Consolidated Statements of Cash Flows
|
|
|
|
|
April 25, 2005
|
|
|
|
Year Ended
|
|
|
(inception)
|
|
|
|
June 30,
|
|
|
through June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,755,510
|
)
|
|
$
|
1,896,990
|
|
|
$
|
(83,891,966
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
|
|
|
|
836,769
|
|
Amortization of financing costs
|
|
|
-
|
|
|
|
|
|
|
|
2,403,966
|
|
Change in unrealized gain of derivative instruments
|
|
|
(1,974,084
|
)
|
|
|
(7,194,320
|
)
|
|
|
(43,831,532
|
)
|
Stock and warrant based compensation
|
|
|
3,799,786
|
|
|
|
161,606
|
|
|
|
18,087,586
|
|
Interest expense related to warrants
|
|
|
3,029,911
|
|
|
|
2,376,123
|
|
|
|
44,419,043
|
|
Write-off of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
Shares issued in connection with merger
|
|
|
-
|
|
|
|
-
|
|
|
|
7,020,000
|
|
Shares issued for note extensions and compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
753,453
|
|
Conversion of common stock to new Series B preferred shares
|
|
|
-
|
|
|
|
-
|
|
|
|
6,606,532
|
|
Non-cash interest expense
|
|
|
3,651,997
|
|
|
|
3,203,958
|
|
|
|
20,114,258
|
|
Non-cash expense related to Series B dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
1,802,611
|
|
Disposition of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
43,412
|
|
Loss on sale of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
179,516
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Prepaid expenses and other assets
|
|
|
19,585
|
|
|
|
(20,385
|
)
|
|
|
(898
|
)
|
License fee receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,963
|
)
|
Accounts payable and accrued expenses
|
|
|
97,646
|
|
|
|
(435,838
|
)
|
|
|
3,439,494
|
|
Accrued interest
|
|
|
|
|
|
|
(71,152
|
)
|
|
|
-
|
|
Deferred lease liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other long term liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(71,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities:
|
|
|
(1,130,669
|
)
|
|
|
(83,018
|
)
|
|
|
(22,019,932
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,912
|
)
|
Acquisition of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,059,699
|
)
|
Restricted cash
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cash paid for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities:
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,213,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
6,153,828
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,761,353
|
|
Proceeds from sale of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
7,711,150
|
|
Preferred stock issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(814,550
|
)
|
Proceeds from sale of Convertible Promissory Notes
|
|
|
1,166,000
|
|
|
|
351,500
|
|
|
|
12,124,000
|
|
Repayment of borrowings from stockholder
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,706,000
|
)
|
Convertible Promissory Notes issuance cost
|
|
|
-
|
|
|
|
-
|
|
|
|
(466,100
|
)
|
Repayment of borrowings from noteholders
|
|
|
(32,500
|
)
|
|
|
(367,500
|
)
|
|
|
(1,725,000
|
)
|
Proceeds from excersise of stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities:
|
|
|
1,133,500
|
|
|
|
(16,000
|
)
|
|
|
23,238,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,831
|
|
|
|
(99,018
|
)
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
2,307
|
|
|
|
101,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
5,138
|
|
|
$
|
2,307
|
|
|
$
|
5,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow informations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
|
73,378
|
|
|
$
|
145,115
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Convertible Notes payable and accrued interest into Common Stock (including derivative liability)
|
|
|
-
|
|
|
|
25,000
|
|
|
$
|
16,285,736
|
|
Conversion of Preferred Stock to Common Stock
|
|
|
62,000
|
|
|
|
55,476
|
|
|
|
6,860,451
|
|
Common Stock issued in repayment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
248,000
|
|
Accrued dividend on Series B prefs treated as capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
387,104
|
|
Cashless excersise of Warrant for Common Stock
|
|
|
411,615
|
|
|
|
144,074
|
|
|
|
18,843,360
|
|
Debt discount from warrants and beneficial conversion feature
|
|
|
890,697
|
|
|
|
351,500
|
|
|
|
1,542,197
|
|
Deemed preferred stock dividend from beneficial conversion feature
|
|
|
700,000
|
|
|
|
-
|
|
|
|
1,650,000
|
|
Issuance of warrants for repayment of accrued expenses
|
|
|
560,000
|
|
|
|
144,085
|
|
|
|
704,085
|
|
See
notes to consolidated financial statements
Note 1. Business Description and Going Concern
Intellect Neurosciences, Inc., a Delaware
corporation, (“Intellect”, “our”, “us”, “we” or the “Company” refer
to Intellect Neurosciences, Inc. and its subsidiaries) is a biopharmaceutical company, which together with its subsidiary, Intellect
Neurosciences, USA, Inc. (“Intellect USA”), is engaged in the discovery and development of disease-modifying therapeutic
agents for the treatment and prevention of neurodegenerative conditions, collectively known as proteinopathies, which include
Alzheimer’s (“AD”), Parkinson’s and Huntington disease. 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. We have had no product sales from inception but we have received $10,516,667 in license fees from inception
through June 30, 2013. Our losses from operations have been funded primarily with the proceeds of equity and debt financings and
fees from license arrangements.
We are a development stage company and our core business strategy is to build a portfolio of compounds
with the potential to treat or prevent neurodegenerative diseases, develop each to pre-determined milestones, and license them
to pharmaceutical companies for advanced development and commercialization. To supplement our own work, we intend to license promising
novel technologies and early stage compounds from academia and other biotechnology companies. 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.
As of June 30, 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.
One of our key assets is our ANTISENILIN
patent estate. We have entered into two license agreements and one option agreement with major global pharmaceutical
companies with respect to this patent estate. In addition, we have licensed OX1to ViroPharma Inc. (“ViroPharma”) who
intend to develop and commercialize OX1 as a treatment for Friedreich’s Ataxia and possibly other diseases for which OX1
may qualify for orphan drug designation
Our proprietary pipeline includes:
OX1 – Licensed to ViroPharma, Inc
.
OX1 is an orally-administered,
brain-penetrating, naturally-occurring copper-binding small molecule, which has the potential to treat various neurodegenerative
diseases such as Friedreich's Ataxia, Parkinson’s and Wilson’s disease. OX1 was tested in human Phase I safety clinical
trials involving 90 healthy elderly volunteers and was found to be well tolerated, even at high pharmacological doses. Our rights
in the intellectual property underlying OX1 are licensed from New York University (“NYU”) and the University of South
Alabama Medical Science Foundation (“SAMSF”).
In September 2011,
we granted an exclusive license to ViroPharma Incorporated (“ViroPharma”) regarding certain of our licensed patents
and patent applications related to OX1. (See Material Agreements below.) 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. Friedreich's
Ataxia is an inherited disease that causes progressive damage to the nervous system, resulting in symptoms ranging from gait disturbance
to speech problems; it can also lead to heart disease and diabetes.
CONJUMAB: NO1-OX2
N01-OX2 is a first-in-class antibody drug
conjugate for treatment of proteinopathies. It is a humanized monoclonal antibody specific for beta amyloid protein that has been
empowered to deliver on-site neuroprotection by its conjugation to melatonin. Melatonin is a potent free radical scavenger and
is recognized as an inhibitor of beta amyloid aggregation. N01-OX2 is designed to reduce oxidative stress and promote clearance
of beta amyloid, which are central to cellular inflammation and damage. N01-OX2 utilizes a mouse antibody that we acquired from
Immuno-Biological Laboratories Co., Ltd. (“IBL”), which was humanized by MRCT.
OLIGOTOPE: TOC-01
TOC -01 is a murine monoclonal antibody
selective for tau oligomers. We plan to test TOC-01 as a potential therapeutic for Alzheimer’s disease and other tauopathies.
The OLIOGOTOPE platform consists of protein oligomer selective antibodies and methods of making them using chemically cross-linked
stabilized aggregates as antigens. Our rights in the intellectual property underlying TOC-01 are licensed from Northwestern University
(“NWU”).
RECALL VAX: RV03
RV03 is a first-in-class bi-specific vaccine
targeting both beta amyloid and delta tau. Delta tau is a shorter form of the tau protein. It is especially toxic to nerve cells
and precedes the formation of neurofibrillary tangles. RV03 has potential for the treatment of Alzheimer’s disease and Frontotemporal
dementias. The RECALL-VAX technology, invented by Dr. Benjamin Chain, Ph.D., (brother of Daniel Chain, our Chief Executive
Officer and Chairman), has been assigned to us.
These consolidated financial statements
are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. Since our inception in 2005, we have generated
losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable
future. As of June 30, 2013, we had negative working capital of $12,321,404 and our deficit accumulated during the development
stage was $83,891,966. We have primarily generated a loss from operations, the Company had an operating loss of $4,347,686
for the for the year ended June 30, 2013 compared to operating income for the year ended June 30, 2012 of $283,782. Our
cash used in operations was $1,130,669 and $83,018 for the years ended June 30, 2013 and 2012, respectively. Our capital deficiency
was $13,548,426 and $11,079,928 as of June 30, 2013 and 2012, respectively.
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 June 30, 2013, we had cash and cash equivalents of $5,138. 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 and additional regulatory milestone payments based upon defined events in the United States
and the European Union.
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 partners within the next month, we may be forced to cease operations. We cannot assure
you that financing will be available in a timely manner, on favorable terms or at all.
On April 12, 2011, we completed a 50 to1
reverse stock split. The accompanying financial statements and notes to the financial statements presented herein give retroactive
effect to the reverse split for all periods presented.
Note 2. Summary of Significant Accounting Policies
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.
Use of Estimates.
The
preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States
involves the use of estimates and assumptions that affect the recorded amounts of assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates
include the fair value of derivative instruments, including stock options and warrants to purchase our common stock, recognition
of clinical trial costs, certain consulting expenses and deferred taxes. Actual results may differ substantially from
these estimates.
Stock-Based Compensation.
We recognize
compensation expense for stock-based compensation in accordance with ASC Topic 718. For employee stock-based awards, we calculate
the fair value of the award on the date of grant using the Black-Scholes method for stock options and the quoted price of our common
stock for unrestricted shares; the expense is recognized over the service period for awards expected to vest. For non-employee
stock-based awards, we calculate the fair value of the award on the date of grant in the same manner as employee awards, however,
the awards are revalued at the end of each reporting period and the pro rata compensation expense is adjusted accordingly until
such time the nonemployee award is fully vested, at which time the total compensation recognized to date equals the fair value
of the stock-based award as calculated on the measurement date, which is the date at which the award recipient’s performance
is complete. The estimation of stock-based awards that will ultimately vest requires judgment, and to the extent actual results
or updated estimates differ from original estimates, such amounts are recorded as a cumulative adjustment in the period estimates
are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical
experience.
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.
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.
During the years ended June 30, 2013 and
2012, we recognized other income of approximately $2.5 million and $7.2 million, respectively, relating to recording the derivative
liabilities at fair value. At June 30, 2013 and 2012 there were approximately $2.6 million and $3.4 million of derivative
liabilities.
Our derivative instruments were valued using
the Black-Scholes option pricing model, using the following assumptions during the year ended June 30, 2013:
Estimated dividends
|
|
None
|
|
Expected volatility
|
|
331%
|
|
Risk-free interest rate
|
|
1.45%
|
|
Expected term (years)
|
|
1.0 - 5.0 years
|
|
Fair value of financial instruments.
We adopted
the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as
used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value
measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts payable and accrued expenses are carried at historical cost basis, which
approximates their fair values because of the short-term nature of these instruments. The carrying amounts of our credit obligations
approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together
with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns
for instruments of similar credit risk.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets
for identical assets or liabilities
Level 2 — quoted prices for similar
assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable
(for example cash flow modeling inputs based on assumptions)
We measure derivative liabilities at fair
value using the Black-Scholes option pricing model with assumptions that include the fair value of the stock underlying the derivative
instrument, the exercise or conversion price of the derivative instrument, the risk free interest rate for a term comparable to
the term of the derivative instrument and the volatility rate and dividend yield for our common stock. The risk-free rate is based
on the U.S. Treasury yield curve in effect at the time of grant. The Company has not paid dividends to date and does not expect
to pay dividends in the foreseeable future due to its substantial accumulated deficit. Accordingly, expected dividends yields are
currently zero. Expected volatility is based principally on an analysis of historical volatilities of similarly situated companies
in the marketplace for a number of periods that is at least equal to the contractual term or estimated life of the applicable financial
instrument.
We also considered the use of the lattice
or binomial models with respect to valuing derivative financial instruments that feature anti-dilution price protection; however,
the differences in the results are insignificant due to the low probability of triggering price adjustments in such financial instruments.
Income taxes
. We use the asset and
liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method,
income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax
consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements
or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation
allowance is provided to reduce the deferred tax assets reported if, based on the weight of the available positive and negative
evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized.
ASC Topic 740.10.30 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. ASC Topic 740.10.40 provides guidance on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Net Loss Per Share.
Basic net
income or basic net loss per common share is computed by dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the periods. Diluted earnings per share give effect to dilutive options, warrants, convertible
debt and other potential common stock outstanding during the period. Therefore, in the case of a net loss the impact of the
potential common stock resulting from warrants, outstanding stock options, convertible debt, and convertible preferred stock are
not included in the computation of diluted loss per share, as the effect would be anti-dilutive. In the case of net income the
impact of the potential common stock resulting from these instruments that have intrinsic value are included in the diluted earnings
per share. The table sets forth the number of potential shares of common stock that have been excluded from diluted net loss per
share.
New Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04,
“Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU
2011-04”). The amendments in ASU 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP
and IFRSs. Consequently, ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair
value and for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for
the amendments in ASU 2011-04 to result in a change in the application of the requirements in Topic 820. ASU 2011-04 is effective
prospectively for interim and annual reporting periods beginning after December 15, 2011. This ASU will become effective for the
company beginning in the quarter ended January 31, 2012 and we do not expect an impact on our consolidated financial statements
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The guidance in ASU 2011-05 applies to both annual and
interim financial statements and eliminates the option for reporting entities to present the components of other comprehensive
income as part of the statement of changes in stockholders' equity. This ASU also requires consecutive presentation of the statement
of net income and other comprehensive income. Finally, this ASU requires an entity to present reclassification adjustments on the
face of the financial statements from other comprehensive income to net income. The amendments in this ASU should be applied retrospectively
and are effective for fiscal year, and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted. The adoption of this guidance is not expected to have a material impact on the Company’s financial position or
results of operations.
Note 3. Material Agreements
Mindset Asset
Transfer Agreement
. The majority of Intellect’s assets were acquired in 2005 from Mindset Biopharmaceuticals, Inc., which
we refer to as “Mindset”. Dr. Daniel Chain, our Chairman and Chief Executive Officer, founded Mindset and remains a
significant stockholder of Mindset. He had previously served as Mindset’s Chairman and Chief Executive Officer, and currently
serves as its President. Dr. Chain spends approximately 5% of his time on matters relating to Mindset. Mindset is not involved
in any business that competes, directly or indirectly, with the business of Intellect. Mindset’s current business plan is
to leverage its intellectual property estate through licenses and other arrangements and to provide transgenic mice for Alzheimer’s
disease research through its existing subsidiary, Mindgenix, Inc.
Research and License
Agreements (“RLAs”) with South Alabama Medical Science Foundation (“SAMS”) and New York University (“NYU”)
.
Effective August 1998, and as amended, Mindset entered into RLAs with SAMS and NYU. In June 2005, SAMS and NYU consented
to Mindset's assignment of the RLAs to us. Under the RLAs, we have an exclusive, worldwide, royalty-bearing license,
with the right to grant sublicenses, under certain patents and know-how relating to the use of indole-3-propionic acid among other
things, to prevent Alzheimer’s Disease (“AD”). We are obligated to make future payments to SAMS and NYU totaling
approximately $3,000,000 upon achievement of certain milestones based on phases of clinical development and approval of the FDA
(or foreign equivalent) and also to pay SAMS and NYU royalties on net sales (as defined) attributable to each product utilizing
the licensed technology. In September 2011, we granted a sublicense of the RLAs 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 RLAs, we have paid each of SAMS and NYU $650,000 of the
up-font licensing fee and are required to pay a portion of future payments we may receive from ViroPharma. (See
ViroPharma License
Agreement
below.)
Chimeric Peptide
Assignment Agreement
. Effective as of June 6, 2000, Dr. Benjamin Chain assigned to Mindset all of his right, title and interest
in certain of his inventions and patent applications related to the use of chimeric peptides for the treatment of AD. Dr. Benjamin
Chain is the brother of our Chairman and Chief Executive Officer. In exchange for such assignment, Mindset agreed to
pay a royalty to Dr. Benjamin Chain equal to 1.5% of net sales of any drug products sold or licensed by Mindset utilizing the chimeric
peptide technology. We acquired these inventions and patent applications and are obligated to make royalty payments to Dr. Benjamin
Chain upon successful development of a drug utilizing this chimeric peptide technology. We have yet to develop any drug product
that would trigger our obligation to make future payments to Dr. Benjamin Chain.
Beta-Amyloid Specific,
Humanized Monoclonal Antibody Purchase and Sale Agreement.
Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal
Antibody Purchase and Sale Agreement (the "IBL Agreement") with Immuno-Biological Laboratories Co., Ltd. ("IBL"),
we acquired two beta amyloid specific monoclonal antibodies ready for humanization, and the IBL patents or applications relating
to them. In consideration, 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 antibodies. Also, we granted to IBL a worldwide,
exclusive, paid-up license under certain of our granted patents and pending applications in Japan. The IBL Agreement expires upon
the last to expire of the relevant Intellect patents, unless earlier terminated as the result of a material breach by or certain
bankruptcy related events of either party to the agreement.
Research Collaboration
Agreement with MRC Technology (“MRCT”)
.
We entered into a Research Collaboration Agreement with MRCT
pursuant to which MRCT agreed to conduct a project to humanize one of our beta-amyloid specific, monoclonal antibodies for the
treatment of AD. We are obligated to pay MRCT a total of $200,000 of up-front fees and $560,000 of research milestone payments
related to the development of the humanized antibody and additional commercialization milestones and sales based royalties related
to the resulting drug products. Under the agreement as amended, we may deliver warrants to purchase our common stock as payment
for the $560,000 in research milestones under certain circumstances related to our future financing activities. Three of the five
research milestones have been achieved and as a result, a liability of $350,000 reflecting research milestone payment obligations
outstanding is included in Accounts Payable and Accrued Expenses. No additional work was performed and no additional liabilities
were incurred during the fiscal year ended June 30, 2013. 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.
Élan Pharma
International Limited and Wyeth License Agreement.
In May 2008, we entered into a License Agreement with AHP Manufacturing
BV, acting through its Wyeth Medica Ireland Branch, (“Wyeth”) and Elan Pharma International Limited (“Elan”)
to provide Wyeth and Elan (collectively, the “Licensees”) with certain license rights under certain of our patents
and patent applications (the “Licensed Patents”) relating to certain antibodies that may serve as potential therapeutic
products for the treatment for AD (the “Licensed Products”).
We granted the Licensees
a non-exclusive license under the Licensed Patents to research, develop, manufacture and commercialize Licensed Products. We received
an upfront payment of $1 million in May 2008 and an additional $1 million in August 2008. We are eligible to receive certain milestones
and royalties based on sale of Licensed Products.
The Licensees have
an option to receive ownership of the Licensed Patents if at any time during the term we abandon all activities related to research,
development and commercialization of our products that are covered by the Licensed Patents and no other licenses granted by us
under the Licensed Patents remain in force. Failure to incur $50,000 in patent or program research related expenses during any
six month period is considered to be abandonment. We initially recorded the up-front payment of $1 million that we received from
the Licensees in May 2008 as a deferred credit, representing our obligation to fund such future patent or program research related
expenses, and we recorded periodic amortization expense related to the deferred credit based on the remaining life of the License.
As described more fully below, we granted a license under the Licensed Patents to another pharmaceutical company in December 2008
and reclassified the balance of the deferred credit as revenue because the grant of the second license removed the requirement
contained in the abandonment clause in this Agreement. We accounted for the payment received in August 2008 as revenue in the period
of receipt.
ANTISENILIN Option
and License Agreement
. In October 2008, we entered into an Option Agreement with a global pharmaceutical company (“Option
Holder”) regarding an option to obtain a license under certain of our patents and patent applications (the “Subject
Patents”) related to antibodies and methods of treatment for AD and to make, have made, use, sell, offer to sell and import
certain Licensed Products, as defined in this agreement.
We granted the Option
Holder an irrevocable option to acquire a non-exclusive, royalty bearing license under the Subject Patents . In consideration,
the Option Holder paid us a non-refundable fee of $500,000 and agreed to pay us $2,000,000 upon exercise of the option (the “Exercise
Fee”). We are entitled to receive an additional $2,000,000 upon the grant in the United States of a Licensed Patent with
at least one Valid Claim that covers a Licensed Product in the Territory in the Field (as such terms are defined in this agreement).
An additional milestone payment shall be made to us should the Option Holder achieve certain thresholds for aggregate annual net
sales. The agreement also provides that we will be eligible to receive certain royalty payments from the Option Holder in connection
with net sales.
In December 2008, the
Option Holder exercised the option and paid us $1,550,000, which is the Exercise Fee, as adjusted.
GSK Option and License
Agreement
. In April 2009, we entered into an Option Agreement with Glaxo Group Limited (“GSK”) regarding an option
to purchase a license under certain of our patents and patent applications (the “GSK Patents”) related to antibodies
and methods of treatment for AD. We granted GSK an irrevocable option to acquire a non-exclusive, royalty bearing license under
the GSK Patents with the right to grant sublicenses, to develop, have developed, make, have made, use, offer to sell, sell, import
and have imported Licensed Products.
Upon exercise of the
option, GSK will pay us $2,000,000 and, upon the later to occur of the exercise of the option by GSK and grant to us in the United
States of a Licensed Patent with at least one Valid Claim that covers a Licensed Product incorporating a GSK Compound, GSK will
pay us an additional $2,000,000. An additional milestone payment will be made to us should GSK achieve certain thresholds of annual
net sales. This agreement also provides that we will be eligible to receive certain royalty payments from GSK in connection with
net sales.
ViroPharma License
Agreement
. On and effective as of September 29, 2011, we entered into an Exclusive License Agreement (the “License Agreement”)
with 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 OX1. 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.
Under the terms of
the License Agreement, we have 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 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 the RLAs described above.
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 the Company. In the event
of a termination of the License Agreement, other than ViroPharma’s termination of the License Agreement for the Company’s
uncured material breach, we will have an exclusive, perpetual, irrevocable, worldwide, royalty-bearing license to exploit the licensed
products.
License Agreement with Northwestern University (“NWU”).
Effective May 2012, we entered into a License Agreement (“License”) with NWU pursuant to which we obtained an exclusive,
worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patents and know-how relating to the use
of monoclonal antibody Tau C3 and TOC-1 for the prophylaxis, mitigation, diagnosis and/or treatment of AD and other tauopathies.
We are obligated to make future payments to NWU totaling approximately $700,000 upon achievement of certain milestones based on
phases of clinical development and also to pay NWU royalties on net sales (as defined) attributable to each product utilizing the
licensed technology.
Note 4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist
of the following:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
Professional Fees
|
|
$
|
1,080,675
|
|
|
$
|
1,160,080
|
|
Consulting Expenses
|
|
|
853,197
|
|
|
|
733,197
|
|
Clinical Expenses
|
|
|
206,890
|
|
|
|
766,890
|
|
Other
|
|
|
346,648
|
|
|
|
289,597
|
|
Total
|
|
$
|
2,487,410
|
|
|
$
|
2,949,764
|
|
Note 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 issue date.
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 Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
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 $0.001 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 $0.05 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 Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
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 Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
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 Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
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 through November 2012, we sold
additional investment units for an aggregate purchase price of $662,500. Each unit consisted of a Convertible Promissory Note and
Warrants. Total proceeds from the sale of these investment units were $662,500.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
January 2013 Financing
During January, February, March, May and June 2013, we sold
investment units for an aggregate purchase price of $372,500. 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 $503,500.
The January 2013 Notes have an aggregate face amount of $503,500,
are due in January, February, March, May and June 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 January 2013 Financing Warrants entitle the holders to purchase up to 247,500,000
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 $2,400,728 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 Financing Notes by $503,500 with the excess of $2,028,228 charged to interest
expense. The discount related to the January 2013 Financing Notes will be amortized over the term of the notes as interest expense,
calculated using an effective interest method.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds
the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
The following table sets forth a summary of all of the outstanding
convertible promissory notes at June 30, 2013:
Convertible promissory notes issued
|
|
$
|
3,657,500
|
|
Allocated to preferred stock
|
|
|
(256,203
|
)
|
Notes repaid
|
|
|
(400,000
|
)
|
Less amounts converted to common stock
|
|
|
(625,000
|
)
|
|
|
|
2,376,297
|
|
Less debt discount
|
|
|
1,144,560
|
|
Balance June 30, 2013
|
|
$
|
1,231,737
|
|
Note 6. Series B 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 June 30, 2013, the aggregate liquidation value of the Series
B Prefs was $1,870,380, with a fair value of $172,874. As of June 30, 2013, we have accrued Series B Preferred Stock dividends
payable of $576,934 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 year ended June 30, 2013, we issued 37,000,000 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 year ended June 30, 2013, we issued 25,000,000 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
Note 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 May 2013, all of the 2006 Warrants
expired without being exercised.
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 June 30, 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 June 30, 2013, a total of 2,857 Series B Warrants remain outstanding, with a strike
price of $0.001 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 June 30, 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 99,150,000 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, 53,150,000 “April
and May 2012” warrants were exchanged for Series D Preferred shares, while 46,000,000 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 January 2013 Financing Warrants
In connection with the sale of the January
2013 Notes, we issued a total of 247,500,000 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 June 30, 2013, 247,500,000 warrants
remain outstanding.
Note 8. Income Taxes
The reconciliation of income tax benefit at the U.S. statutory
rate of 34% for the years ended June 30, 2013 and 2012 to the Company’s effective tax rate is as follows:
|
|
Years Ended
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
U.S. federal statutory rate
|
|
|
-34
|
%
|
|
|
-34
|
%
|
State income tax, net of federal benefit
|
|
|
-6
|
%
|
|
|
-6
|
%
|
Change in valuation allowance
|
|
|
40
|
%
|
|
|
40
|
%
|
Income Tax provision (benefit)
|
|
|
0
|
%
|
|
|
0
|
%
|
The tax effects of temporary differences that give rise to the
Company’s net deferred tax asset as of June 30, 2013 and 2012 are as follows:
|
|
Years Ended
|
|
|
|
December 31, 2011
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
7,120,000
|
|
|
$
|
5,265,000
|
|
Derivative liability
|
|
|
2,146,800
|
|
|
|
1,355,000
|
|
|
|
|
9,266,800
|
|
|
|
6,620,000
|
|
Less: Valuation allowance
|
|
|
(7,120,000
|
)
|
|
|
(5,265,000
|
)
|
|
|
|
2,146,800
|
|
|
|
1,355,000
|
|
Derivative liability
|
|
|
(2,146,800
|
)
|
|
|
(1,355,000
|
)
|
Total deferred tax liability
|
|
|
(2,146,800
|
)
|
|
|
(1,355,000
|
)
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of June 30, 2013, the Company had approximately
$17,800,000 of Federal and state net operating loss carryovers (“NOLs”) which begin to expire in 2025. Utilization of
the NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50% ownership change
as determined under regulations.
In assessing the realization of deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has
established a full valuation allowance against all of the deferred tax asset because it is more likely than not that all of the
deferred tax asset will not be realized.
The Company files U.S. federal and state of New York tax returns
that are subject to audit by tax authorities beginning with the year ended June 30, 2010. The Company is not currently under audit
for any tax returns
Note 9. Capital Deficiency
Common stock
In April and May 2005, we issued 241,565
and 183,505 shares of common stock at $0.001 per share to founders of Intellect, yielding proceeds of $12,078 and $9,175, respectively.
In June 2005, we issued to Goulston &
Storrs, LLP a warrant to purchase 2,000 shares of our common stock at a purchase price of $0.001 per share, expiring June 20, 2008. In
April 2006, Goulston & Storrs exercised the warrant and we subsequently delivered to them a share certificate representing
2,000 shares of our common stock.
On March 10, 2006, we amended our Certificate
of Incorporation to provide for the issuance of up to 2,000,000 shares of common stock and up to 15,000,000 shares of preferred
stock each with a par value of $.001 per share.
In January 2006, we issued 2,225 shares
of Series A Convertible Preferred Stock, par value per share of $0.001, as partial consideration for settlement of certain claims
totaling $570,000. As a result of the Merger described below, the Series A Preferred Stock was exchanged for 2,577 shares of our
common stock.
In July 2007, we issued a total of 6,595
shares of common stock to various note holders. We issued 6,230 shares as part of agreements with three note holders
to extend the maturity date of their notes to September 30, 2007 and recorded a charge of $622,354 for interest expense in connection
with the issuance of these shares. We issued 365 shares to three note holders who converted their notes with an aggregate
principal amount and accrued interest of $31,733. On April 8, 2008, we rescinded the conversion of these notes into
common shares and reinstated the Notes and agreed with the holders to cancel the shares and extend the maturity date of the notes
to June 30, 2008.
In December 2007, we issued 600 shares of
common stock under a pre-existing agreement with a note holder to extend the maturity date of his note to December 15, 2007. In
February 2008, we rescinded the issuance of the 600 shares of common stock and issued a note to the note holder as additional consideration
for the extension.
In December 2007, we issued 1,000 shares
to a consultant for services rendered.
On January 25, 2007, GlobePan Resources,
Inc. entered into an agreement and plan of merger with Intellect and INS Acquisition, Inc., a newly formed, wholly-owned Delaware
subsidiary of GlobePan Resources, Inc. also called Acquisition Sub. On January 25, 2007, Acquisition Sub merged with
and into Intellect Neurosciences, Inc., Acquisition Sub ceased to exist and Intellect survived the merger and became the wholly-owned
subsidiary of GlobePan Resources, Inc. GlobePan stockholders retained, in the aggregate, 180,000 shares of their common stock.
In November 2009, we amended our Certificate
of Incorporation to provide for the issuance of up to 13,000,000 shares of common stock with a par value of $.001 per share.
In April 2010, we amended our Certificate
of Incorporation to provide for the issuance of up to 40,000,000 shares of common stock with a par value of $.001 per share.
In April 2010, we issued 4,261,194 shares
of our Common stock as full repayment of principal and interest owed to holders of Convertible Promissory Notes. All of these Notes
were in default.
In April 2010, we issued 2,865,374 shares
of our Common stock as full repayment of principal and interest owed to holders of Senior Promissory Notes.
In April, 2010, we issued 4,138,935 shares
of our Common stock to holders of Series B Preferred Stock upon their exercise of the conversion feature contained in those securities.
As described above
,
in connection
with the sale of the November Notes, we agreed that the purchasers of the November Notes will receive at maturity of the November
Notes 50,000 shares of our common stock. Simultaneous with the issuance of the November Notes, Daniel Chain, our CEO, transferred
to an escrow agent, 50,000 shares of Company common stock issued to him at the time that he founded the Company in 2005 as collateral
for the purchasers’ right to receive such shares. On April 23, 2010, the holders of the November Notes accepted common stock
in repayment of their notes in conjunction with the financing transaction described above and the escrow agent released the Purchaser
Shares to the holders of the November Notes. In April 2010, we issued 50,000 shares to Dr. Chain to replace the shares that he
had surrendered to the holders of the November Notes.
On April 23, 2010, we sold 1,160,000 shares
of our common stock for aggregate consideration of $1,740,000 as part of the sale of investment units.
In April 2010, we issued 1,327,583 shares
of our common stock to various consultants.
In April 2010, we issued 77,403 shares of
our common stock to a former holder of our Convertible Promissory Notes in settlement of a claim.
In April 2010, we issued 21,000 shares of
our common stock to certain of our trade creditors in partial settlement of past due amounts owed to these creditors.
In June 2010, we issued 1,765,240 shares
of our common stock to holders of Class A Warrants and Consultant Warrants upon the cashless exercise of those warrants.
In July 2010, we repaid outstanding 2007
Notes through the issuance of 262,338 shares of our common stock and the holder agreed to the cancellation of the associated warrants.
In August 2010, we issued 10,000 shares
of our common stock to our sole independent director as and 70,000 shares of our common stock to various consultants.
In November and December 2010, we issued
3,826,000 shares of our common stock to holders of $237,500 of April 2010 Notes upon conversion of their Notes.
On December 28, 2010, we issued 800,000
shares of our common stock to a holder of Series B Preferred upon conversion of his shares.
On January 4, 2011, we issued 362,358 shares
of our common stock to holders of April 2010 Notes upon conversion of their Notes (plus accrued interest).
On January 12, 2011, we issued 1,000,000
shares of our common stock to a holder of Series B Preferred upon conversion of his shares and 800,000 shares of our common stock
to holders of April 2010 Notes upon conversion of their Notes (plus accrued interest).
On January 20, 2011, we issued 694,417 shares
of our common stock to holders of April 2010 Notes upon conversion of their Notes (plus accrued interest).
On February 15, 2011, we issued one million
shares of our common stock to a holder of Series B Preferred upon conversion of his shares.
On March 9, 2011, we issued 1,500,000 shares
of our common stock to a holder of Series B Preferred upon conversion of his shares.
On March 10, 2011, we issued 1,200,000 shares
of our common stock to a holder of Series B Preferred upon conversion of his shares.
On March 14, 2011, we issued 2 million shares
of our common stock to holders of the April 2010 Warrants upon the cashless exercise of those warrants.
On March 17, 2011, we issued 13,750 shares
of our common stock to a consultant in exchange for public relations consulting services performed during 2011.
On March 17, 2011, we issued 3,714,286 shares
of our common stock to holders of the December 2010 Warrants upon the cashless exercise of those warrants.
During the year ended June 30, 2012 we had
the following capital transactions:
In July 2011, we issued 5,000,000 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 September 2011, we issued 1,000,000 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 October 2011, 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 October 2011, we issued warrants to purchase
2,881,680 shares of our common stock at an exercise price of $0.05 per share to our former independent directors in partial satisfaction
of outstanding fees owed to such directors.
In December 2011, 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 2012 we issued 545,000 shares
of common stock to a vendor in satisfaction of outstanding fees owed to the vendor.
In February 2012, we issued 5,000,000 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 2012, we issued 1,515,306 shares
of common stock to holders of our April 2010 Warrants upon their exercise of the cashless exercise feature contained in those securities.
In March 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 March 2012, we issued 1,928,571 shares
of common stock to holders of our April 2010 Warrants upon their exercise of the cashless exercise feature contained in those securities.
In April 2012, we issued 4,000,000 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 April 2012, we issued 2,500,000 shares
of our common stock in consideration for services rendered to the Company.
In May 2012, we issued 500,000 shares of
our common stock for the conversion of a portion of the principal amount of a Convertible Promissory Note.
In May 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 June 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 June 2012, we issued 500,000 shares of
our common stock in consideration for services rendered to the Company.
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 46,000,000 warrants upon their cashless exercise of the conversion feature contained in those
securities.
In April 2013, we issued 14,000,000 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 May 2013, we issued 9,500,000 shares
of our common stock in consideration for services rendered to the Company.
In May 2013, we issued 5,000,000 shares
of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
Note 10. Related Party Transactions
University of South Florida Agreement.
Our AD research activities require that we test our drug candidates in a certain type of transgenic mouse that exhibits the human
AD pathology. Mindgenix, Inc., a wholly-owned subsidiary of Mindset, holds a license on the proprietary intellectual property related
to these particular mice from the University of South Florida Research Foundation (“USFRF”). We have engaged Mindgenix
to perform testing services for us using these transgenic mice. Dr. Chain, our CEO, is a controlling shareholder of Mindset. We
consolidate the results of operations of Mindgenix with our results of operations because we have agreed to absorb certain costs
and expenses incurred that are attributable to their research.
In December of 2006, we entered into an
agreement with USFRF as a co-obligor with Mindgenix, pursuant to which USFRF agreed to reinstate the license with Mindgenix in
exchange for our agreement to pay to USFRF $209,148 plus accrued interest of $50,870. This amount is in settlement of a previously
outstanding promissory note issued by Mindgenix to the USFRF dated September 30, 2004. Our obligation to pay amounts due under
the agreement are as follows: $109,148 was payable on January 15, 2007 and $100,000 is payable in six equal monthly
installments of $16,667 beginning February 1, 2007 and ending with a final payment of $50,435 on August 1, 2007. We
have paid $184,151 through June 30, 2009. We have recorded these amounts as research and development expense and established
a liability for the remainder of the payments. In addition, we have incurred approximately $325,000 in operating costs on behalf
of Mindgenix for the fiscal year ended June 30, 2009. These amounts have been included in our consolidated results of
operations as research and development expense.
In April 2008, we paid $100,000 on behalf
of Mindgenix and Mindgenix issued a promissory note with a face amount of $100,000 to Harlan Biotech, Israel, an unrelated third
party (‘the “Harlan Note”), as partial payment for past due fees related to maintenance of Mindgenix’ mouse
colony. The Harlan Note bears interest at 10% per annum and is due 40 days from the issue date of April 8, 2008.
One of our principal shareholders posted with an escrow agent 4,300 shares of freely tradable Intellect common stock as security
for the Harlan Note. The shares were sold for total consideration of $104,244 and the proceeds were remitted to Harlan in discharge
of the Harlan Note. We issued a convertible promissory note to the shareholder with a face amount of $104,244 and recorded a corresponding
research and development expense.
Consulting Contracts.
We have entered
into consulting contracts with various members of our Clinical and Scientific Advisory Boards. Certain of these individuals are
shareholders of Intellect. The consulting contracts are for services to be rendered in connection with ongoing research and development
of our drug candidates. The contracts generally provide for per-diem payments of $2,500 for days spent away from the office attending
to Intellect affairs.
Note 11. Commitments and Contingencies.
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, 2013 and 2012.
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 action of various regulatory agencies. If necessary, management consults with counsel and other appropriate experts
to assess any matters that arise. If, in management’s 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 financial statements. We do not anticipate that liabilities arising out of currently pending or threatened lawsuits
and claims will have a material adverse effect on our financial position, results of operations or cash flows.
Note 12. Stock-Based Compensation Plans-
In December 2006, our stockholders approved
the adoption of the "2006 Employee, Director and Consultant Stock Plan" (the "2006 Stock Plan"), under which
240,000 shares of our common stock are available for issuance under the Plan. The 2006 Stock Plan provides for the grant
of either ISOs or non-qualified stock options, which do not qualify as ISOs.
On January 25, 2007, we granted 139,905
stock options to our Chairman and CEO and 60,838 stock options to our Chief Financial Officer. The option exercise price is $37.00
per share. The options are fully vested.
On March 30, 2009, we granted 500 stock
options to a consultant engaged by the Company to assist in research and development activities related to OX1. The grant was effective
as of that date with a strike price of $17.50. The stock options vest over a twelve month period and are exercisable
through March 30, 2014.
On August 31, 2010, we granted 2,000 stock
options to a consultant engaged by the Company to assist in research and development activities. The grant was effective as of
that date with a strike price of $0.83. The stock options vest over a twelve month period and are exercisable through August 31,
2015.
On June 13, 2011, we granted 10,000 stock
options to a consultant engaged by the Company to assist in research and development activities. The grant was effective as of
that date with a strike price of $0.10. The stock options vest over a twelve month period and are exercisable through June 13,
2016.
The exercise price of all the above stock
options was the closing price of the stock on the day of the grant.
As of June 30, 2013 and 2012, there are 26,757
stock options available for grant under the 2006 Stock Plan, respectively.
A summary of our outstanding stock options
under all plans at June 30, 2013 is as follows:
|
|
Year Ended
June 30, 2013
|
|
|
Weighted
Average
Exercise Price
|
|
|
Instrinisic
value
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2012
|
|
|
213,243
|
|
|
$
|
34.87
|
|
|
$
|
-
|
|
|
|
3.35
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
-
|
|
Cancelled/Forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Balance at the end of period
|
|
|
213,243
|
|
|
$
|
34.87
|
|
|
|
-
|
|
|
|
3.35
|
|
Options excercisable at June 30, 2013
|
|
|
213,243
|
|
|
$
|
34.87
|
|
|
|
-
|
|
|
|
3.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested or expected to vest
|
|
|
213,243
|
|
|
$
|
34.87
|
|
|
|
-
|
|
|
|
3.35
|
|
Total compensation expense recorded during
the year ended June 30, 2013 and 2012 for share-based payment awards was $0, and $256 respectively, which is recorded in general
and administrative expenses in the consolidated statement of operations.
Note 13. Per Share Data
The following table sets forth the information needed to compute
basic and diluted earnings per share:
|
|
Twelve Months Ended
|
|
|
|
|
|
|
|
|
|
|
June 30
|
|
|
June 30
|
|
|
|
2013
|
|
|
2012
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, basic
|
|
$
|
(9,755,510
|
)
|
|
$
|
1,896,990
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
136,468,981
|
|
|
|
81,002,258
|
|
|
|
|
|
|
|
|
|
|
Basic income earnings per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, basic
|
|
$
|
(9,755,510
|
)
|
|
$
|
1,896,990
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
2,592,550
|
|
|
|
2,278,171
|
|
|
|
|
|
|
|
|
|
|
Interest on convertible notes
|
|
|
290,005
|
|
|
|
192,293
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, diluted
|
|
$
|
(6,872,955
|
)
|
|
$
|
4,367,454
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
136,468,981
|
|
|
|
81,002,258
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
104,552,263
|
|
|
|
99,683,882
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series B preferred shares
|
|
|
4,593,090
|
|
|
|
4,593,090
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of Series C preferred shares
|
|
|
404,340,000
|
|
|
|
427,810,959
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of convertible notes
|
|
|
163,181,250
|
|
|
|
34,580,000
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding (A)
|
|
|
813,135,584
|
|
|
|
647,670,189
|
|
|
(A)
|
For the year ended June 30, 2013, all common stock equivalents have been determined to be anti-dilutive and have not been considered
in the calculation of diluted weighted average shares outstanding on the statement of operations.
|
Note 14. Subsequent Events
In accordance with authoritative guidance,
we have evaluated any events or transactions occurring after June 30, 2013, the balance sheet date, through the date of filing
of this report and note that there have been no such events or transactions that would require recognition or disclosure in the
consolidated financial statements as of and for the year ended June 30, 2013, except as disclosed below.
a) During July, 2013, we sold investment
units for an aggregate purchase price of $92,500. Each unit consisted of a Convertible Promissory Note and warrants under the same
terms as the January 2013 Financing. Total proceeds from the sale of these investment units were $92,500.
b) On August 5, 2013 we issued 15,000,000
shares of the Company’s common stock to a consultant for services rendered for the Company.
c) On August 7, 2013, a holder of the Company’s
Series C Convertible Preferred Stock converted $675,000 Stated Value of such Preferred Stock, at a conversion price of $0.05 per
share, into 13,500,000 shares of the Company’s common stock.
d) During August, 2013, we sold investment
units for an aggregate purchase price of $150,000. Each unit consisted of a Convertible Promissory Note and warrants under the
same terms as the January 2013 Financing. Total proceeds from the sale of these investment units were $150,000.
e) On September 10, 2013, a holder of the
Company’s Series C Convertible Preferred Stock converted $350,000 Stated Value of such Preferred Stock, at a conversion price
of $0.05 per share, into 7,000,000 shares of the Company’s common stock.
f) On September 16, 2013, a holder of the
Company’s Series D Convertible Preferred Stock converted $825,000 Stated Value of such Preferred Stock, at a conversion price
of $0.05 per share, into 16,500,000 shares of the Company’s common stock.
g) During September, 2013, we sold investment
units for an aggregate purchase price of $25,000. Each unit consisted of a Convertible Promissory Note and warrants under the same
terms as the January 2013 Financing. Total proceeds from the sale of these investment units were $150,000.
h) On October 9, 2013 we issued 19,500,000
shares of the Company’s common stock to a consultant for services rendered for the Company.
i) On October 9, 2013, a holder of the Company’s
Series D Convertible Preferred Stock converted $265,111 Stated Value of such Preferred Stock, at a conversion price of $0.05 per
share, into 5,302,222 shares of the Company’s common stock.
j) During October, 2013, we sold investment
units for an aggregate purchase price of $75,000. Each unit consisted of a Convertible Promissory Note and warrants under the same
terms as the January 2013 Financing. Total proceeds from the sale of these investment units were $75,000.