Notes to Unaudited Condensed Consolidated
Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
Organization and Description of Business
Immune Pharmaceuticals Inc., together with
its subsidiaries (collectively, “Immune” or the “Company”), is a clinical stage biopharmaceutical company
specializing in the development of novel targeted therapeutic agents in the fields of immuno-inflammation, dermatology and immuno-oncology.
The Company’s leading product candidate is bertilimumab, a clinical-stage, first-in-class, fully human antibody, which targets
eotaxin-1, a key regulator of immuno-inflammation. The Company’s asset portfolio includes NanoCyclo, a topical nanocapsule
formulation of cyclosporine-A, for the treatment of atopic dermatitis and psoriasis, AmiKet
TM
, a prescription topical
analgesic cream that has completed Phase II clinical trials, and LidoPain
®
. The Company’s immuno-oncology
pipeline includes Ceplene
®
, which is effective for the maintenance of remission in patients with Acute Myeloid Leukemia
(“AML”) in combination with interleukin-2 (IL-2) and Azixa and crolibulin, two clinical-stage, vascular disrupting
agents (“VDA”), which have demonstrated encouraging preliminary proof of concept study results. In addition, the Company
has two immuno- oncology platform assets, consisting of a bispecific antibody platform and a nanotechnology combination platform,
which it refers to as “NanomAbs”.
The Company’s common stock trades on
the Nasdaq Capital Market (“NASDAQ”) under the symbol IMNP. On April 12, 2017, the Company announced a reverse stock
split of its shares of common stock at a ratio of 1-for-20. On April 13, 2017, the Company’s common stock began trading on
NASDAQ on a post-split basis. All share and per share amounts in this Form 10-Q have been reflected on a post-split basis (see
Note 9 for a more complete description of the reverse stock split and NASDAQ listing compliance matters).
In
April 2017, the Company announced a corporate restructuring with the objective of prioritizing and segregating its research and
development efforts on a focused set of products in inflammatory disease and dermatology and strengthening its financial position.
Under this strategy, the Company intends to focus its business on immuno-inflammation in general, and immuno-dermatology in particular,
by developing its core asset, bertilimumab, and by developing topical nano-cyclosporine for the treatment of atopic dermatitis
and moderate psoriasis. The Company will continue to consider the optimal path forward for its pain programs, AmiKet and LidoPain.
On
June 15, 2017, the Company entered into an Asset Purchase Agreement with Meda Pharma SARL, a Mylan N.V. company to repurchase assets
relating to Ceplene (histamine dihydrochloride), including the right to commercialize Ceplene in Europe and to register and commercialize
Ceplene in certain other countries. See Note 13 for a more complete description of the Asset Purchase Agreement and related financial
matters.
On
July 10, 2017, Cytovia, Inc., a wholly-owned subsidiary of the Company (“Cytovia”), entered into an exclusive licensing
agreement (the “Licensing Agreement”) with Pint Pharma International S.A. ("Pint"), a specialty pharmaceutical
company focused on Latin America and other markets, for the marketing, commercialization and distribution of Ceplene throughout
Latin America through Pint and one or more of its affiliates. See Note 14 for a more complete description of the Licensing Agreement
and related financial matters.
Ceplene
®
, crolibulin
TM
,
Azixa
®
, AmiKet
TM
and LidoPain
®
are trademarks that we own. Each trademark, trade name
or service mark of any other company appearing in this quarterly report on Form 10-Q belongs to its respective holder.
NOTE 2. GOING CONCERN
These condensed consolidated financial statements
are presented on the basis that the Company will continue as a going concern. The going concern concept contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The Company does not have sufficient
cash to fund its anticipated level of operations for at least the next 12 months. The Company’s ability to continue as a
“going concern” in spite of insufficient cash available as of the date of this filing to fund the anticipated level
of operations for at least the next 12 months is dependent on the Company’s ability to raise capital and monetize assets
through sale or licensing of drug candidates under development. If the Company fails to raise additional capital or obtain substantial
cash inflows from potential partners within the next few months, it may be forced to curtail or cease operations. The Company cannot
provide any assurance that financing will be available in a timely manner, on favorable terms or at all. These factors, among others,
raise substantial doubt about the ability of the Company to continue as a going concern.
The Company has limited capital resources and
its operations since inception have been funded by the proceeds of equity and debt offerings and license fee arrangements. The
Company has devoted substantially all of its cash resources to research and development (“R&D”) programs and has
incurred significant general and administrative expenses to enable it to finance and grow its business and operations. To date,
the Company has not generated any revenue and it may not generate any revenue for the indefinite future, if at all. If the Company
is unable to raise additional funds in the future on acceptable terms, or at all, it will be forced to curtail its development
activities or cease operations.
The Company has generated losses from operations
since inception and it anticipates that it will continue to generate significant losses from operations for the foreseeable future.
As of June 30, 2017, the Company had negative working capital of approximately $14.2 million and its accumulated deficit was $104.3
million. The Company’s net loss was $4.9 million and $3.7 million for the three months ended June 30, 2017 and 2016, respectively.
The Company’s net loss was $8.7 million and $8.8 million for the six months ended June 30, 2017 and 2016, respectively. The
Company’s cash used in operations was $4.5 million and $5.9 million for the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, the Company had approximately $22,000 in cash.
The Company will require additional
financing during the remainder of fiscal 2017 to continue at its expected level of operations. If the Company fails to obtain
the needed capital, it will be forced to delay, scale back, sell or out-license or eliminate some or all of its R&D
programs. There is no assurance that the Company will be successful in any capital-raising efforts that it may undertake to
fund operations for the remaining months of 2017. The Company anticipates that it will continue to issue equity and/or debt
securities as a source of liquidity, until such time as it generates positive cash flow to support operations. In addition,
the Company will seek to divest non-core assets and enter into collaborative agreements to generate cash to
support operations. Any future sales of securities to finance operations will dilute existing stockholders' ownership. The
Company cannot guarantee when or if it will generate positive cash flow.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles
of Consolidation
The accompanying condensed consolidated financial
statements include the accounts of Immune and its subsidiaries: Immune Pharmaceuticals Ltd. (“Immune Ltd.”), Immune
Pharmaceuticals USA Corp., Maxim Pharmaceuticals, Inc., Cytovia, Inc. and Immune Oncology Pharmaceuticals Inc. All material inter-company
transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated
financial statements were prepared in accordance with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and instructions to Form 10-Q and do not include all disclosures necessary for a complete presentation
of financial position, results of operations, and cash flows in conformity with U.S. GAAP. These financial statements should be
read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2016 filed
on May 17, 2017. The results of operations for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative
of the results that may be expected for the entire fiscal year or for any other interim period. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements contain all material adjustments consisting of normal
and recurring accruals necessary to present fairly the Company's consolidated financial position as of June 30, 2017, and the results
of operations and cash flows for the three and six months ended June 30, 2017 and 2016.
Use of Estimates
In preparing the condensed consolidated financial
statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and expenses
during the reported periods. Significant estimates include impairment of long lived assets (including intangible assets and In-Process
R&D (“IPR&D”)), amortization of intangible assets, fair value of stock based compensation, fair value of warrants
and valuation of uncertain tax position. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies. Unless otherwise discussed,
the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on
its condensed consolidated financial position or results of operations upon adoption.
In July 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-11, Earnings Per
Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain
Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial
Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception ("ASU
2017-11"). ASU 2017-11 revises the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging
- Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies
for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified
in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify,
freestanding instruments with down round features are no longer classified as liabilities. ASU 2017-11 is effective for annual
and interim periods beginning after December 15, 2018, and early adoption is permitted, including adoption in an interim period.
During the three months ended June 30, 2017, the Company early adopted ASU 2017-11. The impact of this adoption is that the down-round
provisions within our warrants issued with the April 2017 Convertible Notes qualify for a scope exception from derivative accounting
and were recorded in equity. ASU 2017-11 provides that upon adoption, an entity may apply this standard retrospectively to outstanding
financial instruments with a down
round feature
by means of a cumulative-effect adjustment to the opening balance of retained earnings in the fiscal year and interim period of
adoption. The Company did not have any other outstanding instruments with down round provisions and therefore no cumulative-effect
adjustment was made to retained earnings.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance dictates that,
when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset.
The guidance will be effective for the fiscal year beginning on January 1, 2018, including interim periods within that year
(early adoption is permitted). During the three months ended June 30, 2017, the Company early adopted ASU 2017-01. A
SU
2017-01 introduces a “screen” to assist entities in determining when a set should not be considered a business.
If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group
of similar identifiable assets, the set is not considered a business. The ASU includes practical guidance on what to include
in gross assets and what constitutes a single identifiable asset or a group of similar identifiable assets in the context of
applying the screen.
In accounting for the acquisition of the Ceplene rights, the Company considered the purchase of
the Ceplene patents a group of similar identifiable assets which did not meet the definition of a business in accordance with
ASU 2017-11 (see Note 13).
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230)
, Restricted Cash. The amendments of ASU No. 2016-18 were issued to address the diversity
in classification and presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows
which is currently not addressed under Topic 230. The ASU would require an entity to include amounts generally described as restricted
cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning of period and end of period
total amounts on the statement of cash flows. The ASU is effective for annual reporting periods beginning after December 15, 2017,
and interim periods within those annual periods. Early adoption is permitted and the adoption of the ASU should be applied retrospectively.
The Company is evaluating the impact of the standard on the Company’s condensed consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting ("ASU 2016-09")
as part of the FASB simplification initiative. The new standard provides for changes to accounting for stock compensation including
1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax expense in the
reporting period in which they occur; 2) excess tax benefits will be classified as an operating activity in the statement of cash
flows; 3) the option to elect to estimate forfeitures or account for them when they occur; and 4) increase tax withholding requirements
threshold to qualify for equity classification. The ASU is effective for public companies for annual periods, and interim periods
within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The Company adopted the new standard
in 2017 and the impact from adoption did not have a material effect on its condensed consolidated financial statements.
In February 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee
to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients
available. The Company is evaluating the impact of the standard on its condensed consolidated financial statements.
NOTE 4. FAIR VALUE MEASUREMENTS
Financial Instruments and Fair Value
The Company accounts for financial instruments
in accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 establishes
a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
under ASC 820 are described below:
Level 1
– Unadjusted quoted prices
in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
– Quoted prices in markets
that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3
– Prices or valuations
that require inputs that are both significant to the fair value measurement and unobservable.
The financial instruments recorded in the Company’s
condensed consolidated balance sheets consist primarily of cash, restricted cash, debt and accounts payable. The carrying amounts
of the Company’s cash, restricted cash, current portion of debt and accounts payable approximate fair value due to their
short-term nature. The fair value of the Company’s long-term debt approximates its gross carrying value of approximately
$2,176,000 (which has been presented net of issuance costs), of which $1,626,000 was recorded at its present value and $550,000
is due to its remaining maturity of less than two years. The Company had no other financial liabilities or assets that were
measured at fair value as of June 30, 2017.
NOTE 5. INTANGIBLE ASSETS
The Company’s intangible assets
consist of licenses and patents relating to the Company’s bertilimumab, NanomAbs and AMB8LK technologies and were
determined by management to have useful lives ranging between seven and fifteen years. The Company is amortizing these
intangible assets on a straight-line basis.
On June 15, 2017, Immune entered into an Asset
Purchase Agreement (the “Asset Purchase Agreement”) with Meda Pharma SARL, a Mylan N.V. company (“Meda”)
to repurchase assets relating to Ceplene (histamine dihydrochloride) including the right to commercialize Ceplene in Europe and
to register and commercialize Ceplene in certain other countries, for a fixed consideration of $5.0 million payable in installments
over a three-year period. The acquisition is being treated as an asset acquisition in accordance with ASC 805 Business Combinations.
The Company recorded the purchase
price for the underlying patents as intangible assets and recorded the present value of the future payments due under the
Asset Purchase Agreement of $4.2 million as a corresponding liability. The present value of future payments due under the
Asset Purchase Agreement is determined by using the Company’s current borrowing rate of 15% as the relevant discount
rate for present value calculations. As of June 30, 2017, the amount due to Meda on a present value basis, classified as
current and long-term debt, is $2.6 million and $1.6 million, respectively. Attorney’s fees of $0.1 million were
capitalized and recorded as intangible assets. Accordingly, the Company recorded $4.3 million in intangible assets related to
the Ceplene patents (see Note 13). The estimated useful life of these intangible assets is seven years.
The value of the Company’s amortizable
intangible assets as of June 30, 2017 is summarized below ($ in thousands):
|
|
Bertilimumab
iCo
|
|
|
NanomAbs
Yissum
|
|
|
Human
Antibodies
Kadouche
|
|
|
Anti-ferritin
Antibody
MabLife
|
|
|
Ceplene
Acquisition
Intangibles
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
1,586
|
|
|
$
|
429
|
|
|
$
|
428
|
|
|
$
|
363
|
|
|
$
|
-
|
|
|
$
|
2,806
|
|
Addition
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,310
|
|
|
|
4,310
|
|
Amortization
|
|
|
(84
|
)
|
|
|
(24
|
)
|
|
|
(23
|
)
|
|
|
(22
|
)
|
|
|
-
|
|
|
|
(153
|
)
|
Balance, June 30, 2017
|
|
$
|
1,502
|
|
|
$
|
405
|
|
|
$
|
405
|
|
|
$
|
341
|
|
|
$
|
4,310
|
|
|
$
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross asset value
|
|
$
|
2,509
|
|
|
$
|
694
|
|
|
$
|
700
|
|
|
$
|
547
|
|
|
$
|
4,310
|
|
|
$
|
8,760
|
|
Accumulated Amortization
|
|
|
(1,007
|
)
|
|
|
(289
|
)
|
|
|
(295
|
)
|
|
|
(206
|
)
|
|
|
-
|
|
|
|
(1,797
|
)
|
Balance, June 30, 2017
|
|
$
|
1,502
|
|
|
$
|
405
|
|
|
$
|
405
|
|
|
$
|
341
|
|
|
$
|
4,310
|
|
|
$
|
6,963
|
|
Amortization expense amounted to $0.1 million
and $0.2 million for the three and six months ended June 30, 2017, respectively. Amortization expense amounted to $0.1 million
and $0.2 million for the six months ended June 30, 2016, respectively.
Estimated amortization expense for each of
the five succeeding years, based upon intangible assets at June 30, 2017 is as follows ($ in thousands):
Period Ending December 31,
|
|
Amount
|
|
2017 (6 months)
|
|
$
|
460
|
|
2018
|
|
|
921
|
|
2019
|
|
|
921
|
|
2020
|
|
|
921
|
|
2021
|
|
|
907
|
|
Thereafter
|
|
|
2,833
|
|
Total
|
|
$
|
6,963
|
|
NOTE 6. ACCRUED EXPENSES
Accrued expenses consist of the following ($
in thousands):
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
Salaries and employee benefits
|
|
$
|
334
|
|
|
$
|
900
|
|
Rent
|
|
|
-
|
|
|
|
68
|
|
Advances and Fees
|
|
|
-
|
|
|
|
340
|
|
Financing costs
|
|
|
771
|
|
|
|
616
|
|
Professional fees
|
|
|
699
|
|
|
|
414
|
|
License Fees
|
|
|
234
|
|
|
|
-
|
|
Severance
|
|
|
15
|
|
|
|
30
|
|
Other
|
|
|
241
|
|
|
|
252
|
|
Total
|
|
$
|
2,294
|
|
|
$
|
2,620
|
|
NOTE 7. NOTES AND LOANS PAYABLE
The Company is party to loan agreements
as follows ($ in thousands):
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Loan Agreement, net of original issue discount of $0.2 million and $0.4 million, respectively
(1)
|
|
$
|
2,185
|
|
|
$
|
2,857
|
|
Convertible Notes, net of original issue discount, debt issuance cost and debt discount of $0 and $0.1 million
(2)
|
|
|
—
|
|
|
|
937
|
|
April 2017 Convertible Notes
(3)
|
|
|
311
|
|
|
|
—
|
|
May 2017 Convertible Notes, net of original issue discount, debt issuance cost and debt discount of $0.8 million
(4)
|
|
|
2,456
|
|
|
|
—
|
|
Mablife Notes Payable
(5)
|
|
|
387
|
|
|
|
387
|
|
Asset Acquisition Payable
(6)
|
|
|
4,218
|
|
|
|
—
|
|
Total notes and loans payable
|
|
$
|
9,557
|
|
|
$
|
4,181
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable, net of debt discount, current portion
|
|
$
|
7,381
|
|
|
$
|
2,739
|
|
Notes and loans payable, noncurrent portion
|
|
|
2,176
|
|
|
|
1,442
|
|
Total notes and loans payable, net of original issue discount, debt issuance cost and debt discount of $1.0 million and $0.5 million
|
|
$
|
9,557
|
|
|
$
|
4,181
|
|
Repayments under the Company’s
existing debt agreements consist of the following ($ in thousands):
Period Ending June 30,
|
|
Amount
|
|
2017
|
|
$
|
7,454
|
|
2018
|
|
|
1,495
|
|
2019
|
|
|
1,646
|
|
Total
|
|
$
|
10,595
|
|
Loan Agreement (1)
On July 29, 2015, the Company and Immune Pharmaceuticals
USA Corp., a wholly-owned subsidiary of the Company, entered into a Loan and Security Agreement (“Loan Agreement”)
pursuant to which Hercules Capital Inc. (Hercules”) agreed to lend $4.5 million to the Company. The Loan Agreement is senior
in priority to all other Company indebtedness. The interest rate on the Hercules Loan is calculated at the greater of 10% or the
prime rate plus 5.25%. The Company may prepay the Hercules Loan at any time, subject to certain prepayment penalties. The
Hercules Loan matures on September 1, 2018. Interest expense for the three and six months ended June 30, 2017 was $64,000 and $139,000,
respectively. Interest expense for the three and six months ended June 30, 2016 was $107,000 and $221,000, respectively. For the
six months ended June 30, 2017 and 2016, respectively, the Company made $0.9 million and $0.4 million in principal repayments.
The Loan Agreement includes an end of term
charge of $0.5 million payable on the earliest to occur of (i) the Term Loan Maturity Date, (ii) the date that Borrower prepays
the outstanding secured obligations under the Loan Agreement in full, or (iii) the date that the secured obligations under the
Loan Agreement become due and payable in full (as described in the Loan Agreement). The Company accrues a portion of the end of
term charge for each reporting period and will accrue up to the full $0.5 million charge over the 37-month term of the Hercules
Loan. For the three and six months ended June 30, 2017, the Company had recorded a charge of approximately $36,000 and $78,000,
respectively, in interest expense in its condensed consolidated statements of operations related to the Loan Agreement. For
the three and six months ended June 30, 2016, the Company recorded a charge of approximately $60,000 and $124,000 in its condensed
consolidated statements of operations related to the Loan Agreement.
The Company recorded $1.3 million in debt issuance
costs relating to placement agent fees, legal fees, closing costs and the fair value of the placement agent warrants in its condensed
consolidated balance sheets upon execution of the Loan Agreement. The Company amortizes the debt issuance costs over the term of
the Loan Agreement. For the three and six months ended June 30, 2017, the Company recorded $0.1 million and $0.2 million, respectively,
in interest expense related to the amortization of the debt issuance costs. For the three and six months ended June 30, 2016, the
Company recorded $0.2 million and $0.3 million, respectively in interest expense related to the amortization of the debt issuance
costs. As of June 30, 2017, and December 31, 2016, the Company had approximately $0.2 million and $0.4 million, respectively, in
debt issuance costs remaining to be amortized, which is presented net of the debt balance in the Company’s condensed consolidated
balance sheets.
On July 7, 2017, Immune, Hercules and an investor
(the “Investor”) entered into an Assignment Agreement (the “Assignment Agreement”) whereby Hercules assigned
to the Investor the existing amount outstanding under the Loan Agreement (see Note 14).
Convertible Notes (2)
On November 17, 2016, the Company entered into
a securities purchase agreement with HLHW IV, LLC (“Buyer”), pursuant to which Buyer purchased an aggregate principal
amount of $1,050,000 of subordinated convertible notes for an aggregate purchase price of $1,000,000 (“Convertible Notes”),
representing a principal amount of the Convertible Notes of $1,000,000 plus an original issue discount of 5%, which is $50,000.
The Convertible Notes bear interest at a rate
of 7.0% per annum, payable in arrears on the maturity date of November 17, 2017. The Convertible Notes are convertible into
shares of the Company’s common stock at any time from the date of issuance of the Convertible Notes, at a conversion price
equal to eighty percent (80%) of the lowest intraday bid price on the date of conversion (“conversion date”); provided
the lowest intraday bid price on such conversion date is above the lowest closing bid price on the closing date (“Market
Price”). In the event that on the conversion date, the lowest intraday bid price is less than the Market Price, then in that
instance, the conversion price on that conversion date will be equal to the lowest intraday bid price.
On the maturity date, the Company has the option
to pay the amount being redeemed, including accrued but unpaid interest, in cash, shares of the Company’s common stock or
any combination of cash and shares. In addition, if at any time the lowest intraday bid price falls below $5.00 per share, the
holder may elect to redeem up to $350,000 of the outstanding principal, interest and any amounts due under the Convertible Notes;
provided, however, the Company may only use the proceeds from the sale of common stock pursuant to the terms of the Common Stock
Purchase Agreement, dated November 17, 2016 (“CS Purchase Agreement”) entered into with Buyer to redeem the Convertible
Notes. This redemption process may be repeated once every five business days, at the election of Holder, until the Convertible
Notes are fully satisfied. The foregoing notwithstanding, Buyer may convert any or all of these Convertible Notes into shares of
the Company’s common stock at any time. The Convertible Notes are subordinated to the Loan Agreement with Hercules Capital.
The Convertible Note Agreement also includes
certain of events of default, which at any time after Buyer becomes aware of, may require the redemption of all or any portion
of the Convertible Notes by delivery of a written notice to the Company. Each portion of the Convertible Notes subject to redemption
shall be redeemed at a price equal to the greater of 18% per annum or the maximum rate permitted under applicable law of the conversion
amount being redeemed, together with liquidated damages of $250,000. The Company paid approximately $0.1 million in debt issuance
costs and discount in connection with the Convertible Note Agreement.
On December 16, 2016, the Company entered into
Amendment No. 1 with Buyer, effective as of December 5, 2016, which amended the Convertible Note Agreement to provide that in no
circumstance shall the conversion price be lower than $2.00 per share of the Company’s common stock.
In January 2017, the Company paid Buyer $0.3
million in liquidated damages, which was accrued during the fourth quarter of 2016, for failing to file a Registration Statement
within the prescribed time period per the Convertible Note Agreement. On February 3, 2017, the Company and Buyer entered into Amendment
No. 2 to the Convertible Note Agreement whereby the Company agreed to the redeem the Convertible Note for $1.35 million by March
1, 2017 in full satisfaction of the Convertible Note, which included redemption of the principal balance at 120% of the face amount
of the Convertible Note plus accrued interest. The Company recorded $0.3 million in interest expense as the redemption premium
during the first quarter of 2017 related to Amendment No. 2 to the Convertible Note.
The Company has repaid the outstanding balance
of the Convertible Notes as of June 30, 2017. Interest expense for the six months ended June 30, 2017 was $6,000. In addition,
during the six months ended June 30, 2017, the Company recorded to interest expense the remaining $0.1 million in the aggregate
of outstanding debt discount, debt issuance costs and original issue discount.
On May 30, 2017, the Company agreed to pay a total of $0.4 million of liquidated damages to Buyer no later
than June 30, 2017 to settle certain claims of Buyer with respect to the Convertible Notes. The Company has paid $25,000 towards
these liquidated damages amount and is in negotiations with Buyer regarding the payment of the balance. The Company accrued this
amount to interest expense during the three months ended March 31, 2017 and remains outstanding as of June 30, 2017.
April 2017 Convertible Notes (3)
On April 10, 2017, the Company entered into a securities purchase agreement (the “April 2017 Purchase
Agreement”), with EMA Financial, LLC (“EMA”) pursuant to which the EMA purchased an aggregate principal
amount of $525,000 of Convertible Notes for an aggregate purchase price of $450,000 (the “April 2017 Convertible
Notes”). The April Convertible 2017 Convertible Notes included a 5% origination fee of $25,000 and a 10% original issue
discount of $50,000 that was added to the face amount of the April 2017 Convertible Notes. Net proceeds from the offering
were $440,000 after the payment of $10,000 of attorney fees, which have been used for general corporate
purposes.
The April 2017 Convertible Notes bear interest
at a rate of 6.0% per annum, payable in arrears on the maturity date of April 10, 2018 (the “Maturity Date”). The April
2017 Convertible Notes are convertible into shares of the Company’s common stock, after the effectiveness of the Registration
Statement, at a conversion price equal to the lower of $2.80 or seventy-five percent (75%) of the lowest trading price of the Company’s
common stock during 15 trading days immediately preceding conversion (“Conversion Date”). The Company has calculated
a fair value of $175,000 for this conversion feature on the April 2017 Convertible Notes and has recorded a conversion premium
of $175,000 as interest expense with an offset to additional paid-in capital.
In addition, the Company issued 83,333 warrants at an exercise price of $4.00 per share (subject to adjustment)
which may be exercisable on a cashless basis in accordance with the terms of the common stock purchase warrant. The warrants contain
a provision, whereby if the Company completes a transaction with an effective price per share lower than the exercise price of
the warrants,
then the exercise price shall be reduced
and the number of warrant shares issuable hereunder shall be increased such that the aggregate exercise price payable after taking
into account the decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment. The fair
value of these warrants was calculated using the Monte Carlo model. The proceeds from the issuance of the notes were allocated
between the debt and the warrants using the allocated fair value method and the value assigned to the warrants of $180,000 was recorded
as debt discount with an offset to additional paid-in capital (see Note 9).
Until October 10, 2017 (“Prepayment Termination
Date”), the Company has the right, exercisable on not less than five (5) Trading Days’ prior written notice to the
holder of the April 2017 Convertible Notes, to prepay the outstanding balance on the April 2017 Convertible Notes (principal and
accrued interest), in full. On the date fixed for prepayment (the “Optional Prepayment Date”), the Company must make
payment of the Optional Prepayment Amount or upon the order of the Holder as specified by the Holder in writing to the Borrower
at least one (1) business day prior to the Optional Prepayment Date. If the Company exercises its right to prepay the April 2017
Convertible Notes, the Company must pay Holder an amount in cash (the “Optional Prepayment Amount”) equal to the Prepayment
Factor (as defined below), multiplied by the sum of: (w) the then-outstanding principal amount of the April 2017 Note plus (x)
accrued and unpaid interest on the unpaid principal amount of the April 2017 Note to the Optional Prepayment Date plus (y) Default
Interest. For purposes hereof, the “Prepayment Factor” equals one hundred thirty-five percent (135%), provided that
such Prepayment Factor shall equal one hundred twenty-five percent (125%) if the Optional Prepayment Date occurs on or before July
10, 2017.
The April 2017 Convertible Notes contain certain
customary negative covenants preventing the Company from undertaking certain actions without the consent of EMA, including but
not limited to, limitations on its ability to incur additional indebtedness (subject to certain exceptions) and issuance shares
of unregistered securities as well as certain events of default, including, but not limited to, the Company’s failure to
pay principal and interest, material defaults under the other transaction documents, material defaults in other payment obligations,
failure of the Company to comply with its reporting requirements with the SEC, the placing of a “chill” on the Company’s
common stock by the Depositary Trust Company, failure of the Company to meet the current public information requirements under
Rule 144 promulgated under the Securities Act, the Company’s failure to deliver certificates representing the shares of common
stock after a Conversion Date and a change of control transaction (as defined in the April 2017 Convertible Notes). The full principal
amount of the April 2017 Convertible Notes is due upon a default under the terms of the April 2017 Convertible Notes. The April
2017 Convertible Notes are unsecured and subordinated in right of payment to the Company’s existing and future senior indebtedness.
During the existence and continuance of an event of default under the April 2017 Convertible Notes, the outstanding principal amount
of the April 2017 Convertible Notes shall incur interest at a rate of 18% per annum. At any time after the Holder becoming aware
of an Event of Default (as defined in the April 2017 Convertible Notes), the Holder may require the Company to redeem all or any
portion of the April 2017 Convertible Notes.
On May 3, 2017, the Company and EMA signed
a Waiver Letter in which the Company agreed to prepay a portion of the April 2017 Convertible Notes and EMA agreed to participate
in the May 2017 Convertible Notes (See Note 7, “May 2017 Convertible Notes (4)”). Additionally, the April 2017 Convertible
Notes were amended and are convertible into shares of the Company’s common stock, after the effectiveness of the Registration
Statement, at a conversion price equal to the lower of $2.80 or sixty-five percent (65%) of the lowest trading price of the Company’s
common stock during 15 trading days immediately preceding conversion (“Conversion Date”). In connection with the May
2017 Convertible Notes discussed below, EMA converted $123,000 of their outstanding notes with a prepayment premium of 25% or $31,000
for a total of $154,000 and became one of several institutional investors in the May 2017 Convertible Notes (see below). Based
on this Waiver Letter, the Company determined that the amended terms constituted an extinguishment and as a result the Company
has calculated a fair value of $105,000 for this conversion feature on the April 2017 Convertible Notes and has recorded an additional
conversion premium of $105,000 as interest expense with an offset to additional paid-in capital. Additionally, the unamortized
debt discount was written off and charged to interest expense.
On May 30, 2017, the Company and
EMA amended the Registration Rights Agreement dated as of April 10, 2017 to change the filing date of the registration
statement to June 30, 2017 and the Company agreed to prepay $97,000 towards the principal amount outstanding on the April
2017 Convertible Notes at a prepayment price of $121,000, which include a prepayment premium of 25% or $24,000 which was
recorded in interest expense. The Company filed the S-1 registration statement on June 30, 2017.
For the three months ended June 30, 2017, the
Company recorded interest expense of $607,000 related to the April 2017 Convertible Notes, of which $280,000 was for the conversion
premium, $180,000 for the fair value of the warrants, $85,000 for the original issue discount, origination fees and attorney’s
fees, $55,000 for the prepayment premium of 25% and interest expense of approximately $7,000 based on the 6% per annum interest
rate.
In July 2017, EMA assigned the April 2017 Convertible Notes to MEF
I, LP (see Note 14).
May 2017 Convertible Notes (4)
On May 4, 2017, the Company entered into
a securities purchase agreement (the “May 2017 Purchase Agreement”), with several institutional investors (the
“Investors”) in a multi-tranche private placement of up to $3.4 million of convertible notes (the “May 2017
Convertible Notes”). The initial sale of the notes in the May 2017 Convertible Notes closed on May 9, 2017, resulting
in the issuance of convertible notes with a principal balance of $2.0 million and gross proceeds to the Company of $1.6
million. In connection with this initial closing, the Investors received an additional aggregate of 361,455 shares of the
Company’s common stock. On May 22, 2017, a subsequent closing occurred upon reaching the milestone of filing the 2016
Form 10-K resulting in the issuance of convertible notes with a principal balance of $360,000 and gross proceeds to the
Company of $300,000. In connection with this subsequent closing, the Investors received an additional 60,000 shares of the
Company’s common stock valued. In total, the Company issued notes with a principal balance of $2.3 million and original
issue discount of $0.4 million. The gross proceeds from the May 2017 Convertible Notes were $1.8 million and after the
payment of placement agent fees, attorneys and other expenses of $0.2 million, the Company received net proceeds of $1.6
million. The Company issued a total of 421,555 shares which were recorded using the allocated fair value method and the
Company recorded the fair value of $0.6 million for the issuance of the shares to Original Issue Discount.
The May 2017 Convertible Notes are due and
payable upon the earlier of (a) November 9, 2017 and (b) the closing by the Company of one or more subsequent financings with gross
proceeds to the Company equal to at least $5,000,000 in the aggregate. The holder of the note has the option to extend the maturity
date of the note through February 7, 2018. The May 2017 Convertible Notes are subordinated to the indebtedness of Hercules Capital,
Inc. (“Hercules”), pursuant to the Loan and Security Agreement entered into on July 29, 2015 by and between the Company
and Hercules.
The principal amount available of $1.6
million of May 2017 Convertible Notes were initially issuable to the Investors in subsequent closings linked to the
achievement of certain milestones. On June 29, 2017, the Company entered into a letter agreement with the Investors and
waived the right to issue the May 2017 Convertible Notes issuable in the subsequent closings and agreed to return to the
Investors the remaining subscription amounts held in escrow on a pro rata basis relative to each Purchasers’
investment. Accordingly, no further shares of common stock will be issued in connection with the May 2017 Convertible Notes.
In consideration of the foregoing, the Investors agreed to amend Section 4(e) of the May 2017 Convertible Notes to provide
that the Issuable Maximum (as defined in the May 2017 Convertible Notes) shall not exceed 9.99% (rather than 19.99%) of the
number of shares of common stock outstanding on the trading day immediately preceding the date of the May 2017 Purchase
Agreement. Maxim Group LLC acted as the sole placement agent for the offering.
Pursuant to the May 2017 Convertible
Notes agreements, if the Company has not filed a S-1 registration statement for a follow-on offering within 25 days of May 9,
2017 or by June 3, 2017, the May 2017 Convertible Notes would be immediately due at the Mandatory Default Amount, which is
140% of the outstanding principal amount of the note, plus 100% accrued interest and unpaid interest, and all other amounts,
costs, expenses and liquidated damages due. Additionally, interest on the Notes would accrue daily at an interest rate of 2%
per month on the then outstanding principal amount. The holder may also to elect to convert all or any portion of the
remaining principal amount into shares of common stock at price per share equal to the lowest daily VWAP for the 15 days
prior to conversion but in no event, shall the conversion price fall below $1.00. The Company filed the S-1 Registration
Statement on June 30, 2017. As of June 30, 2017, the Company accrued the Mandatory Default Amount of $1.0 million to interest
expense of which $0.9 million represents an additional 40% of principal and $60,000 represents interest at a rate of 2% per
month on the outstanding principal including the additional 40%.
The Company recorded amortization
expense of $0.4 million related to the amortization of the original issue discount and debt issuance costs. As of June 30,
2017, none of the May 2017 Convertible Notes were converted into shares of the Company’s common stock. Subsequent to
June 30, 2017, a portion of the May 2017 Convertible Notes were converted into 117,641 shares of the Company’s common
stock representing payment of $184,000 principal of the May 2017 Convertible Notes.
MabLife Notes Payable (5)
In March 2012, the Company acquired from MabLife
SAS (“MabLife”) through an assignment agreement, all rights, titles and interests in and to the patent rights, technology
and deliverables related to the anti-Ferritin mAb, AMB8LK, including its nucleotide and protein sequences and its ability to recognize
human acid and basic ferritins. The consideration was as follows: (i) $0.6 million payable in six annual installments (one of such
installments being an upfront payment made upon execution of the agreement), and (ii) royalties of 0.6% of net sales of any product
containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on the patent rights with respect
to AMB8LK. The Company is required to assign the foregoing rights back to MabLife, if it fails to make any of the required payments,
is declared insolvent or bankrupt or terminates the agreement. In February 2014, the parties revised the payment arrangement for
the purchase of the original assignment rights. Pursuant to the amendment to the assignment agreement, remaining payments of $0.1
million per year are due each year in 2016 and 2017.
In February 2014, the Company acquired from
MabLife, through an irrevocable, exclusive, assignment of all rights, titles and interests in and to the secondary patent rights
related to the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, nucleotide and protein sequences of
an antibody directed against an epitope common to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules
comprising these sequences. As full consideration for the secondary patent rights, the Company will pay a total of $150,000 of
which $15,000 and $25,000 was paid in 2014 and 2013, respectively, and $25,000 will be paid on the second through fourth anniversary
of the agreement and an additional $35,000 on the fifth anniversary of the agreement.
During the first quarter of 2015, MabLife informed
the Company that it had filed for bankruptcy. For the six months ended June 30, 2017 and 2016, the Company recorded $0 and $38,000,
respectively, in interest expense. The Company has not paid any amounts to MabLife since the time it received notification of the
MabLife bankruptcy. On May 30, 2017, the Company received a summons from the bankruptcy court-liquidator to appear before the commercial
court of Evry, France on September 19, 2017 (see Note 11).
Asset Acquisition Payable (6)
In conjunction with the Asset Purchase
Agreement described in Note 5, the Company agreed to pay a fixed consideration of $5.0 million payable in installments over
a three-year period as follows: $1.5 million on the earlier of: (1) described in Notes, the successful transfer of all of the
marketing authorizations for the product to Immune; or (2) the date which is six months after the Completion Date (as defined
in the Agreement); $1.5 million on the first anniversary of the Completion Date (as defined
in the Asset Purchase Agreement); $1.0 million on the second anniversary of
the Completion Date; and $1.0 million on the third anniversary of the Completion Date. The Company recorded current and
long-term debt of $2.6 million and $1.6 million, respectively, representing the amount due to Meda calculated on a present
value basis (see Notes 5 and Note 13).
NOTE 8. INCOME TAXES
The Company has recognized a deferred
tax liability of $5.9 million as of June 30, 2017 and December 31, 2016 related to the purchase of the AmiKet IPR&D.
This deferred tax liability was recorded to account for the book vs. tax basis difference related to the IPR&D
intangible asset, which was recorded in connection with the merger with Epicept Ltd.. This deferred tax liability was
excluded from sources of future taxable income, as the timing of its reversal cannot be predicted due to the indefinite life
of this IPR&D. Accordingly, this deferred tax liability cannot be used to offset the valuation allowance.
Deferred income taxes reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company’s deferred tax assets relate primarily to its net operating loss carryforwards
and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,” the Company recorded a valuation
allowance to fully offset the gross deferred tax asset, because it is not more likely than not that the Company will realize future
benefits associated with these deferred tax assets at June 30, 2017 and December 31, 2016.
NOTE 9. STOCKHOLDERS’ EQUITY
(a) Stock options and stock award activity
The following table illustrates the common
stock options granted during the six months ended June 30, 2017:
Title
|
|
Grant date
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Management, Directors and Employees
|
|
January – June 2017
|
|
|
161,500
|
|
|
$
|
3.80
|
|
|
$
|
3.40
|
|
|
1-3 years
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
109.42-114.7%
2.22%-2.53%
6-10
0.00%
|
The following table illustrates the common
stock options granted during the six months ended June 30, 2016:
Title
|
|
Grant
date
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant
date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Management, Directors and Employees
|
|
January – June 2016
|
|
|
144,500
|
|
|
$
|
11.40
|
|
|
$
|
7.20
|
|
|
Immediately -3 years
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
91.55%-92.15%
1.39%-2.06%
6-10
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
January – June 2016
|
|
|
16,750
|
|
|
$
|
6.80
|
|
|
$
|
4.80
|
|
|
1-3 years
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
91.55%-92.15%
1.24%-1.69%
5
0.00%
|
The following table illustrates the stock awards
during the six months ended June 30, 2016:
Title
|
|
Grant date
|
|
No. of
stock
awards
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
Consultants
|
|
January – June 2016
|
|
|
27,500
|
|
|
$
|
10.00
|
|
|
Immediately
|
The fair value of stock awards was determined
using the share price on the date of grant.
The following table summarizes information
about stock option activity for the six months ended June 30, 2017:
|
|
Options
|
|
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Exercise price
range
|
|
|
Weighted
average
grant date
fair value
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Outstanding at December 31, 2016
|
|
|
370,757
|
|
|
$
|
23.80
|
|
|
|
$0.80 - $80.00
|
|
|
$
|
27.60
|
|
|
$
|
39
|
|
Granted
|
|
|
161,500
|
|
|
$
|
3.80
|
|
|
|
$2.68-$4.00
|
|
|
$
|
3.40
|
|
|
$
|
—
|
|
Forfeited
|
|
|
(41,716
|
)
|
|
$
|
11.20
|
|
|
|
$0.80-$25.00
|
|
|
$
|
10.40
|
|
|
|
—
|
|
Outstanding at June 30, 2017
|
|
|
490,541
|
|
|
$
|
19.00
|
|
|
|
$0.80 - $80.00
|
|
|
$
|
20.40
|
|
|
$
|
30
|
|
Exercisable at June 30, 2017
|
|
|
326,659
|
|
|
$
|
28.20
|
|
|
|
$0.80 - $80.00
|
|
|
$
|
27.60
|
|
|
$
|
30
|
|
As of June 30, 2017, unamortized stock-based
compensation for stock options was $0.4 million, with a weighted-average recognition period of approximately 0.9 years.
(b) Warrants
The following table illustrates warrants granted
during the six months ended June 30, 2017:
Title
|
|
Grant date
|
|
No. of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-
Scholes
option pricing model
|
Investors
|
|
January – June 2017
|
|
|
52,910
|
|
|
$
|
10.00
|
|
|
$
|
3.80
|
|
|
Immediately
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
109%
1.89%
5
0.00%
|
Title
|
|
Grant date
|
|
No. of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Monte Carlo
model
|
Noteholders
|
|
January – June 2017
|
|
|
83,333
|
|
|
$
|
4.00
|
|
|
$
|
2.16
|
|
|
Immediately
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
105%
1.91%
5
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates warrants granted
during the six months ended June 30, 2016:
Title
|
|
Grant
date
|
|
No. of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Consultants
|
|
January – June 2016
|
|
|
23,800
|
|
|
$
|
12.4
|
|
|
$
|
10.8
|
|
|
Immediately
|
|
Volatility
Risk free interest rate
Expected term, in years
Dividend yield
|
|
92%
1.24%-1.73%
5
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information
about warrants outstanding at June 30, 2017:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercise
price range
|
|
Warrants outstanding at December 31, 2016
|
|
|
580,390
|
|
|
$
|
60.80
|
|
|
|
$9.40-$200.00
|
|
Warrants issued
|
|
|
136,243
|
|
|
$
|
6.40
|
|
|
|
$4.00-$10.00
|
|
Warrants expired
|
|
|
(1,220
|
)
|
|
|
188.40
|
|
|
|
$170.00-$200.00
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
715,413
|
|
|
$
|
50.40
|
|
|
|
$9.40-$200.00
|
|
The 83,333 warrants issued with the April 2017 Convertible Notes were valued using the Monte Carlo model,
which is a pricing model that incorporates all of the required inputs of a Black-Scholes model and Monte Carlo
simulation process that capture additional features of the warrant related to its fair value estimate, but are outside
of the Black-Scholes model. The warrants contain a provision whereby if the Company completes a transaction with an effective
price per share lower than the exercise price of the warrants
then
the exercise price shall be reduced and the number of warrant shares issuable shall be increased such that the aggregate
exercise price payable after taking into account the decrease in the exercise price, shall be equal to the aggregate exercise price
prior to such adjustment. The allocated fair value of the warrant of $180,000 is the mean of the present value of the future cash
flows resulting from the Monte Carlo simulation process. The fair value of $180,000 was calculated using the
Monte Carlo model and the allocated value of $180,000 was recorded as additional paid-in capital.
Stock-based compensation expense for stock
options and awards and warrants for the three months ended June 30, 2017 and 2016 was $(0.1) million and $0.8 million, respectively,
which has not been tax-effected due to the recording of a full valuation allowance against net deferred tax assets. Stock-based
compensation expense for stock options and awards and warrants for the six months ended June 30, 2017 and 2016 was $0.2 million
and $1.3 million, respectively, which has not been tax-effected due to the recording of a full valuation allowance against net
deferred tax assets.
(c) Share Purchase Agreements and Amendments
to Share Purchase Agreements
During the second quarter of 2016, the Company
entered into share purchase agreements with two investors, CrystalClear Group, Inc. (“Crystal”) and Dr. Jean-Marc Menat
to sell a total of 48,333 restricted shares of the Company’s common stock at a price of $7.20 per share for aggregate gross
proceeds of $0.3 million.
On December 16, 2016, the Company entered into
amendment to the securities purchase agreement (the “SPA Amendment”) with Crystal, effective as of December 14, 2016.
The SPA Amendment amends the Securities Purchase Agreement to adjust the per share purchase price paid by Crystal to $8.50 per
share. Pursuant to the SPA Amendment, Crystal returned 4,248 shares to the Company in the first quarter of fiscal 2017.
In consideration for entering into the SPA
Amendment by Crystal, the Company agreed to issue to Crystal a five-year warrant to purchase an aggregate of 9,259 shares at an
exercise price of $10.00 per share, which warrant shall not be exercisable until six months after the date of issuance.
On December 27, 2016, the Company and Dr. Jean-Marc
Menat (“Dr. Menat”) entered into Amendment No. 1 to the Securities Purchase Agreement, which amends the Securities
Purchase Agreement to adjust the per share price paid by Dr. Menat to $8.82 per share. Pursuant to Amendment No. 1, Dr. Menat returned
3,776 shares to the Company in the first quarter of fiscal 2017. In consideration for entering into Amendment No. 1, the Company
agreed to issue to Dr. Menat a five-year warrant to purchase an aggregate of 6,852 shares at an exercise price of $10.00 per share,
which warrant shall not be exercisable until six months after the date of issuance the warrant.
On July 29, 2016, the Company entered into
a securities purchase agreement with certain institutional investors for the issuance and sale of 158,730 shares of the Company’s
common stock and the issuance and sale of warrants to purchase 25,000 shares of the Company’s common stock, for aggregate
gross proceeds of $1.0 million. The warrants are exercisable for a period of five years from the date of issuance at an exercise
price equal to $20.00 per share. The Company agreed to pay to the institutional investors a commitment fee of $100,000, in cash
or alternatively, 17,500 shares of common stock. The Company incurred an additional $40,000 in transaction fees related to this
transaction. The proceeds received for the issuance of the common stock was recorded in stockholder’s equity in the Company’s
condensed consolidated balance sheets. Transaction fees and the value of the consideration paid to the institutional investors
were recorded as a reduction to additional paid in capital in the Company’s condensed consolidated balance sheets.
On January 10, 2017, the Company and the institutional
investors signed an amendment to the securities purchase agreement whereby the institutional investors agreed to give the Company
an additional $0.2 million, in exchange for five year warrants to purchase 52,910 shares of common stock at an exercise price of
$10.00 per share. As of June 30, 2017, the Company received the proceeds of $0.2 million relating to the agreement, which was recorded
as additional paid in capital in its condensed consolidated balance sheets.
(d) Equity Lines
November 2016 Equity
Line
On November 17, 2016, the Company entered into
a Common Stock Purchase Agreement (“November 2016 CS Purchase Agreement”) with HLHW IV, LLC (“Buyer”),
which provides that, upon the terms and subject to the conditions and limitations set forth therein, the Company has the right
to sell to Buyer up to $10.0 million in shares of the Company’s common stock.
Beginning on the day following November 17,
2016, the date that certain closing conditions in the November 2016 CS Purchase Agreement were satisfied (the “Commencement
Date”), the Company has the right, but not the obligation, to direct Buyer via written notice (a “Purchase Notice”)
to purchase up to a specific number of shares of the Company’s common stock (the “Purchase Shares”). The per
share purchase will be equal to: (i) from 9:30am to 4:00pm Eastern Time of the regular session of any trading day, lowest intra-day
bid price or (ii) if after the close of the regular session on any trading day, then such trading day’s closing bid price
on Nasdaq. The Company has the obligation to sell and Buyer shall have the obligation to purchase at the “Purchase Price”
a number of “Purchase Shares” (each as defined in the November 2016 CS Purchase Agreement) with an aggregate value
of $2.0 million of Purchase Shares on or before December 31, 2016, which the Company had met prior to December 31, 2016.
The Company shall not issue, and Buyer shall
not purchase any shares of common stock under the November 2016 CS Purchase Agreement, if such shares proposed to be issued and
sold, when aggregated with all other shares of common stock then owned beneficially (as calculated pursuant to Section 13(d) of
the 1934 Act and Rule 13d-3 promulgated thereunder) by the Buyer and its affiliates would result in the beneficial ownership by
Buyer and its affiliates of more than 4.99% of the then issued and outstanding shares of common stock of the Company, unless waived
in writing by Buyer. Shares of common stock were issued pursuant to the Company’s “shelf” registration statement
on Form S-3 (File No. 333-198647), previously filed with the U.S. Securities and Exchange Committee (“SEC”) on September
8, 2014, as amended on October 3, 2014, and which was declared effective by the SEC on October 28, 2014.
At any time after the Commencement Date, the
November 2016 CS Purchase Agreement may be terminated by the mutual written consent of the Company and Buyer and upon the meeting
of certain conditions as defined in the November 2016 CS Purchase Agreement. In addition, at any time after the Commencement Date,
the Company has the option to terminate the November 2016 CS Purchase Agreement for any reason or for no reason by delivering notice
to Buyer electing to terminate the CS Purchase Agreement without any liability whatsoever except that the Company must pay to Buyer
a termination fee of $250,000 in cash or shares, at Buyer’s election with such shares to be valued at the Purchase Price,
within two (2) Business Days following delivery of such notice of termination. Net proceeds to the Company will depend on the Purchase
Price and the frequency of the Company’s sales of Purchase Shares to Buyer.
As part of the November 2016 CS Purchase Agreement,
the Company paid $0.7 million in commitment fees through delivery of shares of its common stock and recorded the fees as a reduction
to additional paid in capital during the fourth quarter of 2016. The Company also agreed to pay Buyer legal fees related to the
November 2016 CS Purchase Agreement of $35,000. In addition, the Company also agreed to pay on each Purchase Date and on each Additional
Purchase Date (each as defined in the November 2016 CS Purchase Agreement) 1.75% of such aggregate proceeds representing the fees
and expenses of Buyer’s advisers, counsel, accountants and other experts. During the first quarter of 2017, the Company sold
1,100,000 shares of its common stock to Buyer for gross proceeds of $4.0 million, of which $0.2 million was received as an advance
during the fourth quarter of 2016 and paid $70,000 in financing related fees. As of June 30, 2017, $0.2 million of the CS Purchase
Agreement remained available. In June 2017, Buyer returned the shares issued by the Company as commitment fees in connection with
the agreement by the Company to pay $0.4 million in liquidated damages related to the Convertible Note (see Note 7). As of June
30, 2017, these commitment fees remain outstanding.
February 2017 Equity Line
On February 3, 2017, the Company entered into
a Common Stock Purchase Agreement with Buyer (the “February 2017 CS Purchase Agreement”) which provides that the Company
has the right to sell to Buyer a number of the Company’s common shares with an aggregate fair value of up to $3,057,100.
From February 3, 2017 until March 22, 2017, the Company did not sell any shares of common stock to Buyer under the February 2017
CS Purchase Agreement and did not issue any shares of common stock to Buyer in consideration for entering into the CS Purchase
Agreement. On March 22, 2017, the Company filed a prospectus supplement which amended, supplemented and superseded the Company’s
prospectus supplement dated February 3, 2017 and its accompanying prospectus dated October 28, 2014 related to a Common Stock Purchase
Agreement, dated February 3, 2017 with Buyer. The purpose of the prospectus supplement was to cover future shares to be issued
under the February 2017 CS Purchase Agreement.
In March 2017, the Company was advised that
under NASDAQ rules, it was required to obtain shareholder approval prior to issuing any stock to Buyer pursuant to the February
2017 CS Purchase Agreement because the issuance was “below market” and represented an aggregate amount of shares greater
than 20% of the total number of Company shares outstanding. Accordingly, effective March 22, 2017, the Company halted all future
offers and sales of common stock under the February 2017 CS Purchase Agreement and reduced the amount of potential future offers
and sales under the February CS Purchase Agreement to zero.
March 2017 Equity Line
On March 22, 2017, the Company entered into another Common Stock Purchase Agreement with Buyer (the “March
2017 CS Purchase Agreement”) which provides that the Company has the right to sell to Buyer a number of the Company’s
common shares with an aggregate fair value of up to $1.6 million. As consideration for entering into the March 2017 CS Purchase
Agreement, the Company paid to Buyer a cash commitment fee of $1.0 million.
The March 2017 CS Purchase Agreement provides
that the number of shares that may be purchased under each “Purchase Notice” provided by the Company to Buyer is subject
to a ceiling of up to 25,000 shares or an aggregate purchase amount of $250,000 at a price not below the closing bid price of
the Company’s common stock on the day preceding the date of execution of the agreement (“Floor Price”). The
Company and Buyer may mutually agree to increase the number of shares that may be sold pursuant to a “Purchase Notice”
to as much as an additional 100,000 Purchase Shares per business day. The Company has the right to direct Buyer to buy up
to an additional 30% of the trading volume of the common stock for the next business day at the lowest intra-day bid price of
the Company’s common stock on the date of purchase. The purchase price for the additional shares may not be below the Floor
Price. The aggregate number of shares that may be purchased by Buyer is subject to volume limitations of the Company’s common
stock as defined in the March 2017 CS Purchase Agreement.
The Company shall not issue, and Buyer shall
not purchase any shares of common stock under the March 2017 CS Purchase Agreement if the shares proposed to be issued and sold,
when aggregated with all other shares of common stock then owned beneficially (as calculated pursuant to Section 13(d) of the 1934
Act and Rule 13d-3 promulgated thereunder) by Buyer and its affiliates would result in the beneficial ownership by Buyer and its
affiliates of more than 4.99% of the then issued and outstanding shares of common stock of the Company, unless waived in writing
by Buyer.
The shares issued under the March 2017 CS Purchase
Agreement were issued pursuant to the Company’s “shelf” registration statement on Form S-3 (File No. 333-198647)
previously filed with the U.S. Securities and Exchange Committee (“SEC”) on September 8, 2014, as amended on October
3, 2014, and which was declared effective by the SEC on October 28, 2014.
As of June 30, 2017, the Company had issued
496,895 shares of its common stock for gross proceeds of $1.6 million. During the six months ended June 30, 2017, the Company recorded
$48,000 in financing related fees. The Company agreed to pay on each Purchase Date and on each Additional Purchase Date 1.75% of
such aggregate proceeds representing the fees and expenses of Buyer’s advisers, counsel, accountants and other experts.
(e) Reverse Stock Split and Nasdaq Listing Compliance Matters
As previously disclosed by the Company on a
Current Report on Form 8-K filed with the Securities and Exchange Commission on January 11, 2016, the Company had received a written
notification from Nasdaq notifying the Company that it had failed to comply with Listing Rule 5550(a)(2) (the “Rule”)
because the bid price for the Company’s common stock over a period of thirty (30) consecutive business days prior to such
date had closed below the minimum $1.00 per share requirement for continued listing. In accordance with Nasdaq’s Listing
Rule 5810(c)(3)(A), the Company had a period of 180 calendar days, or until July 5, 2016, to regain compliance with the Rule. After
determining that it would not be in compliance with the Rule by such date, the Company notified Nasdaq and applied for an extension
of the cure period, as permitted under the original notification. In response, Nasdaq afforded the Company an additional 180 calendar
day period to regain compliance with the minimum bid price requirement, as set forth in the Rule. In order to regain compliance
with the Rule for a minimum of ten consecutive business days, on April 12, 2017, the Company announced a reverse stock split of
its shares of common stock at a ratio of 1-for-20, which took effect with the opening of trading on April 13, 2017 on the NASDAQ.
The Company’s stock continues to be traded under the symbol IMNP. The Company’s stockholders approved the reverse
stock split at the Company’s 2016 Annual Meeting held on December 20, 2016. The primary purpose of the reverse stock split
was to enable the Company to regain compliance with the $1.00 minimum bid price requirement for continued listing on NASDAQ. All
share and per share amounts in these financial statements have been reflected on a post-split basis.
Within the time required by Nasdaq, the
Company’s common stock traded above the minimum required bid price for ten (10) consecutive days before the expiration of
the grace period. On May 24, 2017, the Company received written confirmation from Nasdaq that it has regained compliance with this
Rule. Immediately following the effectiveness of the Reverse Stock Split, the number of outstanding shares of common stock were
reduced from approximately 194.3 million shares to approximately 9.7 million shares. All per share amounts and outstanding shares
of common stock including stock options, restricted stock and warrants, have been retroactively adjusted in these condensed consolidated
financial statements for all periods presented to reflect the 1-for-20 Reverse Stock Split. Further, exercise prices of stock options
and warrants have been retroactively adjusted in these condensed consolidated financial statements for all periods presented to
reflect the 1-for-20 Reverse Stock Split.
As previously reported by the Company on
April 24, 2017, the Company was notified by Nasdaq’s Hearing Panel (the “Panel”) of deficiencies pursuant to
Nasdaq’s Listing Rule 5250(c)(1) due to its failure to timely file its Form 10-K for the year ended December 31, 2016 and
its Form 10-Q for the period ended March 31, 2017 (“First Quarter Report”). On May 10, 2017, the Company provided a
submission to the Panel explaining the reason for the late filings and asking that the Panel extend its listing through June 15,
2017. The Panel delayed a decision on that issue until after May 17, 2017, the date by which the Company represented it would file
its delinquent Form 10-K. The Company filed its delinquent annual report on May 17, 2017, as acknowledged by the Panel, and informed
the Panel shortly thereafter that it was on target to file the late Form 10-Q and regain compliance with the filing rule by June
15, 2017. Accordingly, the Panel had determined to continue the listing of the Company’s securities, subject to compliance
by the Company to file its first quarter Form 10-Q on or before June 15, 2017 with the Securities and Exchange Commission and to
report to the Panel that it is current in its filing obligations. Within the time prescribed by the Panel, the Company filed its
delinquent First Quarter Report on Form 10-Q on June 14, 2017. Accordingly, the Panel confirmed by letter, dated June 15, 2017,
that the Company had fully regained compliance with Nasdaq’s Listing Rule 5250(c)(1) and is in compliance with all other
applicable requirements as set forth in the decision and required for listing on The Nasdaq Stock Market, and closed this matter.
NOTE 10. LOSS PER SHARE
Basic and diluted loss per share is computed
by dividing loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted weighted average shares outstanding for the three and six months ended June 30, 2017 and 2016 excludes shares
underlying stock options and warrants and convertible preferred because the effects would be anti-dilutive. Accordingly, basic
and diluted loss per share is the same.
Such excluded shares are summarized as
follows:
|
|
Three month period
|
|
|
Six month period
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Common stock options
|
|
|
490,541
|
|
|
|
388,922
|
|
|
|
490,541
|
|
|
|
388,922
|
|
Shares issuable upon conversion of Series D Preferred Stock (not including dividends and conversion premium paid in common stock)
|
|
|
-
|
|
|
|
123,200
|
|
|
|
-
|
|
|
|
123,200
|
|
Shares potentially issuable upon conversion of April 2017 convertible notes (assuming $1.00 floor price)
|
|
|
305,000
|
|
|
|
-
|
|
|
|
305,000
|
|
|
|
-
|
|
Shares potentially issuable upon conversion of May 2017 convertible notes (assuming $1.00 floor price)
|
|
|
2,344,354
|
|
|
|
-
|
|
|
|
2,344,354
|
|
|
|
-
|
|
Warrants
|
|
|
715,413
|
|
|
|
532,770
|
|
|
|
715,413
|
|
|
|
532,770
|
|
Total shares excluded from calculation
|
|
|
3,855,308
|
|
|
|
1,044,892
|
|
|
|
3,855,308
|
|
|
|
1,044,892
|
|
NOTE 11. COMMITMENTS AND CONTINGENCIES
(a) Leases
In February 2015, Company relocated its
corporate headquarters to New York, NY under a lease agreement with Alexandria Real Estate, which expires in 2020. On August 31,
2015, the Company signed an amendment to the New York, NY lease agreement with Alexandria Real Estate for lab space and offices
for an additional 1,674 square feet commencing on September 1, 2015 and ending in 2020. The total base rent for offices and lab
space, as amended, is $30,000 per month, subject to annual rent escalations. On January 15, 2016, the Company signed a one-year
lease agreement with an option for an additional year for new office space in Israel. On May 16, 2016, the Company signed a three-year
lease agreement for new office and laboratory space in Israel. For the three months ended June 30, 2017 and 2016, rent expense
was $0.2 and $0.1 million, respectively. For the six months ended June 30, 2017 and 2016, rent expense was $0.4 and $0.2 million,
respectively.
Effective May 1, 2017, the Company
terminated the lease agreement with Alexandria Real Estate and forfeited a security deposit in the amount of $177,000. The
Company has relocated its headquarters to Englewood Cliffs, NJ. The Company has signed an annual lease with a 60-day
termination. Rent expense is $3,000 per month.
Future minimum lease payments under non-cancelable
leases for office space, as of June 30, 2017, are as follows ($ in thousands):
Period ending December 31,
|
|
Amount
|
|
2017 (6 months)
|
|
$
|
53
|
|
2018
|
|
|
106
|
|
2019
|
|
|
44
|
|
|
|
$
|
203
|
|
(b) Licensing Agreements
The Company is a party to a number of research
and licensing agreements, including BioNanoSim Ltd, iCo Therapeutics Inc., MabLife, Yissum Research Development Company of The
Hebrew University of Jerusalem, Ltd, Dalhousie University, Lonza Sales AG and Shire Biochem Inc., which may require the Company
to make payments to the other party upon the other party attaining certain milestones as defined in the agreements. The Company
may be required to make future milestone payments under these agreements.
(c) Litigation
The Company was the defendant in litigation
involving a dispute with the plaintiffs Kenton L. Cowley and John A. Flores. The complaint alleges breach of contract, breach of
covenant of good faith and fair dealing, fraud and rescission of contract with respect to the development of a topical cream containing
ketamine and butamben, known as EpiCept NP-2. A summary judgment in Immune’s favor was granted in January 2012 and the plaintiffs
filed an appeal in the United States Court of Appeals for the Ninth Circuit in September 2012. A hearing on the motion occurred
in November 2013. In May 2014, the court scheduled the trial in November 2014 and a mandatory settlement conference in July 2014.
In July 2014, the parties failed to reach a settlement at the mandatory settlement conference. The case was tried by a jury, which
rendered a decision on March 23, 2015, in favor of the Company on all causes of action. In April 2015, the plaintiffs filed a motion
for a new trial, which was heard by the Court on June 8, 2015. In October 2015, the court denied the plaintiff’s motion for
a new trial and on October 9, 2015; the plaintiffs filed a notice of appeal to the court. The court on plaintiff’s motion
has made no ruling. For the six months ended June 30, 2017 and 2016, in connection with the trial, the Company incurred approximately
$10,000 and $39,000 of legal costs.
On May 30, 2017, the Company received a
summons from the bankruptcy court-liquidator with respect to the liquidation proceeding on Mablife to appear before the commercial
court of Evry, France on September 19, 2017. The notice alleged that the Company had not paid installments when they became due
on two assets purchased. The notice alleges that Mablife is due $0.4 million in addition to interest and court fees. As of June
30, 2017, the Company had recorded a note payable of $0.4 million and accrued interest of $0.1 million (see Note 7).
From time to time the Company is involved
in legal proceedings arising in the ordinary course of business. The Company believes there is no other litigation pending that
could have, individually or in the aggregate, a material adverse effect on its results of operations or financial condition
NOTE 12. RELATED PARTY TRANSACTIONS
During 2016, Dr. Teper, the former Chief
Executive Officer of the Company and the current CEO of Cytovia advanced a total of $0.9 million to the Company of which the Company
had repaid $0.7 million prior to December 31, 2016 including $0.4 million which was paid in shares of the Company’s common
stock. The balance of $0.2 million owed to Dr. Teper as of June 30, 2017 has been reflected in advances from related parties in
the condensed consolidated balance sheets.
During the first quarter of 2017, the Company
issued 3,825 shares in settlement of the fourth quarter of 2016 board fees of $14,000 for Daniel Kazado, a member of the Company’s
board of directors.
On June 15, 2017, substantially contemporaneous
with the entry into the Asset Purchase Agreement, the Company entered into a Standby Financing Agreement with Daniel Kazado (see
Note 13).
NOTE 13. ACQUISITION OF CEPLENE RIGHTS
On June 15, 2017, Immune entered into an
Asset Purchase Agreement with Meda to repurchase assets relating to Ceplene (histamine dihydrochloride) including the right to
commercialize Ceplene in Europe and to register and commercialize Ceplene in certain other countries, for a fixed consideration
of $5.0 million payable in installments over a three-year period and additional contingent payments of $3.0 million which consists
of $1.5 million due in year 4 upon the initial achievement of $12.0 million in revenue and $1.5 million due in year 5 upon the
initial achievement of $15.0 million in revenue. The Company sold certain of these Ceplene-related assets to Meda in 2012.
Cytovia intends to undertake commercialization efforts in Europe, Asia and Latin America and to pursue continued development of
Ceplene towards potential regulatory approval. The assets acquired from Meda include rights to marketing authorizations,
trademarks, patents, and other intellectual property related to Ceplene and its use.
In addition, on June 15, 2017, substantially
contemporaneous with the entry into the Asset Purchase Agreement, the Company entered into a Standby Financing Agreement (the “Standby
Financing Agreement”) with Daniel Kazado (the “Standby Financer”) a member of the Company’s Board of Directors
and a beneficial owner of the Company’s capital stock.
Currently, the Company intends to finance
the $5.0 million financial obligations contemplated by the Asset Purchase Agreement through Cytovia on a basis that is on terms
that are acceptable to the Company’s board of directors and without recourse to the Company. The Standby Financer will support
the financial obligations of the Company to pay the fixed consideration installments, in the aggregate amount of $5.0 million,
due under and in accordance with the terms of the Asset Purchase Agreement. In the event that Cytovia has not obtained funding
on terms reasonably acceptable to the Company (including, without limitation, that such funding be on a basis that is without recourse
to the Company), then, pursuant to the terms of the Standby Financing Agreement, at or prior to each installment date, the Standby
Financer shall lend the Company or Cytovia (as determined in the discretion of the Company’s Board of Directors) an amount
in immediately available funds equal to the fixed consideration installment payment then due and payable under the Asset Purchase
Agreement (the “Standby Commitment”). The loan made by the Standby Financer in respect of such fixed payment shall
be evidenced by a promissory note in an aggregate principal amount equal to the amount of funds lent by the Standby Financer. The
Standby Commitment shall expire on the earliest of (a) satisfaction in full by the Standby Financer of his obligations under the
Standby Financing Agreement, (b) Cytovia having obtained funding on terms reasonably acceptable to the Company and (c) the Company
having been fully discharged of and released from all liability of all of its obligations under the Asset Purchase Agreement.
The acquisition is being treated as an
asset acquisition in accordance with ASC 805 Business Combinations. The Company recorded the purchase price for the underlying
patents as intangible assets and recorded a liability for the present value of the amounts due under the agreement. Attorney’s
fees of $0.1 million were capitalized and recorded as intangible assets. As of June 30, 2017, the present value of future
payments is $4.2 million using a discount rate of 15% based on the Company’s current borrowing rate. As of June 30, 2017,
the amount due to Meda on a present value, current and long term is $2.6 million and $1.6 million, respectively. The Company recorded
$4.3 million as intangible assets related to the Ceplene patents. The contingent payments payable upon the achievement of milestones
in year 4 and year 5 will be recorded when the contingency is paid or becomes payable which would be upon the achievement of the
milestones.
NOTE 14. SUBSEQUENT EVENTS
Debt Assignment and Exchange
On July 7, 2017 (the “Closing Date”)
the Company, Hercules and an investor (the “Investor”) entered into an Assignment Agreement (the “Assignment
Agreement”) whereby Hercules assigned to the Investor the existing amount outstanding under the Loan and Security Agreement
between the Company and Hercules dated as of July 29, 2015 (the “Loan Agreement”), as further evidenced by a Secured
Term Promissory Note that was issued by the Company to Hercules on July 29, 2015 (the “2015 Note”): the 2015 Note and
the Loan Agreement together, (the “Securities”).
Also on the Closing Date, the Company and
the Investor entered into an Exchange Agreement (the “Exchange Agreement”) whereby the Company issued to the Investor
a senior secured convertible promissory note with a principal amount of $2,974,159 (the “Exchange Note”) in exchange
for the Securities.
The Exchange Note is convertible, at the
option of the holder, into shares of the Company’s common stock, par value $0.001 per share, at a per share price of $2.95
(the “Fixed Conversion Price”), subject to adjustment as provided in the Exchange Note, but in no event to a conversion
price lower than $1.00 per share and subject to a total beneficial ownership limitation of 4.99% of the Company’s issued
and outstanding common stock. The Exchange Note has a maturity date (the “Maturity Date”) that is one year from the
Closing Date. The Maturity Date may be accelerated, at the option of the holder, upon the occurrence of an Event of Default (as
defined in the Exchange Note).
The Exchange Note is repayable by the Company
through equal monthly amortization payments during the term of the Exchange Note, in cash or in shares of common stock at the Amortization
Conversion Price (as defined in the Exchange Note) at the option of the Company. The holder has the option to accelerate each amortization
payment in up to three separate payments and demand such payments in shares of the Company’s common stock. All payments in
shares of common stock are subject to the Company complying with the Equity Conditions (as defined in the Exchange Note). The Company
may prepay the Exchange Note at any time (upon 10 days’ notice) in cash at 115% of principal amount and accrued interest.
Additionally, so long as the Exchange Note
remains outstanding or the holder holds any Conversion Shares (as defined in the Exchange Note), the Company shall not enter into
any financing transaction pursuant to which the Company sells its securities at a price lower than $1.00 per share without the
written consent of the holder. Through August 9, 2017, a total of 448,534 shares have been issued for payment of an aggregate of
$0.8 million of principal and $0.1 million of interest.
In July 2017, EMA assigned the April 2017
Convertible Notes to MEF I, LP.
Pint Licensing Agreement
On July 10, 2017, Cytovia entered into
an exclusive licensing agreement (the “Licensing Agreement”) with Pint Pharma International S.A. ("Pint"),
a specialty pharmaceutical company focused on Latin America and other markets, for the marketing, commercialization and distribution
of Ceplene throughout Latin America (the “Territory”, defined as Argentina, Bolivia, Brazil, Chile, Colombia, Costa
Rica, Cuba, Dominican Republic, Ecuador, El Salvador, French Guiana, British Guiana, Suriname, Guatemala, Haiti, Honduras, Mexico,
Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela) through Pint and one or more of its affiliates. Pursuant to the Licensing
Agreement, Pint will also pay Cytovia (i) 35% of net sales in the territory (ii) a milestone payment of $0.5 million when net sales
of Ceplene in the Territory first reach $10.0 million in any calendar year and (iii) a milestone payment of $1.25 million when
net sales of Ceplene in the Territory first reach $25.0 million in any calendar year. Cytovia further granted Pint and its affiliates
certain sub-licensing rights to Ceplene, and a right of first refusal on any new products of Cytovia within the Territory during
the term of the Licensing Agreement.
With regard to any regulatory approvals
and filings related to the commercialization of Ceplene within the Territory, Pint shall be the applicant, holder of such regulatory
approvals and will be responsible for the content of such regulatory submissions, as well as all costs and expenses related to,
among other items delineated in the Licensing Agreement, the fees, filings, compliance, registration and maintenance of such required
regulatory approval matters. Cytovia shall be responsible for providing (or if in the control of a third party, to ensure such
third party provides) all appropriate documentation, samples and other information in support of Pint in connection with its regulatory
submissions, compliance and maintenance matters in the Territory concerning the Ceplene products.
Additionally, in connection with the Licensing
Agreement, the parties thereto agreed that Pint Gmbh, an affiliate of Pint, will separately enter into an investment agreement
upon satisfaction of the condition that the commercialization of the Ceplene and the Combination Therapy has been met (defined
to mean when Ceplene is commercialized by Pint together with a new product in Territory), pursuant to which and subject to the
terms of such investment agreement when entered, Pint Gmbh will make to an investment of $4.0 million at series A valuation into
Cytovia in exchange for an equity interest in Cytovia. Upon completion of the $4.0 million initial investment by Pint, Pint shall
have the right to appoint one director to the Board of Cytovia.
Carmelit Financing
On July 17, 2017, the Company entered into an agreement in principle with Carmelit 9 Nehassim Ltd (“Carmelit”)
for the sale of up to $300,000 in original issue discount convertible debentures which are convertible into shares of the Company’s
common stock upon shareholder approval. The debentures are convertible into an aggregate of 101,695 shares of the Company's common
stock based upon a conversion price of $2.95 per share, which conversion price is subject to adjustment. Notwithstanding the foregoing,
in no event shall the conversion price fall below $1.00 per share. The debentures are due and payable upon the earlier of (a) January
17, 2018 and (b) the closing by the Company of one or more subsequent financings with gross proceeds to the Company equal to at
least $5,000,000 in the aggregate. The holder of the debentures has the option to extend the maturity date of the debentures through
October 17, 2018. In addition, pursuant to the terms of a proposed securities purchase agreement, Carmelit will also receive up
to 75,000 shares of the Company’s common stock. The closing of the transaction and issuance of the debentures and the shares
is subject to, among other things, approval by shareholders of the Company.