Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission (the “SEC”) on October 15, 2013. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for fair presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.
The results of operations for the three and six months ended December 31, 2013, are not necessarily indicative of the results to be expected for the entire year or for any other period.
2. Business Description and Going Concern
Intellect Neurosciences, Inc. (“Intellect”, “our”, “us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) a Delaware corporation, is a biopharmaceutical company, which together with its subsidiary Intellect Neurosciences, USA, Inc. (“Intellect USA”), is conducting research regarding proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal year end is June 30. We have had no product sales through September 30, 2013 though we have received $
10,516,667
in up-front and milestone license fees from inception through December 31, 2013. Our losses from operations have been funded primarily with the proceeds of equity and debt financings and fees due under license agreements.
We are a development stage company and our core business strategy is to leverage our intellectual property estate through license arrangements and to develop our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, through human proof of concept (Phase II) studies or earlier if appropriate and then seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications. As of March 31, 2013, we had no self-developed or licensed products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that any products developed by any of our licensees will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.
We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of December 31, 2013, we had cash and cash equivalents of $
685
. We anticipate that our existing capital resources will enable us to continue operations for the next few months. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential shareholders or partners within the next few months, we may be forced to cease operations.
Our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners, we will be unable to successfully develop and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities based on the going concern uncertainty.
3. Summary of Significant Accounting Policies
Revenue Recognition
Upfront License Fees
. Consideration that we receive pursuant to patent license agreements is recognized as income when (a) the licensee obtains a license to one or more of our patents, (b) the licensee is responsible for all of the development work on the product candidate, (c) the licensee has the technical ability to perform the development, (d) the licensee requires a license from us to sell the resulting drug product without infringing our patents, (e) payment due under the license agreement is reasonably assured and (f) we have no future performance obligations under the license agreement.
Milestones.
We enter into patent license agreements, which contain milestones related to reaching particular stages in product development. We recognize revenues from milestones when we have no further obligation with respect to the activities under the agreement and when we have confirmed that the milestone has been achieved. Where we have continuing involvement obligations in the form of development efforts, we recognize revenues from milestones ratably over the development period.
Principles of Consolidation
.
The consolidated financial statements include the accounts of our wholly owned subsidiary, Intellect Israel, and the accounts of Mindgenix, Inc. (“Mindgenix”), a wholly-owned subsidiary of Mindset Biopharmaceuticals, Inc. (“Mindset”). We consolidate Mindgenix because we have agreed to absorb certain costs and expenses incurred by Mindgenix that are attributable to its research. Dr. Chain, our CEO, is a controlling shareholder of Mindset and the President of Mindgenix. All inter-company transactions and balances have been eliminated in consolidation
Convertible Instruments.
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
Common Stock Purchase Warrants.
We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
Preferred Stock.
We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
Derivative Instruments
.
Our derivative financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded within our convertible debt. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.
During the six month periods ended December 31, 2013, we recognized other income of $
16,642
, relating to recording the derivative liabilities at fair value. At December 31, 2013 and June 30, 2013, there were $
7,582,213
and $
3,833,457
of derivative liabilities, respectively.
Our derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions during the quarter ended December 31, 2013:
Estimated dividends:
|
|
None
|
|
Expected volatility:
|
|
331
|
%
|
Risk-free interest rate:
|
|
1.45
|
%
|
Expected term (years):
|
|
0.25 to 5 years
|
|
4. ViroPharma License Transaction
On and effective as of September 29, 2011, we entered into an Exclusive License Agreement (the “License Agreement”) with ViroPharma Incorporated, a Delaware corporation (“ViroPharma”), pursuant to which, among other things, we granted an exclusive license to ViroPharma regarding certain of our licensed patents and patent applications related to our clinical stage drug candidate, OX1, an antioxidant molecule containing indole-3-propionic acid. We expect ViroPharma to develop and commercialize OX1 as a treatment of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
Under the terms of the License Agreement, we agreed to transfer to ViroPharma all of our intellectual property rights, data and know-how related to our OX1 research and development program in exchange for payment by ViroPharma of a $
6.5
million up-front licensing fee which was received in October 2011, and additional regulatory milestone payments based upon defined events in the United States and the European Union. The aggregate maximum of these milestone payments assuming successful advancement of the product to market could amount to $
120
million. In addition, ViroPharma will pay us a tiered royalty of up to an aggregate maximum of low double digits based on annual net sales. NYU School of Medicine and South Alabama Medical Science Foundation, which own certain patents in relation to OX1, are entitled to a portion of the royalties and revenues received by us from any sale or license of OX1 pursuant to an exclusive license agreement between the universities and us.
The term of the License Agreement will continue in effect on a licensed product-by-licensed product and country-by-country basis until the expiration of the last royalty obligation with respect to a licensed product in such country. Once the royalty obligation has terminated in a particular country, the license will become non-exclusive and fully paid-up with respect to licensed products in that country.
Either party may terminate the License Agreement upon an uncured material breach of the other party. In addition, if ViroPharma determines that it is not feasible or desirable to develop or commercialize licensed products, it may terminate the License Agreement in whole or on a product-by-product basis
at any time upon ninety (90) days prior written notice to us.
In the event of a termination of the License Agreement, other than ViroPharma’s termination of the License Agreement for our uncured material breach, we will have an exclusive, perpetual, irrevocable, worldwide, royalty-bearing license to exploit the licensed products.
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
50
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 8.)
In October 2013, we issued 13,183,055 shares of our common stock to one of the holders of our “June and July 2011 Notes” upon conversion of $100,000 principal amount due and $31,830.55 in accrued interest with respect to such Note (Note 8).
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, and May through December 2013, we sold investment units for an aggregate purchase price of $
921,000
. Each unit consisted of a Convertible Promissory Note (the January 2013 Notes”) and warrants (the “January 2013 Financing Warrants”). Total proceeds from the sale of these investment units were $
921,000
.
The January 2013 Notes have an aggregate face amount of $
921,000
, are due in January, February, March, and May through October 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
590,000,000
shares of our Common Stock at an initial exercise price of $
0.01
per share.
We determined the initial fair value of the January 2013 Financing warrants to be $
5,825,029
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 $
846,000
with the excess of $
4,979,029
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
December 31, 2013:
Convertible promissory notes issued
|
|
$
|
4,075,000
|
Allocated to preferred stock
|
|
|
(950,000)
|
Accretion of notes allocated to preferred stock
|
|
|
948,000
|
Notes repaid
|
|
|
(400,000)
|
Less amounts converted to common stock
|
|
|
(725,000)
|
|
|
|
2,948,000
|
Less debt discount
|
|
|
1,152,857
|
Balance December 31, 2013
|
|
$
|
1,795,143
|
6. Convertible Preferred Stock and Derivative Liability
Series B Convertible Preferred Stock
During the fiscal year ended June 30, 2007, we issued
459,309
shares of Series B Convertible Preferred Stock (the “Series B Prefs”). The shares carry a cumulative dividend of
6
% per annum. The initial conversion price is
1.75
per share subject to certain anti-dilution adjustments. Each Series B Preferred share carries a stated value of $
17.50
and is convertible into
10
shares of our Common Stock. We issued
3,046,756
warrants in connection with the issuance of the Series B Prefs (the “Series B Warrants”).
Based on authoritative guidance, we accounted for the Series B Prefs and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes option pricing model. We recorded the amount received in consideration for the Series B Prefs as a liability for the Series B Prefs with an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the Series B Prefs and the Series B Warrants will be marked to market for all future periods they remain outstanding with an offsetting charge to earnings.
At 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 December 31, 2013, we have accrued Series B Preferred Stock dividends payable of $
648,737
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 six months ended December 31, 2013, we issued
29,214,500
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 six months ended December 31, 2013, we issued
31,802,222
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 loss attributable to common shareholders reflects both the net loss and the deemed dividend
7. Outstanding Warrants and Warrant Liability
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 December 31, 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
Dec
ember 31, 2013,
2,881,680
warrants are outstanding
The “April and May 2012” Warrants
In connection with the sale of the April and May 2012 Notes, we issued a total of
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
590,000,000
warrants. The January 2013 Financing Warrants expire five years from date of issuance. The exercise price of each warrant is $
0.01
per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the January 2013 Financing Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for the January 2013 Financing Warrants as liabilities. The liability for the January 2013 Financing Warrants, measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes.
As of December 31, 2013,
590,000,000
warrants remain outstanding.
8. Capital Deficiency
Common stock
In August 2013, we issued
13,500,000
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 2013, we issued
15,000,000
shares of our common stock in consideration for services rendered to the Company, which was valued at $
150,000
.
In September 2013, we issued
7,000,000
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 2013, we issued
16,500,000
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 October 2013, we issued
8,714,500
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 2013, we issued
19,500,000
shares of our common stock in consideration for services rendered to the Company, which was valued at $
195,000
.
In October 2013, we issued
15,302,222
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 October 2013, we issued 13,183,055 shares of common stock upon conversion of the principal and accrued interest of the holders convertible promissory note.
9. Per Share Data
The following table sets forth the information needed to compute basic earnings per share:
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31.
|
|
December 31.
|
|
December 31.
|
|
December 31.
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders, basic
|
|
$
|
(2,129,315)
|
|
$
|
(136,924)
|
|
$
|
(6,226,334)
|
|
$
|
(283,193)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
306,036,582
|
|
|
107,990,020
|
|
|
268,069,713
|
|
|
105,655,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income earnings per share (A)
|
|
$
|
(0.01)
|
|
$
|
(0.00)
|
|
$
|
(0.02)
|
|
$
|
(0.00)
|
|
(A)
|
For the three and six month periods ended December 31, 2013 and 2012, respectively, 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.
|
10. Income Taxes
No provision for income taxes has been recorded due to the utilization of net operating losses for which a
100
% valuation allowance had been provided.
11. Subsequent Events
Management has evaluated events occurring after the date of these financial statements through the date these financial statements were issued. There were no material subsequent events as of that date other than disclosed below.
In January 2014, we issued 10,000,000 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 2014, 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 January 2014, we issued 2,500,000 shares of our common stock to a non-profit charitable organization as a charitable contribution.
On January 22, 2014, we issued a convertible promissory note for a face amount and proceeds of $30,000.
On February 11, 2014, we issued a convertible promissory note for a face amount and proceeds of $50,000.