from an operating loss of $952,650 for the three months ended March 31, 2012. Research
and Development costs decreased by $7,968 to $25,380 for the three months ended March 31, 2013 from $33,348 for the quarter ended
March 31, 2012, primarily due to a decrease in spending on our leading drug candidate OX-1 as we licensed the product to ViroPharma
the prior year. General and Administrative expenses decreased by $2,097,952 602,048 to $3,017,254 for the quarter ended March 31,
2013, compared to $919,302 for the quarter ended March 31, 2012. The increase is primarily due to non-cash charge of $2,700,000
for the issuance of our Series E Preferred shares. Other expenses decreased approximately $600,000 which was due to a decrease
in professional fees of $384,427, primarily legal patent fees, and a decrease in salary and benefit expenses of $99,647 as we moved
to a consulting CFO from a permanent CFO. The remaining decreases were in various accounts as the Company managed its expenses
to conserve its cash.
Other expenses were $1,942,391 for the three months ended March
31, 2013, compared to $6,535,380 for the three months ended March 31, 2012. Interest expense increased $1.166,168 to $1,946,363
for the quarter ended March 31, 2013, primarily due an approximately $1.0 million charge to interest expense for the warrants issued
with the January 2013 Financing Notes, the interest expense incurred for the Series D Preferred shares as well as an increase in
convertible notes payable as the Company has increased the amount of notes outstanding. In the quarter ended March 31, 2013 the
Company recorded a gain on the change in the fair market value of derivative instruments of $3,972 compared to a loss of $5,755,185
in the prior year quarter. This is primarily due to the conversion of the majority of our outstanding warrants to Series D Preferred
Shares in October 2012.
Nine Months Ended March 31, 2013 Compared to Nine Months
Ended March 31, 2012
|
|
Nine Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Revenue
|
|
|
-
|
|
|
|
6,500,000
|
|
|
|
(6,500,000
|
)
|
Research and Development Costs
|
|
|
209,362
|
|
|
|
189,199
|
|
|
|
(20,163
|
)
|
General and Administrative
|
|
|
3,782,759
|
|
|
|
5,264,329
|
|
|
|
1,481,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(3,992,121
|
)
|
|
$
|
1,046,472
|
|
|
$
|
(5,038,593
|
)
|
|
|
Nine Months Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
Income (loss) from operations
|
|
|
(3,992,121
|
)
|
|
|
1,046,472
|
|
|
|
(5,038,593
|
)
|
Other income (expenses):
|
|
|
(1,276,097
|
)
|
|
|
6,660,903
|
|
|
|
(7,937,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,268,218
|
)
|
|
$
|
7,707,375
|
|
|
$
|
(12,975,593
|
)
|
Our operating loss increased $5,038,593 to a loss of $3,992,121
for the nine months ended March 31, 2013 from an operating profit of $1,046,472 for the nine months ended March 31, 2012. This
was due to a decrease in license fees of $6.5 million as we granted our license to ViroPharma for our patents and patent applications
to our drug candidate OX1 in the prior year period. Also, our Research and Development costs increased but were offset by a decrease
in General and Administrative expenses.
Research and Development costs increased by $20,163, from $189,199
for the nine months ended March 31, 2012 to $209,362 for the nine months ended March 31, 2013, primarily due to the payment of
warrants for work performed on a project to humanize one of our beta-amyloid specific, monoclonal antibodies for the treatment
of Alzheimer’s disease.
General and Administrative expenses decreased by $1,481,570
to $3,782,759 for the nine months ended March 31, 2013, from $5,264,329 for the nine months ended March 31, 2012. The decrease
is mostly due to the fact that we paid $1.3 million in licensing fees to our research partners and $826,000 to consultants who
helped secure the licensing agreement with ViroPharma in the prior year period. The Company also had miscellaneous decreases in
General and Administrative expenses which were primarily decreases in professional fees, primarily legal and consulting fees as
the Company prepared to license its drug candidate OX1 in the prior year quarter. These decreases were offset by a $2.7 million
non-cash charge for the issuance of the Series E Preferred shares in the period ended March 31, 2013.
Total other expenses were $1,276,097 for the nine months ended
March 31, 2013, compared to income of $6,660,903 for the nine months ended March 31, 2012. This is due to the recording of a gain
on the change in the fair market value of derivative instruments and preferred stock liability of $2,596,441, for the period ended
March 31, 2013 compared to a gain on the change in the fair market value of our derivative and preferred stock liability of $10,881,693
for the nine months ended March 31, 2012, a decrease of income of $7,937,000, primarily due to a decrease in the amount of warrants
outstanding as a majority of warrants were converted to Series D Preferred shares. Interest expense was $3,872,538 for the nine
months ended March 31, 2013 compared to expense of $4,220,790 for the period ended March 31, 2012, a decrease of $348,252. The
decrease in interest expense was primarily due to a decrease in the amount of warrants granted with the convertible notes sold
during the period ended March 31, 2012 compared to the period ended March 31, 2013.
Liquidity and Capital Resources
Since our inception in 2005, we have mainly
generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the
foreseeable future. As of March 31, 2013, our deficit accumulated during the development stage was $80,104,676. Our income (loss)
from operations for the nine months ended March 31, 2013 and 2012 was $(3,992,121) and $1,046,472, respectively. Our cash provided
(used) in operations was $(927,479) and $336,750 for the nine months ended March 31, 2013 and 2012, respectively. Our capital deficiency
was $9,856,136 as of March 31, 2013.
We have limited capital resources and operations
since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of March 31,
2013, we had cash and cash equivalents of $85,828. In September 2011, we granted an exclusive license to ViroPharma regarding certain
of our licensed patents and patent applications related to OX1 in exchange for payment by ViroPharma of a $6.5 million up-front
licensing fee which was received in October, 2011, and additional regulatory milestone payments based upon defined events in the
United States and the European Union. Proceeds from this transaction were used to pay expenses related to the ViroPharma transaction,
payment of accounts payable and fund working capital. We anticipate that our existing capital resources will enable us to continue
operations for the next few months. However, our business will require substantial additional investment that we have not yet secured.
We cannot be sure how much we will need to spend in order to develop new products and technologies in the future. Further, we will
not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional
financing on acceptable terms or secure funds from new or existing partners. If we fail to raise additional capital or obtain substantial
cash inflows from existing or potential partners within the next twenty four months, we will be unable to successfully develop
and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable terms or
at all.
The audit report prepared by our independent
registered public accounting firm relating to our consolidated financial statements for the year ended June 30, 2012 includes an
explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of March 31, 2013, we had no material
off-balance sheet arrangements other than obligations under various agreements as follows:
Under a License Agreement with NYU and a
similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OX1
program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement
of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay each
of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect. In September 2011,
we granted a sublicense of the License Agreements to ViroPharma pursuant to which we received a $6.5 million up-front licensing
fee and are entitled to receive additional regulatory milestone payments based upon defined events in the United States and the
European Union. Pursuant to the terms of the License Agreements, we paid SAMS and NYU $650,000 of the up-front licensing fee and
are obligated to pay a portion of future payments we may receive from ViroPharma.
Mindset acquired from Mayo Foundation for
Medical Education and Research (“Mayo”) a non-exclusive license to use certain transgenic mice as models for AD and
is obligated to pay Mayo a royalty of 2.5% of any net revenue that Mindset receives from the sale or licensing of a drug product
for AD in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMSF to conduct
research with respect to OX1. Pursuant to the Assignment that we executed with the SAMSF, we agreed to assume Mindset’s obligations
to pay royalties to Mayo. We have not received any net revenue that would trigger a payment obligation to Mayo.
Pursuant to a Letter Agreement with the
Institute for the Study of Aging, we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical
development of OX1.
Under a Research Agreement with MRC Technology
(“MRCT”), we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related
to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty
based on sales, of the resulting drug products. MRCT has achieved their research milestones and we have included the total $560,000
in accrued expenses. On September 16, 2012 the Company issued to MRCT 11,200,000 warrants with an exercise price of $0.0625 in
full consideration for the money owed to MRCT.
Under the terms of a Beta-Amyloid Specific,
Humanized Monoclonal Antibody Purchase and Sale Agreement with Immuno-Biological Laboratories Co., Ltd (“IBL”), we
agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales of any
pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.
Under the terms of a Royalty Participation
Agreement effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties that
we receive from the license of our ANTISENILIN patent estate.
Under a License Agreement with Northwestern
University (“NWU”) related to our TOC-01 program, we are obligated to make future payments totaling approximately $700,000
to NWU upon achievement of certain milestones based on phases of clinical development and also to pay NWU a royalty based on product
sales.
Under the terms of a consulting agreement
with a former member of our Board of Directors, we are obligated to pay $1,000,000 from revenue generated from product sales or
licenses. We have paid $119,070 to date.
Under an Agreement with The Regents of The
University of California, on behalf of its Irvine campus ("University") executed in April 2012, we are obligated to make
future payments totaling approximately $176 thousand to the University as payment for research and development work to be conducted
by the University related to our Anti-Amyloid RECALL-VAX vaccine, Anti-Tau RECALL-VAX vaccine and the combination of Anti-Beta
Amyloid and Anti-Tau RECALL-VAX vaccine.
In the ordinary course of business, we enter
into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for
companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant
to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred
by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted
by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited.
We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result,
the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for
these provisions as of June 30, 2012 or 2011.
In the normal course of business, we may
be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental
actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim.
If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States,
an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits
and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements
in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to
be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate
or different estimates that could have been selected could have a material impact on our consolidated results of operations or
financial condition.
Convertible Instruments
We evaluate
and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging
Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for
them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which
(a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the
economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative
instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered
a derivative instrument.
We account for convertible instruments (when
we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based
upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related
debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion
options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment
date of the transaction and the effective conversion price embedded in the preferred shares.
Common Stock Purchase Warrants
We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own
stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts
that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event
is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or
net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each
reporting date to determine whether a change in classification between assets and liabilities is required.
Preferred
Stock.
We apply
the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and
measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in
stockholders’ equity.
Derivative Instruments
. Our derivative
financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features
embedded within our convertible debt. The accounting treatment of derivative financial instruments requires that we
record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value
as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or
expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet
date, we recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent
balance sheet date, we recorded non-operating, non-cash income.
Research and Development Costs and Clinical
Trial Expenses.
Research and development costs include costs directly attributable to the conduct of research and
development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research
equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors,
including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research,
preclinical development, and clinical trials. All costs associated with research and development are expensed as incurred.
Revenue Recognition.
We recognize
revenue in accordance with authoritative accounting guidance, which provides that non-refundable upfront and research and development
milestone payments and payments for services are recognized as revenue as the related services are performed over the term of the
collaboration.