UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________
TO ____________.
COMMISSION FILE NUMBER: 0-50295
OCATA THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER)
DELAWARE |
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87-0656515 |
(STATE OR OTHER JURISDICTION OF |
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(I.R.S. EMPLOYER IDENTIFICATION NO.) |
INCORPORATION OR ORGANIZATION) |
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33 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS
01752
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT’S TELEPHONE NUMBER, INCLUDING
AREA CODE: (508) 756-1212
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Smaller reporting company o |
|
|
(Do not check if a smaller
reporting company) |
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date.
Class: |
|
Outstanding at July 31, 2015: |
Common Stock, $0.001 par value per share |
|
42,225,714
shares |
OCATA THERAPEUTICS, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION |
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ITEM 1. FINANCIAL STATEMENTS |
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3 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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17 |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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23 |
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ITEM 4. CONTROLS AND PROCEDURES |
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23 |
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PART II. OTHER INFORMATION |
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ITEM 1. LEGAL PROCEEDINGS |
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24 |
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ITEM 1A. RISK FACTORS |
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24 |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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24 |
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ITEM 6. EXHIBITS |
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24 |
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SIGNATURE |
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25 |
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PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
OCATA THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 31,851,575 | | |
$ | 4,424,374 | |
Prepaid expenses and other current assets | |
| 482,079 | | |
| 324,661 | |
Total current assets | |
| 32,333,654 | | |
| 4,749,035 | |
| |
| | | |
| | |
Property and equipment, net | |
| 888,495 | | |
| 832,963 | |
Deferred royalty fees | |
| 76,561 | | |
| 107,779 | |
Other assets | |
| 39,795 | | |
| 47,707 | |
TOTAL ASSETS | |
$ | 33,338,505 | | |
$ | 5,737,484 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Accounts payable | |
$ | 1,942,381 | | |
$ | 1,271,325 | |
Accrued expenses | |
| 2,030,534 | | |
| 2,515,674 | |
Accrued settlement | |
| – | | |
| 1,731,202 | |
Warrant overallotment liability | |
| 614,535 | | |
| – | |
Lease liability, current portion | |
| 21,117 | | |
| – | |
Deferred revenue, current portion | |
| 157,873 | | |
| 157,873 | |
Total current liabilities | |
| 4,766,440 | | |
| 5,676,074 | |
| |
| | | |
| | |
Warrant liabilities | |
| 10,827,517 | | |
| 16,255 | |
Other liabilities | |
| – | | |
| 1,188,874 | |
Lease liability, less current portion | |
| 45,694 | | |
| – | |
Deferred revenue, less current portion | |
| 1,512,890 | | |
| 1,591,826 | |
Total liabilities | |
| 17,152,541 | | |
| 8,473,029 | |
| |
| | | |
| | |
Commitments and contingencies (Note 2) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDERS' EQUITY (DEFICIT): | |
| | | |
| | |
Common stock, $0.001 par value; 60,000,000 shares authorized, 42,158,214 and 34,620,218 shares issued and outstanding | |
| 42,158 | | |
| 34,620 | |
Additional paid-in capital | |
| 379,559,411 | | |
| 346,364,060 | |
Accumulated deficit | |
| (363,415,605 | ) | |
| (349,134,225 | ) |
Total stockholders' equity (deficit) | |
| 16,185,964 | | |
| (2,735,545 | ) |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
$ | 33,338,505 | | |
$ | 5,737,484 | |
The accompanying notes are an integral part
of these consolidated financial statements.
OCATA THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2015 AND 2014 (UNAUDITED)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenue (License fees and royalties) | |
$ | 39,468 | | |
$ | 39,469 | | |
$ | 78,936 | | |
$ | 78,937 | |
Cost of revenue | |
| 15,609 | | |
| 15,608 | | |
| 31,218 | | |
| 31,217 | |
Gross profit | |
| 23,859 | | |
| 23,861 | | |
| 47,718 | | |
| 47,720 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Research and development | |
| 3,543,880 | | |
| 2,718,625 | | |
| 6,921,453 | | |
| 5,226,469 | |
General and administrative expenses | |
| 3,158,901 | | |
| 2,175,749 | | |
| 6,846,760 | | |
| 5,488,312 | |
Loss on settlement of litigation | |
| – | | |
| 11,567,009 | | |
| – | | |
| 13,468,547 | |
Total operating expenses | |
| 6,702,781 | | |
| 16,461,383 | | |
| 13,768,213 | | |
| 24,183,328 | |
Loss from operations | |
| (6,678,922 | ) | |
| (16,437,522 | ) | |
| (13,720,495 | ) | |
| (24,135,608 | ) |
| |
| | | |
| | | |
| | | |
| | |
Non-operating income (expense): | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| – | | |
| 951 | | |
| – | | |
| 55,840 | |
Interest expense | |
| (437 | ) | |
| (132,532 | ) | |
| (437 | ) | |
| (429,504 | ) |
Other loss | |
| – | | |
| (343,511 | ) | |
| – | | |
| (394,237 | ) |
Issuance expense | |
| (904,189 | ) | |
| – | | |
| (904,189 | ) | |
| – | |
Adjustment to fair value of unsettled warrant obligation | |
| – | | |
| 1,004,867 | | |
| – | | |
| 18,959 | |
Adjustments to fair value of derivatives | |
| 337,738 | | |
| 389,771 | | |
| 343,741 | | |
| 676,800 | |
Total non-operating income (expense) | |
| (566,888 | ) | |
| 919,546 | | |
| (560,885 | ) | |
| (72,142 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss before provision for income tax | |
| (7,245,810 | ) | |
| (15,517,976 | ) | |
| (14,281,380 | ) | |
| (24,207,750 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income tax | |
| – | | |
| – | | |
| – | | |
| – | |
Net loss | |
$ | (7,245,810 | ) | |
$ | (15,517,976 | ) | |
$ | (14,281,380 | ) | |
$ | (24,207,750 | ) |
| |
| | | |
| | | |
| | | |
| | |
Preferred stock dividend | |
| – | | |
| 593,191 | | |
| – | | |
| 1,216,995 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss applicable to common stock | |
$ | (7,245,810 | ) | |
$ | (16,111,167 | ) | |
$ | (14,281,380 | ) | |
$ | (25,424,745 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average shares outstanding: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 36,566,842 | | |
| 29,554,577 | | |
| 35,759,552 | | |
| 28,450,663 | |
| |
| | | |
| | | |
| | | |
| | |
Net loss applicable to common share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
$ | (0.20 | ) | |
$ | (0.55 | ) | |
$ | (0.40 | ) | |
$ | (0.89 | ) |
The accompanying notes are an integral part
of these consolidated financial statements.
OCATA THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2015 (UNAUDITED)
| |
Common Stock | | |
Additional
Paid-in | | |
Accumulated | | |
Total Stockholders’
Equity | |
| |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
(Deficit) | |
Balance December 31, 2014 | |
| 34,620,218 | | |
$ | 34,620 | | |
$ | 346,364,060 | | |
$ | (349,134,225 | ) | |
$ | (2,735,545 | ) |
Shares issued for services | |
| 15,000 | | |
| 15 | | |
| 85,710 | | |
| – | | |
| 85,725 | |
Stock based compensation | |
| – | | |
| – | | |
| 2,915,701 | | |
| – | | |
| 2,915,701 | |
Issuance of common stock in financing arrangements, net
of discounts and issuance costs of $2,612,466 | |
| 7,522,996 | | |
| 7,523 | | |
| 30,193,940 | | |
| – | | |
| 30,201,463 | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (14,281,380 | ) | |
| (14,281,380 | ) |
Balance, June 30, 2015 | |
| 42,158,214 | | |
$ | 42,158 | | |
$ | 379,559,411 | | |
$ | (363,415,605 | ) | |
$ | 16,185,964 | |
The accompanying notes are an integral part
of these consolidated financial statements.
OCATA THERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND
2014 (UNAUDITED)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net loss | |
$ | (14,281,380 | ) | |
$ | (24,207,750 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation | |
| 132,824 | | |
| 64,342 | |
Amortization of deferred charges | |
| 31,218 | | |
| 31,217 | |
Deferred revenue | |
| (78,936 | ) | |
| (78,937 | ) |
Stock based compensation | |
| 2,915,701 | | |
| 566,026 | |
Amortization of deferred issuance costs | |
| – | | |
| 65,903 | |
Amortization of discounts on senior secured convertible debentures | |
| – | | |
| 262,877 | |
Changes in fair value of warrant obligation | |
| – | | |
| (18,959 | ) |
Changes in fair value of derivatives | |
| (343,741 | ) | |
| (676,800 | ) |
Shares of common stock issued for services | |
| 85,725 | | |
| 142,734 | |
Non-cash financing costs | |
| 727,844 | | |
| 18,223 | |
Loss on settlement of litigation | |
| – | | |
| 13,468,547 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Prepaid expenses and other assets | |
| (149,506 | ) | |
| 642,256 | |
Accounts payable and other liabilities | |
| (2,734,160 | ) | |
| (852,615 | ) |
| |
| | | |
| | |
Net cash used in operating activities | |
| (13,694,411 | ) | |
| (10,572,936 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchases of property and equipment | |
| (119,846 | ) | |
| (119,385 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| (119,846 | ) | |
| (119,385 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from issuance of common stock and warrants | |
| 41,243,157 | | |
| 14,281,295 | |
Principal payments on capital lease obligations | |
| (1,699 | ) | |
| – | |
Repayment of senior secured convertible debentures | |
| – | | |
| (1,200,000 | ) |
Redemption of 0 and 250 shares of Series B Preferred Stock, net | |
| – | | |
| (70,129 | ) |
Net cash provided by financing activities | |
| 41,241,458 | | |
| 13,011,166 | |
| |
| | | |
| | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 27,427,201 | | |
| 2,318,845 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE | |
| 4,424,374 | | |
| 1,743,485 | |
| |
| | | |
| | |
CASH AND CASH EQUIVALENTS, ENDING BALANCE | |
$ | 31,851,575 | | |
$ | 4,062,330 | |
| |
| | | |
| | |
CASH PAID FOR: | |
| | | |
| | |
Interest | |
$ | 437 | | |
$ | 100,724 | |
Income taxes | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
Capital expenditures funded by capital lease borrowings | |
$ | 68,510 | | |
$ | – | |
Accrued dividends on Series B and C Preferred Stock | |
$ | – | | |
$ | 1,216,995 | |
Accretion of note receivable discount on Series B and C Preferred Stock | |
$ | – | | |
$ | 1,153,738 | |
Issuance of 0 and 427,373,609 shares of common stock for accrued settlement | |
$ | – | | |
$ | 25,977,600 | |
Issuance of 0 and 10,606,707 shares of common stock as commitment financing fee | |
$ | – | | |
$ | 698,926 | |
The accompanying notes are an integral part
of these consolidated financial statements.
OCATA THERAPEUTICS,
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATIONAL MATTERS
Organization and Nature of Business
Ocata Therapeutics, Inc., and Subsidiary (the “Company”)
is a clinical stage biotechnology company focused on the development and commercialization of Regenerative OphthalmologyTM
therapeutics. The most advanced products are in clinical trials for the treatment of Stargardt’s macular degeneration, dry
age-related macular degeneration, and myopic macular degeneration. The Company is also developing several pre-clinical terminally
differentiated-cell therapies for the treatment of other ocular disorders. Additionally, the Company has a number of pre-clinical
stage assets in disease areas outside the field of ophthalmology, including autoimmune, inflammatory and wound healing-related
disorders. The Company’s intellectual property portfolio includes pluripotent human embryonic stem cell, or hESC; induced
pluripotent stem cell, or iPSC, platforms; and other cell therapy technologies. The Company has no therapeutic products currently
available for sale and does not expect to have any therapeutic products commercially available for sale for a period of years,
if at all. These factors indicate that the Company’s ability to continue research and development activities is dependent
upon the ability of management to obtain additional financing as required.
The Company pursues a number of approaches to generating transplantable
tissues both in-house and through collaborations with other researchers who have particular interests in, and skills related to,
cellular differentiation. The Company’s research in this area includes projects focusing on the development of many different
cell types that may be used to treat a range of diseases within ophthalmology and other therapeutic areas. Control of cellular
differentiation and the culture and growth of stem and differentiated cells are important areas of research and development for
the Company. Based on the success to date of the Phase 1 clinical trials and what the Company sees as favorable market dynamics
of the ophthalmology sector, the Company has shifted its strategic priorities to focus primarily on the development, and ultimate
commercialization of ophthalmology therapies. The largest indication involving macular degeneration is “age-related macular
degeneration,” or AMD. AMD is the leading cause of blindness and visual impairment in adults over fifty years of age. The
Company is also pursuing a treatment for Stargardt’s Macular Degeneration, or SMD, an inherited juvenile onset form of macular
degeneration. The Company plans to initiate the Phase 2 clinical trial for dry AMD in the second half of this year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation — The Company follows
accounting standards set by the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America, GAAP.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification,™ sometimes referred
to as the Codification or “ASC.” Although the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance
with GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”).
The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included
in the Company’s Annual Report on Form 10−K for the fiscal year ended December 31, 2014 filed with the SEC on March
16, 2015. The results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 31, 2015, or any future period.
The accompanying consolidated financial statements have been prepared
in conformity with GAAP which contemplate continuation of the Company as a going concern. Management’s plans to continue
as a going concern contemplate raising additional capital including the execution of an underwritten secondary offering completed
in the second quarter of 2015 that resulted in approximately $28.4 million in net proceeds, and the prior execution of an agreement
for a $30 million equity line in late June 2014, of which approximately $5.8 million remains available as of June 30, 2015. The
Company believes that its current cash balance, and the $5,822,405 available under the Lincoln Park financing arrangement as of
June 30, 2015, will be sufficient to fund operations into the second half of 2016. There can be no assurances that management can
raise the necessary additional capital on favorable terms or at all. The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Principles of Consolidation — The accounts of
the Company and its wholly-owned subsidiary Mytogen, Inc. are included in the accompanying consolidated financial statements.
All intercompany balances and transactions were eliminated in consolidation.
Segment Reporting — ASC 280, Segment Reporting
requires use of the “management approach” model for segment reporting. The management approach model is based on the
way a company’s management organizes segments within the company for making operating decisions and assessing performance.
The Company determined it has one operating segment.
Use of Estimates — These consolidated financial
statements have been prepared in accordance with GAAP and, accordingly, require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. In addition, management has estimated variables used to calculate the Black-Scholes option
pricing model used to value derivative instruments, including outstanding warrants. Also, management has estimated the expected
economic life and value of the Company’s licensed technology, the Company’s net operating loss for tax purposes, share-based
payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the Company’s
fixed assets. Actual results could differ from those estimates.
Reclassifications — Certain prior period financial
statement balances have been reclassified to conform to the current period presentation. Items include the presentation of net
loss applicable to common stock and net loss applicable to common share on the face of the statement of operations.
Cash and Cash Equivalents — Cash equivalents
are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains
its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses
related to this concentration of risk. As of June 30, 2015 and December 31, 2014, the Company had deposits in excess of federally-insured
limits totaling $31,601,475 and $4,325,886, respectively.
Commitments and Contingencies — The Company
recognizes liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated.
Relating to loss contingencies the Company accrues the best estimate
of a loss within a range. If no estimate in a range is better than any other, the minimum amount is accrued. The Company discloses
a reasonably possible loss in excess of the amount accrued, if applicable. For reasonably possible loss contingencies, the Company
discloses the nature of the loss contingency and provides a range of the estimate of possible loss or state that an estimate cannot
be made.
Included in the other liabilities balance as of December 31, 2014
is approximately $1,200,000, primarily related to the acquisition of Mytogen which the Company did not expect to settle during
2015. This balance was reclassified to the accounts payable balance as of June 30, 2015 as the Company expects to settle within
the coming year.
Grants Receivable — The Company periodically
assesses its grants receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely,
the Company records an allowance for that doubtful account. Once the Company has exhausted efforts to collect, management writes
off the grants receivable against the allowance it has already created.
Property and Equipment — The Company records
its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon disposition of property
and equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net
book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets
are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged
as collateral for the related lease.
The Company provides for depreciation over the assets’ estimated
useful lives as follows:
Machinery & equipment |
|
4 years |
Computer equipment |
|
3 years |
Office furniture |
|
4 years |
Leasehold improvements |
|
Lesser of remaining lease life or economic life |
Capital leases |
|
Lesser of lease life or economic life |
Patents — The Company follows ASC 350-30, General
Intangibles Other than Goodwill (“ASC 350-30”), in accounting for its patents. ASC 350-30 provides that costs of
internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate
lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when
incurred. The Company has expensed as research and development expense all costs associated with developing its patents.
Equity Method Investment — The Company follows
ASC 323, Investments-Equity Method and Joint Ventures, in accounting for its investment in the joint venture. In the event
the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero, the Company will
discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed obligations
of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint venture
subsequently reports net income, the Company will resume applying the equity method only after its share of that net income equals
the share of net losses not recognized during the period the equity method was suspended.
Long-Lived Assets— The Company follows ASC 360-10,
Property, Plant, and Equipment, which established a “primary asset” approach to determine the cash flow estimation
period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used.
Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets
to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. For the six months ended June 30,
2015, the Company had not experienced impairment losses on its long-lived assets.
Fair Value Measurements — The Company applies
the provisions of ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). ASC 820-10 defines
fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, grants receivable,
prepaid expenses, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short
maturities. The carrying amount of senior secured convertible debentures approximated fair value as the interest rate charged on
the debentures was based on the prevailing rate. The three levels of valuation hierarchy are defined as follows:
|
· |
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. |
|
· |
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
|
· |
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The Company analyzes all financial instruments with features of
both liabilities and equity under ASC 480, Distinguishing Liabilities From Equity, and ASC 815, Derivatives and Hedging.
Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being
recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives
are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values
of freestanding derivative instruments such as warrant derivatives are valued using the Black-Scholes model.
The Company uses Level 3 inputs for its valuation methodology for
the fair value of certain embedded conversion options and other warrant derivative liabilities.
|
· |
The expected volatility of the Company’s common stock is estimated from the historical volatility of daily returns in the Company’s common stock price. The Company monitors the volatility of its common stock on a quarterly basis to observe trends that may impact the fair value of the notes. |
|
· |
The discount for illiquidity is measured using an average-strike option that calculates the discount as the opportunity cost for not being able to sell a large block of the Company’s common stock immediately at prevailing observable market prices. Inputs to the average-strike option model include the expected volatility of the Company’s common stock and time to sell a large block of the Company’s stock as Level 3 inputs and other observable inputs. The time to sell the stock is estimated considering the historical daily trading volume of our common stock and market maker estimates of the amount of shares that can be offered for sale above the daily trading volume without depressing the price of the Company’s common stock. |
At June 30, 2015, the Company identified the following assets and
liabilities that are required to be presented on the balance sheet at fair value:
Description |
|
Fair Value
As of
June 30, 2015 |
|
|
Fair Value Measurements at
June 30, 2015
Using Fair Value Hierarchy |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Warrant liabilities |
|
$ |
10,827,517 |
|
|
|
– |
|
|
|
– |
|
|
|
10,827,517 |
|
Warrant overallotment liability |
|
|
614,535 |
|
|
|
– |
|
|
|
– |
|
|
|
614,535 |
|
Total |
|
$ |
11,442,052 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
11,442,052 |
|
The following tables reconcile the change in fair value for measurements
categorized within Level 3 of the fair value hierarchy:
|
|
Warrant Liabilities |
|
Balance at December 31, 2014 |
|
$ |
16,255 |
|
Addition of warrant liability |
|
|
11,140,771 |
|
Total change in fair value for the period included in earnings |
|
|
(329,509) |
|
Balance at June 30, 2015 |
|
$ |
10,827,517 |
|
|
|
Warrant Overallotment Liabilities |
|
Balance at December 31, 2014 |
|
$ |
– |
|
Addition of warrant overallotment liability |
|
|
628,767 |
|
Total change in fair value for the period included in earnings |
|
|
(14,232) |
|
Balance at June 30, 2015 |
|
$ |
614,535 |
|
Gains included in earnings for the six months ended June 30, 2015
are reported as follows:
|
|
Adjustments to fair value of derivatives |
|
Total gain included in earnings |
|
$ |
343,741 |
|
The following table provides quantitative information about measurements
categorized within Level 3 of the fair value hierarchy:
|
|
Fair Value at |
|
|
|
|
|
|
|
|
June 30, |
|
Valuation |
|
|
|
|
Description |
|
2015 |
|
Technique |
|
Unobservable Input |
|
Value |
Warrant derivative liabilities |
|
$11,442,052 |
|
Black Scholes Model |
|
Expected volatility of the Company's common stock |
|
45% - 93% |
For the three and six months ended June 30, 2015, the Company recognized
gains of $337,738 and $343,741, respectively, for the changes in the valuation of derivative liabilities. For the three and six
months ended June 30, 2014, the Company recognized gains of $389,771 and $676,800, respectively, for the changes in the valuation
of derivative liabilities.
The Company did not identify any non-recurring assets and liabilities
that were recorded at fair value during the periods presented.
Revenue Recognition and Deferred Revenue
— The Company’s revenues are primarily generated from license and research agreements with collaborators. Licensing
revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the
patents related to the license.
License fee revenue begins to be recognized in the first full month
following the effective date of the license agreement. Deferred revenue represents the portion of the license and other payments
received that has not been earned. Costs associated with license revenue are deferred and recognized over the same term as the
revenue. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement
becomes assured, because the reimbursements are subject to approval.
In some cases, the Company is entitled to receive royalty payments
from licensees. In such cases, the Company recognizes the royalties when they are earned and collectability of those royalty payments
is reasonably assured.
In connection with its license agreements, the Company recorded
$39,468 and $78,936 in license fee revenue for the three and six months ended June 30, 2015, respectively, in its consolidated
statements of operations, and recorded $39,469 and $78,937 in license fee revenue for the three and six months ended June 30, 2014,
respectively. The remainder of the license fees are included in deferred revenue at June 30, 2015 and December 31, 2014, respectively.
Research and Development Costs — Costs incurred
in connection with research and development activities are expensed as incurred. Research and development expenses consist of (i) employee-related
expenses, including salaries, benefits, travel and stock compensation expense; (ii) external research and development expenses
incurred under arrangements with third parties, such as contract research organizations, investigational sites and consultants;
(iii) the cost of acquiring, developing and manufacturing clinical study materials; (iv) facilities and other expenses,
which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other supplies; and (v) costs
associated with pre-clinical and clinical activities and regulatory operations.
The Company enters into consulting, research and other agreements
with commercial firms, researchers, universities and others for the provision of goods and services. Under such agreements, the
Company may pay for services on a monthly, quarterly, project or other basis. Such arrangements are generally cancellable upon
reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion
of specific tasks under each contract using information and data provided to us by the Company’s clinical sites and vendors.
These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that
perform certain research on behalf of the Company. Reimbursements of research expense pursuant to grants are recorded in the period
during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval.
In certain circumstances, the Company is required to make advance
payments to vendors for goods or services that will be received in the future for use in research and development activities. In
such circumstances, the advance payments are deferred and are expensed when the activity has been performed or when the goods have
been received.
Stock Compensation — The Company records stock
compensation in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires
companies to measure compensation cost for stock employee compensation at fair value at the measurement date (generally the grant
date) and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of
operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
Income Taxes — Deferred income taxes are provided
using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and
tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates at the date of enactment.
When tax returns are filed, it is highly certain that some positions
taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of
the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on the weight of available evidence, management believes it is more
likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes,
if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized
upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds
the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with
any associated interest and penalties that would be payable to the taxing authorities upon examination.
Applicable interest and penalties associated with unrecognized tax
benefits are classified as additional income taxes in the statements of operations.
Net Loss Per Share — Basic net loss per share
applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average
shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated
by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period,
determined using the treasury-stock method and the if-converted method. For purposes of the diluted net loss per share calculation,
convertible preferred stock, stock options, unvested restricted stock, and warrants are considered to be common stock equivalents
but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods
presented. Therefore, basic and diluted net loss per share was the same for all periods presented. Additionally, dividends associated
with the preferred stock, all of which has been extinguished as of June 30, 2015, has been added back in order to calculate the
net loss applicable to common stockholders.
At June 30, 2015 and 2014, approximately 5,834,337 and 1,330,357
potentially dilutive shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their
inclusion would be anti-dilutive.
Recent Accounting Pronouncements — In May 2014,
the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires
a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that
the company expects to receive for those goods or services. In July 2015, the FASB voted to approve a one-year deferral of the
effective date of ASU No. 2014-09. The new standard will now be effective for the Company on January 1, 2018. The Company is currently
evaluating the potential impact that Topic 606 may have on its financial position and results of operations and its method of adoption.
3. INVESTMENT IN JOINT VENTURE
On December 1, 2008, the Company and CHA Bio & Diostech Co.,
Ltd. (“CHA”) formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International,
Inc. (“SCRMI”), will work towards developing human blood cells and other clinical therapies based on the Company’s
hemangioblast program. As of June 30, 2015, the Company holds a 40% interest in the joint venture and CHA owns a 60% interest.
Additionally, SCRMI has paid the Company a fee of $500,000 for an exclusive, worldwide license to the hemangioblast program. The
Company recorded $7,353 and $14,706 in license fee revenue for the three and six months ended June 30, 2015, respectively, in its
accompanying consolidated statements of operations, and recorded $7,353 and $14,706 in license fee revenue for the three and six
months ended June 30, 2014, respectively. The balance of unamortized license fee of $307,598 and $322,304 is included in deferred
revenue in the accompanying consolidated balance sheets at June 30, 2015 and December 31, 2014, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following
at June 30, 2015 and December 31, 2014:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
Machinery & equipment | |
$ | 1,305,078 | | |
$ | 1,186,232 | |
Computer equipment | |
| 104,857 | | |
| 104,857 | |
Office furniture | |
| 54,226 | | |
| 54,226 | |
Leasehold improvements | |
| 620,252 | | |
| 620,252 | |
Capital leases | |
| 68,510 | | |
| – | |
| |
| 2,152,923 | | |
| 1,965,567 | |
| |
| | | |
| | |
Accumulated depreciation | |
| (1,264,428 | ) | |
| (1,132,604 | ) |
Property and equipment, net | |
$ | 888,495 | | |
$ | 832,963 | |
Depreciation expense for the three and six
months ended June 30, 2015 amounted to $67,680 and $132,824, respectively. Depreciation expense for the three and six months ended
June 30, 2014 amounted to $33,382 and $64,342, respectively.
5. ACCRUED SETTLEMENT
The accrued settlement is comprised of the following at June 30,
2015 and December 31, 2014:
| |
June 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
SEC Civil Action | |
$ | – | | |
$ | 1,356,202 | |
SEC Section 16 Investigation | |
| – | | |
| 375,000 | |
Total | |
$ | – | | |
$ | 1,731,202 | |
Securities and Exchange Commission – Civil Action
In May 2012, the Company was named as a defendant in a civil action
brought by the Securities and Exchange Commission (the “SEC”) related to transactions involving the sale and issuance
of the Company’s securities. The Securities and Exchange Commission alleges that Company violated Section 5(a) and 5(c) of
the Securities Act of 1933 (the “Securities Act”) because certain sales of shares to outside organizations, completed
in late 2008 and early 2009 under the Company’s former management, resulted in $3.5 million in proceeds to the Company, were
neither registered under the Securities Act nor subject to an exemption from registration under Section 3(a)(10) of the Securities
Act, as amended. In addition, the Company is alleged to have violated Section 13(a) of the Exchange Act of 1934 because the Company
did not disclose the sale and issuance of the shares to the SEC on a timely basis.
In December 2013, the Company settled the civil action. Under the
terms of the settlement accepted by the SEC, the Company consented to entry of judgment under which it neither admits nor denies
liability and agreed to the disgorgement of $3.5 million in proceeds from the transactions in question. In addition, the Company
will pay approximately $587,000 in pre-judgment interest. The total amount due, approximately $4.1 million, was paid over six equal
quarterly installments. In addition, the settlement permanently restrains and enjoins the Company from violations of Sections 5(a)
and 5(c) of the Securities Act, Section 13(a) of the Exchange Act and Rule 13a-11 under the Exchange Act. As of June 30, 2015,
the Company has paid in full its obligation to the SEC.
Securities and Exchange Commission – Section 16 Investigation
In April 2013, it was determined that Gary Rabin, the Company’s
former Chief Executive Officer, failed to report 27 transactions in a timely manner on Form 4 under Section 16 of the Exchange
Act in which Mr. Rabin sold shares of the Company’s common stock that took place between February 7, 2011 and January 10,
2013. The SEC then investigated the unreported transactions involving sales of shares of the Company’s common stock. In September
2014, the Company settled the SEC action arising from the SEC’s investigation. Under the terms of the settlement accepted
by the SEC, the Company consented to the entry of order under which it neither admits nor denies liability and has agreed to pay
a civil penalty of $375,000, which has been previously accrued for, by July 2015. In addition, the settlement requires the Company
to engage an independent Section 16 compliance consultant, provide Section 16(a) training to each Section 16(a) reporting person,
and provide a certification of compliance that each of the preceding requirements were completed. The settlement also requires
the Company to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the
Securities Act, Sections 13(a) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 14a-9 thereunder. The terms of this
settlement require the Company to allocate financial and management resources to complying with the settlement’s terms, which
may have adverse effect on our business. Also, if the SEC deems the Company to not have complied with any portion of the settlement,
it may issue additional fines or sanctions against us which may limit our ability to issue securities or otherwise conduct our
business as currently conducted. As of June 30, 2015 the Company has paid in full its obligation to the SEC.
6. CONVERTIBLE PROMISSORY NOTES
CAMOFI Senior Secured Convertible Debentures
On January 11, 2013, the Company entered into a settlement agreement
and mutual release (“the Settlement Agreement”) with CAMOFI Master LDC (“CAMOFI”) and CAMHZN Master LDC
(“CAMHZN” and together with CAMOFI, the “CAMOFI Parties”), relating to the lawsuit between the CAMOFI Parties,
as plaintiffs, and the Company, as defendant, in the Supreme Court of New York. Pursuant to the Settlement Agreement, the Company
issued Debentures in the principal amount of $4,732,781 and $1,267,219 to CAMOFI and CAMHZN, respectively (together the “Debentures”).
The Debentures had contained an embedded beneficial conversion feature
as the Debentures are convertible at a price per share of common stock equal to 80% of VWAP of the ten consecutive trading days
prior to the conversion date. The embedded beneficial conversion feature was modeled using a binomial lattice model, and had a
calculated value at June 30, 2014 of $0. The Company recorded a gain of $663,000 for the change in the fair value of the embedded
conversion option liability for the six months ended June 30, 2014 in connection with the retirement of the remaining debentures.
The Company recorded a debt discount of $725,000, which was being
amortized over the life of the Debentures using the effective interest rate of 22.9%. The unamortized discount balance of $108,229
was written off to interest expense with the retirement of the remaining outstanding Debentures.
On May 2, 2014, the Company paid to the CAMOFI Parties an aggregate
amount of approximately $1,616,000 calculated in accordance with the payment acceleration provisions of the Debentures and satisfying
the Company’s obligations under the Debentures. The payment represented the remaining $1,200,000 in principal amount due
and an additional amount of approximately $416,000, which represented penalties, interest and legal cost reimbursement to the CAMOFI
Parties. With the payment, the Company satisfied in full its obligations under the Debentures and the terms of the Settlement Agreement
and Mutual Release dated as of December 31, 2012 pursuant to which the Debentures were issued in January 2013. The Company received
correspondence from the CAMOFI Parties stating that the CAMOFI Parties believe the aggregate amount due to be different than the
amount the Company paid. The Company believes that its interpretation of the Debentures is accurate and complete and its liability
under the Debentures is zero as of June 30, 2015.
7. WARRANT SUMMARY
Warrant Activity
A summary of warrant activity for the six months ended June 30,
2015 is presented below:
|
|
Number of Warrants |
|
Number of Common Shares Underlying Warrants |
|
Weighted Average Exercise Price $ |
|
Weighted Average Remaining Contractual Life (in years) |
|
Aggregate Intrinsic Value (000)$ |
|
Outstanding, December 31, 2014 |
|
45,906 |
|
45,906 |
|
40.46 |
|
1.45 |
|
– |
|
Granted |
|
5,985,000 |
|
2,992,500 |
|
7.48 |
|
|
|
|
|
Outstanding, June 30, 2015 |
|
6,030,906 |
|
3,038,406 |
|
7.98 |
|
5.42 |
|
– |
|
Exercisable, June 30, 2015 |
|
45,906 |
|
45,906 |
|
40.46 |
|
0.96 |
|
– |
|
The aggregate intrinsic value in the table above is before applicable
income taxes and is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s
common stock as of the reporting date.
On June 16, 2015, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) related to a registered direct offering (the “Offering”) of an
aggregate of 5,500,000 shares of common stock, par value $0.001 per share (the “Shares”), together with accompanying
warrants to purchase an aggregate of 2,750,000 shares of common stock (the “Warrants”).
The Shares and Warrants were sold in combination, with one Warrant
to purchase one half of one share of common stock, for each Share sold. The combined sale price to the public for each Share and
accompanying Warrant was $5.50. The per share proceeds received by the Company from the underwriters, after accounting for the
standard 6% underwriting fee, for the Shares and accompanying Warrants was $5.17. The Offering closed on June 22, 2015 and the
aggregate net proceeds from the sale of the Shares and accompanying Warrants, excluding the potential future proceeds, if any,
from the exercise of the Warrants issued in the offering, was approximately $28.2 million after deducting the underwriting discount
of $1,815,000 and estimated offering expenses payable by the Company of approximately $170,000.
The Warrants may be exercised at any time after December 22,
2015 until December 22, 2020. The initial exercise price for the Warrants will be $7.48 subject to adjustment in the event
of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the
Company’s common stock. The Warrants are classified as a liability on the balance sheet as of June 30, 2015 due to the fact
that at inception, the Warrants embody an obligation to repurchase the Warrants in the event of a change in control whereby the
surviving entity is not listed on a public exchange. Because of this potential settlement, regardless of probability, and the fact
that the choice of cash settlement may ultimately lie with the warrant holders, triggers liability classification for the warrants
under ASC 480. At inception, the fair value of the warrants was $10,237,968.
In addition, the Underwriting Agreement provides the underwriters
a 30-day option to purchase up to an additional 825,000 shares and/or warrants to purchase an additional 412,500 shares of common
stock from the Company (of which 485,000 Warrants representing 242,500 shares of common stock were purchased immediately in connection
with the Offering’s closing on June 22, 2015).
8. STOCKHOLDERS’ EQUITY (DEFICIT) TRANSACTIONS
On September 19, 2012 the Company entered into a purchase agreement
with Lincoln Park Capital, LLC (“Lincoln Park”). Pursuant to the purchase agreement, the Company had the right to sell
to Lincoln Park up to $35,000,000 in shares of its common stock. On June 18, 2014, the Company completed the last sale of common
stock to Lincoln Park under this agreement.
On June 27, 2014, the Company entered into a similar purchase agreement,
the “2014 Purchase Agreement,” with Lincoln Park pursuant to which the Company has the right to sell to Lincoln Park
up to $30,000,000 in shares of its common stock, subject to certain limitations set forth in the purchase agreement.
During the six months ended June 30, 2015, Lincoln Park purchased
2,022,996 shares of common stock pursuant to the 2014 Purchase Agreement for cash proceeds of $12,797,047.
During the six months ended June 30, 2015, the Company issued various
board members 15,000 shares of common stock valued at $85,725 as compensation for board services.
At the annual meeting of the Company’s stockholders held in
November 2014, the Company’s stockholders approved a Certificate of Amendment to the Company’s Certificate of Incorporation.
The Certificate of Amendment provided for an increase in the number of authorized shares of the Company’s common stock, par
value $0.001 per share, from 37,500,000 to 60,000,000. The Certificate of Amendment became effective upon its filing with the Secretary
of State of the State of Delaware on November 12, 2014.
On June 16, 2015, the Company entered into the Underwriting
Agreement related to the Offering. See Note 7, “Warrant Summary,” for additional information about the Offering.
9. STOCK-BASED COMPENSATION
A summary of stock plans as of June 30, 2015 is presented below:
Stock Plans
|
|
|
|
|
|
|
|
Options/Shares |
|
|
|
|
|
|
Options/Shares |
|
|
Options |
|
|
Available |
|
|
Total |
|
Stock Plan |
|
Issued |
|
|
Outstanding |
|
|
For Grant |
|
|
Authorized |
|
2005 Stock Incentive Plan |
|
|
2,756,356 |
|
|
|
2,118,931 |
|
|
|
3,231,457 |
|
|
|
5,818,388 |
|
2014 Stock Option and Incentive Plan |
|
|
209,000 |
|
|
|
174,000 |
|
|
|
41,000 |
|
|
|
250,000 |
|
|
|
|
2,965,356 |
|
|
|
2,292,931 |
|
|
|
3,272,457 |
|
|
|
6,068,388 |
|
Stock Option Activity
A summary of option activity for the six months ended June 30, 2015
is presented below:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Life (in years) |
|
|
Value |
|
Outstanding, December 31, 2014 |
|
|
2,245,381 |
|
|
$ |
12.03 |
|
|
|
8.12 |
|
|
$ |
12,110 |
|
Granted |
|
|
99,000 |
|
|
|
6.30 |
|
|
|
|
|
|
|
|
|
Forfeited/canceled |
|
|
(51,450 |
) |
|
|
17.48 |
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2015 |
|
|
2,292,931 |
|
|
$ |
11.67 |
|
|
|
7.72 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at
June 30, 2015 |
|
|
2,173,329 |
|
|
$ |
11.89 |
|
|
|
7.64 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2015 |
|
|
1,372,916 |
|
|
$ |
14.45 |
|
|
|
6.77 |
|
|
$ |
8 |
|
The aggregate intrinsic value in the table above is before applicable
income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s
common stock as of the reporting date.
The assumptions used in calculating the fair value of options granted
using the Black-Scholes option pricing model for options granted during the six months ended, are as follows:
|
|
June 30, |
|
June 30, |
|
|
2015 |
|
2014 |
Risk-free interest rate |
|
1.59 – 2.07% |
|
.02 – 2.27% |
Expected life of the options |
|
5.00 - 6.25 years |
|
5.00 - 6.25 years |
Expected volatility |
|
93 - 124% |
|
112 - 148% |
Expected dividend yield |
|
0% |
|
0% |
The weighted average grant-date fair value
for the options granted during the six months ended June 30, 2015 and 2014 was $5.10 and $7.68, respectively.
The unrecognized compensation expense related
to the unvested options as of June 30, 2015, was $6,176,415 which will be recognized over the weighted average vesting period of
2.24 years.
Restricted Stock Unit Activity
A summary of the restricted stock unit activity for the six months
ended June 30, 2015:
|
|
Number of
Shares
Underlying Restricted
Units |
|
|
Weighted
Average
Grant-Date
Fair Value
per Share |
|
|
Weighted
Average
Remaining
Recognition
Period
(in years) |
|
Outstanding, December 31, 2014 |
|
|
493,000 |
|
|
$ |
7.28 |
|
|
|
2.60 |
|
Granted |
|
|
10,000 |
|
|
|
6.62 |
|
|
|
|
|
Outstanding, June 30, 2015 |
|
|
503,000 |
|
|
$ |
7.19 |
|
|
|
2.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned stock-based compensation expense of outstanding restricted units |
|
$ |
2,616,066 |
|
|
|
|
|
|
|
|
|
Stock compensation expense to employees and
non-employees for the three and six months ended June 30, 2015 and 2014 are as follows:
Three Months Ended |
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
R&D |
|
$ |
537,772 |
|
|
$ |
90,144 |
|
G&A |
|
|
898,300 |
|
|
|
179,546 |
|
|
|
$ |
1,436,072 |
|
|
$ |
269,690 |
|
Six Months Ended |
|
June 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2014 |
|
R&D |
|
$ |
1,092,492 |
|
|
$ |
175,329 |
|
G&A |
|
|
1,908,934 |
|
|
|
533,431 |
|
|
|
$ |
3,001,426 |
|
|
$ |
708,760 |
|
10. SUBSEQUENT EVENTS
At the annual meeting of the Company’s stockholders held in
July 2015, the Company’s stockholders approved the First Amendment to the Company’s 2014 Stock Option and Incentive
Plan (the “Plan Amendment”) to, among other things, increase the number of shares of common stock available
for issuance thereunder by 3,750,000 shares to a total of 4,000,000 shares. The Plan Amendment previously had been approved, subject
to stockholder approval, by the Company’s Board of Directors.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
Certain statements in this quarterly report
on Form 10-Q that are not historical in fact constitute “forward-looking statements.” Words such as, but not limited
to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,”
and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events
that may cause the actual results of the Company to be materially different from historical results or from any results expressed
or implied by such forward-looking statements. These risks and uncertainties, as well as the Company’s critical accounting
policies, are discussed in more detail under “Management’s Discussion and Analysis—Critical Accounting Policies”
and in periodic filings with the Securities and Exchange Commission. You should review carefully the factors identified in Part
I, Item 1A under the heading “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31,
2014 and below under Part II, Item IA, “Risk Factors.” We disclaim any intent to update or announce revisions to any
forward-looking statements to reflect actual events or developments, except as required by law. Except as otherwise indicated herein,
all dates referred to in this report represent periods or dates fixed with reference to our fiscal year ended December 31. The
Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future
events or otherwise.
You should read the following discussion
of our financial condition and results of operations together with the audited financial statements and the notes to the audited
financial statements included in this annual report. This discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
We are a clinical stage biotechnology company
focused on the development and commercialization of Regenerative OphthalmologyTM therapeutics. Our most advanced products
are in clinical trials for the treatment of Stargardt’s macular degeneration, dry age-related macular degeneration, and myopic
macular degeneration. We are also developing several pre-clinical terminally differentiated-cell therapies for the treatment of
other ocular disorders. Additionally, we have a number of pre-clinical stage assets in disease areas outside the field of ophthalmology,
including autoimmune, inflammatory and wound healing-related disorders. Our intellectual property portfolio includes pluripotent
human embryonic stem cell, or hESC; induced pluripotent stem cell, or iPSC, platforms; and other cell therapy technologies.
We pursue a number of approaches to generating
transplantable tissues both in-house and through collaborations with other researchers who have particular interests in, and skills
related to, cellular differentiation. Our research in this area includes projects focusing on the development of many different
cell types that may be used to treat a range of diseases within ophthalmology and other therapeutic areas. Control of cellular
differentiation and the culture and growth of stem and differentiated cells are important areas of research and development for
us. Based on the success to date of our Phase 1 clinical trials and what we see as favorable market dynamics of the ophthalmology
sector, we have shifted our strategic priorities to focus primarily on the development, and ultimate commercialization of ophthalmology
therapies. The largest indication involving macular degeneration is “age-related macular degeneration,” or AMD. AMD
is the leading cause of blindness and visual impairment in adults over fifty years of age. The Company is also pursuing a treatment
for Stargardt’s Macular Degeneration, or SMD, an inherited juvenile onset form of macular degeneration. The Company plans
to initiate the Phase 2 clinical trial for dry AMD in the second half of this year.
We have no therapeutic products currently available
for sale and do not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These
factors indicate that our ability to continue research and development activities is dependent upon the ability of management to
obtain additional financing as required.
Comparison of Three months Ended June 30, 2015 and 2014
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
$ Change |
|
|
% Change |
|
Revenue |
|
$ |
39,468 |
|
|
$ |
39,469 |
|
|
$ |
(1 |
) |
|
|
0% |
|
Cost of revenue |
|
|
15,609 |
|
|
|
15,608 |
|
|
|
1 |
|
|
|
0% |
|
Gross profit |
|
|
23,859 |
|
|
|
23,861 |
|
|
|
(2 |
) |
|
|
0% |
|
Research and development expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-R&D expenses, excluding non-cash stock compensation |
|
|
3,006,108 |
|
|
|
2,628,481 |
|
|
|
377,627 |
|
|
|
14.4% |
|
-R&D stock compensation |
|
|
537,772 |
|
|
|
90,144 |
|
|
|
447,628 |
|
|
|
496.6% |
|
Total Research and Development Expenses |
|
|
3,543,880 |
|
|
|
2,718,625 |
|
|
|
825,255 |
|
|
|
30.4% |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-G&A expenses, excluding non-cash stock compensation |
|
|
2,260,601 |
|
|
|
1,996,203 |
|
|
|
264,398 |
|
|
|
13.2% |
|
-G&A stock compensation |
|
|
898,300 |
|
|
|
179,546 |
|
|
|
718,754 |
|
|
|
400.3% |
|
Total General and Administrative Expenses |
|
|
3,158,901 |
|
|
|
2,175,749 |
|
|
|
983,152 |
|
|
|
45.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on settlement of litigation |
|
|
– |
|
|
|
11,567,009 |
|
|
|
(11,567,009 |
) |
|
|
(100% |
) |
Non-operating (expense) income |
|
|
(566,888 |
) |
|
|
919,546 |
|
|
|
(1,486,434 |
) |
|
|
(161.6% |
) |
Net loss |
|
$ |
(7,245,810 |
) |
|
$ |
(15,517,976 |
) |
|
$ |
8,272,166 |
|
|
|
(53.3% |
) |
Revenue
Revenue relates to license fees and royalties
collected that are being amortized over the period of the license granted. Revenue was materially unchanged from the prior year
at $39,468 for the three months ended June 30, 2015. The deferred revenue balance of $1,670,763, as of June 30, 2015, is being
amortized and recorded to revenue over approximately 11 years. We currently have no therapeutic products available for sale and
do not expect to have any commercially available for sale for a period of years, if at all.
Research and Development Expenses
Our research and development, or R&D, expenses
consist mainly of payroll and payroll related expenses for our scientific, manufacturing, clinical and regulatory staff, services
attained in connection with our ongoing clinical trials and pre-clinical programs, our R&D and manufacturing facilities, and
research supplies and materials. Our primary focus is on the development of novel therapies based on terminally differentiated
cells. R&D expenses represent both pre-clinical and clinical development costs and costs associated with support activities
such as manufacturing, quality control and regulatory processes. The cost of our research and development personnel is the most
significant category of R&D expense; however, we also incur expenses with third parties, including license agreements, sponsored
research programs and consulting expenses.
R&D expenditures, excluding non-cash stock
compensation expense, increased from $2,628,481 for the three months ended June 30, 2014 to $3,006,108 for the same period in 2015,
for an increase of $377,627 or 14.4%. The increase in R&D expenditures was primarily related to an increase in clinical trial
related costs of approximately $377,000 and an increase in lab testing and supplies of approximately $141,000. These increases
were partially offset by decreases in employee costs of approximately $177,000. These shifts in expenditures were driven primarily
by our shift in focus from pre-clinical programs to our planned expansion of our clinical capabilities as we prepare for the commencement
of our Phase 2 clinical trial in AMD and Pivotal clinical trial in SMD.
R&D expenses related to non-cash stock compensation
increased from $90,144 for the three months ended June 30, 2014 to $537,772 for the same period in 2015, for an increase of $447,628,
or 496.6%. This increase is due to grants to the Chief Scientific Officer and Chief Medical Officer in the third quarter of 2014
which each accounted for approximately $150,000 of the increase. Additionally, company-wide grants were made to non-executives
during the third quarter of 2014 which resulted in higher stock compensation expense for the three months ended June 30, 2015 as
compared to the same period in 2014.
We expect that R&D expenses will increase
from period to period for the foreseeable future. This planned increase will be driven primarily by our expansion of our clinical
operations and capabilities as we initiate our Phase 2 clinical trial for AMD and Pivotal clinical trial for SMD. Spending will
continue to increase throughout 2015 as our trials are initiated, clinical sites are activated, and patients are enrolled in the
trials. We currently work with four clinical sites in the US and two in the UK. We plan to expand the number of sites in both the
US and in Europe. In addition, we are expanding the network of consultants and service providers we contract and we also plan to
expand our internal workforce. These expansions and the increased spend that will result from these expanded capabilities is consistent
with our previously stated plans. Our spending is impacted by the timing of enrollment and treatment of clinical trial patients
along with interim results of our many pre-clinical programs. The amount and timing of these fluctuations can be difficult to predict
due to the uncertainty inherent in the timing and extent of progress in our research programs, initiation of new clinical trials
and rate of progression of existing clinical trials. In addition, the results from our basic research and pre-clinical trials,
as well as the results of trials of similar therapeutics under development by others, will influence the number, size and duration
of future trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment
of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish
discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with
others in the biotechnology or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.
We believe that it is not possible at this stage
to provide a meaningful estimate of the total cost to complete our ongoing projects and bring any proposed products to market.
The use of human embryonic stem cells as a therapy is an emerging area of medicine, and it is not known what clinical trials will
be required by the U.S. Food and Drug Administration, or FDA, in order to gain marketing approval. Costs to complete could vary
substantially depending upon the projects selected for development, the number of clinical trials required and the number of patients
needed for each study. It is possible that the completion of these studies could be delayed for a variety of reasons, including
difficulties in enrolling patients, delays in manufacturing, incomplete or inconsistent data from the pre-clinical or clinical
trials, and difficulties evaluating the trial results. Any delay in completion of a trial would increase the cost of that trial,
which would harm our results of operations. Due to these uncertainties, we cannot reasonably estimate the size, nature or timing
of the costs to complete, or the amount or timing of the net cash inflows from, our current activities. Until we obtain further
relevant pre-clinical and clinical data, we will not be able to estimate our future expenses related to these programs or when,
if ever, and to what extent we will receive cash inflows from resulting products.
General and Administrative Expenses
General and administrative, or G&A,
expenses consist mainly of payroll and payroll related expenses, legal costs relating to corporate matters, and fees for consultants,
service providers and other administrative costs. G&A expenditures, excluding non-cash stock compensation expense, increased
from $1,996,203 for the three months ended June 30, 2014 to $2,260,601 for the same period in 2015, for an increase of $264,398
or 13.2%.
The increase in G&A expenditures was primarily
due to increases in payroll and other compensation costs of approximately $251,000, in consulting and other professional fees of
approximately $198,000, and in compliance costs of approximately $107,000. Payroll costs were higher due to the hiring of a new
Chief Executive Officer and a Chief Commercial Officer during the second half of 2014. The increase in consulting and other professional
fees was primarily attributable to an increase in strategic business initiatives during the quarter. These increases were partially
offset by a reduction in legal costs of approximately $215,000 and a decrease in recruiting fees of approximately $85,000.
G&A expenses related to non-cash stock compensation
increased from $179,546 for the three months ended June 30, 2014 to $898,300 for the same period in 2015, for an increase of $718,754,
or 400.3%. This increase is due to grants to the Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of
Directors in the third quarter of 2014 which accounted for approximately $672,000 of the increase. Additionally, company-wide grants
were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the three
months ended June 30, 2015 as compared to the same period in 2014.
Loss on Settlement of Litigation
The loss on settlement of litigation
relates to the settlement in June 2014 of the warrant holder litigation. The total value of the litigation settlement was recorded
at $23,577,600 based on a 3,840,000 share settlement valued at $6.14 per share. Partially offsetting this charge was the reversal
of previously recorded accruals for the unsettled warrant obligation and loss contingency totaling $12,010,591.
Other Income (Expense)
|
|
2015 |
|
|
2014 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
– |
|
|
$ |
951 |
|
|
$ |
(951 |
) |
|
|
(100% |
) |
Interest expense |
|
|
(437 |
) |
|
|
(132,532 |
) |
|
|
132,095 |
|
|
|
(99.7% |
) |
Other loss |
|
|
– |
|
|
|
(343,511 |
) |
|
|
343,511 |
|
|
|
100% |
|
Issuance expense |
|
|
(904,189 |
) |
|
|
– |
|
|
|
(904,189 |
) |
|
|
(100% |
) |
Adjustments to fair value of unsettled warrant obligation |
|
|
– |
|
|
|
1,004,867 |
|
|
|
(1,004,867 |
) |
|
|
(100% |
) |
Adjustments to fair value of derivatives |
|
|
337,738 |
|
|
|
389,771 |
|
|
|
(52,033 |
) |
|
|
(13.3% |
) |
Total non-operating expense |
|
$ |
(566,888 |
) |
|
$ |
919,546 |
|
|
$ |
(1,486,434 |
) |
|
|
(161.6% |
) |
Interest expense for the three months ended
June 30, 2015 compared to the three months ended June 30, 2014 decreased from $132,532 to $437. The decrease is due to the discontinuation
of interest expense on our previously outstanding debt obligations to CAMOFI Master LDC and CAMHZN Master LDC, or together the
CAMOFI Parties.
The change in other loss during the three months
ended June 30, 2015, compared to that of the same period in 2014, relates primarily to an accrued loss contingency that was deemed
no longer likely to be settled during 2014.
The issuance expense, which accounted for $904,189
in expense for the three months ended June 30, 2015, related to the issuance costs of the warrants as part of the underwritten
secondary offering completed in June 2015.
The unsettled warrant obligation, adjustments
to which generated $1,004,867 in income for the three months ended June 30, 2014, was settled on June 4, 2014 and therefore there
was no activity related to this item in the current quarter.
Adjustments to the fair value of derivatives
resulted in a gain of $337,738 for the three months ended June 30, 2015 compared to a gain of $389,771 for the three months ended
June 30, 2014. The change of $52,033 is primarily due to the retirement in 2014 of the derivatives associated with the debt issued
to the CAMOFI Parties and therefore less derivative instruments are being re-valued for the three months ended June 30, 2015 as
compared to the same period in 2014.
Comparison of Six months Ended June 30, 2015 and 2014
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
$ Change |
|
|
% Change |
|
Revenue |
|
$ |
78,936 |
|
|
$ |
78,937 |
|
|
$ |
(1 |
) |
|
|
0% |
|
Cost of revenue |
|
|
31,218 |
|
|
|
31,217 |
|
|
|
1 |
|
|
|
0% |
|
Gross profit |
|
|
47,718 |
|
|
|
47,720 |
|
|
|
(2 |
) |
|
|
0% |
|
Research and development expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-R&D expenses, excluding non-cash stock compensation |
|
|
5,828,961 |
|
|
|
5,051,140 |
|
|
|
777,821 |
|
|
|
15.4% |
|
- R&D stock compensation |
|
|
1,092,492 |
|
|
|
175,329 |
|
|
|
917,163 |
|
|
|
523.1% |
|
Total Research and Development |
|
|
6,921,453 |
|
|
|
5,226,469 |
|
|
|
1,694,984 |
|
|
|
32.4% |
|
General and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-G&A expenses, excluding non-cash stock compensation |
|
|
4,937,826 |
|
|
|
4,954,881 |
|
|
|
(17,055 |
) |
|
|
(0.3% |
) |
-G&A stock compensation |
|
|
1,908,934 |
|
|
|
533,431 |
|
|
|
1,375,503 |
|
|
|
257.9% |
|
Total General and Administrative |
|
|
6,846,760 |
|
|
|
5,488,312 |
|
|
|
1,358,448 |
|
|
|
24.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on settlement of litigation |
|
|
– |
|
|
|
13,468,547 |
|
|
|
(13,468,547 |
) |
|
|
(100% |
) |
Non-operating income (expense) |
|
|
(560,885 |
) |
|
|
(72,142 |
) |
|
|
(488,743 |
) |
|
|
677.5% |
|
Net loss |
|
$ |
(14,281,380 |
) |
|
$ |
(24,207,750 |
) |
|
$ |
9,926,370 |
|
|
|
(41.0% |
) |
Revenue
Revenue relates to license fees and royalties
collected that are being amortized over the period of the license granted. Revenue was materially unchanged from the prior year
at $78,936 for the six months ended June 30, 2015. The deferred revenue balance of $1,670,763, as of June 30, 2015, is being amortized
and recorded to revenue over approximately 11 years. We currently have no therapeutic products available for sale and do not expect
to have any commercially available for sale for a period of years, if at all.
Research and Development Expenses
R&D expenditures, excluding non-cash stock
compensation expense, increased from $5,051,140 for the six months ended June 30, 2014 to $5,828,961 for the same period in 2015,
for an increase of $777,821 or 15.4%. The increase in R&D expenditures was primarily related to an increase in clinical trial
related costs of approximately $767,000 and an increase in lab testing and supplies of approximately $92,000. These increases were
partially offset by decreases in pre-clinical program expenditures of approximately $79,000. These shifts in expenditures were
driven primarily by our shift in focus from pre-clinical programs to our planned expansion of our clinical capabilities as we continue
to prepare for the commencement of our Phase 2 clinical trial in AMD and Pivotal clinical trial in SMD.
R&D expenses related to non-cash stock compensation
increased from $175,329 for the six months ended June 30, 2014 to $1,092,492 for the same period in 2015, for an increase of $917,163,
or 523.1%. This increase is due to Q3 grants to the Chief Scientific Officer and Chief Medical Officer in the third quarter of
2014 which each accounted for approximately $300,000 of the increase. Additionally, company-wide grants were made to non-executives
during the third quarter of 2014 which resulted in higher stock compensation expense for the six months ended June 30, 2015 as
compared to the same period in 2014.
We expect that R&D expenses will increase
from period to period, for the foreseeable future. This planned increase will be driven primarily by our expansion of our clinical
operations capabilities as we initiate our Phase 2 clinical trial for AMD and Pivotal clinical trial for SMD. Spending will continue
to increase throughout 2015 as our trials are initiated, clinical sites are activated, and patients are enrolled in the trials.
We currently work with four clinical sites in the US and two in the UK. We plan to expand the number of sites in both the US and
in Europe. In addition, we are expanding the network of consultants and service providers we contract and we also plan to expand
our internal workforce. These expansions and the increased spend that will result from these expanded capabilities is consistent
with our previously stated plans. Our spending is impacted by the timing of enrollment and treatment of clinical trial patients
along with interim results of our many pre-clinical programs. The amount and timing of these fluctuations can be difficult to predict
due to the uncertainty inherent in the timing and extent of progress in our research programs, initiation of new clinical trials
and rate of progression of existing clinical trials. In addition, the results from our basic research and pre-clinical trials,
as well as the results of trials of similar therapeutics under development by others, will influence the number, size and duration
of future trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment
of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish
discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with
others in the biotechnology or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.
General and Administrative Expenses
The decrease in G&A expenditures was primarily
due to a reduction in legal costs of approximately $723,000, and a decrease in severance costs related our prior CEO of approximately
$335,000. Legal costs incurred in the six months ended June 30, 2014 included the costs associated with the resolution of several
legacy matters. These decreases were partially offset by increases in payroll and other compensation costs of approximately $632,000,
in consulting and other professional fees of approximately $255,000, and in compliance costs of approximately $165,000. Payroll
costs were higher due to the hiring of a new Chief Executive Officer and a Chief Commercial Officer during the second half of 2014.
The increase in consulting and other professional fees was primarily attributable to the Company becoming listed on the NASDAQ
Global Market as well as an increase in IT spending period over period.
G&A expenses related to non-cash stock compensation
increased from $533,431 for the six months ended June 30, 2014 to $1,908,934 for the same period in 2015, for an increase of $1,375,503,
or 257.9%. This increase is due to grants to the Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of
Directors in the third quarter of 2014 which accounted for approximately $1,300,000 of the increase. Additionally, company-wide
grants were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the
six months ended June 30, 2015 as compared to the same period in 2014.
Loss on Settlement of Litigation
The loss on settlement of litigation
relates to the settlement in June 2014 of the warrant holder litigation. The total value of the litigation settlement was recorded
at $23,577,600 based on a 3,840,000 share settlement valued at $6.14 per share. Partially offsetting this charge was the reversal
of previously recorded accruals for the unsettled warrant obligation and loss contingency totaling $12,010,591.
Other Income (Expense)
|
|
2015 |
|
|
2014 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
– |
|
|
$ |
55,840 |
|
|
$ |
(55,840 |
) |
|
|
(100% |
) |
Interest expense |
|
|
(437 |
) |
|
|
(429,504 |
) |
|
|
429,067 |
|
|
|
(99.9% |
) |
Other loss |
|
|
– |
|
|
|
(394,237 |
) |
|
|
394,237 |
|
|
|
(100% |
) |
Issuance expense |
|
|
(904,189 |
) |
|
|
– |
|
|
|
(904,189 |
) |
|
|
(100% |
) |
Adjustments to fair value of unsettled warrant obligation |
|
|
– |
|
|
|
18,959 |
|
|
|
(18,959 |
) |
|
|
(100% |
) |
Adjustments to fair value of derivatives |
|
|
343,741 |
|
|
|
676,800 |
|
|
|
(333,059 |
) |
|
|
(49.2% |
) |
Total non-operating expense |
|
$ |
(560,885 |
) |
|
$ |
(72,142 |
) |
|
$ |
(488,743 |
) |
|
|
(677.5% |
) |
Interest expense for the six months ended June
30, 2015 compared to the six months ended June 30, 2014 decreased from $429,504 to $437. The decrease is due to the discontinuation
of interest expense on our previously outstanding debt obligations to the CAMOFI Parties.
The change in other loss during the six months
ended June 30, 2015, compared to that of the same period in 2014, relates primarily to an accrued loss contingency that was deemed
no longer likely to be settled during 2014.
The issuance expense, which accounted for $904,189
in expense for the six months ended June 30, 2015, related to the issuance costs of the warrants as part of the underwritten secondary
offering completed in June 2015.
The unsettled warrant obligation, adjustments
to which generated $18,959 in income for the six months ended June 30, 2014, was settled on June 4, 2014 and therefore there was
no activity related to this item in the current quarter.
Adjustments to the fair value of derivatives
resulted in a gain of $343,741 for the six months ended June 30, 2015 compared to a gain of $676,800 for the six months ended June
30, 2014. The change of $333,059 is primarily due to the retirement in 2014 of the derivatives associated with the debt issued
to the CAMOFI Parties and therefore less derivative instruments are being re-valued for the six months ended June 30, 2015 as compared
to the same period in 2014.
Liquidity and Capital Resources
Cash Flows
The following table sets forth a summary of
our cash flows for the periods indicated below:
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
Net cash used in operating activities | |
$ | (13,694,411 | ) | |
$ | (10,572,936 | ) |
Net cash used in investing activities | |
| (119,846 | ) | |
| (119,385 | ) |
Net cash provided by financing activities | |
| 41,241,458 | | |
| 13,011,166 | |
Net increase in cash and cash equivalents | |
| 27,427,201 | | |
| 2,318,845 | |
Cash and cash equivalents at the end of the period | |
$ | 31,851,575 | | |
$ | 4,062,330 | |
Operating Activities
Our net cash used in operating activities during
the six months ended June 30, 2015 and 2014 was $13,694,411 and $10,572,936, respectively. Net cash used in operating activities
increased in the six months ended June 30, 2015 period compared to the same period in 2014 period despite a decrease in our net
loss. The net loss decrease of approximately $10 million was offset primarily by an add-back to cash in the 2014 period of approximately
$13.5 million for the settlement of litigation. Other drivers include an increase in stock compensation of approximately $2.3 million
and an increase in non-cash financing costs related to the underwritten secondary offering in June 2015 of approximately $0.8 million.
Cash Used in Investing Activities
Cash used in investing activities during the
six months ended June 30, 2015 and 2014 was $119,846 and $119,385, respectively. Our cash used in investing activities during both
periods was attributed to the purchase of fixed assets.
Cash Flows from Financing Activities
On June 27, 2014, we entered into the 2014 Purchase
Agreement with Lincoln Park pursuant to which we have the right to sell to Lincoln Park up to $30,000,000 in shares of its common
stock, subject to certain limitations set forth in the 2014 Purchase Agreement.
Upon the satisfaction of the conditions set
forth in the 2014 Purchase Agreement, we obtained the right over a 36-month period to sell up to $30,000,000 worth of shares of
our common stock to Lincoln Park based upon the terms set forth in the 2014 Purchase Agreement. Pursuant to the 2014 Purchase Agreement,
the purchase price of such common stock is based on the prevailing market price of our common stock immediately preceding the time
of sales, with our controlling the timing and amount of any future sales, if any, of common stock to Lincoln Park. There are no
upper limits to the price Lincoln Park may pay to purchase our common stock. Lincoln Park shall not have the right or the obligation
to purchase any shares of common stock on any business day that the closing price of our common stock is below a floor price of
$1.00, as adjusted under the 2014 Purchase Agreement due to the 100-to-1 reverse split, of our common stock effected in August
2014.
On June 16, 2015, the Company entered into
an underwriting agreement (the “Underwriting Agreement”) related to a registered direct offering (the “Offering”)
for an aggregate of 5,500,000 shares of common stock, par value $0.001 per share (the “Shares”), together with accompanying
warrants to purchase an aggregate of 2,750,000 shares of common stock (the “Warrants”).
The Shares and Warrants were sold in combination,
with one Warrant to purchase one half of one share of common stock, for each share sold. The combined sale price to the public
for each share and accompanying warrant was $5.50. The per share proceeds received by the Company from the underwriters, after
accounting for the standard 6% underwriting fee, for the Shares and accompanying Warrants was $5.17. The Offering closed on June
22, 2015 and the aggregate net proceeds from the sale of the Shares and accompanying Warrants, excluding the potential future proceeds,
if any, from the exercise of the Warrants issued in the offering, was approximately $28.2 million after deducting the underwriting
discount and estimated offering expenses payable by the Company.
The Warrants may be exercised at any time after
December 22, 2015 until December 22, 2020. The initial exercise price for the Warrants will be $7.48 subject to adjustment
in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events
affecting the Company’s common stock.
In addition, the Underwriting Agreement provides
the underwriters a 30-day option to purchase up to an additional 825,000 shares and/or warrants to purchase an additional 412,500
shares of common stock from the Company (of which 242,500 Warrants were purchased immediately in connection with the Offering’s
closing on June 22, 2015).
Cash flows provided by financing activities
during the six months ended June 30, 2015 and 2014 was $41,241,458 and $13,011,166, respectively. During the six months ended June
30, 2015, we received $12,797,047 from the issuance of 2,022,996 shares to Lincoln Park as part of the 2014 Purchase Agreement.
We plan to fund our operations for the foreseeable
future from the following sources:
|
· |
As of June 30, 2015, we have $31,851,575 in cash. |
|
· |
As of June 30, 2015, $5,822,405 is available to us through the Lincoln Park financing arrangement. |
We have no expectation of generating any meaningful
revenues from our product candidates for a substantial period of time and must rely on raising funds in capital transactions to
finance our research and development programs. Our future cash requirements will depend on many factors, including the pace
and scope of our research and development programs, the costs involved in filing, prosecuting and enforcing patents, and other
costs associated with commercializing our potential products.
We believe that our current cash balance, and
the $5,822,405 available to us under the Lincoln Park financing arrangement as of June 30, 2015, will be sufficient to fund our
operations into the second half of 2016. We are continually in discussions with potential investors and collaborators to explore
alternative sources of funding which may or may not result in immediate and substantial dilution to our stockholders, so that we
may either extend our current cash runway beyond the second half of 2016 or accelerate the rate of investment in our many clinical
and pre-clinical programs.
We cannot assure you that public or private
financing or grants will be available on acceptable terms, if at all. Several factors will affect our ability to raise additional
funding, including, but not limited to, the volatility of our common stock and the broader public equity market, especially public
equities issued by other pre-commercial biotechnology companies, and our ability to raise capital through non-dilutive transactions
such as out-licenses. If we are unable to raise additional funds, we will be forced to either scale back our business efforts or
curtail our business activities entirely. As of June 30, 2015, the Company has an accumulated deficit of $363.4 million and recurring
losses from operations which raise substantial doubt about the ability of the Company to continue as a going concern.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current
or future effect upon our financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our exposure to market risk is limited primarily
to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because
a significant portion of our investments are in short-term debt securities issued by the U.S. government and institutional money
market funds. The primary objective of our investment activities is to preserve principal. Due to the nature of our marketable
securities, we believe that we are not exposed to any material market risk. We do not have any derivative financial instruments
or foreign currency instruments. If interest rates had varied by 10% in the quarter ended June 30, 2015, it would not have had
a material effect on our results of operations or cash flows for that period.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our principal executive and financial officer
after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Exchange Act Rule 13a-
15(e) or Rule 15d-15(e)), with the participation of our management has concluded that as of the end of the period covered by this
Quarterly Report on Form 10-Q our disclosure controls and procedures were effective and were designed to ensure that information
we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated
and communicated to management including our principal executive and financial officer as appropriate to allow timely decisions
regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms. It should be noted that any system of controls is designed to provide reasonable but not
absolute assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances. Our principal
executive and financial officer has concluded that our disclosure controls and procedures as of the end of the period covered by
this report were effective at a level that provides such reasonable assurances.
We carried out an evaluation, under the supervision
and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2015.
Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls
and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the six months ended June 30, 2015 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are from
time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property,
commercial arrangements and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty,
as of June 30, 2015, we were not party to any legal or arbitration proceedings that may have, or have had in the recent past, significant
effects on our financial position or profitability. No governmental proceedings are pending or, to our knowledge, contemplated
against us. We are not a party to any material proceedings in which any director, member of senior management or affiliate of ours
is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.
ITEM 1A. RISK FACTORS
Investment in our securities involves a high degree of
risk. Our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 16, 2015,
as amended, contains in Part I, Item 1A numerous risk factors relating to, among other things, our business and operations, our
intellectual property, clinical trials, regulatory matters, our dependence on third parties, our industry and our common stock.
During the six months ended June 30, 2015, there were no
material changes to the risk factors that were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 30, 2015, we issued various board members
7,500 shares of common stock valued at $39,525 as compensation for board services.
We relied on the exemption from registration
provided by Section 4(a)(2) of the Securities Act, with respect to each of the issuances of unregistered securities set forth above.
ITEM 6. EXHIBITS
Exhibit Description
10.1 |
Underwriting Agreement, dated June 16, 2015, by and between Ocata Therapeutics, Inc. and Jefferies LLC and Cowen and Company, LLC (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2015, File No. 001-36855). |
|
|
4.1 |
Form of Warrant to Purchase Common Stock (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on June 17, 2015, File No. 001-36855). |
|
|
31.1 |
Section 302 Certification of Principal Executive Officer.* |
|
|
31.2 |
Section 302 Certification of Principal Financial Officer.* |
|
|
32.1 |
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.* |
|
|
32.2 |
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.* |
|
|
101.SCH |
XBRL Schema Document* |
|
|
101.CAL |
XBRL Calculation Linkbase Document* |
|
|
101.DEF |
XBRL Definition Linkbase Document* |
|
|
101.LAB |
XBRL Label Linkbase Document* |
|
|
101.PRE |
XBRL Presentation Linkbase Document* |
_________________
* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
OCATA THERAPEUTICS, INC. |
|
|
|
By: |
/s/ Paul K.
Wotton |
|
|
Paul K. Wotton |
|
|
President and Chief Executive Officer |
Dated: August 6, 2015 |
|
(Principal Executive Officer) |
|
OCATA THERAPEUTICS, INC. |
|
|
|
By: |
/s/ Edward Myles |
|
|
Edward Myles |
|
|
Chief Operating Officer and Chief Financial Officer |
Dated: August 6, 2015 |
|
(Principal Financial Officer and Principal Accounting Officer) |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, Paul K. Wotton, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ocata Therapeutics,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant including its consolidated subsidiary is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
|
Dated: August 6, 2015 |
By: |
/s/ Paul K. Wotton |
|
|
Paul K. Wotton |
|
|
President and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward Myles, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Ocata Therapeutics,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating
to the registrant including its consolidated subsidiary is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
|
Dated: August 6, 2015 |
By: |
/s/ Edward Myles |
|
|
Edward Myles |
|
|
Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul K. Wotton, certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Ocata
Therapeutics, Inc. for the quarter ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such report fairly presents, in all material respects, the
financial condition and results of operations of Ocata Therapeutics, Inc.
|
|
|
Dated: August 6, 2015 |
By: |
/s/ Paul K. Wotton |
|
|
Paul K. Wotton |
|
|
Principal Executive Officer |
EXHIBIT 32.2
CERTIFICATIONS OF
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward Myles, certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Ocata
Therapeutics, Inc. for the quarter ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such report fairly presents, in all material respects, the
financial condition and results of operations of Ocata Therapeutics, Inc.
|
|
|
Dated: August 6, 2015 |
By: |
/s/ Edward Myles |
|
|
Edward Myles |
|
|
Principal Financial Officer |
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