UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2014
|
Or
|
¨
|
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: 333-128226
INTELLECT NEUROSCIENCES, INC.
(Exact Name of Registrant as Specified
in Its Charter)
Delaware
|
20-8329066
|
(State or Other Jurisdiction of
|
(I.R.S. Employer
|
Incorporation)
|
Identification Number)
|
|
|
550 Sylvan Ave. Suite 101
|
|
Englewood Cliffs, New Jersey
|
07632
|
(Address of Principal Executive Offices)
|
(Zip Code)
|
(201) 608-5101
(Registrant’s Telephone Number,
Including Area Code)
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
þ
No
¨
Indicate
by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, any Interactive Data
File required to be submitted and posted pursuant to Rule 405 of regulation S-T (Section 232.405) of this chapter during the preceding
12 months or for such shorter period that the Registrant was required to submit and post such files. Yes
¨
No
¨
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 the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
¨
|
Accelerated filer
¨
|
Non-accelerated filer
¨
|
Smaller reporting company
þ
|
|
|
(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
¨
No
þ
The registrant had 387,215,676 shares of Common Stock, par value
$.001 par value per share, outstanding as of May 19, 2014.
EXPLANATORY NOTE
Intellect Neuroscience’s Inc. (the
“Registrant”) filed its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 on May 20, 2014.
The Registrant is filing this Amendment No. 1 on Form 10-Q/A to furnish its Interactive Data Files (XBRL Exhibits) as Exhibit 101.
Users of this data are advised that pursuant
to Rule 405 of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus
for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of
the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
Investors should continue to rely on the
originally filed version of the Form 10-Q. No other changes have been made to the Form 10-Q other than those described above. This
Amendment No. 1 on Form 10-Q/A does not reflect subsequent events occurring after the original filing date of the Form 10-Q or,
except as described above, modify or update any disclosures made in the Form 10-Q.
Index
Intellect Neurosciences Inc. and
Subsidiary
|
(a development stage company)
|
|
Consolidated Balance Sheets
|
(Unaudited)
|
|
|
March 31, 2014
|
|
|
June 30, 2013
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
106
|
|
|
$
|
5,138
|
|
Total current assets
|
|
|
106
|
|
|
|
5,138
|
|
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
4,715
|
|
|
|
4,715
|
|
Total Assets
|
|
$
|
4,821
|
|
|
$
|
9,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITAL DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,394,603
|
|
|
$
|
2,487,410
|
|
Accrued interest - convertible promissory notes
|
|
|
736,743
|
|
|
|
482,298
|
|
Derivative instruments
|
|
|
7,685,695
|
|
|
|
3,833,457
|
|
Preferred stock liability
|
|
|
172,867
|
|
|
|
172,874
|
|
Preferred stock dividend payable
|
|
|
7,357,058
|
|
|
|
5,350,503
|
|
Total Current liabilities
|
|
$
|
18,346,966
|
|
|
$
|
12,326,542
|
|
|
|
|
|
|
|
|
|
|
Long Term Debt
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
|
2,042,955
|
|
|
|
1,231,737
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
20,389,921
|
|
|
$
|
13,558,279
|
|
|
|
|
|
|
|
|
|
|
Capital deficiency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Convertible Preferred stock - 1,000,000 shares
designated and 106,878 shares issued at March 31, 2014, and June 30, 2013 (classified as liability above) (liquidation preference
$1,870,380)
|
|
|
-
|
|
|
|
-
|
|
Series C Convertible Preferred stock, $.001 par value
- 25,000 shares designated and 17,829 and 19,790 shares issued at March 31, 2014 and June 30, 2013 respectively (liquidation
preference $18,329,000 and $19,790,000 respectively)
|
|
$
|
18
|
|
|
$
|
20
|
|
Series D Convertible Preferred stock, $.001 par value
- 25,000 shares designated and 2,376 and 5,466 shares issued at March 31, 2014 and June 30, 2013 respectively (liquidation
preference $2,376,000 and $5,466.000 respectively)
|
|
|
2
|
|
|
|
5
|
|
Series E Convertible Preferred stock, $.001 par value
- 25,000 shares designated and 2,000 and 2,000 shares issued at March 31, 2014 and June 30, 2013 respectively (liquidation
preference $2,000,000 respectively)
|
|
|
2
|
|
|
|
2
|
|
Common stock, par value $0.001 per share, 2,000,000,000
shares authorized; 385,215,676 and 209,015,899 issued and outstanding at March 31, 2014, and June 30, 2013, respectively
|
|
|
385,216
|
|
|
|
209,016
|
|
Additional paid in capital
|
|
|
70,460,133
|
|
|
|
70,134,497
|
|
Deficit accumulated during the
development stage
|
|
|
(91,230,471
|
)
|
|
|
(83,891,966
|
)
|
|
|
|
|
|
|
|
|
|
Total Capital Deficiency
|
|
$
|
(20,385,100
|
)
|
|
$
|
(13,548,426
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Capital Deficiency
|
|
$
|
4,821
|
|
|
$
|
9,853
|
|
See notes to consolidated financial statements
Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
Consolidated Statements of Operations
(Unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
April
25, 2005
(inception) through
March 31, 2014
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,516,667
|
|
Total
revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,516,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
-
|
|
|
|
25,380
|
|
|
|
68,400
|
|
|
|
209,362
|
|
|
|
14,723,489
|
|
General and administrative
|
|
|
94,667
|
|
|
|
3,017,254
|
|
|
|
741,335
|
|
|
|
3,782,759
|
|
|
|
46,096,520
|
|
Total
cost and expenses
|
|
|
94,667
|
|
|
|
3,042,634
|
|
|
|
809,735
|
|
|
|
3,992,121
|
|
|
|
60,820,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(94,667
|
)
|
|
|
(3,042,634
|
)
|
|
|
(809,735
|
)
|
|
|
(3,992,121
|
)
|
|
|
(50,303,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,033,537
|
)
|
|
|
(1,946,363
|
)
|
|
|
(6,561,445
|
)
|
|
|
(3,872,538
|
)
|
|
|
(76,496,309
|
)
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,525
|
|
Changes in value of derivative instruments and preferred stock liability
|
|
|
16,033
|
|
|
|
3,972
|
|
|
|
32,675
|
|
|
|
2,596,441
|
|
|
|
44,566,068
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(627,809
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,587,604
|
)
|
Write off of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income/(expense):
|
|
|
(1,017,504
|
)
|
|
|
(1,942,391
|
)
|
|
|
(6,528,770
|
)
|
|
|
(1,276,097
|
)
|
|
|
(39,277,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,112,171
|
)
|
|
|
(4,985,025
|
)
|
|
|
(7,338,505
|
)
|
|
|
(5,268,218
|
)
|
|
|
(89,580,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed preferred stock dividend
|
|
|
-
|
|
|
|
700,000.00
|
|
|
|
-
|
|
|
|
700,000.00
|
|
|
|
1,650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shareholders
|
|
$
|
(1,112,171
|
)
|
|
$
|
(5,685,025
|
)
|
|
$
|
(7,338,505
|
)
|
|
$
|
(5,968,218
|
)
|
|
$
|
(91,230,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
348,123,285
|
|
|
|
132,672,974
|
|
|
|
294,586,639
|
|
|
|
114,633,115
|
|
|
|
|
|
Diluted
|
|
|
348,123,285
|
|
|
|
132,672,974
|
|
|
|
294,586,639
|
|
|
|
114,633,115
|
|
|
|
|
|
See notes to consolidated financial statements
Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
April 25, 2005
|
|
|
|
Nine Months Ended
|
|
|
(inception)
|
|
|
|
March 31,
|
|
|
through March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,338,505
|
)
|
|
$
|
(5,968,218
|
)
|
|
$
|
(91,230,471
|
)
|
Adjustments to reconcile net income (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
|
|
|
|
836,769
|
|
Amortization of financing costs
|
|
|
-
|
|
|
|
|
|
|
|
2,403,966
|
|
Change in unrealized (gain) loss of derivative instruments
|
|
|
(32,675
|
)
|
|
|
(2,596,441
|
)
|
|
|
(43,864,207
|
)
|
Stock and warrant based compensation
|
|
|
370,000
|
|
|
|
3,704,784
|
|
|
|
18,457,586
|
|
Interest expense related to warrants
|
|
|
3,156,484
|
|
|
|
1,303,796
|
|
|
|
47,575,527
|
|
Write-off of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
Shares issued in connection with merger
|
|
|
-
|
|
|
|
-
|
|
|
|
7,020,000
|
|
Shares issued for note extensions and compensation
|
|
|
-
|
|
|
|
|
|
|
|
753,453
|
|
Conversion of common stock to new Series B preferred shares
|
|
|
-
|
|
|
|
-
|
|
|
|
6,606,532
|
|
Non-cash interest expense
|
|
|
3,404,961
|
|
|
|
2,568,742
|
|
|
|
23,519,219
|
|
Non-cash expense related to Series B dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
1,802,610
|
|
Disposition of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
43,412
|
|
Loss on sale of fixed assets
|
|
|
-
|
|
|
|
-
|
|
|
|
179,516
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,060
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Prepaid expenses and other assets
|
|
|
-
|
|
|
|
19,585
|
|
|
|
(898
|
)
|
License fee receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,963
|
)
|
Accounts payable and accrued expenses
|
|
|
(92,807
|
)
|
|
|
40,273
|
|
|
|
3,346,688
|
|
Other long term liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(71,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities:
|
|
|
(532,542
|
)
|
|
|
(927,479
|
)
|
|
|
(22,552,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,912
|
)
|
Acquisition of property and equipment
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,059,699
|
)
|
Cash paid for acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities:
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,213,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cashflows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
6,153,828
|
|
Proceeds from sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,761,353
|
|
Proceeds from sale of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
7,711,150
|
|
Preferred stock issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
(814,550
|
)
|
Proceeds from sale of Convertible Promissory Notes
|
|
|
552,510
|
|
|
|
1,043,500
|
|
|
|
12,676,510
|
|
Repayment of borrowings from stockholder
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,706,000
|
)
|
Convertible Promissory Notes issuance cost
|
|
|
-
|
|
|
|
-
|
|
|
|
(466,100
|
)
|
Repayment of borrowings from noteholders
|
|
|
(25,000
|
)
|
|
|
(32,500
|
)
|
|
|
(1,750,000
|
)
|
Proceeds from excersise of stock warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities:
|
|
|
527,510
|
|
|
|
1,011,000
|
|
|
|
23,766,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(5,032
|
)
|
|
|
83,521
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
5,138
|
|
|
|
2,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
106
|
|
|
$
|
85,828
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow informations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
-
|
|
|
|
-
|
|
|
$
|
145,115
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Convertible
Notes payable and accrued interest into Common Stock (including derivative liability)
|
|
|
131,831
|
|
|
|
-
|
|
|
$
|
16,417,567
|
|
Conversion of Preferred Stock
to Common Stock
|
|
|
55,267
|
|
|
|
43,000
|
|
|
|
6,915,718
|
|
Common Stock issued in repayment
of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
248,000
|
|
Accrued dividend on Series
B prefs treated as capital contribution
|
|
|
-
|
|
|
|
-
|
|
|
|
387,104
|
|
Cashless excersise of Warrant
for Common Stock
|
|
|
-
|
|
|
|
-
|
|
|
|
18,843,360
|
|
Debt discount from warrants
and beneficial conversion feature
|
|
|
342,500
|
|
|
|
768,197
|
|
|
|
1,884,697
|
|
Deemed preferred stock dividend
from beneficial conversion feature
|
|
|
-
|
|
|
|
700,000
|
|
|
|
1,650,000
|
|
Issuance of warrants for repayment
of accrued expenses
|
|
|
-
|
|
|
|
560,000
|
|
|
|
704,085
|
|
See notes to consolidated financial statements
Intellect Neurosciences, Inc. (a development stage company)
Notes to Unaudited Consolidated Condensed Financial Statements
March 31, 2014
Note 1. Basis of Presentation
The accompanying unaudited consolidated condensed financial
statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information
and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s
Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission (the “SEC”)
on October 15, 2013. In the opinion of management, this interim information includes all material adjustments, which are of a
normal and recurring nature, necessary for fair presentation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value
of securities owned and non-readily marketable securities.
The results of operations for the three and nine months ended
March 31, 2014, are not necessarily indicative of the results to be expected for the entire year or for any other period.
2. Business Description and Going Concern
Intellect Neurosciences, Inc. (“Intellect”, “our”,
“us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) a
Delaware corporation, is a biopharmaceutical company, which together with its subsidiary Intellect Neurosciences, USA, Inc. (“Intellect
USA”), is conducting research regarding proprietary drug candidates to treat Alzheimer’s disease (“AD”)
and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related
to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts
and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal
year end is June 30. We have had no product sales through March 31, 2014 though we have received $10,516,667 in up-front and milestone
license fees from inception through December 31, 2013. Our losses from operations have been funded primarily with the proceeds
of equity and debt financings and fees due under license agreements.
We are a development stage company and our core business strategy
is to leverage our intellectual property estate through license arrangements and to demonstrate “proof of concept”
of our proprietary compounds that we have purchased, developed internally or in-licensed from universities and others, and then
seek to enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting
drug products. Our objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related
to the use of our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or
applications. As of March 31, 2014, we had no self-developed or licensed products approved for sale by the U.S. Food and Drug
Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that
any products developed by any of our licensees will obtain necessary government regulatory approval or that any approved products
will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the
continued services of our current employees, consultants and subcontractors.
We have limited capital resources and operations since inception
have been funded with the proceeds from equity and debt financings and license fee arrangements. As of March 31, 2014, we had
cash and cash equivalents of $106. If we fail to raise additional capital or obtain substantial cash inflows from existing or
potential shareholders or partners within the next month, we may be forced to cease operations.
Our business will require substantial additional investment
that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies
in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are
able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. If we fail to
raise additional capital or obtain substantial cash inflows from existing or potential partners, we will be unable to successfully
develop and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable
terms or at all. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities
based on the going concern uncertainty.
3. Summary of Significant Accounting Policies
Revenue Recognition
Upfront License Fees
. Consideration that we receive
pursuant to patent license agreements is recognized as income when (a) the licensee obtains a license to one or more of our patents,
(b) the licensee is responsible for all of the development work on the product candidate, (c) the licensee has the technical ability
to perform the development, (d) the licensee requires a license from us to sell the resulting drug product without infringing
our patents, (e) payment due under the license agreement is reasonably assured and (f) we have no future performance obligations
under the license agreement.
Milestones.
We enter into patent license agreements,
which contain milestones related to reaching particular stages in product development. We recognize revenues from milestones when
we have no further obligation with respect to the activities under the agreement and when we have confirmed that the milestone
has been achieved. Where we have continuing involvement obligations in the form of development efforts, we recognize revenues
from milestones ratably over the development period.
Principles of Consolidation
.
The consolidated
financial statements include the accounts of our wholly owned subsidiary, Intellect USA. Formerly, we included the accounts of
Intellect Israel and the accounts of Mindgenix, Inc. (“Mindgenix”), a wholly-owned subsidiary of Mindset Biopharmaceuticals,
Inc. (“Mindset”). Intellect Israel was liquidated in 2012. Mindgenix has not conducted any activity since 2012 and
does not expect to resume operations. All inter-company transactions and balances have been eliminated in consolidation
Convertible Instruments.
We evaluate and account for
conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative
financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics
and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks
of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is
not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
We account for convertible instruments (when we have determined
that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary,
discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences
between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion
price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated
date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in
preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the
transaction and the effective conversion price embedded in the preferred shares.
Common Stock Purchase Warrants.
We classify as equity
any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement
in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined
in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require
net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our
control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine
whether a change in classification between assets and liabilities is required.
Preferred Stock.
We apply the guidance enumerated in
ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred
stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair
value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption
rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely
within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
Derivative Instruments
.
Our derivative financial
instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded
within our convertible debt. The accounting treatment of derivative financial instruments requires that we record the derivatives
and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent
balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date.
If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge.
If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.
During the nine month period ended March 31, 2014, we recognized
other income of $2,596,441, relating to recording the derivative liabilities at fair value. At March 31, 2014 and June 30, 2013,
there were $7,685,695 and $3,833,457 of derivative liabilities, respectively.
Our derivative instruments were valued using the Black-Scholes
option pricing model, using the following assumptions during the quarter ended December 31, 2013:
Estimated dividends:
|
|
None
|
|
Expected volatility:
|
|
331
|
%
|
Risk-free interest rate:
|
|
.40
to .80
|
%
|
Expected term (years):
|
|
0.25 to 5 years
|
|
4. ViroPharma License Transaction
On and effective as of September 29, 2011, we entered into
an Exclusive License Agreement (the “License Agreement”) with ViroPharma Incorporated, a Delaware corporation (“ViroPharma”),
pursuant to which, among other things, we granted an exclusive license to ViroPharma regarding certain of our licensed patents
and patent applications related to our clinical stage drug candidate, OX1, an antioxidant molecule containing indole-3-propionic
acid.
On November 11, 2013, ViroPharma entered into an Agreement
and Plan of Merger with Shire Pharmaceutical Holdings Ireland Limited ("SPHIL"), Venus Newco, Inc., a wholly owned subsidiary
of SPHIL ("Venus Newco"), and, solely for the limited purposes set forth therein, Shire plc, which provides for the
acquisition of ViroPharma by SPHIL by means of a tender offer by Venus Newco (the "Tender Offer") followed by a merger
of Venus Newco with and into ViroPharma, with ViroPharma continuing as the surviving corporation (the "Merger"). The
Tender Offer was completed in January 2014 and the Merger was consummated shortly thereafter. In a letter dated February 5, 2014,
Shire informed us that that all existing work under the License Agreement regarding the development of OX1 will continue per the
agreement. ViroPharma continues as the counterparty to the License Agreement.
We expect Shire to develop and commercialize OX1 as a treatment
of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
Under the terms of the License Agreement, we agreed to transfer
to ViroPharma all of our intellectual property rights, data and know-how related to our OX1 research and development program in
exchange for payment by ViroPharma of a $6.5 million up-front licensing fee which was received in October 2011, and additional
regulatory milestone payments based upon defined events in the United States and the European Union. The aggregate maximum of
these milestone payments assuming successful advancement of the product to market could amount to $120 million. In addition, ViroPharma
will pay us a tiered royalty of up to an aggregate maximum of low double digits based on annual net sales. NYU School of Medicine
and South Alabama Medical Science Foundation, which own certain patents in relation to OX1, are entitled to a portion of the royalties
and revenues received by us from any sale or license of OX1 pursuant to an exclusive license agreement between the universities
and us.
The term of the License Agreement will continue in effect on
a licensed product-by-licensed product and country-by-country basis until the expiration of the last royalty obligation with respect
to a licensed product in such country. Once the royalty obligation has terminated in a particular country, the license will become
non-exclusive and fully paid-up with respect to licensed products in that country.
Either party may terminate the License Agreement upon an uncured
material breach of the other party. In addition, if ViroPharma determines that it is not feasible or desirable to develop or commercialize
licensed products, it may terminate the License Agreement in whole or on a product-by-product basis at any time upon ninety (90)
days prior written notice to us. In the event of a termination of the License Agreement, other than ViroPharma’s termination
of the License Agreement for our uncured material breach, we will have an exclusive, perpetual, irrevocable, worldwide, royalty-bearing
license to exploit the licensed products.
5. Notes Payable
The December 2010 Notes
On December 15, 2010, we sold investment
units for an aggregate purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “December 2010
Notes”), shares of Series C Convertible Preferred Stock (“Series C Prefs”) and warrants (the “December
2010 Warrants”). Total proceeds from the sale of these investment units were $500,000.
The December 2010 Notes have an aggregate
face amount of $500,000, are due on December 15, 2013 and bear interest at 14%, payable at maturity. Principal and accrued interest
on the Notes are convertible into shares of our common stock at an initial conversion price of $.125 per share, subject to customary
anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and
subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than
the then effective conversion price of the Notes. As a result of the ratchet provisions contained in the Notes, the holders are
entitled to purchase up to 50 million shares of our Common Stock.
The December 2010 Warrants initially entitle
the holders to purchase up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share.
As a result of the ratchet provisions contained in the December 2010 Warrants, the holders are entitled to purchase up to 10 million
shares of our Common Stock at an exercise price of $0.001 per share. Also, we issued an aggregate of 10,000 shares of Series C
Prefs with an initial aggregate liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained
in the Certificate of Designation of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at
a conversion price of $0.05 per share.
We allocated the $500,000 of proceeds to
the December 2010 Notes and Series C Preferred shares based on their relative fair values at date of issuance, which resulted
in an allocation of $25,000 and $475,000, respectively. We determined the initial fair value of the December 2010 Warrants to
be $378,017 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in
the carrying value of the December 2010 Notes. Under authoritative guidance, the carrying value of the December 2010 Notes may
not be reduced below zero. Accordingly, we recorded the excess of the value of the December 2010 Warrants over the allocated fair
value of the December 2010 Notes as interest expense incurred at the time of issuance of the December 2010 Notes in the amount
of $353,017. The discount related to of the December 2010 Notes will be amortized over the term of the notes as interest
expense, calculated using an effective interest method.
The guidance provided in ASC 470-20-30-5
has been applied to the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to
measure the intrinsic value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible
instrument. The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion
price and the market price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial
conversion feature has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the
Series C Preferred stock is immediately convertible upon issuance and has no stated redemption date.
As a result of the “ratchet”
provisions contained in the April 2010 Notes and outstanding Warrants, the conversion price of the remaining outstanding April
2010 Notes and exercise price of our outstanding Warrants and Series B Convertible Preferred Stock were adjusted to $0.001 per
common share. The conversion price of previously issued and outstanding Series B Convertible Preferred Stock held by holders other
than the purchasers of the April 2010 Notes is not subject to adjustment as a result of the issuance of the December 2010 Notes.
In January 2011, as a result of the
“ratchet” provisions contained in the April 2010 Notes, we issued to purchasers of the April 2010 Notes remaining
outstanding an additional 2,000 shares of our Series C Prefs with an initial aggregate liquidation preference equal to $2 million,
which are convertible into 40 million shares of our common stock at an exercise price of $0.001 per share. In addition, in May
2011, we issued 429,000 shares of our Common Stock as additional compensation to certain holders of the April 2010 Notes as a
result of the “ratchet” provisions contained in those Notes.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
The “March 2011 Notes”
On March 15, 2011, we sold investment units
for an aggregate purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “March 2011 Notes”),
shares of Series C Prefs and warrants (the “March 2011 Warrants”). Total proceeds from the sale of these investment
units were $500,000. The terms of the March 2011 Notes and Warrants are the same as the terms contained in the December
2010 Notes and Warrants.
The March 2011 Notes have an aggregate
face amount of $500,000, are due on March 15, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest
on the Notes are convertible into shares of our common stock at an initial conversion price of $.125 per share, subject to customary
anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and
subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than
the then effective conversion price of the Notes. As a result of the ratchet provisions contained in the March 2011Notes, the
holders are entitled to purchase up to 10 million shares of our Common Stock.
The March 2011 Warrants initially entitle
the holders to purchase up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share.
As a result of the ratchet provisions contained in the March 2011 Warrants, the holders are entitled to purchase up to 10 million
shares of our Common Stock at an exercise price of $0.001 per share. Also, we issued an aggregate of 10,000 shares of Series C
Prefs with an initial aggregate liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained
in the Certificate of Designation of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at
a conversion price of $0.001 per share.
We allocated the $500,000 of proceeds to
the March 2011 Notes and Series C Prefs based on their relative fair values at date of issuance, which resulted in an allocation
of $25,000 and $475,000, respectively. We determined the initial fair value of the March 2011 Warrants to be $378,017 based on
the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of
the March 2011 Notes. Under authoritative guidance, the carrying value of the March 2011 Notes may not be reduced below zero.
Accordingly, we recorded the excess of the value of the March 2011Warrants over the allocated fair value of the March 2011 Notes
as interest expense incurred at the time of issuance of the March 2011 Notes in the amount of $353,017. The discount
related to of the March 2011 Notes will be amortized over the term of the notes as interest expense, calculated using an effective
interest method.
The guidance provided in ASC 470-20-30-5
has been applied to the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to
measure the intrinsic value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible
instrument. The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion
price and the market price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial
conversion feature has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the
Series C Preferred stock is immediately convertible upon issuance and has no stated redemption date
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
The “June and July 2011 Notes”
On June 30, 2011, we sold investment units
(“June 2011 Investment Units”) for an aggregate purchase price of $100,000. Each unit consisted of a Convertible Promissory
Note (the “June 2011 Notes”) and warrants (the “June 2011 Warrants”). Total proceeds from the sale of
these investment units were $100,000.
The June 2011 Notes have an aggregate face
amount of $100,000, are due on June 30, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on
the June 2011 Notes are convertible into shares of our common stock at an initial conversion price of $.05 per share, subject
to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations
and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less
than the then effective conversion price of the June 2011 Notes. The June 2011 Warrants entitle the holders to purchase up to
a total of 10 million shares of our Common Stock at an initial exercise price of $0.05 per share.
We determined the initial fair value of
the June 2011 Warrants to be $817,151 based on the Black-Scholes option pricing model, which we treated as a liability with a
corresponding decrease in the carrying value of the June 2011 Notes by $100,000 with the excess of $717,151 charged to interest
expense. This difference was amortized over the term of the June 2011 Notes as interest expense, calculated using an effective
interest method.
During July and August, 2011, we sold additional
investment units for an aggregate purchase price of $150,000. Each unit consisted of a Convertible Promissory Note (the “July
2011 Notes”) and warrants (the “July 2011 Warrants”). Total proceeds from the sale of these investment units
were $150,000.
The June 2011 Notes issued in July have
an aggregate face amount of $150,000, are due on various dates during July and August, 2014 and bear interest at 14%, payable
at maturity. Principal and accrued interest on the July 2011 Notes are convertible into shares of our common stock at an initial
conversion price of $.05 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits,
reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common
stock or common stock equivalents by us at a price less than the then effective conversion price of the Notes. The July 2011 Warrants
entitle the holders to purchase up to a total of 20 million shares of our Common Stock at an initial exercise price of $0.05 per
share.
We determined the initial fair value of
the July 2011 Warrants to be $1,626,973 based on the Black-Scholes option pricing model, which we treated as a liability with
a corresponding decrease in the carrying value of the July 2011 Notes by $150,000 with the excess of $1,476,973 charged to interest
expense.
In April 2012, we issued 500,000 shares
of our common stock to one of the holders of July 2011 Notes upon his conversion of $25,000 principal amount due with respect
to such Notes (Note 8.)
In October 2013, we issued 13,183,055 shares
of our common stock to one of the holders of our “June and July 2011 Notes” upon conversion of $100,000 principal
amount due and $31,830.55 in accrued interest with respect to such Note (Note 8).
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
The “April and May 2012” Financing
During April and May 2012, we sold investment
units for an aggregate purchase price of $201,500. Each unit consisted of a Convertible Promissory Note (the April and May 2012
Notes”) and warrants (the “April and May 2012 Warrants”). Total proceeds from the sale of these investment units
were $201,500.
The April and May 2012 Notes have an aggregate
face amount of $201,500, are due in April and May 2015 and bear interest at 14%, payable at maturity. Principal and accrued interest
are convertible into shares of our common stock at an initial conversion price of $0.05 per share, subject to customary anti-dilution
protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to
full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less than the effective
conversion price of the April 2012 Notes. The April and May 2012 Warrants entitle the holders to purchase up to 25,150,000 shares
of our Common Stock at an initial exercise price of $0.05 per share.
We determined the initial fair value of
the April and May 2012 warrants to be $1,100,650 based on the Black-Scholes option pricing model, which we treated as a liability
with a corresponding decrease in the carrying value of the April and May 2012 Notes by $201,500 with the excess of $899,150 charged
to interest expense. The discount related to the April and May 2012 Notes will be amortized over the term of the notes as interest
expense, calculated using an effective interest method.
During July through November 2012, we sold
additional investment units for an aggregate purchase price of $662,500. Each unit consisted of a Convertible Promissory Note
and Warrants. Total proceeds from the sale of these investment units were $662,500.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
2013 Financings
During January, February, March, and May
through December 2013, we sold investment units for an aggregate purchase price of $921,000. Each unit consisted of a Convertible
Promissory Note (the January 2013 Notes”) and warrants (the “January 2013 Financing Warrants”). Total proceeds
from the sale of these investment units were $921,000.
The January 2013 Notes have an aggregate
face amount of $921,000, are due in January, February, March, and May through October 2016 and bear interest at 14%, payable at
maturity. Principal and accrued interest are convertible into shares of our common stock at an initial conversion price of $0.01
per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations
and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalent
by us at a price less than the effective conversion price of the April 2012 Notes. The January 2013 Financing Warrants entitle
the holders to purchase up to 590,000,000 shares of our Common Stock at an initial exercise price of $0.01 per share.
We determined the initial fair value of
the January 2013 Financing warrants to be $5,825,029 based on the Black-Scholes option pricing model, which we treated as a liability
with a corresponding decrease in the carrying value of the January 2013 Financing Notes by $846,000 with the excess of $4,979,029
charged to interest expense. The discount related to the January 2013 Financing Notes will be amortized over the term of the notes
as interest expense, calculated using an effective interest method.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
2014 Financings
During January and February 2014, we sold
investment units for an aggregate purchase price of $120,000. Each unit consisted of a Convertible Promissory Note (the Q1 CY
2014 Notes”) and warrants (the “Q1 CY 2014 Financing Warrants”). Total proceeds from the sale of these investment
units were $120,000.
The Q1 CY 2014 Notes have an aggregate
face amount of $120,000, are due in January and February, 2017 and bear interest at 14%, payable at maturity. Principal and accrued
interest are convertible into shares of our common stock at an initial conversion price of $0.01 per share, subject to customary
anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and
subject to full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less than
the effective conversion price of the Q1 CY 2014 Notes. The Q1 CY 2014 Financing Warrants entitle the holders to purchase up to
60,000,000 shares of our Common Stock at an initial exercise price of $0.01 per share.
We determined the initial fair value of
the Q1 CY 2014 Financing warrants to be $119,508 based on the Black-Scholes option pricing model, which we treated as a liability
with a corresponding decrease in the carrying value of the Q1 CY 2014 Financing Notes. The discount related to the Q1 CY 2014 Financing Notes will be amortized over the term of the notes
as interest expense, calculated using an effective interest method.
The Company has determined that the conversion
feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative
liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative
exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
The following table sets forth a summary
of all of the outstanding convertible promissory notes at March 31, 2014:
Convertible promissory notes issued
|
|
$
|
4,210,010
|
|
Allocated to preferred stock
|
|
|
(950,000
|
)
|
Accretion of notes allocated to preferred stock
|
|
|
950,000
|
|
Notes repaid
|
|
|
(425,000
|
)
|
Less amounts converted to common stock
|
|
|
(725,000
|
)
|
|
|
|
3,060,010
|
|
Less debt discount
|
|
|
1,017,055
|
|
Balance March 31, 2014
|
|
$
|
2,042,955
|
|
6. Convertible Preferred Stock and Derivative Liability
Series B Convertible Preferred Stock
During the fiscal year ended June 30, 2007,
we issued 459,309 shares of Series B Convertible Preferred Stock (the “Series B Prefs”). The shares carry a cumulative
dividend of 6% per annum. The initial conversion price is $1.75 per common share subject to certain anti-dilution adjustments.
Each Series B Preferred share carries a stated value of $17.50 and is convertible into 10 shares of our Common Stock. We issued
3,046,756 warrants in connection with the issuance of the Series B Prefs (the “Series B Warrants”).
Based on authoritative guidance, we accounted
for the Series B Prefs and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes option
pricing model. We recorded the amount received in consideration for the Series B Prefs as a liability for the Series B Prefs with
an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the
Series B Prefs and the Series B Warrants will be marked to market for all future periods they remain outstanding with an offsetting
charge to earnings.
At June 30, 2013, the aggregate liquidation
value of the Series B Prefs was $1,870,380, with a fair value of $172,874. As of March 31, 2014, we have accrued Series B Preferred
Stock dividends payable of $648,737 which has been recognized as interest expense.
As a result of the “ratchet”
provisions contained in the Certificate of Designation of the Series B Prefs, the conversion price of the remaining Series B Prefs,
as subsequently amended by a majority in interest of the holders of the series B Prefs, was reduced to $0.01 per common share
as a result of the issuance of convertible promissory notes with conversion prices of $0.01 as described above. The conversion
price of previously issued and outstanding Series B Prefs held by holders other than the purchasers of the April 2010 Notes is
not subject to adjustment as a result of subsequent issuances of convertible promissory notes with conversion prices below the
conversion price of $1.75 per common share.
Series C Convertible Preferred Stock
Effective December 15, 2010, our Board
of Directors approved a Certificate of Designation of Series C Convertible Preferred Stock. Each share of Series C Convertible
Preferred Stock carries a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution
protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to
full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then
effective conversion price of the Series C Preferred Stock. We issued to the purchasers of the December 2010 Notes 12,000 shares
of our Series C Convertible Preferred Stock with an initial aggregate liquidation preference equal to $12 million, which are convertible
into 240 million shares of our common stock.
On March 15, 2011, we issued to certain
purchasers of the March 2011 Notes an additional 10,000 shares of our Series C Convertible Preferred Stock with an initial aggregate
liquidation preference equal to $10 million, which are convertible into 200 million shares of our common stock, in exchange for
$500,000 (Note 5).
During the nine months ended March 31,
2014, we issued 64,214,500 shares of our common stock to holders of Series C Preferred upon conversion of their shares.
Series D Convertible Preferred Shares
Effective October 24, 2010, our Board of
Directors approved a Certificate of Designation of Series D Convertible Preferred Stock. Each share of Series D Convertible Preferred
Stock carries a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution protection
in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet
protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion
price of the Series D Preferred Stock. The Series D Preferred Stock was issued to holders of our warrants in exchange for cancellation
of those warrants. The number of shares of Series D Preferred Stock issued to each warrant holder is an amount equal to the number
of Series D Preferred Shares that would be convertible into an amount of common shares equal to 50% of the number of warrants
held by such holder. Based on this formula, we issued 6,716 shares of Series D Preferred stock, which are convertible into 134,320,000
shares of our common stock.
During the nine months ended March 31,
2014, we issued 61,802,222 shares of our common stock to holders of Series D Preferred upon conversion of their shares.
Series E Convertible Preferred Shares
Effective January 2, 2013, our Board of
Directors approved a Certificate of Designation of Series E Convertible Preferred Stock. Each share of Series E Convertible Preferred
Stock carries a stated value of $1,000 and a conversion price of $0.01 per common share, subject to customary anti-dilution protection
in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet
protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion
price of the Series E Preferred Stock. The Series E Preferred Stock was issued to holders of royalty rights with respect to the
Company’s antisenilin patent estate (the “Royalty Rights”) in exchange for the Royalty Rights held by them.
On January 2, 2013, we issued 2,000 shares of Series E Preferred stock, which are convertible into 200,000,000 shares of our common
stock.
The Company recognized this difference
between the fair value per share of its common stock and the conversion price, multiplied by the number of shares issuable upon
conversion. This Beneficial Conversion Feature of $700,000 was recorded as additional paid-in-capital for common shares, per EITF
98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”.
The offsetting amount was amortizable over the period from the issue date to the first conversion date. Since the Series E Preferred
Stock is immediately convertible, a deemed dividend of $700,000 to the Series E Preferred Stock was recorded and immediately amortized.
As the Company is in an accumulated deficit position, the deemed dividend was charged against additional paid-in-capital for common
shares, there being no retained earnings from which to declare a dividend. The net loss attributable to common shareholders reflects
both the net loss and the deemed dividend
7. Outstanding Warrants and Warrant Liability
The “Series B Warrants”
In connection with the issuance of the
Series B Preferred, we issued Series B warrants to purchase up to 75,939 shares of our common stock. The initial exercise price
of the Series B Warrants was $2.50 per common share, subject to anti-dilution adjustments. The strike price of the Series B Warrants
was subsequently reduced to $1.75 per common share pursuant the anti-dilution adjustment. The Series B Warrants have a 5 year
term.
The Series B Warrants provide for cashless
exercise under certain circumstances. Accordingly, the amount of additional shares underlying potential future issuances of Series
B Warrants is indeterminate. There is no specified cash payment obligation related to the Series B Warrants and there is no obligation
to register the common shares underlying the Series B Warrants except in the event that we decide to register any of our common
stock for cash (“piggyback registration rights”). Presumably, we would be obligated to make a cash payment to the
holder if we failed to satisfy our obligations under these piggyback registration rights. Based on authoritative guidance, we
have accounted for the Series B Warrants as liabilities. As of December 31, 2013, a total of 2,857 Series B Warrants remain outstanding,
with a strike price of $0.001 per share.
The “April 2010 Warrants”.
In connection with the April 2010 Financing,
we issued a total of 1,546,667 Class A, 1,546,667 Class B and 1,546,667 Class C Warrants (collectively, the “April 2010
Warrants”). The Class A Warrants have a 5 year term, an initial exercise price of $1.50 per common share, subject to anti-dilution
adjustments and contain a “cashless exercise feature”. The Class B Warrants have a 9 month term and an initial exercise
price of $1.50 per common share, subject to anti-dilution adjustments. The Class C Warrants have a 5 year and 9 month term, an
initial exercise price of $1.50 per common share, subject to anti-dilution adjustments and contain a “cashless exercise
feature”. The April 2010
Warrants provide the holder with “piggyback registration rights” as described
above. Based on authoritative guidance, we have accounted for the April 2010
Warrants as liabilities. The liability,
measured at fair value on the date of issuance using a Black-Scholes option pricing model has been offset by a reduction in the
carrying value of the April 2010 Notes and will be marked to market for each future period they remain outstanding.
On June 28, 2010, holders of 1,013,333
Class A Warrants exercised their Warrants through the cashless exercise feature and received a total of 11,000 shares of Company
common stock.
As a result of the “ratchet”
provisions contained in the April 2010 Warrants, the number of warrants and the exercise price of the warrants are subject to
adjustment as a result of the December 2010 Notes described above.
On March 15, 2011 holders of 4 million
Class B Warrants exercised their Warrants for cash and received a total of 4 million shares of our Common Stock. The
remaining Class B Warrants expired in January 2011.
As of October 26, 2012, a total of 53,733,333
April 2010 A warrants were exchanged for Series D Preferred shares.
“Consultant Warrants”
In connection with the April 2010 Financing,
we issued 700,000 warrants to various consultants (the “Consultant Warrants”) with terms that are the same as those
contained in the Class A Warrants. Based on authoritative guidance, we have accounted for the Consultant
Warrants
as liabilities.
On June 28, 2010, holders of all of the
outstanding Consultant Warrants exercised their Warrants through the cashless exercise feature and received a total of 11,000
shares of Company common stock.
In August and October 2010, we issued an
additional 6,000,000 warrants to consultants for investor relations and legal services. These warrants expire five years from
the date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants
provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying
the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security
holder (other than with respect to registration of securities covered by certain employee option plans. The terms of the warrants
fail to specify a penalty if we fail to satisfy our obligation under these piggyback registration rights. Presumably we would
be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted
for these consultant warrants as liabilities, measured at fair value, based on a Black-Scholes option pricing model.
As of October 26, 2012, 6,000,000 Consultant
Warrants were exchanged for Series D Preferred shares.
“The December 2010 and March
2011 Warrants”
In connection with the sale of the December
2010 Notes and March 2011 Notes, we issued warrants, we issued a total of 20,000,000 warrants (the “December 2010 and March
2011 Warrants”). These warrants expire five years from the date of issuance. The exercise price of each warrant is $0.05
per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”,
which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common
stock either for our own account or the account of a security holder (other than with respect to registration of securities covered
by certain employee option plans. The terms of the warrants fail to specify a penalty if we fail to satisfy our obligation under
these piggyback registration rights. Presumably we would be obligated to make a cash payment to the holder to compensate for such
failure. Based on authoritative guidance, we have accounted for these consultant warrants as liabilities, measured at fair value,
based on a Black-Scholes option pricing model.
As of October 26, 2012, 9,800,000 of December
2010 and March 2011 Warrants, were exchanged for Series D Preferred shares.
The “June and July 2011 Warrants”
In connection with the sale of the June
Notes, we issued a total of 30 million warrants (the “June and July 2011 Warrants”). The June and July 2011 Warrants
expire five years from date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments.
These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares
underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account
of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms
of the June and July Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration
rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative
guidance, we have accounted for the June and July 2011 Warrants as liabilities. The liability for the June and July 2011 Warrants,
measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of
the related Notes.
As of October 26, 2012, 30 million “June
and July 2011” warrants were exchanged for Series D Preferred shares.
The “2011 Director Warrants”
In October 2011, we issued warrants to
purchase 2,881,680 shares of our common stock to our former independent directors in partial satisfaction of outstanding fees
owed to such directors (the “2011 Director Warrants”). The 2011 Director Warrants have a 5 year term, an initial exercise
price of $0.05 per common share, subject to anti-dilution adjustments, and contain a “cashless exercise feature”.
The 2011 Director Warrants provide the holder with “piggyback registration rights” as described above. Based on authoritative
guidance, we have accounted for the 2011 Director Warrants as liabilities. The liability, measured at fair value on the date of
issuance using a Black-Scholes option pricing model will be marked to market for each future period they remain outstanding. As
of March 31, 2014, 2,881,680 warrants are outstanding
The “April and May 2012” Warrants
In connection with the sale of the April
and May 2012 Notes, we issued a total of 99,150,000 warrants (the “April and May 2012 Warrants”). The April and May
2012 Warrants expire five years from date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution
adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register
the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account
or the account of a security holder (other than with respect to registration of securities covered by certain employee option
plans). The terms of the April and May 2012 Warrants fail to specify a penalty if we fail to satisfy our obligations under these
piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure.
Based on authoritative guidance, we have accounted for the April and May 2012 Warrants as liabilities. The liability for the April
and May 2012 Warrants, measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in
the carrying value of the related Notes.
As of October 26, 2012, 53,150,000 “April
and May 2012” warrants were exchanged for Series D Preferred shares, while 46,000,000 warrants were outstanding as of December
31, 2012. On March 13, 2013, all of the outstanding warrants were exchanged for common stock in a cashless exercise and 29,525,879
shares of common stock were issued.
The January 2013 Financing Warrants
In connection with the sale of the January
2013 Notes, we issued a total of 590,000,000 warrants. The January 2013 Financing Warrants expire five years from date of issuance.
The exercise price of each warrant is $0.01 per share, subject to anti-dilution adjustments. These warrants provide the holder
with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the
event that we decide to register any of our common stock either for our own account or the account of a security holder (other
than with respect to registration of securities covered by certain employee option plans). The terms of the January 2013 Financing
Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably,
we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we
have accounted for the January 2013 Financing Warrants as liabilities. The liability for the January 2013 Financing Warrants,
measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of
the related Notes.
As of March 31, 2014, 590,000,000 warrants
remain outstanding.
The
Q1 CY 2014
Financing Warrants
In connection with the sale of the Q1 CY
2014 Notes, we issued a total of 590,000,000 warrants. The Q1 CY 2014 Financing Warrants expire five years from date of issuance.
The exercise price of each warrant is $0.01 per share, subject to anti-dilution adjustments. These warrants provide the holder
with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the
event that we decide to register any of our common stock either for our own account or the account of a security holder (other
than with respect to registration of securities covered by certain employee option plans). The terms of the Q1 CY 2014 Financing
Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably,
we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we
have accounted for the Q1 CY 2014 Financing Warrants as liabilities. The liability for the Q1 CY 2014 Financing Warrants, measured
at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related
Notes.
As of March 31, 2014, 590,000,000 Q1 CY
2014 Financing Warrants remain outstanding.
8. Capital Deficiency
Common stock
In August 2013, we issued 13,500,000 shares
of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
In August 2013, we issued 15,000,000 shares
of our common stock in consideration for services rendered to the Company, which was valued at $150,000.
In September 2013, we issued 7,000,000
shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
In September 2013, we issued 16,500,000
shares of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
In October 2013, we issued 8,714,500 shares
of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
In October 2013, we issued 19,500,000 shares
of our common stock in consideration for services rendered to the Company, which was valued at $195,000.
In October 2013, we issued 15,302,222 shares
of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
In October 2013, we issued 13,183,055 shares
of common stock upon conversion of the principal and accrued interest of the holders convertible promissory note.
In January 2014, we issued 10,000,000
and 20,000,000 shares of our common stock to holders of Series C and Series D Convertible Preferred Stock, respectively, upon
their exercise of the conversion feature contained in those securities.
In January 2014, we issued 2,500,000 shares
of common stock to a charitable organization registered as a nonprofit corporation under Internal Revenue Service guidelines.
In February 2014, we issued
10,000,000 shares of common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion
feature contained in those securities.
In March 2014, we issued 25,000,000 shares
of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained
in those securities.
9. Income Taxes
No provision for income taxes has been
recorded due to the utilization of net operating losses for which a 100% valuation allowance had been provided.
10. Subsequent Events
Management has evaluated events occurring
after the date of these financial statements through the date these financial statements were issued. There were no material subsequent
events as of that date other than disclosed below.
In May 2014, we issued 2,000,000 shares
of common stock to a charitable organization registered as a nonprofit corporation under Internal Revenue Service guidelines..
ITEM 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of
our financial condition and results of operations contains information that management believes is relevant to an assessment and
understanding of our results of operations. You should read this discussion in conjunction with the Financial Statements and Notes
included elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations
for the year ended June 30, 2013 and Risk Factors contained in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission (the “SEC”) on October 15, 2013. Certain statements set forth below constitute “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. See “Special Note Regarding Forward-Looking Statements”. References to “Intellect,”
the “Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and
its subsidiaries.
General
We are a biopharmaceutical company that
is conducting research regarding proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases
associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic
approaches for treating Alzheimer’s disease (“AD”). Since our inception in 2005, we have devoted substantially
all of our efforts and resources to advancing our intellectual property portfolio and research and development activities. We
have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither
we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate
under a single segment. Our fiscal year end is June 30.
Our core business strategy is to leverage
our intellectual property estate through license arrangements and to demonstrate “proof of concept” of our proprietary
compounds that we have purchased, developed internally or in-licensed from universities and others, and then seek to enter into
collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. Our
objective is to obtain revenues from licensing fees, milestone payments, development fees and royalties related to the use of
our intellectual property estate and the use of our proprietary compounds for specific therapeutic indications or applications.
Our most advanced drug candidate, OX1 (OX1),
is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule. In September 2011, we
granted an exclusive license to ViroPharma Incorporated (“ViroPharma”) regarding certain of our licensed patents and
patent applications related to OX1 and transferred to ViroPharma all of our data and know-how related to OX1 in exchange for payment
by ViroPharma of a $6.5 million up-front licensing fee, which we received in October, 2011, and additional regulatory milestone
payments based upon future defined events in the United States and the European Union.
On November 11, 2013, ViroPharma entered
into an Agreement and Plan of Merger with Shire Pharmaceutical Holdings Ireland Limited ("SPHIL"), Venus Newco, Inc.,
a wholly owned subsidiary of SPHIL ("Venus Newco"), and, solely for the limited purposes set forth therein, Shire plc,
which provides for the acquisition of ViroPharma by SPHIL by means of a tender offer by Venus Newco (the "Tender Offer")
followed by a merger of Venus Newco with and into ViroPharma, with ViroPharma continuing as the surviving corporation (the "Merger").
The Tender Offer was completed in January 2014 and the Merger was consummated shortly thereafter. In a letter dated February 5,
2014, Shire informed us that that all existing work under the License Agreement regarding the development of OX1 will continue
per the agreement. ViroPharma continues as the counterparty to the License Agreement.
We expect Shire to develop and commercialize
OX1 as a treatment of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
Our pipeline includes
TauC3
,
a monoclonal antibody being tested as potential disease modifying treatment for Alzheimer's disease;
TOC-1
, a monoclonal
antibody with diagnostic potential for AD and other tauopathies; and
CONJUMAB-A
, an antibody-drug conjugate for
treatment of age related macular degeneration. These pipeline programs are in pre-clinical development.
Our current business is focused on granting
licenses to our patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the
treatment of AD through outsourcing and other arrangements with third parties. We expect research and development, including patent
related costs, to continue to be the most significant expense of our business for the foreseeable future. Our research and development
activity is subject to change as we develop a better understanding of our projects and their prospects. Total research and development
costs from inception through March 31, 2014 were $14,723,489.
Results of Operations
Three Months Ended March 31, 2014 Compared to Three Months
Ended March 31, 2013:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Research and Development Costs
|
|
|
-
|
|
|
|
25,380
|
|
|
|
25,380
|
|
General and Administrative
|
|
|
94,667
|
|
|
|
3,017,254
|
|
|
|
2,922,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(94,667
|
)
|
|
$
|
(3,042,634
|
)
|
|
$
|
2,947,967
|
|
|
|
Three Months Ended March
31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Income (loss) from operations
|
|
|
(94,667
|
)
|
|
|
(3,042,634
|
)
|
|
|
2,947,967
|
|
Other income (expenses):
|
|
|
(1,017,504
|
)
|
|
|
(1,942,391
|
)
|
|
|
924,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,112,171
|
)
|
|
$
|
(4,985,025
|
)
|
|
$
|
3,872,854
|
|
Our operating loss decreased $2,947,967
to a loss of $94,667 for the three months ended March 31, 2014 from an operating loss of $3,042,634 for the three months ended
March 31, 2013. This was due to a decrease in our General and Administrative costs offset by a small increase in Research and
Development expenses.
Research and Development costs decreased
by $25,380, from $25,380 for the three months ended March 31, 2013 to zero for the three months ended March 31, 2014 as we curtailed
our research effort due to lack of funds.
General and Administrative
expenses decreased by $2,922,587 to $94,667 for the three months ended March 31, 2014, from $3,017,254 for the three months
ended March 31, 2013. The decrease in General and Administrative expenses was primarily due to the absence of the one time
charge of $2,700,000 for the issuance of our Series E Preferred Shares during the quarter ended March 31, 2013 and reduced
operating expenses from reduction in activities due to lack of working capital.
Other expense was $1,017,504 for
the three months ended March 31, 2014, compared to income of $1,942,391 for the three months ended December 31, 2013.
The decrease in other expense of $924,887 primarily is due to changes in the fair market value of our derivative and
Preferred Stock liability.
Interest expense was $1,033,537 for the
three months ended March 31, 2014, compared to an expense of $1,946,363 for the period ended March 31, 2013, an decrease of $912,826.
The decrease in interest expense was primarily due to a reduction in the issuance of warrants granted with convertible notes sold
during the period ended March 31, 2014 compared to the period ended March 31, 2013.
Nine Months Ended March 31, 2014
Compared to Nine Months Ended March 31, 2013:
|
|
Nine Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Research and Development Costs
|
|
|
68,400
|
|
|
|
209,362
|
|
|
|
140,962
|
|
General and Administrative
|
|
|
741,335
|
|
|
|
3,782,759
|
|
|
|
3,041,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
(809,735
|
)
|
|
$
|
(3,992,121
|
)
|
|
$
|
3,182,386
|
|
|
|
Nine Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
Change
|
|
Income (loss) from operations
|
|
|
(809,735
|
)
|
|
|
(3,992,121
|
)
|
|
|
3,182,386
|
|
Other income (expenses):
|
|
|
(6,528,770
|
)
|
|
|
(1,276,097
|
)
|
|
|
(5,252,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,338,505
|
)
|
|
$
|
(5,268,218
|
)
|
|
$
|
(2,070,287
|
)
|
Our operating loss decreased $3,182,386
to a loss of $809,735 for the nine months ended March 31, 2014 from an operating loss of $3,992,121 for the nine months ended
March 31, 2013. This decrease was due to a decrease in Research and Development costs of $115,582, and General and Administrative
costs decreased $118,837.
Research and Development costs decreased
by $140,962, from $209,362 for the nine months ended March 31, 2013 to $68,400 for the nine months ended March 31, 2014, primarily
due to the payment of warrants for work performed on a project to humanize one of our beta-amyloid specific, monoclonal antibodies
for the treatment of Alzheimer’s disease in the period ended December 31, 2012.
General and Administrative
expenses decreased by $3,041,424 to $741,335 for the nine months ended March 31, 2014, from $3,782,759 for the nine months
ended March 31, 2013. The decrease in General and Administrative expenses was primarily due to the absence of the one time
non-cash charge of $2,700,000 for the issuance of our Series E Preferred Shares during the quarter ended March 31, 2013 and
reduced operating expenses from reduction in activities due to lack of working capital. The remainder of the decrease in
General and Administrative expenses was primarily due to small decreases in various accounts.
Other expense was $6,528,770 for the nine
months ended March 31, 2014, compared to $1,276,097 for the nine months ended March 31, 2013. The decrease in other expense of $525,673 primarily is due to changes in the fair market value of our derivative and
Preferred Stock liability.
Interest expense increased by $2,688,907,
to $6,561,445 for the nine months ended March 31, 2014, compared to $3,872,538 for the nine months ended March 31, 2013.
The increase in interest expense was due to a $3,066,177 increase in the amount charged for warrants issued with the convertible
notes issued in the six months ended December 31, 2013, an increase of $138,134 in preferred stock interest due to the Series
D and Series E shares outstanding for the entire six month period ending December 31, 2013, while the remainder was due to the
an increase in the outstanding balance of convertible notes payable.
The gain on the change in the fair
market value of derivative instruments and preferred stock liability decreased by $2,563,766, from $2,596,441 for the nine
months ended March 31, 2013 compared to $32,675 for the nine months ended December 31, 2014.
Liquidity and Capital Resources
Since our inception in 2005, we have mainly
generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the
foreseeable future. As of March 31, 2014, our deficit accumulated during the development stage was $91,430,471. Our loss
from operations for the nine months ended March 31, 2014 and 2013 was $809,735 and $3,992,121, respectively. Our cash used in
operations was $421,953 and $620,801 for the six months ended March 31, 2014 and 2013, respectively. Our capital deficiency was
$20,385,100 as of March 31, 2014.
We have limited capital resources and operations
since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of March 31,
2014, we had cash and cash equivalents of $106. In September 2011, we granted an exclusive license to ViroPharma regarding
certain of our licensed patents and patent applications related to OX1 in exchange for payment by ViroPharma of a $6.5 million
up-front licensing fee which was received in October, 2011, and additional regulatory milestone payments based upon defined events
in the United States and the European Union. Proceeds from this transaction were used to pay expenses related to the ViroPharma
transaction, payment of accounts payable and fund working capital. We anticipate that our existing capital resources will enable
us to continue operations for the next few weeks.
However, our business will require substantial
additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products
and technologies in the future. Further, we will not have sufficient resources to develop fully any new products or technologies
unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners.
If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners within the next
few months, we will be unable to successfully develop and commercialize our products. We cannot assure you that financing will
be available in a timely manner, on favorable terms or at all.
The audit report prepared by our independent
registered public accounting firm relating to our consolidated financial statements for the year ended June 30, 2013 includes
an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
As of March 31, 2014, we had no material
off-balance sheet arrangements other than obligations under various agreements as follows:
Under a License Agreement with NYU and
a similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OX1
program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement
of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay
each of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect. In September
2011, we granted a sublicense of the License Agreements to ViroPharma pursuant to which we received a $6.5 million up-front licensing
fee and are entitled to receive additional regulatory milestone payments based upon defined events in the United States and the
European Union. Pursuant to the terms of the License Agreements, we paid SAMS and NYU $650,000 of the up-front licensing fee and
are obligated to pay a portion of future payments we may receive from ViroPharma.
Mindset acquired from Mayo Foundation for
Medical Education and Research (“Mayo”) a non-exclusive license to use certain transgenic mice as models for AD and
is obligated to pay Mayo a royalty of 2.5% of any net revenue that Mindset receives from the sale or licensing of a drug product
for AD in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMSF to conduct
research with respect to OX1. Pursuant to the Assignment that we executed with the SAMSF, we agreed to assume Mindset’s
obligations to pay royalties to Mayo. We have not received any net revenue that would trigger a payment obligation to Mayo.
Pursuant to a Letter Agreement with the
Institute for the Study of Aging, we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical
development of OX1.
Under a Research Agreement with MRC Technology
(“MRCT”), we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related
to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty
based on sales, of the resulting drug products. MRCT has achieved their research milestones and we have included the total $560,000
in accrued expenses. On September 16, 2012 the Company issued to MRCT 11,200,000 warrants with an exercise price of $0.0625 in
full consideration for the money owed to MRCT.
Under the terms of a Beta-Amyloid
Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement with Immuno-Biological Laboratories Co., Ltd (“IBL”),
we agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales
of any pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.
Under the terms of a Royalty Participation
Agreement effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties
that we receive from the license of our ANTISENILIN patent estate.
Under a License Agreement with Northwestern
University (“NWU”) related to our TOC-01 program, we are obligated to make future payments totaling approximately
$700,000 to NWU upon achievement of certain milestones based on phases of clinical development and also to pay NWU a royalty based
on product sales.
Under the terms of a consulting agreement
with a former member of our Board of Directors, we are obligated to pay $1,000,000 from revenue generated from product sales or
licenses. We have paid $119,070 to date.
In the ordinary course of business,
we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary
for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant
to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or
incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken
or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions
is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.
As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities
recorded for these provisions as of December 31, 2013.
In the normal course of business, we may
be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental
actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim.
If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States,
an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements.
After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits
and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Critical Accounting Estimates and New Accounting Pronouncements
Critical Accounting Estimates
The preparation of financial statements
in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate
to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the
estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations
or financial condition.
Convertible Instruments
We
evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives
and Hedging Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances
in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported
in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be
considered a derivative instrument.
We account for convertible instruments
(when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows:
We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of
the related debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of
conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock
at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
Common Stock Purchase Warrants
We
classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement
or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our
own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts
that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event
is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement
or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at
each reporting date to determine whether a change in classification between assets and liabilities is required.
Preferred
Stock.
We
apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification
and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments
and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares
that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of
uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in
stockholders’ equity.
Derivative Instruments
. Our derivative
financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features
embedded within our convertible debt. The accounting treatment of derivative financial instruments requires that we
record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value
as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or
expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet
date, we recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent
balance sheet date, we recorded non-operating, non-cash income.
Research and Development Costs and Clinical
Trial Expenses.
Research and development costs include costs directly attributable to the conduct of research and
development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research
equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors,
including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research,
preclinical development, and clinical trials. All costs associated with research and development are expensed as incurred.
Revenue Recognition.
We recognize
revenue in accordance with authoritative accounting guidance, which provides that non-refundable upfront and research and development
milestone payments and payments for services are recognized as revenue as the related services are performed over the term of
the collaboration.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not Applicable
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal
financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a –
15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the
end of the period covered by this quarterly report. They have concluded that, based on such evaluation, our disclosure controls
and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December
31, 2012, as described in our Form 10-K for the year ended June 30, 2012 filed with the SEC on October 15, 2012.
Changes in Internal Controls Over Financial Reporting
There has been no change in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II – OTHER INFORMATION
ITEM 5. OTHER
None
ITEM 6. EXHIBITS
31.1* Certification of Principal Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32.1* Certification of Principal Executive Officer and Chief
Financial Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation Linkbase
101.DEF** XBRL Taxonomy Extension Definition Linkbase
101.LAB** XBRL Taxonomy Extension Label Linkbase
101.PRE** XBRL Taxonomy Extension Presentation Linkbase
* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, these interactive
data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities
Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
In accordance with the Securities Exchange
Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
Dated: May 20, 2014
|
INTELLECT NEUROSCIENCES, INC.
|
|
|
|
|
|
/s/ Elliot Maza
|
|
Elliot Maza
|
|
Principal Executive Officer and Chief Financial Officer (Principal Financial and Accounting Officer)
|