NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Description of Business
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Formation
IntelliCell Biosciences Inc., a New York corporation, was formed under the name Regen Biosciences, Inc. on August 13, 2010 as a pioneering regenerative medicine company to develop and commercialize regenerative medical technologies in large markets with unmet clinical needs. On February 17, 2011, Regen Biosciences, Inc. changed its name to IntelliCell BioSciences Inc. (“IntelliCell”). To date, IntelliCell has developed proprietary technologies that allow for the efficient and reproducible separation of stromal vascular fraction (branded “IntelliCell™”) containing adipose stem cells that can be performed in tissue processing centers and in doctors’ offices.
In conjunction with the formation of IntelliCell (formerly Regen Biosciences, Inc.), a shareholder contributed, as part of his initial capital contribution, one hundred percent (100%) of the outstanding stock of Tech Stem Inc., a New York corporation (“Tech Stem”) originally formed on May 24, 2010. Tech Stem’s business is the sourcing, sales and distribution of laboratory equipment and supplies utilized in tissue processing related to IntelliCell’s technologies.
Reverse Merger
On April 27, 2011, IntelliCell and Media Exchange Group, Inc. (“MEG”) entered into an Agreement and Plan of Merger which was amended on June 3, 2011 (the “Merger Agreement”). Under the terms of the Merger Agreement, a subsidiary of MEG (“Merger Sub”) merged into IntelliCell. The Merger Sub ceased to exist as a corporation and IntelliCell continued as the surviving corporate entity. As a result of the merger, MEG’s former shareholders acquired majority of IntelliCell’s outstanding common stock and all of IntelliCell’s Series B preferred stock. The recapitalized IntelliCell Biosciences, Inc. is hereafter referred to as “IntelliCell” or the “Company”. As consideration for the Merger, the holders of the an aggregate of 7,975,768 shares of IntelliCell’s common stock exchanged their shares of common stock for an aggregate of 15,476,978 shares of the Company’s common stock and Dr. Steven Victor, the principal shareholder of IntelliCell and Chief Executive Officer (“CEO”), exchanged an aggregate of 10,575,482 shares of IntelliCell’s common stock for an aggregate of 20,521 shares of the Company’s series B preferred stock. Each share of series B preferred stock is convertible into 1,000 shares of the Company’s common stock. In addition, the holders of the series B preferred stock are entitled to notice of stockholders’ meetings and to vote as a single class with the holders of the Common Stock on any matter submitted to the stockholders for a vote, and are entitled to the number of votes equal the product of (a) the number of shares of Common Stock into which the series B preferred stock is convertible into on the record date of the vote multiplied by (b) ten (10). The closing of the Merger took place on June 3, 2011 (the “Closing Date”).
Prior to the consummation of the Merger, the Company entered into agreements the holders of an aggregate of $1,619,606 of indebtedness to the Company, comprised of accrued compensation in the amount of $1,201,551, promissory notes in the principal amount of $263,707 plus accrued interest of $9,398 less unamortized debt discounts of $83,264 and accrued expenses totaling $228,414 in exchange for the issuance of an aggregate of 12,123 shares of series C preferred stock. Each share of series C preferred stock shall be convertible into 1,000 shares of the Company’s common stock. Certain holders of the Company’s series C preferred stock have contractually agreed to restrict their ability to convert the series C preferred stock such that the number of shares of the Company common stock held by each of holder and its affiliates after such conversion shall not exceed 4.99% of the Company’s then issued and outstanding shares of common stock.
Furthermore, prior to the consummation of the Merger, the Company entered into agreements with the holders of an aggregate of $250,000 of accrued compensation, pursuant to which such persons agreed to forgive all amounts owed to the Company.
The financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred losses since inception resulting in an accumulated deficit of $48,903,450 and a working capital deficit of $9,253,941 as of December 31, 2013, respectively. Further losses are anticipated in the continued development of its business, raising substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months with existing cash on hand and a private placement of common stock or other debt or equity securities. There can be no assurance that we will be able to obtain further financing, do so on reasonable terms, or do so on terms that would not substantially dilute our current stockholders’ equity interests in us. If we are unable to raise additional funds on a timely basis, or at all, we probably will not be able to continue as a going concern.
3.
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Summary of Significant Accounting Policies
|
Basis of Presentation
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of IntelliCell and those of Tech Stem Inc., the Company’s wholly owned subsidiary (collectively the “Company”). All significant inter-company transactions and balances have been eliminated.
Management’s Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions affecting 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 revenue and expenses during the reporting period. Actual results could differ from these estimates. Management’s estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the periods they are determined to be necessary.
Fair Value of Financial Instruments
GAAP requires certain disclosures regarding the fair value of financial instruments. The fair value of financial instruments is made as of a specific point in time, based on relevant information about financial markets and specific financial instruments. As these estimates are subjective in nature, involving uncertainties and matters of significant judgment, they cannot be determined with precision. Changes in assumptions can significantly affect estimated fair values.
GAAP defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal, or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.
GAAP establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the degree of subjectivity that is necessary to estimate the fair value of a financial instrument. GAAP establishes three levels of inputs that may be used to measure fair value:
Level 1 – Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 - Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3 - Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Share Based Expenses
GAAP prescribes that accounting and reporting standards for all stock-based payment awards to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company should determine if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if:
|
a)
|
the option to settle by issuing equity instruments lacks commercial substance, or
|
|
b)
|
the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity.
|
With respect to stock-based compensation issued to non-employees and consultants GAAP requires that the amount of share-based payment transactions be based on the fair value of whichever is more reliably measurable:
|
a)
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the goods or services received or
|
|
b)
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the equity instruments issued.
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The fair value of the share-based payment transaction should be determined at the earlier of performance commitment date or performance completion date.
Revenue Recognition
The Company licenses independent third parties to use the Company’s technology in order to enable them to establish tissue processing centers in major metropolitan markets, as well as establishing centers it will operate. Each center will utilize the Company’s proprietary technology in conjunction with a suite of laboratory equipment selected by the Company that will enable the lab to process adipose tissue into stromal vascular fraction containing adipose stem cells using the Company’s technology and protocols. In certain centers, the Company will maintain ownership of the laboratory equipment and in other cases the laboratory equipment will be sold to an independent party. These license fees are payable upon signing of a license agreement and are recognized as revenue ratably over the license.
The Company has also entered into agreements with independent sales representative organizations that will market the centers services to physicians in the geographic area. Fees for tissue processing cases from such physicians will be collected by the Company and recognized upon performance of the laboratory analysis. Sales of equipment by Tech Stem are recognized when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.
Concentrations
The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. This potentially subjects the Company to a concentration of credit risk; however the Company believes the risk is negligible. The Company’s carrying amount of deposits in financial institutions did not exceed federally insured limits December 31, 2013.
Certain Risks and Uncertainties
The Company has a limited operating history and its prospects are subject to the risks and uncertainties frequently encountered by companies in the early stages of development and commercialization, especially those companies in rapidly evolving and technologically advanced industries such as the biotech / medical device field. The future viability of the Company largely depends on its ability to complete development of new products and processes and maintain and/or receive regulatory approval for those products and processes. No assurance can be given that the Company’s new processes and products will be successfully developed, regulatory approvals will be maintained or granted, or acceptance of these processes and products by the medical and patient communities will be achieved.
Accounts Receivable
The Company extends credit to customers without requiring collateral. The Company provides for doubtful accounts based on management’s evaluations of the collectability of accounts receivable. Management’s evaluation is based on the Company’s historical collection experience and a review of past-due amounts. Based on management’s evaluation of collectability, the Company did not require an allowance for doubtful accounts as of December 31, 2013 and 2012, respectively. The Company determines accounts receivable to be delinquent when collection is past due under the agreed upon terms. Accounts receivable are written off when it is determined that amounts are uncollectible.
Equipment
Equipment is recorded at cost. Depreciation and amortization are computed for financial reporting purposes utilizing the straight-line method over the estimated useful lives of the related asset or, for leasehold improvements, the shorter of the lease term or estimated useful life.
Maintenance and repairs are charged to expense as incurred. Costs of renewals and betterments are capitalized.
Research and Development Costs
Research and development (“R&D”) expenses include supplies, salaries, benefits, and other headcount related costs, clinical trial and related clinical manufacturing costs, contract and other outside service and facilities and overhead costs. The Company expenses the costs associated with research and development activities when incurred.
Income Taxes
The Company accounts for income taxes using the liability method. The liability method requires recognition of future tax benefits, measured by enacted rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities to the extent that realization of such benefits is “more likely than not.” The Company’s temporary differences between financial statement and income tax reporting relate primarily to receivable reserves, depreciation expense, and operating loss carryforwards. This standard also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.
GAAP requires that, in applying the liability method, the financial statement effects of an uncertain tax position be recognized based on the outcome that is more likely than not to occur. Under this criterion the most likely resolution of an uncertain tax position should be analyzed base on technical merits and on the outcome that will likely be sustained under examination.
Net Loss per Share
Basic net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is calculated by dividing loss for the period by the weighted-average number of common shares outstanding during the period, increased by potentially dilutive common shares ("dilutive securities") that were outstanding during the period. Dilutive securities include stock options and warrants granted and convertible debt. The Company’s loss attributable to common stockholders, along with the dilutive effect of potentially issuable common stock due to outstanding options warrants and convertible securities cause the normal computation of diluted loss per share to be smaller than the basic loss per share; thereby yielding a result that is counterintuitive. Consequently, the diluted loss per share amount presented does not differ from basic loss per share due to this “anti-dilutive” effect.
Reclassifications
Certain prior year amounts were reclassified to conform with current year presentation.
4.
|
Property and Equipment
|
The Company’s property and equipment at December 31, 2013 and 2012 consists of the following:
|
|
2013
|
|
|
2012
|
|
Lab equipment
|
|
$
|
206,089
|
|
|
$
|
203,204
|
|
Leasehold Improvements
|
|
|
2,226,181
|
|
|
|
1,954,181
|
|
Furniture & Fixtures
|
|
|
463,769
|
|
|
|
459,498
|
|
Computer Equipment
|
|
|
416,816
|
|
|
|
416,816
|
|
|
|
|
3,312,855
|
|
|
|
3,033,699
|
|
Less accumulated depreciation
|
|
|
642,356
|
|
|
|
236,654
|
|
Property and Equipment, net
|
|
$
|
2,670,499
|
|
|
$
|
2,797,045
|
|
Depreciation expense for the year ended December 31, 2013 and 2012 was $405,702 and $221,428, respectively and is included in general and administrative expenses on the Company’s statement of operations.
5.
|
Accounts Payable and Accrued Liabilities
|
Accounts payable and accrued liabilities at December 31, 2013 and 2012 are as follows
:
|
|
2013
|
|
|
2012
|
|
Accounts payable
|
|
$
|
2,020,974
|
|
|
$
|
1,376,790
|
|
Accrued expenses and liabilities
|
|
|
154,040
|
|
|
|
466,811
|
|
Accrued payroll
|
|
|
434,243
|
|
|
|
273,667
|
|
Other
|
|
|
-
|
|
|
|
45,000
|
|
Total
|
|
$
|
2,609,257
|
|
|
$
|
2,162,268
|
|
During the years ended December 31, 2013 and 2012, the Company executed various license agreements and collected an aggregate of $1,222,500 in license fees for six centers which had not yet commenced operations as of December 31, 2013. Consequently, recognition of such revenue had been deferred pending commencement of operations. The Company was unable to perform its obligations in regards to the licensing agreements and, accordingly, the agreements were cancelled. The Company has classified the amounts to be returned to the former licensees as Licensee Fees Payable on the consolidated balance sheet.
In 2013, the Company converted three different license fees outstanding into convertible debentures totaling $300,000, bringing the total balance as of December 31, 2013 to $922,500.
Consorteum Notes Payable
In conjunction with the Merger, the Company assumed notes payable in the principal amount of $2,463,652 plus accrued interest of $369,898.
Following completion of the Merger, the Company entered into an asset purchase agreement (the “Consorteum Purchase Agreement”) with Consorteum Holdings, Inc. (“Consorteum”), an unrelated company, pursuant to which the Company agreed to sell, transfer and assign to Consorteum all of the Company’s rights, title and interests to, and agreements relating to, its digital trading card business and platform in exchange for Consorteum assuming an aggregate principal amount of $1,864,152 of indebtedness of the Company (the “Consorteum Notes”). Such rights include, but are not limited to, the Company’s name, phone number and listing, reputation, relationships and other intangible assets (including its rights to any intellectual property or proprietary technology), as well as the company’s rights under certain licensing agreements (“Digital Trading Assets”).
Also on June 6, 2011, the Company and Consorteum entered into an amendment agreement (the “Amendment Agreement”) to the Consorteum Purchase Agreement pursuant to which the parties agreed, among other things, that the obligations of the Parties to consummate the transactions contemplated by the Purchase Agreement are subject to (i) the approval of the Board of Directors of each of the parties, and (ii) the completion of the assignment of the Assumed Liabilities (including receipt of all the necessary consents of the holders of all outstanding indebtedness of the Buyer).
On June 30, 2011, the Company and Consorteum agreed to waive the requirement that the conditions precedent set forth in the Consorteum Purchase Agreement as amended be satisfied on or before closing and each party agreed that as of the date of the Consorteum Purchase Agreement, Consorteum would assume an aggregate of $1,477,052 of principal indebtedness plus accrued interest from the Company totaling $250,695 less unamortized note discounts of $9,890. Upon completion of the requirements of the Consorteum Purchase Agreement and the Amendment Agreement, the note holders who consented to the assumption of their obligations by Consorteum received shares of Consorteum common stock in satisfaction of their notes. Included in the notes assumed by Consorteum were notes payable to former officers and directors of the Company prior to the Merger totaling $450,000 in principal plus accrued interest of $74,935. Notwithstanding the foregoing, Consorteum agreed to provide the Company a guarantee, whereby Consorteum agrees to unconditionally and irrevocably guarantee to the Company the prompt and complete payment, as and when due and payable (whether at stated maturity or by required prepayment, acceleration, demand or otherwise), of any remaining notes payable for which the Company had not received the necessary consent as of the date of the waiver. As a result of the foregoing, the transactions contemplated by the Consorteum Purchase Agreement closed on June 30, 2011.
Upon completion of the Consorteum Purchase Agreement, the Company had notes payable totaling $986,600 that were not assumed in the agreement.
During the period ending June 30, 2012, $375,000 of the principal balance of the Consorteum Notes and accrued interest of $152,549 was converted to common stock and warrants as part of the February 2012 private placement. Furthermore, in the year ended December 31, 2012, another $375,000 of the principal balance of the Consorteum Notes was converted to common stock and warrants.
As of December 31, 2013 and 2012, the principal balance of the Consorteum Notes amounted to $236,600 and accrued interest amounted to $55,688 and $41,768, respectively. These Consorteum Notes are currently in default.
Frank Note
On August 26, 2012, the Company entered into a secured promissory note (the “Frank Note”) with Fredrick Frank (the “August 2012 Lender”) pursuant to which the August 2012 Lender loaned the Company $200,000 that was due and payable on October 31, 2012 in accordance with the terms of the Frank Note (the “Maturity Date”). The Frank Note is secured by 500,000 shares of the Company’s common stock. On November 6 2012, the Company and the August 2012 Lender agreed to extend the Frank Note until November 30, 2012. Fredrick Frank is an advisor of the Company.
In August 2013 the Company was advised that the Frank Note and accrued interest of $18,696 was assigned to Redwood as part of Redwood Deal #1.
JJK Notes Payable
On May 29, 2013 and June 26, 2013, the Company issued promissory notes in the amount of $50,000 and $75,000, respectively, for advances from JJK, LLC (the “JJK Notes”). The terms of the JJK Notes required repayment in 30 days and an annual interest rate of 10%. The notes are currently due and payable.
In August 2013 the Company was advised that the JJK Notes and accrued interest of $28,442 were assigned to Redwood as part of Redwood Deal #4 (see Note 10).
May Davis Partners Note Payable
On September 4, 2013, the Company issued a promissory note in the amount of $75,000, for $75,000 cash, of which $72,000 went to pay accrued expenses for accounting fees and $3,000 were expensed as legal fees, to May Davis Partners (the “May Davis Note”). The terms of the May Davis Note require repayment in 21 days and 10% compounded interest effective upon the maturity date of September 25, 2013. The May Davis Note is currently due and payable.
As of December 31, 2013, the principal balance of the May Davis Note amounted to $75,000, plus accrued interest of $2,210.
Sichenzia Ross Notes Payable
On September 16, 2013, the Company issued a promissory note in the amount of $386,445 to Sichenzia Ross Friedman Ference LP, for outstanding legal fees due (the “Sichenzia Note”). The terms of the Sichenzia Note require repayment by December 31, 2013, and annual simple interest of 10%.
In September 2013 the Company was advised that the Sichenzia Notes were assigned to Redwood as part of Redwood Deal #3 (see Note 10).
MD Global Partners, LLC Notes Payable
On October 11, 2013 and November 6, 2013, the Company issued promissory notes in the amount of $15,000 and $4,000, respectively for compensation due to MD Global Partners for services of raising capital for the Company (the “MD Global Notes”). The terms of the MD Global Notes require repayment on demand and 10% interest compounded annually. The MD Global Notes are currently due and payable.
As of December 31, 2013, the principal balance of the MD Global Notes was $19,000 plus accrued interest of $394.
Highland Capital Notes Payable
On December 11, 2013 and December 20, 2013, the Company issued promissory notes to Highland Capital (the “Highland Notes”) in the amount of $5,500 for money owed to a stock transfer agent and $5,000 for legal expenses owed, respectively. The Highland Notes are due June 25, 2014 and July 1, 2014, respectively. The interest rate on the Highland Notes is not specified. The Highland Notes are currently due and payable.
As of December 31, 2013, the principal balance of the Highland Notes were $10,500.
As of December 31, 2013 and 2012, the principal balance of the Company's notes payable were as follows:
|
|
2013
|
|
|
2012
|
|
Consorteum notes payable
|
|
$
|
236,600
|
|
|
$
|
236,600
|
|
May Davis Notes
|
|
|
75,000
|
|
|
|
-
|
|
MD Global Notes
|
|
|
19,000
|
|
|
|
-
|
|
Highland Notes
|
|
|
10,500
|
|
|
|
-
|
|
Total
|
|
$
|
341,100
|
|
|
$
|
236,600
|
|
8.
|
Related Party Transactions
|
Rent
The Company is provided office facilities and related services by a company owned by the Company’s CEO, a significant shareholder. The Company has recorded rent and utilities expenses of $759,978 and $467,803, respectively, representing the Company’s portion of use for such for year ended December 31, 2013 and 2012, respectively.
Officer Salary
The Company has recorded a salary expense of $275,000 and $275,000 for the years ended December 31, 2013 and 2012, respectively, related to the Company’s CEO and a salary expense totaling approximately $205,000 and $205,000 for the years ended December 31, 2013 and 2012, respectively, recorded for the Company’s Executive Vice President, a shareholder and the spouse of the Company's CEO.
During the year ended December 31, 2013, the Company converted $585,794 of the CEO’s accrued salary, and $229,464 of the Executive Vice President’s accrued salary into convertible notes payable.
Officer Advance
From time to time, the Company has received advances from certain of its officers to meet short term working capital needs. These advances may not have formal repayment terms or arrangements.
Advances received for working capital purposes amounted to $176,940 and $103,366 as of December 31, 2013 and 2012, respectively. These advances do not have formal repayment terms or arrangements.
Regen Agreement
On April 16, 2012, the Company entered into a technology license and administrative services agreement (the “Agreement”) with Regen Medical P.C., the medical practice which is owned by, and through which, our CEO, Dr. Steven Victor, engages in the practice of Cosmetic Dermatology (“Regen Medical”). Pursuant to the Agreement, the Company, among other things, (i) granted Regen Medical the non-exclusive and non-assignable license to utilize the Company's proprietary process and technology for its patients, (ii) granted Regen Medical a license to use a laboratory which can be used by Regen Medical for use of the Company’s proprietary process and (iii) was appointed as the exclusive manager and administrator of Regen Medical’s operations which relates to the implementation of the Company's proprietary process as well as Regen Medical’s cosmetic dermatology practice, and (iv) was appointed the sole provider of non-medical managerial, administrative and business functions for Regen Medical’s cosmetic dermatology practice. The Agreement became effective as of April 16, 2012 and shall continue until April 16, 2017. Thereafter, the Agreement is to be automatically renewed for successive five year periods unless either party notifies the other in writing of its intention not to renew the Agreement. Such a notice is to be given at least 12 months but no more than 15 months prior to the expiration of the then current term. Either party may terminate the Agreement, for among other things, the failure to cure a material breach of the agreement within 30 days after receipt of written notice or in the event any state or federal laws or regulations, now existing or enacted or promulgated after the effective date, are interpreted in such a manner as to indicate that the structure of the agreement may be in violation of any such laws or regulations.
In consideration for the services to be provided under the Agreement, Regen Medical is to pay the Company (i) an annual administrative fee of $600,000, payable in equal monthly installments during the term of the term of the agreement (subject to an annual increase of up to a maximum of ten percent (10%) beginning on the second anniversary of the effective date), (ii) an annual technology license fee of $120,000, payable in equal monthly installments during the term of the term of the agreement, for the use of our proprietary process (including the laboratory and the laboratory technician) and (iii) a processing fee of $1,000 for each tissue processing case that utilizes our proprietary process. The Company is also entitled to a an annual performance fee during the term of either (i) $150,000, in the event total income to Regen Medical exceeds $5,500,000 or (ii) $200,000, in the event that total income to Regen Medical exceeds $7,000,000. In addition, beginning on October 16, 2013 and on each six month anniversary thereafter during the term, the Company is entitled to a share of Regen Medical’s Savings (as defined below), minus its share of any Loss (as defined below”), based upon an agreed upon base burden percentage for Regen Medical (the “Base Burden Percentage”). The Base Burden Percentage is to be calculated by dividing (a) the aggregate actual costs of Regen Medical paid by the Company during the period ending on December 31, 2011 by (b) the aggregate revenue of Regen Medical collected by the Company during the period ending on December 31, 2011; provided , however , that the Base Burden Percentage shall be recalculated on January 1, 2013 and every 12 months thereafter during the term by dividing (i) the aggregate actual costs for the Regen Medical paid by the Company during the preceding three six-month periods by (ii) the aggregate Savings or Loss is to be calculated by subtracting (a) the aggregate actual costs for the Regen Medical paid by the Company during the preceding Period from (b) an amount equal to (I) the Base Burden Percentage multiplied by (ii) the aggregate revenue of the Regen Medical collected by the Company during the preceding Period (the “Burden Amount”). If the Burden Amount exceeds the Period Actual Costs (the “Savings”) or the Period Actual Costs exceed the Burden Amount (the “Loss”), Regen Medical and the Company shall share such Savings or Loss 65% for the account of the Regen Medical and 35% for the account of the Company. The Company recognized revenue of $0 and $514,000 for the year ended December 31, 2013 and 2012, respectively, under the agreements.
On August 26, 2013, the Company and Regen Medical entered into a termination and general release agreement (the “Termination Agreement”), effective December 31, 2012 (the “Effective Date”), pursuant to which the Company and Regen Medical agreed, among other things, that as of the Effective Date, (i) the Company shall forgive the $514,000 owed to the Company by Regen Medical under the Regen Medical Agreement in exchange for the exclusive right to certain open label data and other data which the Company would like to have the rights to use as empirical data or evidence of the efficacy of the Company’s proprietary process (the “Clinical Data”), (ii) the parties will take all necessary steps to enter into an agreement for the grant of a license to Regen Medical for the Company’s proprietary process as well as a license of the Clinical Data, (iii) the Regen Medical Agreement is terminated in its entirety and shall be deemed null and void and of no further force or effect and (iii) neither Company nor Regen Medical shall have any further rights or obligations under the Regen Medical Agreement. Each party also provided a general release to the other party with respect to the Regen Medical Agreement and all transactions contemplated by the Regen Medical Agreement.
Research and Development
Research and development costs for the years ended December 31, 2013 and 2012 was $441,913 and $291,889 respectively, including fees accrued and payable to Regen Medical for services as the attending physician in fifteen (15) patient cases included as part of the Company’s ongoing research of its technologies and processes in the amount of $287,000 and $0 for the years ended December 31, 2013 and 2012, respectively. No fees were accrued for the years ended December 31, 2013 and 2012.
As of December 31, 2013 and 2012, accrued research fees totaled $361,000 for both years.
LMazur Associates JV Loan
On September 1, 2012, the Company entered into a secured promissory note (the “
Note
”) with LMazur Associates JV (the “Agent”), as agent for LMazur Associates JV, and JJK LLC (collectively, the “
Lender
”) pursuant to which the Lender loaned the Company $100,000 that was due and payable on October 1, 2012 in accordance with the terms of the Note (the “
Maturity Date
”). LMazur Associates JV is an entity controlled by Leonard Mazur, a director of the Company. The Note bore interest at a rate of 10% per annum, which was payable on the Maturity Date. The Company’s obligations under the Note were guaranteed by Dr. Steven Victor, the Company’s CEO. In addition, the Company, Dr. Victor and the Lender entered into a pledge and security Agreement pursuant to which the Note was secured by all of Dr. Victor’s shares of series B preferred stock of the Company. The Note, and all accrued and unpaid interest thereon, was paid in full on October 1, 2012.
As of December 31, 2013 and 2012, the following related party amounts were due from (to) the Company:
|
|
12/31/2013
|
|
|
12/31/2012
|
|
Regen Medical advances, net of accrued research fees due of $287,000 and $0 as of December 31, 2013 and 2012, respectively
|
|
$
|
(93,174
|
)
|
|
$
|
(285,434
|
)
|
Advances to Dr. Steven Victor, CEO
|
|
|
(530,534
|
)
|
|
|
(21,508
|
)
|
Credit card payables
|
|
|
176,940
|
|
|
|
103,366
|
|
Accrued research fees
|
|
|
361,000
|
|
|
|
361,000
|
|
Accrued payroll
|
|
|
393,389
|
|
|
|
753,647
|
|
Totals
|
|
$
|
307,621
|
|
|
$
|
911,071
|
|
9.
|
Convertible Debentures
|
May 2011 Convertible Debenture Offering
In May 2011, IntelliCell completed a convertible debt offering aggregating $1,385,000. The units offered consist of a $50,000 subordinated convertible debenture payable one year from the date of issue with interest at a rate of 6% and convertible, at the option of the holder, into the Company’s common stock at an initial conversion price of $1.72 per share (the “May 2011 Debentures”). Each unit also included a detachable five (5) year warrant to purchase 57,143 shares of IntelliCell’s common stock at an exercise price of $1.72 per share. The proceeds from the issuance of convertible debt securities with detachable warrants were allocated between the warrants and the debt security. The discount is being amortized over the life of the debt. As of December 31, 2011, the Company recorded an original issue discount of $288,564 related to the value of the warrants that will be amortized as interest expense over the initial one year term of the May 2011 Debentures.
As a result of the Company’s Merger, and the effect of recapitalization, the exercise price of the May 2011 Debentures and warrants was decreased from $1.72 to $.88. The subordinated convertible debentures are convertible into an aggregate of 1,561,443 shares of common stock and warrants to purchase an aggregate of 3,071,542 shares of common stock.
On May 17, 2012, the holder of an aggregate of $500,000 principal amount of IntelliCell Notes informed the Company that it is in default and demanded repayment under the IntelliCell Notes. Pursuant to the terms of the IntelliCell Notes, upon the occurrence, after the expiration of a cure period of fifteen (15) days with respect to monetary defaults, following the receipt by the Company of written notice from a holder of a default in the payment of any installment of principal or interest, or any part thereof, when due, a holder, at its election may accelerate the unpaid balance of the principal and all accrued interest due under this Note and declare the same payable at once without further notice or demand. Upon an event of default under the IntelliCell Notes, the holders of the IntelliCell Notes shall be entitled to, among other things (i) the principal amount of the IntelliCell Notes along with any interest accrued but unpaid thereon and (ii) costs and expenses in connection with the collection and enforcement under the IntelliCell Notes, including reasonable attorneys’ fees. As a result of the notice of default, the IntelliCell Notes in the aggregate principal amount of $1,360,000 are immediately due and payable. The Company is currently working with its investors on making arrangements to honor its obligations under the IntelliCell Notes, however, there can be no assurance that any such arrangements will ever materialize or be permissible or sufficient to cover any or all of the obligations under the IntelliCell Notes. In conjunction with the agreement arrangements with the note holders, $77,744 of accrued interest was converted to 89,358 shares of the Company's common stock in May 2012. Furthermore, a $25,000 convertible debenture and related accrued interest of $904 was converted to 29,436 shares of common stock during the year ended December 31, 2012.
During the year ended December 31, 2013, Redwood Management, LLC (“Redwood”) assumed $1,030,000 of the May 2011 Debentures, which included $600,000 of principal and $60,781 of accrued interest as part of Redwood Deal #1, and $430,000 as part of Redwood Deal #2 (see Note 10).
As of December 31, 2013, the May 2011 Debentures had a principal balance totaling $330,000 and accrued interest of $31,816. The May 2011 Debentures are currently in default.
Hudson Street, LLC Convertible Debentures
On October 7, 2013, Hudson Street LLC (“Hudson”), assumed a total of $300,000 of convertible notes from Redwood as part of their total convertible debentures. On October 31, 2013, the Company issued a secured convertible debenture with Hudson for $100,000 (combined, the “Hudson Debentures”). Under the terms of the agreement, Hudson has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the Hudson Debentures require repayment on the date of the note and bears a 10% simple annual interest rate. The Hudson Debentures are convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
In the last quarter of 2013, $189,100 of the principal balance of the Hudson Debentures were converted to 128,694,835 shares of common stock.
As of December 31, 2013, the Hudson Debentures had a principal balance totaling $210,900 and accrued interest of $4,527.
License Fee Conversion
On January 1, 2013, the Company issued three separate secured convertible debentures totaling $300,000 to convert license fees due certain third parties. Bill Hess, POBD Holding Co. was issued a convertible debenture for $80,000. Patty Dixon, Allwin Scientific Corp. was issued a convertible debenture for $60,000. Brian Kozer, MD was issued a convertible debenture for $160,000. The terms of these convertible debentures were the same: a maturity date of January 1, 2014, 10% simple interest calculated on a 360 day year, and a conversion rate equal to 48.5% of the average of the three lowest traded prices (not the same day) of the common Stock, determined on the then current trading market for the Common Stock for 20 trading days immediately preceding the Conversion Date as quoted by Bloomberg, LP
As of December 31, 2013, the three convertible debentures memorializing license fees due totaled $300,000 and had accrued interest of $30,000. These debentures are currently in default.
The Company accounted for the conversion features underlying the convertible debentures and issued in accordance with GAAP, as the conversion feature embedded in the convertible debentures could result in the debentures being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate conversion features of these debentures at the relevant commitment dates to total $819,372 utilizing a Black-Scholes valuation model. The change in fair value of the liability for the conversion feature of all convertible debentures resulted in a net increase in expense of $891,653, and a net reduction to income of $4,382,432 for years ended December 31, 2013 and 2012, respectively. The fair value of the derivative conversion features for the debentures was determined to be $1,479,173 and $587,520 at December 31, 2013 and 2012, respectively.
As of December 31, 2013 and 2012, the principal balance of the Company's convertible debentures were as follows:
|
|
12/31/2013
|
|
|
12/31/2012
|
|
May 2011 convertible debentures
|
|
$
|
330,000
|
|
|
$
|
1,360,000
|
|
Hudson convertible debentures
|
|
|
210,900
|
|
|
|
-
|
|
Hess convertible debentures
|
|
|
80,000
|
|
|
|
-
|
|
Dixon convertible debentures
|
|
|
60,000
|
|
|
|
-
|
|
Kozer convertible debentures
|
|
|
160,000
|
|
|
|
-
|
|
|
|
$
|
840,900
|
|
|
$
|
1,360,000
|
|
The Company accounted for the detachable warrants included with the convertible debentures as liabilities in accordance with GAAP, as the warrants are subject to anti-dilution protection and could result in them being converted to a variable number of the Company’s common shares. The Company determined the value of the derivate feature of the warrants at the relevant commitment dates to total $332,401 utilizing a Black-Scholes valuation model. The change in fair value of the liability for the warrants resulted in a reduction to income of $382,296 and $9,921,400 for the years ended December 31, 2013 and 2012, respectively. The fair value of the derivative conversion features for the warrants was determined to be $6,735 and $388,550 at December 31, 2013 and 2012, respectively.
10.
|
Convertible Notes Payable
|
TCA Convertible Promissory Note
On June 7, 2012, the Company issued a convertible promissory note to TCA Global Master Fund, L.P. ("TCA") for $500,000 (the “TCA Note”). The maturity date of the TCA Note is June 7, 2013, and the Convertible Note bears interest at a rate of twelve percent (12%) per annum. The TCA Note is convertible into shares of the Company’s common stock at a price equal to ninety-five percent (95%) of the average of the lowest daily volume weighted average price of the common stock during the five (5) trading days immediately prior to the date of conversion. The TCA Note may be prepaid in whole or in part at the Company’s option without penalty.
Pursuant to the terms of the Equity Agreement, for a period of twenty-four months commencing on the effective date of a registration statement, TCA is to commit to purchase up to $2,000,000 of the Company’s common stock, pursuant to Advances, covering the Registerable Securities. The purchase price of the Shares under the Equity Agreement is equal to ninety-five percent (95%) of the lowest daily volume weighted average price of the Company’s common stock during the five (5) consecutive trading days after the Company delivers to TCA an Advance notice in writing requiring TCA to advance funds (an “Advance”) to the Company, subject to the terms of the Equity Agreement.
As further consideration for TCA entering into and structuring the Equity Facility, on June 14, 2012, the Company paid TCA a fee by issuing 275,000 shares of its common stock that equal to $110,000.
In July 2013, the Company was advised that the TCA Note was sold to Ironridge Global IV, Ltd.
As of December 31, 2013 and 2012, the TCA Note had a principal balance of $500,000 for both years, and accrued interest of $15,000 and $75,000, respectively.
Ludlow Capital Convertible Promissory Note
On April 30, 2013, the Company issued a convertible promissory note to Ludlow Capital, LLC, for $15,000 in professional services (the “Ludlow Note”). The terms of the Ludlow Note require repayment immediately and bear a 0% interest rate. The Ludlow Note is convertible into shares of the Company’s common stock at a price that shall be 10% below the closing bid upon notice of conversion. The Ludlow Note is currently due and payable.
Steven Victor Convertible Promissory Note
On October 1, 2013, the Company issued a $1,000,000 convertible promissory note to Dr. Steven Victor, the Company’s CEO, to convert $585,794 of accrued salary and $414,206 of personal loans due to Dr. Steven Victor (the “Victor Note”). The Victor Note is payable on demand and bears an annual 12% simple interest rate. The Victor Note is convertible into shares of the Company’s common stock at a price equal to the average five trading day closing bid price during the five days immediately prior to the conversion date multiplied by one and a half.
On October 1, 2013, the Company was advised that the Victor Note was assigned to Redwood as part of Redwood Deal #5.
Anna Rhodes Convertible Promissory Note
On October 1, 2013, the Company issued a $389,711 convertible promissory note to Anna Rhodes, the Company’s Executive Vice President, to convert $229,464 of accrued salary and $160,247 of personal loans due to Anna Rhodes (the “Rhodes Note”). The Rhodes Note is payable on demand and bears an annual 12% simple interest rate. The Rhodes Note is convertible into shares of the Company’s common stock at a price equal to the average five trading day closing bid price during the five days immediately prior to the conversion date multiplied by one and a half.
On October 1, 2013, the Company was advised that the Rhodes Note was assigned to Redwood as part of Redwood Deal #5.
WHC Capital Convertible Promissory Notes
On November 11, 2013, WHC Capital, LLC (“WHC”) assumed $100,000 of convertible notes from Redwood as part of their total convertible notes. On November 15, 2013, the Company issued a $75,000 convertible promissory note to WHC (combined, the “WHC Notes”). The Company received $66,000 in cash and $9,000 was recorded as othe current assets on the balance sheet. The terms of the WHC Notes require repayment on November 15, 2014 and bears an interest rate of 12% per annum. The WHC Notes are convertible into shares of the Company’s common stock at a price equal to 48% of the lowest intra-day trading price for the Company’s common stock during the fifteen trading days immediately preceding the conversion date.
During November and December 2013, $39,617 of the principal of the WHC Notes was converted into 49,920,000 shares of the Company’s common stock.
As of December 31, 2013, the WHCs Note had a principal balance of $135,383, and accrued interest of $2,582.
Crowning Capital Convertible Promissory Note
On January 10, 2013, the Company entered into a promissory note with Crowning Capital, LLC (the “Crowning Note”) pursuant to which Crowning Capital performed services in the amount of $250,000. The promissory note has a due date of July 31, 2013, and 0% interest rate. The note is currently due and payable.
During December 2013, $98,845 of the principal of the Crowning Note was converted into 92,476,326 shares of the Company’s common stock.
As of December 31, 2013, the Crowning Note had a principal balance of $151,155.
JMJ Financial Promissory Note
On February 20, 2013 (the "Effective Date"), the Company entered into promissory note, as amended (the “JMJ Note”) with JMJ Financial (“JMJ”), pursuant to which JMJ agreed to lend the Company up to an aggregate principal amount of $500,000 (the “Principal Sum”) for an aggregate purchase price of $450,000. JMJ provided $100,000 to the Company on the Effective Date. The JMJ Note matures one year from the date of each payment by JMJ to the Company (the “Maturity Date”).
The Company may repay the JMJ Note at any time on or before the 90th day after the Effective Date, after which the Company may not make further payments on the Note prior to the Maturity Date without written approval from the Investor. If the Company repays the JMJ Note on or before the 90th day after the Effective Date, the interest rate under the JMJ Note shall be zero percent (0%). If the Company does not repay the JMJ Note on or before the 90th day after the Effective Date, a one-time interest payment of 12% shall be applied to the Principal Sum.
JMJ may convert, beginning on the six month anniversary of the Effective Date, the outstanding principal and accrued interest on the Note into shares of the Company’s common stock at a conversion price per share equal to the lesser of (i) $0.16 or (ii) 60% of the lowest trade price in the 25 trading days prior to the date of conversion (the “Conversion Price”). The Conversion Price will be subject to adjustment for, among other things, the Company’s failure to be DTC eligible and only being Xclearing deposit eligible.
The Company shall include on the next registration statement the Company files with Securities and Exchange Commission (or on the subsequent registration statement if such registration statement is withdrawn) all shares issuable upon conversion of the JMJ Note. Failure to include such securities on the next registration statement will result in liquidated damages of 25% of the outstanding principal balance of the Note, but not less than $25,000, being immediately due and payable to JMJ at its election in the form of cash or added to the Principal Sum of the JMJ Note.
JMJ has contractually agreed to restrict its ability to convert the JMJ Note such that the number of shares of the Company common stock held by the Investor and its affiliates after such conversion does not exceed 4.99% of the Company’s then issued and outstanding shares of common stock.
So long as the JMJ Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to JMJ in the JMJ Note, then the Company shall notify the Borrower of such additional or more favorable term and such term, at JMJ’s option, shall become a part of the transaction documents with JMJ.
In October and November 2013, $71,670 of the principal balance of the JMJ Note were converted into 32,500,000 shares of the Company’s common stock.
As of December 31, 2013, the principal balance of the JMJ Note was $28,330, and accrued interest was $24,444.
Redwood Deal #1
On August 5, 2013, Redwood assumed $600,000 of principal and $60,781 of accrued interest, which was converted to principal, from two debenture holders from the May 2011 Offering, and $199,167 of principal and $18,697 of accrued interest, which was converted to principal, from the Frank Note as part of Redwood Deal #1. The terms of the assumed debt remained the same.
On October 7, 2013, Redwood assigned a total of $300,000 in principal debt from Redwood Deal #1 to Hudson.
On November 11, 2013, Redwood assigned a $100,000 in principal debt from Redwood Deal #1 to WHC.
In October and November 2013, Redwood converted a total of $323,400 in principal from the outstanding debt in Redwood Deal #1 into 102,010,399 shares of the Company’s common stock.
As of December 31, 2013, the principal balance of Redwood Deal #1 was $155,204, and accrued interest was $50,297.
Redwood Deal #2
On August 5, 2013, Redwood assumed $430,000 of total principal from seven debenture holders from the May 2011 Offering as part of Redwood Deal #2. The terms of the assumed debt remained the same.
In November and December 2013, Redwood converted a total of $113,787 in principal from the outstanding debt in Redwood Deal #2 into 120,580,000 shares of the Company’s common stock.
As of December 31, 2013, the principal balance of Redwood Deal #2 was $316,213, and accrued interest was $41,044.
Redwood Deal #3
On September 16, 2013, Redwood assumed $386,445 of total principal from the Sichenzia Note as part of Redwood Deal #3. The terms of the assumed debt remained the same.
As of December 31, 2013, the principal balance of Redwood Deal #3 was $386,445, and accrued interest was $11,271.
Redwood Deal #4
On August 5, 2013, the Company issued a convertible promissory note to Redwood for $250,000 as part of Redwood Deal #4. The Company received $125,000 cash, of which $15,000 is being amortized as financing fees over the term of the convertible promissory note, on August 7, 2013 as a partial payment for the convertible promissory note. The remaining $125,000 was paid in October 2013. The terms of the convertible promissory note require repayment in one year and bears a 12% simple annual interest rate. The convertible promissory note is convertible into shares of the Company’s common stock at a price that shall be the lesser of $0.05 per share or 48% of the average of the lowest traded price of the Common Stock as quoted by Bloomberg, L.P. on any three trading days during the twenty trading days immediately preceding the conversion date. The convertible promissory note may be prepaid in whole or in part at the Company’s option without penalty.
On October 23, 2013, Redwood assumed $125,000 of principal and $28,442 of accrued interest, which was converted to principal, from the JJK Notes as part of Redwood Deal #4. The terms of the assumed debt remained the same.
As of December 31, 2013, the principal balance of Redwood Deal #4 was $403,442, and accrued interest was $17,336 The related amortizable financing fees had a balance of $8,712 as of December 31, 2013, of which $6,288 were expensed as financing fees on the statement of operations.
Redwood Deal #5
On October 1, 2013, Redwood assumed $389,711 of total principal from the Rhodes Note, and $1,000,000 of total principal from the Victor Note, as part of Redwood Deal #5. The terms of the assumed debt remained the same.
As of December 31, 2013, the principal balance of Redwood Deal #5 was $1,389,711, and accrued interest was $41,691.
As of December 31, 2013 and December 31, 2012, the Company's convertible notes payable and accrued interest was as follows:
|
|
2013
|
|
|
2012
|
|
TCA Note
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Ludlow Note
|
|
|
15,000
|
|
|
|
-
|
|
WHC Notes
|
|
|
135,383
|
|
|
|
-
|
|
Crowning Note
|
|
|
151,155
|
|
|
|
-
|
|
JMJ Note
|
|
|
53,330
|
|
|
|
-
|
|
Redwood Deal #1
|
|
|
155,204
|
|
|
|
199,167
|
|
Redwood Deal #2
|
|
|
316,213
|
|
|
|
-
|
|
Redwood Deal #3
|
|
|
386,445
|
|
|
|
-
|
|
Redwood Deal #4
|
|
|
403,442
|
|
|
|
-
|
|
Redwood Deal #5
|
|
|
1,389,711
|
|
|
|
-
|
|
Total
|
|
$
|
3,505,883
|
|
|
$
|
699,167
|
|
11.
|
Derivative Liabilities
|
The Company has issued various financial instruments to investors that contain full ratchet anti-dilution provisions. GAAP provides guidance on determining what types of financial instruments or embedded features in a financial instrument would cause the financial instrument to be classified as a liability instead of equity. Under the evaluation criteria, the Company concluded that the financial instruments that contained full ratchet anti-dilution provisions are to be treated as derivative liabilities. GAAP requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value over the period reported in the statement of operations. These instruments were valued using pricing models which incorporate the Company’s stock price, volatility, U.S. risk free rate, dividend rate and estimated life.
The following table sets forth the Company’s estimate of the fair value of the financial instruments that are classified as liabilities as of December 31:
|
|
2013
|
|
|
2012
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
|
|
|
Significant Other Observable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,774,790
|
|
|
$
|
3,774,790
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
987,020
|
|
|
$
|
987,020
|
|
The following table sets forth a summary of changes in fair value of our derivative liabilities for the years ended December 31:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
987,020
|
|
|
$
|
14,791,291
|
|
Fair value of financial instruments at issue date
|
|
|
|
|
|
|
19,036,312
|
|
Fair value of embedded conversion feature at issue date
|
|
|
-
|
|
|
|
-
|
|
Change in fair value of financial instruments included in the statement of operations
|
|
|
3,180,535
|
|
|
|
(28,946,762)
|
|
Change in fair value of embedded conversion features included in the statement of operations
|
|
|
(392,765
|
)
|
|
|
(3,893,821)
|
|
|
|
$
|
3,774,790
|
|
|
$
|
987,020
|
|
The following tables set forth a description of the financial instruments classified as derivate liabilities as of December 31, 2013 and 2012 and the assumption used to value the instruments.
Convertible Debt
The derivative liabilities related to the embedded conversion feature and the outstanding warrants were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:
|
|
2013
|
|
|
2012
|
|
|
|
Embedded Detachable Warrants
|
|
|
Embedded Conversion Features
|
|
|
Embedded Detachable Warrants
|
|
|
Embedded Conversion Feature
|
|
Risk free interest rate
|
|
|
1.750
|
%
|
|
|
0.13
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Expected volatility (peer group)
|
|
|
316.09
|
%
|
|
|
316.09
|
%
|
|
|
105.09
|
%
|
|
|
105.09
|
%
|
Expected life (in years)
|
|
|
2.25
|
|
|
|
0.58-1.0
|
|
|
|
3.25
|
|
|
|
0.50
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Number outstanding
|
|
|
3,071,542
|
|
|
|
1,592,259,716
|
|
|
|
3,071,542
|
|
|
|
9,066,667
|
|
Fair value at issue date
|
|
$
|
263,146
|
|
|
$
|
2,481,128
|
|
|
$
|
263,146
|
|
|
$
|
25,418
|
|
Accumulated change in derivative liability as of the year ended December 31
|
|
$
|
(256,892
|
)
|
|
$
|
(1,286,927
|
)
|
|
$
|
125,104
|
|
|
$
|
562,102
|
|
Fair value at December 31
|
|
$
|
6,254
|
|
|
$
|
3,768,055
|
|
|
$
|
388,250
|
|
|
$
|
587,520
|
|
Private Placement Offering
The derivative liabilities related to the warrants issued as part of the private placement offering were valued using the Black-Scholes option valuation model and the following assumptions on the following dates:
|
|
2013
|
|
|
2012
|
|
Risk free interest rate
|
|
|
1.75
|
%
|
|
|
3.00%
|
|
Expected volatility (peer group)
|
|
|
316.09
|
%
|
|
|
105.09%
|
|
Expected life (in years)
|
|
|
3.25
|
|
|
|
4.25
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Number outstanding
|
|
|
200,000
|
|
|
|
200,000
|
|
Fair value at issue date
|
|
$
|
19,036,312
|
|
|
$
|
19,036,312
|
|
Accumulated change in derivative liability as of the year ended December 31
|
|
$
|
(19,035,831
|
)
|
|
$
|
(19,025,362)
|
|
Fair value at December 31
|
|
$
|
481
|
|
|
$
|
10,950
|
|
Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse
A reconciliation of tax expense computed at the statutory federal tax rate income (loss) from operations before income taxes to the actual income tax expense is as follows:
|
|
2013
|
|
|
2012
|
|
Tax provision (benefits) computed at the statutory rate
|
|
$
|
(4,405,000
|
)
|
|
$
|
(1,637,000
|
)
|
Nondeductible expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(4,405,000
|
)
|
|
|
(1,637,000
|
)
|
Increase in valuation allowance for deferred tax assets
|
|
|
4,405,000
|
|
|
|
1,637,000
|
|
Income tax expense benefit
|
|
$
|
--
|
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes include the net tax effects of net operating loss (NOL) carryforwards and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
|
|
2013
|
|
|
2012
|
|
Stock based compensation
|
|
$
|
1,387,000
|
|
|
$
|
2,122,000
|
|
Warrant
|
|
|
-
|
|
|
|
5,357,000
|
|
Fair Value of Derivative Liability
|
|
|
2,441,000
|
|
|
|
276,000
|
|
Net operating loss carryover
|
|
|
10,000,000
|
|
|
|
6,757,000
|
|
Charitable contributions
|
|
|
-
|
|
|
|
8,000
|
|
Total defered tax assets
|
|
|
13,828,000
|
|
|
|
14,520,000
|
|
Valuation allowance
|
|
|
(13,828,000
|
)
|
|
|
(14,520,000
|
)
|
Net deferred tax assets
|
|
$
|
--
|
|
|
$
|
--
|
|
The Company has provided a valuation reserve against the full amount of the net deferred tax assets, because in the opinion of management, it is more likely than not that these tax assets will not be realized.
The Company’s NOL and tax credit carryovers may be significantly limited under the Internal Revenue Code (IRC). NOL and tax credit carryovers are limited under Section 382 when there is a significant “ownership change” as defined in the IRC. During 2011 and in prior years, the Company may have experienced such ownership changes, which could impose such limitations.
The limitation imposed by the IRC would place an annual limitation on the amount of NOL and tax credit carryovers that can be utilized. When the Company completes the necessary studies, the amount of NOL carryovers available may be reduced significantly. However, since the valuation allowance fully reserves for all available carryovers, the effect of the reduction would be offset by a reduction in the valuation allowance.
The Company files income tax returns in the U.S. federal jurisdiction, and the State of New York.
The principal features of the Company's capital stock are as follows:
Series B Preferred Stock
As of December 31, 2013 and, 2012, the Company has designated 21,000 shares of preferred stock as Series B preferred stock, with a par value of $.01 per share, of which 15,058 shares of preferred stock are issued and outstanding. Each share of series B preferred stock shall be convertible into 1,000 shares of the Company’s common stock. In addition, the holders of the series B preferred stock shall be entitled to notice of stockholders’ meeting and to vote as a single class with the holders of the Common Stock upon any matter submitted to the stockholders for a vote, and shall be entitled to such number of votes as shall equal the product of (a) the number of shares of Common Stock into which the series B preferred stock is convertible into on the record date of such vote multiplied by (b) ten (10).
Series C Preferred Stock
As of December 31, 2013 and 2012, the Company has designated 13,000 shares of preferred stock as Series C preferred stock, with a par value of $.01 per share, of which 7,250 shares of preferred stock are issued and outstanding. Each share of Series C preferred stock shall be convertible into 1,000 shares of the Company’s common stock. . In addition, the holders of the series B preferred stock shall be entitled to notice of stockholders’ meeting and to vote as a single class with the holders of the Common Stock upon any matter submitted to the stockholders for a vote, and shall be entitled to such number of votes as shall equal to the number of shares of Common Stock into which the series B preferred stock is convertible into on the record date.
Certain holders of the Company’s Series C preferred stock have contractually agreed to restrict their ability to convert the Series C preferred stock such that the number of shares of the Company common stock held by each of holder and its affiliates after such conversion shall not exceed 4.99% of the Company’s then issued and outstanding shares of common stock.
Series D Preferred Stock
As of December 31, 2013 and 2012, the Company has designated 500,000 shares of preferred stock as Series D preferred stock, with a par value of $.01 per share, of which 56,500 shares of preferred stock are issued and outstanding. Each share of series D convertible preferred stock is convertible at any time at an initial conversion price equal to $2.00 per share, subject to adjustment under certain circumstances. As long as the series D preferred stock is outstanding, the conversion price of the series D convertible preferred stock in effect shall be reduced by $0.05 for every 180 day period a share of series D preferred stock is held by the investor. The series D convertible preferred stock automatically converts into shares of the Company’s common stock after three years. Each share of Series D convertible preferred stock was issued with a warrant to purchase 10 shares of the Company’s common stock. The warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $2.00, subject to adjustment under certain circumstances. The exercise price of the warrants and the conversion price of the series D convertible preferred stock are subject to full ratchet and anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like. However, no adjustment made shall cause the exercise price of the series D convertible preferred stock and warrants to be less than $1.00. The holders of Series D preferred stock have no voting rights.
Common Stock
The Company has authorized 3,500,000,000 shares of common stock, with a par value of $.0001 per share. As of December 31, 2013 and 2012, the Company had 922,722,023 and 58,445,053 shares of common stock issued and outstanding, respectively.
During the years ended December 31, 2013 and 2012, the Company issued the following equity instruments:
·
|
During the years ended December 31, 2012 and 2011, the Company entered into a securities purchase agreement with various investors pursuant to which the Company sold an aggregate of 14,500 and 42,000 shares, respectively, of series D convertible preferred stock and warrants to purchase 145,000 and 420,000, respectively, of the Company’s common stock, for aggregate gross proceeds of $290,000 and $840,000, respectively. In connection with the offering, the Company paid professional fees of $60,000 and issued a placement agent 15,000 warrants to purchase shares of common stock in the year ended December 31, 2012. The warrants issued to the placement agent may be exercised on a cashless basis
|
·
|
In February 2012, the Company entered into securities purchase agreements with accredited investors pursuant to which the Company sold (i) an aggregate of 2,600,000 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), (ii) class A warrants to purchase an aggregate of 5,200,000 shares of Common Stock (the “Class A Warrants”), and (iii) class B warrants to purchase an aggregate of 5,200,000 shares of Common Stock (the “Class B Warrants” and together with the Class A Warrants, the “Warrants”), for aggregate gross cash proceeds of $2,627,649, which consisted of $2,100,000 of cash and the exchange and cancelation of a promissory note (bearing principal and interest totaling $527,549) and a warrant ("Exchange Agreement"). In connection with the private placement, we paid placement agent fees and professional fees of $55,750 and issued the placement agent 27,500 warrants to purchase shares of common stock. The warrants issued to the placement agent may be exercised on a cashless basis.
|
·
|
The Class A Warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $2.00, subject to adjustment. The Class B Warrants are exercisable for a period of five years from the date of issuance at an initial exercise price of $3.75, subject to adjustment. The exercise price of the Warrants are subject to anti-dilution adjustment for subsequent lower price issuances by the Company, as well as customary adjustments provisions for stock splits, stock dividends, recapitalizations and the like. The investors may exercise the Warrants on a cashless basis anytime after the six month anniversary of the initial exercise date of the Warrants if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event the investors exercise the Warrants on a cashless basis, we will not receive any proceeds.
|
·
|
Between September 5, 2012 and October 11, 2012, the February 2012 investors (including the investor that exchanged and cancelled his outstanding promissory note) agreed to certain amendments to their securities purchase agreement and exchange their respective Warrants for (i) an aggregate of 6,100,000 shares of the Company’s Common Stock (ii) a new series A warrant to purchase an aggregate of 6,100,000 shares of Common Stock at an exercise price of seventy-five cents ($0.75) per share and (iii) a new series B warrant to purchase an aggregate of 6,100,000 shares of Common Stock at an exercise price of seventy-five cents ($0.75) per share.
|
·
|
The Company issued 16,128,295 shares of common stock to the holders of its February 2012 investors in connection with the anti-dilution features present in the instruments.
|
·
|
During the year ended December 31, 2012, the Company issued 118,794 shares of its common stock in exchange for the conversions of convertible debentures and accrued interest of $103,648.
|
·
|
During the year ended December 31, 2012, two of the Company’s notes payable and the related accrued interest, totaling $902,548, were converted into an aggregate of 687,500 shares of common stock of the Company based on an agreed upon conversion price ranging from $1.31-$2.00 per share.
|
·
|
During the year ended December 31, 2012, the Company issued 750,000 shares of its common stock to employees. The Company recognized the fair market value of $120,250 as an expense.
|
·
|
During the year ended December 31, 2012, the Company issued 5,930,668 shares of its common stock for professional and advisory services, financing costs and license fees. The Company recognized the fair market value of $5,923,039 as an expense as of the date of issue.
|
·
|
From September through December 2012, the Company entered into securities purchase agreements,, pursuant to which the Company sold 2,499,998 units, each unit consisting of two (2) shares of the Company’s common stock, par value $0.001 per share and a warrant to purchase a share of common stock for aggregate gross proceeds of $750,000. The Warrant is exercisable for a period of five years from the date of issuance at an initial exercise price of $0.45, subject to adjustment. The exercise price of the Warrant is subject to customary adjustments for stock splits, stock dividends, recapitalizations and the like. In connection with the private placement, the Company paid placement agent fees and professional fees of $28,200.
|
·
|
In May 2013, pursuant to the terms of the Hanover Holdings Settlement Agreement approved by the court order, on May 23, 2013, the Company issued and delivered to Hanover Holdings, Inc. 8,500,000 Settlement Shares of the Company’s common stock. The matter is further discussed in litigation section of Note 15, "Commitments".
|
·
|
In June 2013, the Company issued Hanover Holdings, Inc. an additional 9,850,000 shares of common stock for additional Settlement Agreement shares.
|
·
|
In July 2013, the Company issued Hanover Holdings, Inc. an additional 21,316,171 shares of common stock for additional Settlement Agreement shares.
|
·
|
In August 2013, the Company issued Hanover Holdings, Inc. an additional 12,300,000 shares of common stock for additional Settlement Agreement shares.
|
·
|
In August 2013, the Company issued Ironridge Global IV, Ltd. 4,959,613 shares of common stock as payment for a facility fee per their litigation settlement.
|
·
|
In September 2013, the Company issued Hanover Holdings, Inc. an additional 6,800,000 shares of common stock for additional Settlement Agreement shares.
|
·
|
In October 2013, the Company issued Hanover Holdings, Inc. an additional 10,000,000 shares of common stock for additional Settlement Agreement shares.
|
·
|
In October 2013, the Company issued to Highland Capital Fund. 5,000,000 shares of common stock for consulting services valued at $90,000.
|
·
|
In October 2013, the Company issued a total of 83,035,917 shares of common stock for debt conversions.
|
·
|
In November 2013, the Company issued a total of 112,583,243 shares of common stock for debt conversions.
|
·
|
In December 2013, the Company issued Hanover Holdings, Inc. an additional 33,009,817 shares of common stock for additional Settlement Agreement shares. This was the final issuance of shares to Hanover per the Settlement Agreement.
|
·
|
In December 2013, the Company issued JJK, LLC 19,000,000 shares of common stock for JJK, LLC granting extensions to their outstanding notes during 2013.
|
·
|
In December 2013, the Company issued Dr. Steven Victor and Anna Phodes 177,691,000 and 30,000,000 shares of common stock, respectively, for conversion of their related party debt.
|
·
|
In December 2013, the Company issued a total of 330,562,400 shares of common stock for debt conversions.
|
14.
|
Stock Options and Warrants
|
Employee Stock Options
The following table summarizes the changes in the options outstanding at December 31, 2013, and the related prices for the shares of the Company’s common stock issued to employees of the Company under a non-qualified employee stock option plan.
Range of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01 - 0.25
|
|
|
|
1,775,000
|
|
|
$
|
0.15
|
|
|
|
8.57
|
|
|
|
1,762,500
|
|
|
$
|
0.15
|
|
|
4.00
|
|
|
|
2,347,926
|
|
|
|
4.00
|
|
|
|
7.99
|
|
|
|
1,879,173
|
|
|
|
4.00
|
|
|
|
|
|
|
4,122,926
|
|
|
|
|
|
|
|
8.24
|
|
|
|
3,641,673
|
|
|
|
|
|
A summary of the Company’s stock awards for options as of December 31, 2013 and changes for the year ended December 31, 2013 is presented below:
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, December 31, 2012
|
|
|
4,747,926
|
|
|
$
|
1.48
|
|
Granted
|
|
|
--
|
|
|
|
--
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
Expired/Cancelled
|
|
|
(625,000
|
)
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
4,122,926
|
|
|
$
|
2.34
|
|
Exercisable, December 31, 2013
|
|
|
3,641,673
|
|
|
$
|
2.14
|
|
The weighted-average fair value of stock options granted to employees during the year ended December 31, 2013 and December 31, 2012, respectively, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
--
|
|
|
|
0.31 to 1.71
|
%
|
Expected stock price volatility
|
|
|
--
|
|
|
|
105
|
%
|
Expected dividend payout
|
|
|
--
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
--
|
|
|
|
3.0 to 10. 0
|
|
Expected forfeiture rate
|
|
|
--
|
|
|
|
0
|
%
|
Fair value per share of options granted
|
|
$
|
--
|
|
|
$
|
0.17
|
|
The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company has no historical experience with which to establish a basis for determining an expected life of these awards. Therefore, the Company only gave consideration to the contractual terms and did not consider the vesting schedules, exercise patterns and pre-vesting and post-vesting forfeitures significant to the expected life of the option award.
We estimate the volatility of our common stock based on the calculated historical volatility of similar entities in industry, in size and in financial leverage whose share prices are publicly available. We base the risk-free interest rate used in the Black-Scholes-Merton option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. We have not paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero in the Black-Scholes-Merton option valuation model.
There were no options exercised during the years ended December 31, 2013 or 2012.
Total stock-based compensation expense in connection with options granted to employees recognized in the consolidated statement of operations for the years ended December 31, 2013 and 2012 was $0 and $2,213,672, respectively, net of tax effect. Total stock-based compensation expense in connection with options granted to non-employees recognized in the consolidated statement of operations for the years ended December 31, 2013 and 2012 was $0 and $34,930, respectively, net of tax effect. Additionally, none of the options outstanding and unvested as of December 31, 2013 had any intrinsic value.
Warrants
The following table summarizes the changes in the warrants outstanding at December 31, 2013, and the related prices for the shares of the Company’s common stock issued to non-employees of the Company. These warrants were issued in lieu of cash compensation for services performed or financing expenses and in connection with the private placements and merger.
Range of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
3,071,542
|
|
|
$
|
0.33
|
|
|
|
2.36
|
|
|
|
3,071,542
|
|
|
$
|
0.33
|
|
$
|
.045
|
|
|
|
2,566,664
|
|
|
$
|
0.45
|
|
|
|
3.90
|
|
|
|
2,566,664
|
|
|
$
|
0.45
|
|
$
|
0.75 - 0.86
|
|
|
|
11,580,000
|
|
|
$
|
0.75
|
|
|
|
3.10
|
|
|
|
11,580,000
|
|
|
$
|
0.75
|
|
$
|
1.00
|
|
|
|
42,500
|
|
|
$
|
1.00
|
|
|
|
2.98
|
|
|
|
42,500
|
|
|
$
|
1.00
|
|
$
|
1.58
|
|
|
|
45,000
|
|
|
$
|
1.58
|
|
|
|
8.25
|
|
|
|
45,000
|
|
|
$
|
1.58
|
|
$
|
2.00
|
|
|
|
2,529,200
|
|
|
$
|
2.00
|
|
|
|
3.09
|
|
|
|
2,529,200
|
|
|
$
|
2.00
|
|
$
|
2.45 - 2.60
|
|
|
|
800,000
|
|
|
$
|
2.51
|
|
|
|
3.01
|
|
|
|
800,000
|
|
|
$
|
2.51
|
|
$
|
3.00
|
|
|
|
750,000
|
|
|
$
|
3.00
|
|
|
|
2.95
|
|
|
|
750,000
|
|
|
$
|
3.00
|
|
$
|
3.20
|
|
|
|
350,000
|
|
|
$
|
3.20
|
|
|
|
2.92
|
|
|
|
350,000
|
|
|
$
|
3.20
|
|
$
|
3.75
|
|
|
|
100,000
|
|
|
$
|
3.75
|
|
|
|
3.14
|
|
|
|
100,000
|
|
|
$
|
3.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,834,906
|
|
|
|
|
|
|
|
3.09
|
|
|
|
21,834,906
|
|
|
|
|
|
A summary of the Company’s stock awards for warrants as of December 31, 2013 and changes for the year ended December 31, 2013 is presented below:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, January 1, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2013
|
|
|
|
|
|
|
|
|
The Company issued 0 and 1,684,000 compensatory warrants to non-employees during the years ended December 31, 2013 and 2012, respectively. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for the grants, respectively; dividend yield of zero percent for all periods; expected volatility is 105%; risk-free interest rate from a range of .10% to 2.23%; expected lives ranging from one years to ten years. Total non-employee stock-based compensation expense in connection with warrants recognized in the consolidated statement of operations for the years ended December 31, 2013 and 2012 was $0 and $2,720,764, respectively, net of tax effect.
The following table presents the computations of basic and dilutive loss per share:
|
|
2013
|
|
|
2012
|
|
Net Income (Loss)
|
|
$
|
(11,140,817
|
)
|
|
$
|
(4,151,891
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.13
|
)
|
Net income (loss) per share – diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic
|
|
|
153,636,036
|
|
|
|
32,338,788
|
|
Weighted average common shares outstanding – diluted
|
|
|
153,636,036
|
|
|
|
32,338,788
|
|
For the year ended December 31, 2013 and 2012 common stock equivalents totaling 5,396,636,857 and 43,931,682 related to warrants, convertible debt and preferred stock were excluded from the calculation of the diluted net loss per share as their effect would have been antidilutive.
On June 1, 2011, a company owned by Dr. Steven Victor, the Company’s CEO, entered into a 13 year lease for new office space, for which the Company unconditionally guaranteed any and all obligations owed under the lease to the landlord. In connection with the execution of the lease, the Company established a restricted cash account in the amount of approximately $650,000 to secure a line of credit to be used as a security deposit under the lease.
The lease commenced on June 1, 2012 and expire on May 31, 2025. Upon commencement, the aggregate minimum annual lease payments under operating leases are as follows:
2014
|
|
$
|
646,062
|
|
2015
|
|
665,555
|
|
2016
|
|
679,479
|
|
2017
|
|
679,479
|
|
2018
|
|
679,479
|
|
Thereafter
|
|
5,440,474
|
|
Total
|
|
$
|
8,790,528
|
|
The Company has evaluated its subsequent events through May 8, 2014, the date the financial statements were available to be issued. Except as disclosed below, there were no additional significant subsequent events requiring disclosure.
Material Modification to Rights of Security Holders
On January 17, 2014, Intellicell Biosciences, Inc. (the “Corporation”) filed a certificate of designations, rights and preferences (the “Certificate of Designation”) with the Secretary of State of the State of Nevada pursuant to which the Corporation set forth the designation, powers, rights, privileges, preferences and restrictions of the Series E Preferred Stock. On January 22, 2014 the Corporation filed a certificate of correction (the “Certificate of Correction”) with the Secretary of State of Nevada to change the name of the designation from “Series E Preferred Stock” to “Series F Preferred Stock.” Among other things, each one (1) share of the Series F Preferred Stock shall have voting rights equal to (x) 0.019607
multiplied by
the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “
Numerator
”),
divided by
(y) 0.49,
minus
(z) the Numerator. For purposes of illustration only, if the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote is 5,000,000, the voting rights of one share of the Series F Preferred shall be equal to 102,036 (0.019607 x 5,000,000) / 0.49) – (0.019607 x 5,000,000) = 102,036).
The foregoing description of the Series F Preferred Stock does not purport to be complete and is subject to, and qualified in its entirety by, the Certificate of Designation and the Certificate of Correction, copies of which are attached hereto as Exhibit 99.1 and Exhibit 99.2, respectively, and incorporated herein by reference.
Amendment to Articles of Incorporation
On March 7, 2014, Intellicell Biosciences, Inc. (the “Company”) filed an amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada (the “Amendment”), to increase the Company’s authorized common stock from one billion five hundred million (1,500,000,000) shares of common stock to three billion five hundred million (3,500,000,000) shares of common stock. The Amendment also changed the par value of the Company’s authorized common stock from $0.001 per share to $0.0001 per share.
Entry into a Material Definitive Agreement
On March 11, 2014 (the “
Effective Date
”), Intellicell Biosciences, Inc., a Nevada corporation (the “
Company
”), entered into a Securities Purchase Agreement (the “
SPA
”) to issue and sell a secured convertible debenture (the “
Debenture
”) to YA Global Investments, L.P., a Cayman Islands exempted company (the “
Investor
”), in the principal amount of $2,100,000. In addition to the Debenture, the Company also agreed to issue a warrant to the Investor entitling the Investor to purchase up to 400,000,000 shares of the Company’s common stock at an exercise price of $0.005 per share (the “
Warrant
”). The Company’s issuance of the securities to the Investor pursuant to the SPA is exempt from registration requirements of the Securities Act of 1933, as amended (the “
Securities Act
”), pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D promulgated under the Securities Act.
The Debenture shall mature on or before March 11, 2015 (the “
Maturity Date
”) and shall accrue interest at an annual rate equal to 7.5%. Such interest shall be paid on the Maturity Date (or sooner as provided in the Debenture), in cash or, in shares of Common Stock in accordance with the terms of the Debenture at the applicable Conversion Price (as defined in the Debenture). At any time, and at its sole option, the Investor shall be entitled to convert a portion or all amounts of principal and interest due and outstanding under the Debenture into shares of common stock at a price equal to 48.5% of the average of the three (3) lowest prices per share of reported trades (not on the same day) of the common stock on the OTC Markets or on the exchange which the common stock is then listed as quoted by Bloomberg, LP during the twenty (20) trading days preceding the conversion date.
Unless the Investor provides sixty-five (65) days prior written notice to the Company, the Company shall not effect any conversion, and the Investor shall not have the right to convert any portion of the Debenture to the extent that after giving effect to such conversion, the Investor (together with any affiliate of the Investor) would beneficially own more than 9.99% of the then issued and outstanding shares of common stock.
The obligations under the Debenture are guaranteed by that certain Guaranty Agreement (the “
Guaranty Agreement
”) and secured by that certain (i) Security Agreement (the “
Security Agreement
”), (ii) Intellectual Property Security Agreement (the “
Intellectual Property Security Agreement
”) and (iii) Pledge Agreement (the “
Pledge Agreement
”), the aforementioned agreements being dated the Effective Date, and each by and among the Company, Intellicell Biosciences, Inc., a New York corporation (“
Intellicell NY
”), ICBS Research Corp., a New York corporation (“
ICBS
”), Tech-Stem, Inc., a New York corporation (“
Tech-Stem
”) and the Investor.
In connection with the SPA, the Company also entered into lockup agreements dated the Effective Date by and between the Company and its officers and directors in the form attached as Exhibit C to the SPA, that certain Escrow Agreement dated the Effective Date, by and among the Company, the Investor, and escrow agent named therein pursuant to the terms of the SPA , and that certain Escrow Agreement dated the Effective Date, by and among the Company, MD Global Partners, LLC, and the escrow agent named therein pursuant to the terms of the SPA.
Laboratory Services and License Agreement
On March 11, 2014 (the “
Effective Date
”), Intellicell Biosciences, Inc., a Nevada corporation (the “
Company
”), executed a Laboratory Services and License Agreement (the “
License Agreement
”), effective March 7, 2014, with The Andrews Research and Education Foundation, Inc. (“
AREF
”) pursuant to which the Company agreed to grant certain technology and trademark licenses to AREF.
The term of the License Agreement shall be for a period of three (3) years commencing on March 7, 2014 and shall automatically renew for subsequent periods of three (3) years unless either party to the License Agreement provides notice of its intention not to renew at least ninety (90) days prior to the expiration of any three (3) year term.
Subject to the terms and conditions of the License Agreement, the Company agreed to grant AREF a non-exclusive (except for the Pensacola, Florida area and a surrounding radius of 150 miles), non-assignable, non-transferrable, non-sublicensable license to market the use of and practice the Technology (as such term is defined in the License Agreement) at AREF’s premises for restricted purposes as provided in the License Agreement. The Company also agreed to grant AREF a non-exclusive, non-assignable, non-sublicensable, license to the Trademarks (as such term is defined in the Agreement). Furthermore, the Company reserved the perpetual worldwide right to license and use the Patent (as defined in the License Agreement), Trademarks and the Technology licensed under the License Agreement for any purpose.
Except for when performed for research purposes, AREF shall pay to the Company a fee equal to $2,500 per Tissue Processing (as such term is defined in the License Agreement) case processed. The parties to the License Agreement have mutually agreed not to disclose any Confidential Information (as such term is defined in the License Agreement), whether verbal or written, conveyed to them prior to, during or subsequent to the term of the License Agreement.
Consulting Agreement
On March 11, 2014, the Company executed a Consulting Agreement (the “
Consulting Agreement
”) with Dr. James Andrews, effective March 7, 2014, pursuant to which Dr. Andrews shall serve as Chairman of the Intellicell Orthopedic Cellular Therapy Advisory Board. The initial term of the Agreement shall be for a period of ten (10) years unless extended as provided in the Agreement or unless terminated by either party with thirty (30) days advance written notice to the other party. In consideration for Consultant’s services, the Consultant shall be paid a monthly fee and make a monthly charitable contribution to the Andrews Foundation after the Company closes a Capital Raise (as defined in the Consulting Agreement), and the amount of such monthly fee and monthly charitable contribution shall be determined based on the amount raised in the Capital Raise. For example, if the value of the Capital Raise is equal to or greater than $2,000,000 but less than $15,000,000, the monthly fee payable to the Consultant thereafter shall be equal to $30,000 (with $6,000 of such amount payable to Dr. Michael Immel) with a charitable contribution of $10,000 payable to the Andrews Foundation thereafter for the term of the Consulting Agreement.
Furthermore, commencing on March 1, 2014 and ending on May 1, 2017, on each of March 1, June 1, October 1 and January 1 during such period, the Company shall issue and the Consultant shall be entitled to receive non-qualified stock options to purchase a number of shares of the Company’s common stock equal to 750,000 divided by the average of the closing bid price per share of such common stock for the ten (10) trading days immediately prior to the date of issuance, subject to certain adjustments as set forth in the Consulting Agreement. The options have a strike price of $0.0058 per share and are exercisable for ten (10) years. A portion (13.33%) of such options will be issued to the Andrews Foundation (and Dr. Immel shall receive 20% of such options). In addition, The Company shall issue to the Consultant 6,666,666 shares of its common stock based on the market price at the date of the execution of the License Agreement (see description above), as well as 2,000,000 shares to Dr. Immel and 1,333,333 shares to the Andrews Foundation. Additionally, 1,000,000 shares shall be issued to the Consultant, 200,000 shares shall be issued to Dr. Immel and 133,333 shares shall be issued to the Andrews Foundation upon FDA approval of the Company’s Stromal Vascular Fraction Cell injection for treatment of osteoarthritis.
Issuance of Convertible Debentures
On January 31, 2014, the Company issued a secured convertible debenture with The Roth Firm for $196,612 to memorialize outstanding accounts payable. Under the terms of the agreement, The Roth Firm has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the Common Stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with Mintz et al for $25,382 to memorialize outstanding accounts payable. Under the terms of the agreement, Mintz et al has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with Biologic Consulting Group for $93,005.93 to memorialize outstanding accounts payable. Under the terms of the agreement, Biologic Consulting Group has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with The Roth Firm for $196,612 to memorialize outstanding accounts payable. Under the terms of the agreement, The Roth Firm has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with University of Florida, Department of Materials Sciences & Engineering for $33,781 to memorialize outstanding accounts payable. Under the terms of the agreement, University of Florida, Department of Materials Sciences & Engineering has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with Hunton & Williams, LLP for $187,106.57 to memorialize outstanding accounts payable. Under the terms of the agreement, Hunton & Williams, LLP has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with Lucoksky Brookman, LLP for $124,812.45 to memorialize outstanding accounts payable. Under the terms of the agreement, Lucoksky Brookman, LLP has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
On January 31, 2014, the Company issued a secured convertible debenture with Buchanan Ingersoll & Rooney for $525,583 to memorialize outstanding accounts payable. Under the terms of the agreement Buchanan Ingersoll & Rooney has the rights of first refusal for a period of eighteen months from the issuance of the debenture on any issuance or sale of capital stock that the Company issues to raise additional capital. The terms of the convertible debenture require repayment on the date of the note and bears a 10% simple annual interest rate. The convertible debenture is convertible into shares of the Company’s common stock at a price equal to 48.5% of the average 3 lowest trades (not on the same day) of the common stock of the 20 trading days immediately preceding the conversion date as quoted by Bloomberg, LP.
TCA Default Notice
On July 15, 2013, while the Company was finalizing an amendment and waiver to that certain Convertible Promissory Note (the “Note”) issued by the Company in favor of TCA Global Credit Master Fund, LP (“TCA”) on June 7, 2012 in the principal amount of $500,000, the Company was advised that Ironridge Global IV, LTD (“Ironridge”), led by Mr. John C. Kirkland, Esq., purportedly purchased the Note from TCA. The Complaint and Motion alleged that Ironridge and TCA each served the Company with a Notice of Foreclosure and Sale, both claiming to be the “Secured Party” of the same assets.
On August 8, 2013, a Summons and Complaint (the “Complaint”) was filed along with a Motion for a Temporary Restraining Order (the “Motion”) before the Supreme Court of the State of New York, County of New York (the “
Court
”) under the caption
Intellicell Biosciences, Inc. v Ironridge Global IV, LTD., and TCA Global Credit Master Fund, LP
, Index No. 652800/13. The Motion sought to restrain the sale of the Company’s assets.
Given that Ironridge and TCA asserted that they would sell the secured assets of the Company at auction on August 12, 2013, the Motion sought to temporarily restrain both parties from so doing. On August 12, 2013, Justice Sherwood, Justice of the Supreme Court, New York County, issued a written Order granting the relief requested, thereby restraining any sale of assets (the “Temporary Restraining Order”).
On August 26, 2013, despite the Company’s best efforts to amicably resolve the dispute related to the Note, a subsequent hearing on the Motion was held, at which time the Company voluntarily brought with it to Court: (i) a certified check in the amount of $535,833.33 constituting payment of all principal and interest owed under the Note; and (ii) a stock certificate constituting the facility fee shares owed to the Secured Party pursuant to that certain Equity Facility Agreement. Since TCA admitted in prior court filings that it has no remaining interest in the that certain Note and Equity Facility Agreement, both the check and the stock certificate were tendered to Ironridge in open court, and counsel for Ironridge confirmed receipt thereof to Justice Oing directly. The company's attorneys argued in court that with the exception of possible attorney’s fees owed, the Company's obligations under the transaction documents have now been satisfied in full.
In addition, the Court found Ironridge’s jurisdictional argument to be unavailing and held that the case shall remain in New York and directed all parties to file submissions with the Court on September 10, 2013, indicating why any other monies are or are not owed under those certain transaction documents. Judge Oing further directed that the Temporary Restraining Order restraining the sale of the Company’s assets shall remain in place indefinitely until further order of the Court and that the auction shall not be rescheduled and that Ironridge shall not make, post or distribute any further advertisements, internet postings, blogs or otherwise in relation thereto. Finally, Judge Oing held that the balance of the $680,000 that was being held in escrow be immediately released.
The Company intends to vigorously defend itself against Ironridge and Kirklands’s improper attempts to seize the Company’s assets for not giving into Kirkland’s improper threats and demands. The Company will take all legal action necessary to protect the interests of the Company and its shareholders. The Company is also arranging for all outstanding principal and interest under the Note to be paid as soon as possible.
Additional litigations
On March 17, 2014, Dean E. Miller, as representative shareholder, on behalf of the nominal defendant Intellicell Biosciences, Inc., filed a shareholder’s derivative action against Steven Victor, MD, in his capacity as Chairman - CEO and individually, Anna Rhodes as former Executive Vice President and individually, Leonard L. Mazur as interim Chief Operating Officer and individually, Myron Holubiak as a Director and individually, Michael Hershman, as Chairman of the Board of Directors and individually, Stuart Goldfarb as a former Director and individually, Victor Dermatology & Rejuvenation, P.C., Victor Cosmeceuticals, Inc., Lasersculpt, Inc., and the Doe Entities 1-5, as defendants, and Intellicell Biosciences, Inc., as nominal-defendant. The complaint, which was filed on the aforementioned date with the United States District Court Southern District of New York, alleges that the Company has failed to comply with US Food and Drug Administration and United States Patent and Trade Office regulations. The allegations in the complaint include, but are not limited to, allegations involving fraud, negligence, false reporting, and mismanagement of laboratory facilities. Pursuant to the complaint, the amount in controversy exceeds $75,000. Furthermore, the complaint as filed lists the following counts: 1. Against the individual defendants for breach of their fiduciary duties in connection with their management of the Company; 2. Against the individual defendants for breach of fiduciary duty in connection with disseminating false information; 3. Against the individual defendants for breach of fiduciary duty for failing to design and implement adequate internal controls; 4. Request for injunctive relief; 5. Imposition of constructive trust/accounting; and 6. Appointment of referee injunctive relief. The Company believes that such allegations and claims are without merit and intends to vigorously defend such allegations and claims. Because the inquiry is in its initial stages, the Company is not currently able to predict the probability of a favorable or unfavorable outcome, or the amount of any possible loss in the event of an unfavorable outcome. Consequently, no material provision or liability has been recorded for such allegations and claims as of December 31, 2013. However, management is confident in its defenses to such allegations and claims.
On March 11, 2014, Steven A. Victor (“Dr. Victor”), Intellicell Biosciences, Inc., a Nevada corporation, Intellicell Biosciences Inc., a New York corporation, and Regen Medical P.C., a New York corporation filed a complaint against Jonathan Schwartz (“Schwarz”), Joseph P. Salvani (“Salvani”) and Douglas R. Dollinger (“Dollinger”), in the Supreme Court of the State of New York, County of New York. Schwartz and Salvani, both shareholders of the Company, are represented by Dollinger in his capacity as legal counsel. Pursuant to the complaint, the plaintiffs’ first cause of action alleges that the defendants conspired together and acted in concert, to defame Dr. Victor and the Company in an effort to take control of the Company and to reap large profits by dumping their shares thereafter. Furthermore, the plaintiffs’ second cause of action alleges that Salvani made false statements to a potential investor, resulting in damages amounting to $250,000. The plaintiffs seek compensatory damages, together with punitive damages and interest in connection with the first cause of action, and compensatory damages in the amount of $250,000.00, together with punitive damages and interest, in connection with the second cause of action.
Through April 24, 2014, a total of 1,058,838,813 shares of common stock were issued for various conversions of debt.
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