NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014
(Unaudited)
1. Basis of Presentation and Nature of Operations
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Cellceutix Corporation have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2013, included in our Annual Report on Form 10-K for the year ended June 30, 2013.
In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three month periods have been made. Results for the interim periods presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms "Company", "we", "us" or "our" mean Cellceutix Corporation.
Cellceutix Corporation, formerly known as EconoShare, Inc., (“Cellceutix” or the “Company”) was incorporated on August 1, 2005. On December 6, 2007, the Company acquired Cellceutix Pharma, Inc. which was incorporated in the State of Delaware on June 20, 2007, in exchange for newly issued shares of the Company’s common stock. As a result of the exchange, Cellceutix Pharma, Inc. became a wholly-owned subsidiary of the Company. The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. Accordingly, the accompanying financial statements have been prepared in accordance with generally accepted accounting principles related to development-stage companies as set forth in Financial Accounting Standards Board Accounting Standards Codification 915 (“FASB ASC 915”). A development-stage company is one in which planned principal operations have not commenced or if its operations have commenced, there has been no significant revenues there from.
The Company’s Common Stock is quoted on the Over the Counter Bulletin Board (OTCBB), symbol “CTIX”.
All amounts, where it is designated in these notes to the financial statements as an approximate amount, are rounded to the nearest thousand dollars.
Nature of Operations
Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of cancer and inflammatory disease. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing on our lead compounds, Kevetrin, Prurisol and Brilacidin, and advancing them as quickly as possible along the regulatory pathway. We will develop the highest quality data and broadest intellectual property to support our compounds.
We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
2. Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the period since June 20, 2007 (date of inception) through March 31, 2014, the Company has had a cumulative net loss attributable to common stockholders of approximately $26.6 million and a working capital deficit of approximately $4.0 million at March 31, 2014. As of March 31, 2014, the Company has not emerged from the development stage. In view of these matters, the ability of the Company to continue as a going concern is dependent upon the Company’s ability to generate additional financing. Since inception, the Company has financed its activities principally from the use of equity securities, debt issuance and loans from an officer to pay for its operations. The Company intends on financing its future development activities and its working capital needs largely from the issuance of debt and the sale of equity securities, until such time that funds provided by operations are sufficient to fund working capital requirements. On October 25, 2013, we terminated a previous agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), and entered into a new stock purchase agreement (the “Purchase Agreement”) with Aspire Capital.
The Purchase Agreement provides that upon meeting the terms of the agreement, Aspire Capital is committed to purchase up to an aggregate of $20,000,000 of our shares of Class A Common Stock over the approximately 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 210,523 shares of its Class A Common Stock as a commitment fee. The commitment fee will be amortized as the funding is received. The unamortized portion is carried on the balance sheet as deferred offering costs. Concurrently with entering into the Purchase Agreement, the Company agreed to file one or more registration statements as permissible and necessary under the Securities Act of 1933, as amended, or the Securities Act, for the sale of shares of our Class A Common Stock that have been and may be issued to Aspire Capital under the Purchase Agreement. On November 4, 2013, the Company filed a Form S-3 registration statement and the registration statement was declared effective by the SEC on November 15, 2013.
These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
3. Significant Accounting Policies and Recent Accounting Pronouncements
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term highly liquid investments purchased with original maturities of three months or less. There were no cash equivalents at March 31, 2014 and June 30, 2013.
Property, plant and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures that extend the life, increase the capacity, or improve the efficiency of property and equipment are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation is recognized using the straight-line method over the following approximate useful lives:
Depreciation is recognized using the straight-line method over the following approximate useful lives:
Machinery and equipment 5 Years
Intangible Assets – Patents
Costs incurred to file patent applications and acquired intangibles are capitalized when the Company believes that there is a high likelihood that the patent will be issued and there will be future economic benefit associated with the patent. These costs will be amortized on a straight-line basis over a 12 - 17 years life from the date of patent filing. All costs associated with abandoned patent applications are expensed. In addition, the Company will review the carrying value of patents for indicators of impairment on a periodic basis and if it determines that the carrying value is impaired, it values the patent at fair value. Costs incurred to file patent applications and acquire intangibles are expensed when the patents have failed to develop products which have gained market acceptance. For the three months ended March 31, 2014 and 2013, the Company has charged to operations $107,000 and $0, respectively, for these patent application costs. For the nine months ended March 31, 2014 and 2013 and from inception to March 31, 2014, the Company has charged to operations approximately $107,000, $29,000, and $305,000, respectively, for these patent application costs.
In accordance with the provisions of the applicable authoritative guidance, the Company’s long-lived assets and amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The Company assesses the recoverability of such assets by determining whether their carrying value can be recovered through undiscounted future operating cash flows, including its estimates of revenue driven by assumed market segment share and estimated costs. If impairment is indicated, the Company measures the amount of such impairment by comparing the fair value to the carrying value. During the three and nine months ended March 31, 2014 and 2013, no impairment expense was recorded.
Financial Instruments
The Company’s financial instruments include cash, accounts payable and accrued liabilities. The carrying amounts of these financial instruments approximate their fair value, due to the short-term nature of these items.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Estimates
These accompanying consolidated financial statements include some amounts that are based on management’s best estimates and judgments. The most significant estimates relate to valuation of stock grants and stock options, valuation of purchased intangibles and the valuation allowance on deferred tax assets. It is reasonably possible that these above-mentioned estimates and others may be adjusted as more current information becomes available, and any adjustment could be significant in future reporting periods.
Certain Risks and Uncertainties
Product Development
We devote significant resources to research and development programs in an effort to discover and develop potential future product candidates. The product candidates in our pipeline are at various stages of preclinical and clinical development. The path to regulatory approval includes three phases of clinical trials in which we collect data to support an application to regulatory authorities to allow us to market a product for treatment of a specified disease. There are many difficulties and uncertainties inherent in research and development of new products, resulting in a high rate of failure. To bring a drug from the discovery phase to regulatory approval, and ultimately to market, takes many years and significant cost. Failure can occur at any point in the process, including after the product is approved, based on post-market factors. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals, limited scope of approved uses, reimbursement challenges, difficulty or excessive costs of manufacture, alternative therapies or infringement of the patents or intellectual property rights of others. Uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be submitted for approval, which have the highest likelihood of obtaining approval and which will be commercially viable and generate profits. Successful results in preclinical or clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.
Expenditures for research, development, and engineering of products are expensed as incurred. In November 2010, the Company was awarded three separate U.S. government grants under the Qualifying Therapeutic Discovery Project (QTDP) program. For the period from inception to March 31, 2014, the Company has reflected approximately $733,000 of grants as a one time reduction of research and development expenses. For the three months ended March 31, 2014 and 2013, the Company incurred approximately $1,831,000 and $543,000 of research and development costs, net of grants respectively. For the nine months ended March 31, 2014 and 2013, and the period from inception to March 31, 2014, the Company incurred approximately $3,417,000, $1,010,000, and $9,291,000 of research and development costs, net of grants, respectively.
Concentrations of Credit Risk
All cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Income Taxes
Deferred income tax assets and liabilities arise from temporary differences associated with differences between the financial statements and tax basis of assets and liabilities, as measured by the enacted tax rates, which are expected to be in effect when these differences reverse. Deferred tax assets and liabilities are classified as current or non-current, depending upon the classification of the asset or liabilities to which they relate. Deferred tax assets and liabilities not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company has generated net losses since inception and accordingly has not recorded a provision for income taxes. The deferred tax assets were primarily comprised of federal and state tax net operating loss, or NOL, carryforwards. Due to uncertainties surrounding the Company’s ability to generate future taxable income to realize these tax assets, a full valuation allowance has been established to offset the deferred tax assets. Additionally, the future utilization of the NOL carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforwards that expire prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.
The Company follows the provisions of FASB ASC 740-10 "Uncertainty in Income Taxes" (ASC 740-10). The Company has not recognized a liability as a result of the implementation of ASC 740-10. A reconciliation of the beginning and ending amount of unrecognized tax benefits has not been provided since there is no unrecognized benefit since the date of adoption. The Company has not recognized interest expense or penalties as a result of the implementation of ASC 740-10. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
The Company has identified its U.S. Federal income
tax return and its State return in Massachusetts as its major
tax jurisdictions. The fiscal 2011 and forward years are still open for a tax examination.
Basic Earnings (Loss) per Share
Basic and diluted earnings per share are computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of stock options, warrants and convertible notes payable. Common share equivalents of approximately 47.1 million and 50 million were excluded from the computation of diluted earnings per share as of March 31, 2014 and 2013, respectively, and have been excluded from the per share computations for the three and nine months ended March 31, 2014 and 2013, because their effect is anti-dilutive.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by Cellceutix for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S.“tax regulations”. Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.
ASC 505-50-30-11 (previously EITF 96-18) further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
i.
|
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
|
ii.
|
The date at which the counterparty’s performance is complete.
|
We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.
The components of stock based compensation recognized in the Company’s Statement of Operations for the three and nine months ended March 31, 2014 and 2013 and since inception are as follows(rounded to nearest thousand):
|
|
Three Months
Ended
March 31,
2014
|
|
|
Three Months
Ended
March 31,
2013
|
|
|
Nine Months
Ended
March 31,
2014
|
|
|
Nine Months
Ended
March 31,
2013
|
|
|
For the cumulative period
from June 20,
2007
(Date of Inception) through
March 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee’s stock compensation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
105,000
|
|
|
$
|
-
|
|
|
$
|
105,000
|
|
Officers’ stock compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,925,000
|
|
Consulting
|
|
|
237,000
|
|
|
|
44,000
|
|
|
|
388,000
|
|
|
|
258,000
|
|
|
|
2,266,000
|
|
Patent expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
Charitable contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
358,000
|
|
Total
|
|
$
|
237,000
|
|
|
$
|
44,000
|
|
|
$
|
493,000
|
|
|
$
|
258,000
|
|
|
$
|
7,673,000
|
|
Total stock-based compensation and stock issued for financing costs and charitable contributions totaled approximately $7.7 million from inception to March 31, 2014.
Recent Accounting Pronouncements
In April 2014, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update No (ASU 2014-08), “Reporting
Discontinued
Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 on
Discontinued
Operations changes the criteria for determining which disposals can be presented as
discontinued
operations and modified related disclosure requirements. Under the new guidance, a discontinued operation is defined as: (i) a disposal of a component or group of components that is disposed of or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business or nonprofit activity that is classified as held for sale on the date of acquisition. The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Under the current US GAAP, an entity is prohibited from reporting a discontinued operation if it has certain continuing cash flows or involvement component after the disposal. The new guidance eliminates these criteria.
The Company does not expect the adoption of any recent accounting pronouncements to have a material impact on its financial statements.
4. Polymedix Inc. Asset Acquisition –Patent Rights and Equipment
On September 4, 2013, the Company purchased substantially all of the assets (“Purchased Assets”) of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. (“Seller”) from the U.S. Bankruptcy Court.
The aggregate purchase price for the sale and transfer of the Purchased Assets was $2.1 million in cash, plus 1.4 million shares of the Company’s Class A common stock (the “Registrable Securities”), for a total aggregate purchase price of approximately $4.8 million. These common shares were valued at $1.93 per share, based on the September 4, 2013 opening stock price as quoted on the OTB Bulletin Board, resulting in approximately $2.7 million of stock issued to acquire the Purchased Assets. The Purchased Assets Agreement also provides the Seller with the right to require the Company to redeem the Common Stock held by such Seller (the “Put Option”) at any time between one day after the closing and three hundred and sixty-five days after the closing, the seller or any holder of the registrable securities may make written demand upon the purchase for the purchase to repurchase the registrable securities for $1 per share.
Because the Company is required to repurchase these issued common shares if the Seller exercises the above Put Option, this redemption feature meets the definition under the ASC 480-10-25-8, “Obligations to Repurchase Issuer’s Equity Shares by Transferring Assets”. Per ASC 480-10-25-8, the obligation to repurchase an issuer’s own shares by transferring assets should be recognized as a liability at inception date. Therefore, the number of potential shares needed to repurchase the Common Stock under this Put Option was 1,400,000 shares as of December 31, 2013. This obligation was recorded as a current liability of $1.4 million of Redeemable Common Stock liability in the accompanying balance sheet.
ASC 805, Business Combinations, provides guidance on determining whether an acquired set of assets meets the definition of a business for accounting purposes. Under the framework, the acquired set of activities and assets have to be capable of being operated as a business, from the viewpoint of a market participant as defined in ASC 820, Fair Value Measurements. Two essential elements required for an integrated set of activities are inputs and outputs. The Company evaluated the Asset Purchase Agreement and in accordance with the guidance, determined it did not meet the definition of a business acquisition as the acquisition consisted solely of the two primary compounds, Brilacidin and related compounds, and Delparantag and related compounds, and certain other tangible assets. The Company did not acquire the right to any employees previously involved with the technology, or research processes previously in place at Seller. The Company has therefore accounted for the transaction as an asset acquisition.
The purchase price was allocated to the identified tangible and intangible assets acquired based on their relative fair values, which were derived from their individual estimated fair values of $96,000 and $4,706,000, respectively.
The following table summarizes the purchase price allocation for the assets acquired:
Intangible assets – patents rights – Brilacidin, Delparantag and other related compounds
|
|
$
|
4,706,000
|
|
Tangible assets - Laboratory equipment and computer systems
|
|
$
|
96,000
|
|
These tangible assets of $96,000 acquired were expensed to research and development costs in September 2013.
5. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
|
Useful life
|
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Patent Rights– Brilacidin, and related compounds (note 4)
|
|
14
|
|
|
$
|
4,082,000
|
|
|
$
|
-
|
|
Purchased Patent Rights–Delparantag and related compounds (note 4)
|
|
12
|
|
|
|
480,000
|
|
|
|
-
|
|
Purchased Patent Rights–
Anti-microbial- surfactants and related compounds
(note 4)
|
|
12
|
|
|
|
144,000
|
|
|
|
-
|
|
Patents – Kevetrin and related compounds
|
|
17
|
|
|
|
48,000
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,754,000
|
|
|
$
|
11,000
|
|
Accumulated amortization
|
|
|
|
|
|
197,000
|
|
|
|
1,000
|
|
|
|
|
|
|
$
|
4,557,000
|
|
|
$
|
10,000
|
|
The patents are amortized on a straight-line basis over the estimated remaining useful lives of the assets, determined 12-17 years from the date of acquisition.
Amortization expense for the three and nine months ended March 31, 2014 and 2013 and from inception to March 31, 2014 was approximately $94,000, $0, $196,000, $0, and $197,000, respectively.
At March 31, 2014, the amortization period for all patents was approximately 11.25 to 16.25 years. Future estimated annual amortization expenses are approximately $346,000 for years from 2015 to 2025, $304,000 for the year 2026, $294,000 for the year 2027, $57,000 for the year 2028 and $3,000 for Year 2029 and 2030.
6. Property, plant and equipment, net
Property, plant and equipment, net consisted of the following (rounded to nearest thousand):
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
Testing equipment
|
|
$
|
43,000
|
|
|
$
|
-
|
|
Accumulated depreciation
|
|
|
2,000
|
|
|
|
-
|
|
|
|
$
|
41,000
|
|
|
$
|
-
|
|
Depreciation expense for the three and nine months ended March 31, 2014 and 2013 and from inception to March 31, 2014 was approximately $2,000, $0, $2,000, $0, and $2,000, respectively.
7. Accrued Expenses
Accrued expenses consisted of the following (rounded to nearest thousand):
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
Accrued research and development consulting fees
|
|
$
|
659,000
|
|
|
$
|
200,000
|
|
Accrued rent – related parties
|
|
|
56,000
|
|
|
|
60,000
|
|
Accrued interest – related parties
|
|
|
201,000
|
|
|
|
294,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
916,000
|
|
|
$
|
554,000
|
|
8. Accrued Salaries and Payroll Taxes
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
|
|
March 31,
2014
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
Accrued salaries – related parties
|
|
$
|
3,033,000
|
|
|
$
|
3,244,000
|
|
Accrued payroll taxes – related parties
|
|
|
149,000
|
|
|
|
152,000
|
|
Withholding tax – related parties
|
|
|
40,000
|
|
|
|
31,000
|
|
Withholding tax – employees
|
|
|
13,000
|
|
|
|
4,000
|
|
Total
|
|
$
|
3,235,000
|
|
|
$
|
3,431,000
|
|
On December 29, 2010, the Company entered into employment agreements with its two executive officers, Leo Ehrlich, the Company’s Chief Executive Officer, and Krishna Menon, Chief Scientific Officer. Both agreements provide for a three year term with each executive receiving an annual base salary for $350,000 per year commencing January 1, 2011, with an annual increase of 10% for each year commencing January 2012. The Board, at its discretion, may increase the base salary based upon relevant circumstances. On January 1, 2014 the Board a
pproved the extension of the employment agreements for a one year period with a 10% increase in salary from the calendar year 2013 annual salary of $423,500, to an annual salary of $465,850.
9. Commitments and Contingencies
Legal
Formatech is a former vendor of ours which had had received 184,375 shares of Cellceutix Class A Common Stock (“Cellceutix Stock”) for services that were not completed. Formatech had gone bankrupt while still in possession of the Cellceutix Stock. In July 2012, the US Bankruptcy Court allowed the trustee of the Formatech estate to sell the Cellceutix Stock. We have been advised that the stock has been sold in 2013 and the funds released to the secured creditors of Formatech. Cellceutix presently is in the unsecured creditors class and does not expect to receive any proceeds.
Lease Commitments
Operating Leases
In September, 2013, Cellceutix Corporation signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $17,000.
Future minimum lease payments required under the non-cancelable operating lease are as follows (rounded to nearest thousand):
Year ending June 30,
Remainder of 2014
|
|
$
|
52,000
|
|
2015
|
|
|
207,000
|
|
2016
|
|
|
207,000
|
|
2017
|
|
|
207,000
|
|
2018
|
|
|
207,000
|
|
2019
|
|
|
54,000
|
|
Total minimum payments
|
|
$
|
934,000
|
|
Rent expense under this operating lease agreement was $56,000 and $0 for the three months ended March 31, 2014 and 2013, respectively, and $119,000 and $0 for the nine months ended March 31, 2014 and 2013, respectively. Before September, 2013, the Company paid rent to KARD for share of office space and details were shown at Note 10 Related Party Transactions.
Contractual Commitments
Clinical Trial Agreements between the Company and Contract Research Organizations- ABSSSI Trial
In December 2013, the Company entered into Clinical Trial Agreements with a Contract Research Organization (“CRO”). Terms include the Company making an upfront study advance of approximately $460,000 to the CRO and seven additional similar monthly payments to the CRO while the study is actively recruiting and treating patients. The advance will be earned as subjects are randomized into the Study. The Company has other terms with the CRO which allow for a bonus payment of $125,000 if the CRO meets study milestones; a non-refundable administrative start-up cost of $12,500 per Study Site; payment to CRO for pass-through costs within thirty days of receipt of invoice and third-party documentation from CRO; and pass-through costs are subject to a 15% invoicing fee.
During the three months and nine months ended March 31, 2013, the Company expensed approximately $630,000 and $684,000, respectively, and recorded under research and development costs in the condensed consolidated statements of operations related to this CRO.
Clinical Trial Agreements between the Company and Contract Research Organizations- Phase 1 Trial
In December 2013, the Company entered into a Clinical Trial Agreement with a Contract Research Organization (“CRO”) to conduct a Phase 1 Pharmacokinetic and Bioequivalence study for the Company. The Company has agreed to pay the CRO approximately $185,000 for this study. As of March 31, 2014, the Company paid approximately $96,000, which was recorded under Prepaid expenses in the accompanying condensed consolidated balance sheets.
10. Related Party Transactions
Office Lease
Dr. Menon, the Company’s principal shareholder, President, and Director, also serves as the Chief Operating Officer and Director of Kard Scientific (“KARD”). On December 7, 2007, the Company began renting office space from KARD, on a month to month basis for $900 per month. This continued through August 2013 and since September 1, 2013, the Company no longer leases space from Kard. For the three and nine months ended March 31, 2014 and 2013 and the period June 20, 2007 (date of inception) through March 31, 2014, the Company has included approximately $0, $2,700, $1,800, $8,100 and $62,100 of rent expense paid to KARD in general and administrative expenses, respectively. At March 31, 2014 and June 30, 2013, rent payables to KARD of approximately $56,000 and $60,000, respectively, were included in accrued expenses.
In September 2013, Cellceutix Corporation signed a lease extension agreement with Cummings Properties for the company’s offices and laboratories at 100 Cummings Center, Suite 151-B Beverly, MA 01915. The lease is for a term of five years from October 1, 2013 to September 30, 2018 and requires monthly payments of approximately $16,000. Cellceutix had taken over the space occupied by KARD. In addition, Innovative Medical Research Inc., (“Innovative Medical”) a company owned by Leo Ehrlich and Dr. Krishna Menon, officers of Cellecutix has co-signed the lease and will rent approximately 200 square feet of office space, the space previously used by Cellceutix and will pay Cellceutix $900 per month, the same amount Cellceutix previously paid KARD. Innovative Medical paid total rent of $6,300 to Cellceutix from October 1, 2013 to March 31, 2014 and the rental payment was offset with the accrued rent owed to KARD.
Clinical Studies
As of September 28, 2007 the Company engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company has now developed its own research study capabilities and no longer uses KARD. At March 31, 2014 and June 30, 2013, the accrued research and development expenses to KARD of approximately $1,686,000 were included in accounts payable.
11. Note Payable – Related Party
During the year ended June 30, 2010, Mr. Ehrlich loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note
, Ehrlich Promissory Note C.
The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the
Ehrlich Promissory Note C
and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional approximately $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of the demand note to approximately $2,022,000.
On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principle and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten (10) years from the date of issuance.
At March 31, 2014 and June 30, 2013, approximately $201,000 and $294,000 was accrued as interest expense on this note. As of March 31, 2014, the balance of the demand note was approximately $2,022,000.
12. Stock Options and Warrants
Stock Options
On April 1, 2014 the Board of Directors approved a stock option grant, for services rendered from January 7, 2014 to July 6, 2014, to a consultant to purchase 40,000 shares of common stock exercisable at $1.64 per share. The option was vested on April 1, 2014 and the option life is 5 years and will expire on March 31, 2019. In addition, the Company will pay the consultant $20,000 per month during the six month period from January 7, 2014 to July 6, 2014. The total value of this 40,000 shares of stock option was $55,396 and we accrued $27,698 as consulting expenses at March 31, 2014.
Assumptions used in the Black Scholes option-pricing model for the nine months ended March 31, 2014 and 2013 were as follows:
|
|
For the nine
months ended
|
|
|
For the nine
months ended
|
|
|
|
3/31/2014
|
|
|
3/31/2013
|
|
|
|
|
|
|
|
|
Average risk-free interest rate
|
|
|
0.9%-1.98
|
%
|
|
|
1.53%-1.98
|
%
|
Average expected life- years
|
|
|
3-5
|
|
|
|
5-10
|
|
Expected volatility
|
|
|
91.25% - 124.94
|
%
|
|
|
132.51%-137.33
|
%
|
Expected dividends
|
|
|
0
|
|
|
|
0
|
|
On April 5, 2009 the Board of Directors of the Registrant adopted the 2009 Stock Option Plan (“the Plan”). The Plan permits the grant of 2,000,000 shares of both Incentive Stock Options (“ISOs”), intended to qualify under section 422 of the Code, and Non-Qualified Stock Options.
Under the 2010 Equity Incentive Plan the total number of shares of Common Stock reserved and available for issuance under the Plan shall be 45,000,000 shares. Shares of Common Stock under the Plan (“Shares”) may consist, in whole or in part, of authorized and unissued shares or treasury shares. The term of each Stock Option shall be fixed by the Committee; provided, however, that an Incentive Stock Option may be granted only within the ten-year period commencing from the Effective Date and may only be exercised within ten years of the date of grant (or five years in the case of an Incentive Stock Option granted to an optionee who, at the time of grant, owns Common Stock possessing more than 10% of the total combined voting power of all classes of voting stock of the Company (“10% Shareholder”).
The following table summarizes all stock option activity under the plans:
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual Life (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at June 30, 2013
|
|
|
39,142,500
|
|
|
$
|
0.14
|
|
|
$
|
7.47
|
|
|
$
|
64,170,000
|
|
Exercised
|
|
|
(25,000
|
)
|
|
|
0.20
|
|
|
|
-
|
|
|
|
|
|
Forfeited/expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
39,117,500
|
|
|
$
|
0.14
|
|
|
$
|
6.73
|
|
|
$
|
58,657,500
|
|
Exercisable at March 31, 2014
|
|
|
39,117,500
|
|
|
$
|
0.14
|
|
|
$
|
6.73
|
|
|
$
|
58,657,500
|
|
The exercise of 25,000 Common Stock options at $0.20 per share at $5,000 was disclosed at Note 13 Equity Transactions.
The Company recognized approximately $237,000, $44,000, $493,000 and $258,000 of stock-based compensation costs related to stock and stock options awards for the three and nine months ended March 31, 2014 and 2013, respectively; and approximately $7,673,000 for the period from inception to March 31, 2014.
Stock Warrants
From July 19, 2013 to September 17, 2013, the Company issued 1,025,000 Class A common shares par value $.0001 to a warrant holder upon exercise of Common Stock Purchase Warrants exercisable at $1 per share. The Company received an aggregate of $1,025,000. The issuance was exempt from registration under Section 4(2) of the Securities Act. In addition, on January 3, 2014, the Company issued 200,000 Class A common shares par value $.0001 to same warrant holder upon exercise of Common Stock Purchase Warrants exercisable at $1 per share and received an aggregate of $200,000 (See Note 13 Equity Transactions).
On December 31, 2013, the Company issued 848,084 Class A common shares par value $.0001 to two warrant holders upon exercise of Common Stock Purchase Warrants exercisable at the range from $0.39 to $0.53 per share, with total of $400,000. The Company received $400,000 as a Subscription Receivable on April 1, 2014. The issuance was exempt from registration under Section 4(2) of the Securities Act.
Extension of the expiration date of an aggregate of 2,223,000 Series B, Series C, and Series D common share purchase warrants
On December 1, 2013, 2,223,000 Series B, Series C, and Series D common share purchase warrants issued by the Company were modified to extend their maturity date to December 31, 2015. As the Company is in an accumulated deficit position, the deemed dividend was charged against additional paid-in-capital for common shares, there being no retained earnings from which to declare a dividend. The net income (loss) attributable to common shareholders reflects both the net income (loss) and the deemed dividend.
The deemed dividend of $1,880,000 was computed as the incremental value of the modified warrants over the unmodified warrants on the modification date using a per share price of the range from $0.50 to $1.50 per share which were the contemporaneous private placement offering price. Assumptions used in the Black Scholes option-pricing model for these warrants were as follows:
Average risk-free interest rate
|
|
|
0.29
|
%
|
Average expected life- years
|
|
|
2
|
|
Expected volatility
|
|
|
55.22
|
%
|
Expected dividends
|
|
|
0
|
|
On January 23, 2014, the Company issued 25,000 shares of restricted common stock and 25,000 common share purchase warrants exercisable at $1.79 a share to one consultant. The shares will be vested on March 31, 2014, valued at approximately $44,750 and the option life is three years.
The following table summarizes stock warrants as of March 31, 2014 and June 30, 2013:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at June 30, 2013
|
|
|
5,571,084
|
|
|
$
|
0.92
|
|
|
|
1.43
|
|
|
$
|
4,793,786
|
|
Extended
|
|
|
2,223,000
|
|
|
|
1.00
|
|
|
|
1.75
|
|
|
|
-
|
|
Granted
|
|
|
25,000
|
|
|
|
1.79
|
|
|
|
2.82
|
|
|
|
|
|
Exercised
|
|
|
(2,073,084
|
)
|
|
$
|
1.00
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(2,223,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2014
|
|
|
3,523,000
|
|
|
$
|
1.01
|
|
|
|
1.36
|
|
|
$
|
2,238,720
|
|
Exercisable at March 31, 2014
|
|
|
3,523,000
|
|
|
$
|
1.01
|
|
|
|
1.36
|
|
|
$
|
2,238,720
|
|
13. Equity Transactions
Polymedix Trustee
On September 4, 2013, the Company purchased substantially all of the assets of Polymedix Inc, and Polymedix Pharmaceuticals, Inc. from the U.S. Bankruptcy Court. The purchase price included the issuance of 1,400,000 shares of the Company’s Class A common stock.
$20 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC
On October 25, 2013, we terminated a previous agreement with Aspire Capital Fund, LLC, an Illinois limited liability company (Aspire Capital), and entered into a new Class A Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital, which provides that upon meeting the terms of the agreement, Aspire Capital is committed to purchase up to an aggregate of $20,000,000 of our shares of Class A Common Stock over the approximately 36-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, the Company issued to Aspire Capital 210,523 shares of our Class A Common Stock as a commitment fee. The commitment fee of $373,000 will be amortized as the funding is received. The amortized amount of $30,000 was debited to additional paid-in capital. The unamortized portion is carried on the balance sheet as deferred offering costs and was $343,000 at March 31, 2014.
Concurrently with entering into the Purchase Agreement, the Company agreed to file one or more registration statements as permissible and necessary under the Securities Act of 1933, as amended, or the Securities Act, for the sale of shares of our Class A Common Stock that have been and may be issued to Aspire Capital under the Purchase Agreement. On November 4, 2013, the Company filed a Form S-3 registration statement and the registration statement was declared effective by the SEC on November 15, 2013.
Under the Purchase Agreement, on any trading day selected by Cellceutix which the closing sale price of our Class A Common Stock exceeds $0.25 per share, we may direct Aspire Capital to purchase up to 200,000 shares of our Class A Common Stock per trading day. The Purchase Price of such shares is equal to the lesser of a) the lowest sale price of our Class A Common Stock on the purchase date; or b) the arithmetic average of the three lowest closing sale prices for our Class A Common Stock during the twelve consecutive trading days ending on the trading day immediately preceding the purchase date.
In addition, on any date on which we submit a Purchase Notice to Aspire Capital for purchase of at least 100,000 Purchase Shares and the closing sale price of our stock is equal to or greater than $0.50 per share, we also have the right to direct Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of the our Class A Common Stock traded on the OTC Bulletin Board on the next trading day, subject to the VWAP Purchase Share Volume Maximum and the VWAP Minimum Price Threshold, which is equal to the greater of (a) 90% of the closing price of our Class A Common Stock on the business day immediately preceding the VWAP Purchase Date or (b) such higher price as set forth by the Company in the VWAP Purchase Notice. The VWAP Purchase Price of such shares is the lower of (a) the Closing Sale Price on the VWAP Purchase Date; or 95% of the volume-weighted average price for our Class A Common Stock traded on the OTC Bulletin Board; and (b)on the VWAP Purchase Date, if the aggregate shares to be purchased on that date have not exceeded the VWAP Purchase Share Volume Maximum or during that portion of the VWAP Purchase Date until such time as the sooner to occur of (i) the time at which the aggregate shares traded on the OTC Bulletin Board exceed the VWAP Purchase Share Volume Maximum or (ii) the time at which the sale price of our Class A Common Stock falls below the VWAP Minimum Price Threshold.
The purchase price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the trading day(s) used to compute the purchase price. We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.
Under the Purchase Agreement, we and Aspire Capital may not affect any sales of shares of our Class A Common Stock under the Purchase Agreement on any trading day that the closing sale price of our Class A Common Stock is less than $0.25 per share.
The Company is never under any obligation to sell shares to Aspire Capital Fund. Aspire Capital Fund has no rights to require the Company to sell shares.
For the period from October 25, 2013 to March 31, 2014, the Company had completed sales to Aspire totaling 900,000 shares of common stock generating gross proceeds of approximately $1.6 million. As of March 31, 2014, a balance of $18.4 million remains and is available under the financing arrangement.
From April 1, 2014 to May 8, 2014, the Company has generated additional proceeds of approximately $1,402,000 under the Common Stock Purchase Agreement with Aspire on the sale 900,000 shares of its common stock.
$10 million Class A Common Stock Purchase Agreement with Aspire Capital Fund, LLC- Prior Agreement
During the fiscal year ended June 30, 2013, the Company, under its prior purchase agreement with Aspire, had completed sales to Aspire totaling 2,712,208 shares of common stock generating gross proceeds of approximately $4,383,000. During the period from July 1, 2013 to October 24, 2013, the Company had completed sales, under its prior purchase agreement with Aspire totaling 3,204,537 shares of common stock generating gross proceeds of approximately $5,618,000. As of October 24, 2013, Aspire Capital completed its commitment to purchase up to an aggregate of $10,000,000 of our shares of Class A Common Stock under the prior Common Stock Purchase Agreement dated December 6, 2012.
Issuance of Common Stock by Exercise of Common Stock Purchase Warrants
From July 19, 2013 to September 17, 2013, the Company issued 1,025,000 Class A common shares par value $.0001 to a warrant holder upon exercise of Common Stock Purchase Warrants exercisable at $1 per share. The Company received an aggregate of $1,025,000 from the exercise of these warrants. The issuance was exempt from registration under Section 4(2) of the Securities Act. In addition, on January 3, 2014, the Board of Directors of the Company authorized the exercise of 200,000 Warrants into 200,000 shares of Common Stock by Huang Min Chung, followed by the resolution of the extension of the expiration date of an aggregate of 2,223,000 Series B, Series C, and Series D common share purchase warrants of the Company to December 31, 2015 made by the Board of Directors on December 1, 2013. It was resolved that the Board of Directors approved the issuance 200,000 fully paid Common shares par value $0.0001 per share, of the capital stock of Cellceutix Corporation to Huang Min Chung which shares have been registered in the S-3 registration statement rendered effective February 14, 2013 by the SEC. The total exercise price was $200,000.
On December 31, 2013, the Company issued 848,084 Class A common shares par value $.0001 to two warrant holders upon exercise of Common Stock Purchase Warrants exercisable at the range from $0.39 to $0.53 per share, with a total exercise price of $400,000. The issuance was exempt from registration under Section 4(2) of the Securities Act.
Issuance of Common Stock by Exercise of Common Stock Options
On March 18, 2014, the Company issued 25,000 Class A common shares par value $.0001 upon exercise of 25,000 Common Stock options at $0.20 per share, for total proceeds of $5,000.
Issuance of Common Stock to Consultants and Employees
On December 17, 2013, the Company issued 5,000 shares of restricted Class A common shares par value $.0001 to one consultant valued at approximately $9,000 for prior services.
On December 31, 2013, the Company issued 50,000 shares of restricted Class A common shares par value $.0001 to two consultants valued at approximately $105,000 for prior services.
On December 31, 2013, the Company issued 60,000 shares of restricted Class A common shares par value $.0001 to six employees as a year-end bonus valued at approximately $96,000.
On October 17, 2013, the Board of Directors approved the stock grant of 35,000 shares of restricted Class A common stock to be issued and vested on January 6, 2014 to a consultant valued at $70,000.
On January 23, 2014, the Company issued 25,000 shares of restricted Class A common stock and 25,000 stock options exercisable at $1.79 per share to a consultant. The shares were granted on January 23, 2014 and vested on March 31, 2014 were valued at $44,750. The option life is three years and valued at $28,988
On January 23, 2014, the Company further issued 25,000 shares of restricted Class A common shares par value $.0001 at $1.79 per share to a consultant. The shares were granted on January 23, 2014, vested on March 31, 2014, and were valued at $44,750.
On March 31, 2014, the Company issued 25,000 shares of restricted Class A common shares, par value $.0001, to a consultant for prior services rendered. The shares were granted and vested on March 31, 2014. The shares were valued at $41,000.
On April 1, 2014 the Board of Directors approved a stock option grant, for services rendered from January 7, 2014 to July 6, 2014, to a consultant to purchase 40,000 shares of common stock exercisable at $1.64 per share. The option was vested on April 1, 2014,the option life is 5 years and will expire on March 31, 2019. In addition, the Company will pay the consultant $20,000 per month during the six month period from January 7, 2014 to July 6, 2014. The total value of this 40,000 shares of stock option was $55,396 and assumptions we used in the Black Scholes option-pricing model were disclosed in Note 12. We accrued $27,698 as consulting fee expense at March 31, 2014 and will be reallocated to additional paid-in capital on April 1, 2014.
In restricted stock and stock option issuances where the employee or consultant service inception date precedes the grant date, at each reporting date before the grant date, the fair value of the award is re-measured with compensation cost recorded accordingly. Then, in the period in which the grant date occurs, cumulative compensation cost is adjusted to reflect the cumulative effect of measuring compensation cost based on the fair value at the grant date rather than the fair value(s) previously reported.
14. Subsequent Events
From April 1, 2014 to May 8, 2014, the Company has generated additional proceeds of approximately $1,402,000 under the Common Stock Purchase Agreement with Aspire from the sale 900,000 shares of its common stock.
On April 1, 2014, the Board of Directors approved the stock option grant to a consultant to purchase 40,000 shares of common stock exercisable at $1.64 per share and we accrued $27,698 as consulting fee expense at March 31, 2014 (See Note 13 Equity Transactions).
On April 30, 2014, the Company received an exercise notice from a warrant holder for exercise of 200,000 warrants and the Company received the $200,000 on May 2, 2014.