Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Organization (Planned Principal Operations Have Not Commenced)
ImmunoCellular Therapeutics, Ltd. (the Company) is seeking to develop and commercialize new therapeutics to fight cancer using the immune system. These condensed consolidated financial statements include the Company’s wholly owned subsidiaries, ImmunoCellular Bermuda, Ltd. in Bermuda and ImmunoCellular Therapeutics (Ireland) Limited and ImmunoCellular Therapeutics (Europe) Limited in Ireland, that were formed during 2014. The Company has been primarily engaged in the acquisition of certain intellectual property, together with development of its product candidates and the recent clinical testing for its immunotherapy product candidates, and has not generated any recurring revenues.
In June 2017, the Company announced that it had determined it was unable to secure sufficient additional financial resources to complete the phase 3 registration trial of ICT-107, its patient-specific, dendritic cell-based immunotherapy for patients with newly diagnosed glioblastoma, which was previously its lead product candidate. As a result, the Company suspended the trial while it continues to seek a collaborative arrangement or acquisition of its ICT-107 program. The suspension of the phase 3 registration trial of ICT-107 has reduced the amount of cash used in the Company's operations.
As a result of suspending the ICT-107 trial, the Company recorded a charge to research and development of
$2,349,404
during the nine months ended September 30, 2017 to write-off the remaining trial related supplies. Additionally, at June 30, 2017, the Company recorded a charge to research and development of approximately
$3.0 million
to reflect the contractual vendor obligations associated with terminating the trial. The Company recorded a credit to other income of
$7,719,440
to account for the derecognition of the CIRM award liability including accrued interest. Previously, the Company accounted for the award as a loan and accrued interest expense (See Note 7).
The Company is developing Stem-to-T-Cell immunotherapies for the treatment of cancer based on rights to novel technology it exclusively licensed from the California Institute of Technology (Caltech). The technology originated from the labs of David Baltimore, Ph.D., Nobel Laureate and President Emeritus at Caltech, and utilizes the patient’s own hematopoietic stem cells to create antigen-specific killer T cells to treat cancer. The Company plans to utilize this technology to expand and complement its DC-based cancer immunotherapy platform, with the goal of developing new immunotherapies that kill cancer cells in a highly directed and specific manner and that can function as monotherapies or in combination therapy approaches.
The Company also has two other product candidates: ICT-140 for ovarian cancer and ICT-121 for recurrent glioblastoma. During the third quarter of 2016, the Company completed its enrollment of ICT-121, and the trial was completed in March 2017. Currently, the Company is holding the initiation ICT-140 until it can find a partner to share expenses.
The Company has incurred operating losses and, as of
September 30, 2017
, the Company had an accumulated deficit of
$116,012,364
. The Company expects to incur significant research, development and administrative expenses before any of its products can be launched and recurring revenues generated.
The Company's activities are subject to significant risks and uncertainties, including the failure of any of the Company's product candidates to achieve clinical success or to obtain regulatory approval. Additionally, it is possible that other companies with competing products and technology might obtain regulatory approval ahead of the Company. The Company will need significant amounts of additional funding in order to complete the development of any of its product candidates and the availability and terms of such funding cannot be assured.
Interim Results
The accompanying condensed consolidated financial statements as of
September 30, 2017
and for the
three and nine
month periods ended
September 30, 2017
and
2016
are unaudited, but include all adjustments, consisting of normal recurring entries, which the Company’s management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of
December 31, 2016
have been derived from the Company’s audited financial statements included in its Form 10-K for the year ended
December 31, 2016
filed with the Securities and Exchange Commission (SEC) on March 9, 2017.
The condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) have been condensed or omitted pursuant to
such rules and regulations. The condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements in its Form 10-K for the year ended
December 31, 2016
. The Company’s operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.
2. Summary of Significant Accounting Policies
Basis of presentation and going concern
- The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. Since inception, the Company has been engaged in research and development activities and has not generated any cash flows from operations. Through
September 30, 2017
, the Company has incurred accumulated losses of
$116,012,364
and as of
September 30, 2017
, the Company had
$6,005,298
of cash and a working capital deficit of
$582,967
. The Company believes that it will not have enough cash resources to fund the business for the next 12 months. Successful completion of the Company’s research and development activities, and its transition to attaining profitable operations, is dependent upon obtaining additional financing. Additional financing may not be available on acceptable terms or at all. If the Company issues additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the date the financial statements are issued. These condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.
In June 2017, the Company announced that it had determined it was unable to secure sufficient additional financial resources to complete the phase 3 registration trial of ICT-107. As a result, the Company suspended further patient randomization in the ICT-107 trial while it continues to seek a collaborative arrangement or acquisition of its ICT-107 program. The suspension of the phase 3 registration trial of ICT-107 has reduced the amount of cash used in the Company's operations.
In July 2017, the Company completed a financing that provided funds that are expected to be sufficient to wind down the phase 3 trial of ICT-107. The Company plans to improve its future liquidity by obtaining additional financing through the issuance of financial instruments such as equity and warrants or through the receipt of grants and awards. Additionally, the Company continues to evaluate its strategic alternatives, which may include a potential merger, consolidation, reorganization or other business combination, as well as the sale of the Company or the Company's assets.
Principles of Consolidation -
The condensed consolidated balance sheets include the accounts of the Company and its subsidiaries. The condensed consolidated statements of operations include the Company’s accounts and the accounts of its subsidiaries from the date of acquisition. All intercompany transactions and balances have been eliminated in consolidation.
Cash and cash equivalents
– The Company considers all highly liquid instruments with an original maturity of 90 days or less at acquisition to be cash equivalents. As of
September 30, 2017
and
December 31, 2016
, the Company had
$466,601
and
$3,462,617
, respectively, of certificates of deposit. The Company places its cash and cash equivalents with various banks in order to maintain FDIC insurance on all of its
investments.
Supplies for clinical trials
- Supplies are stated at the lower of cost or market, with cost determined by the first-in, first-out basis and consist of items that will be used in the Company’s ongoing clinical trials. With the suspension of the phase 3 trial of ICT-107, the Company determined that the remaining supplies should be expensed. Accordingly, for the nine month period ended September 30, 2017, the Company recorded a charge to expense of
$2,349,404
, which is included in research and development expenses. The Company did not record any reserve for obsolescence during the
three and nine
month periods ended
September 30, 2016
.
Property and Equipment
– Property and equipment are stated at cost and depreciated using the straight-line method based on the estimated useful lives (generally
three
to
five years
) of the related assets. Computers and computer equipment are depreciated over
three years
. Management continuously monitors and evaluates the realizability of recorded long-lived assets to determine whether their carrying values have been impaired. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the nondiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Any impairment loss is measured by comparing the fair value of the asset to its carrying amount. Repairs and maintenance costs are expensed as incurred.
Research and Development Costs
– Research and development expenses consist of costs incurred for direct research and development and are expensed as incurred.
Stock Based Compensation
– The Company records the cost for all share-based payment transactions in the Company’s condensed consolidated financial statements. Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally equals the vesting period, based on the number of awards that are expected to vest. Estimating the fair value for stock options requires judgment, including the expected term of the Company’s stock options, volatility of the Company’s stock, expected dividends, risk-free interest rates over the expected term of the options and the expected forfeiture rate. In connection with performance-based programs, the Company makes assumptions principally related to the number of awards that are expected to vest after assessing the probability that certain performance criteria will be met.
Stock option grants issued to employees and officers and directors were valued using the Black-Scholes pricing model. The Company did not issue any stock-based compensation during the
nine
months ended
September 30, 2017
.
Fair value was estimated at the date of grant using the following weighted average grant date assumptions:
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|
|
|
|
|
|
|
Nine Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2016
|
Risk-free interest rate
|
—
|
%
|
|
1.3
|
%
|
Expected dividend yield
|
None
|
|
|
None
|
|
Expected life
|
0.0 years
|
|
|
6.0 years
|
|
Expected volatility
|
—
|
%
|
|
82.7
|
%
|
Expected forfeitures
|
—
|
%
|
|
—
|
%
|
The risk-free interest rate used is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not declared or paid any dividends and does not currently expect to do so in the future. The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on projected holding periods for the remaining unexercised options. Consideration was given to the contractual terms of our stock-based awards, vesting schedules and expectations of future employee behavior. The expected volatility is based upon the historical volatility of the Company’s common stock. Forfeitures are accounted for when they occur.
The Company’s stock price volatility and option lives involve management’s best estimates, both of which impact the fair value of the option calculated and, ultimately, the expense that will be recognized over the life of the option.
When options are exercised, our policy is to issue reserved but previously unissued shares of common stock to satisfy share option exercises. As of
September 30, 2017
, the Company had
3,121,042
shares of authorized and unreserved common stock.
No
tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.
Income Taxes
–
The Company accounts for federal and state income taxes under the liability method, with a deferred tax asset or liability determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates. The Company’s provision for income taxes represents the amount of taxes currently payable, if any, plus the change in the amount of net deferred tax assets or liabilities. A valuation allowance is provided against net deferred tax assets if recoverability is uncertain on a more likely than not basis. As of
September 30, 2017
and
December 31, 2016
, the Company fully reserved its deferred tax assets. The Company recognizes in its financial statements the impact of an uncertain tax position if the position will more likely than not be sustained upon examination by a taxing authority, based on the technical merits of the position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. As of
September 30, 2017
, the Company had
no
unrecognized tax benefits and as such,
no
liability, interest or penalties were required to be recorded. The Company does not expect this to change significantly in the next twelve months. The Company has determined that its main taxing jurisdictions are the United States of America and the State of California. The Company is not currently under examination by any taxing authority nor has it been notified of a pending examination. The Company’s tax returns are generally
no
longer subject to examination for the years before December 31, 2011
for the state and December 31, 2012
for the federal taxing authority.
During 2014, the Company licensed the non-U.S. rights to a significant portion of its intellectual property to its Bermuda-based subsidiary for approximately
$11.0 million
. The fair value of the intellectual property rights was determined by
an independent third party. The proceeds from this sale represented a gain for U.S. tax purposes and were offset by current year losses and net operating loss carryforwards. However, the Internal Revenue Service, or the IRS, or the California Franchise Tax Board, or the CFTB, could challenge the valuation of the intellectual property rights and assess a greater valuation, which would require the Company to utilize a larger portion, or all, of its available net operating losses. If an IRS or a CFTB valuation exceeds the available net operating losses, the Company would incur additional income taxes. The Company’s ability to use its net operating losses is subject to the limitations of IRS Section 382, as well as expiration of federal and state net operating loss carryforwards
.
Fair Value of Financial Instruments
– The carrying amounts reported in the balance sheets for cash, cash equivalents, and accounts payable approximate their fair values due to their quick turnover. Previously, the Company estimated the fair value of warrant derivative liability using the Binomial Lattice option valuation model for warrants that are not publicly traded. The Company determined the fair value of the warrant derivative liability of its publicly traded warrants based upon the last trading price as of the balance sheet date. Effective July 1, 2017, the Company early adopted ASU No. 2017-11, which specifies that financial instruments with down round protection should be accounted for as equity rather than as derivatives. Accordingly, the Company reclassified its derivatives warrants from liabilities to equity.
Fair value for financial reporting is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:
Level 1—quoted prices in active markets for identical assets or liabilities
Level 2—quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3—inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Warrant liabilities represented the only financial assets or liabilities recorded at fair value by the Company. The fair value of warrant liabilities was based on Level 1 or Level 3 inputs.
Reverse Stock Split
- On November 18, 2016, the Company effected a one-for-forty reverse stock split of its common stock through an amendment to its amended and restated certificate of incorporation (the 2016 Amendment). As of the effective time of the reverse stock split, every forty shares of the Company’s issued and outstanding common stock were converted into one issued and outstanding share of common stock, without any change in par value per share. The reverse stock split affected all shares of the Company’s common stock outstanding immediately prior to the effective time of the reverse stock split, as well as the number of shares of common stock available for issuance under the Company’s equity incentive plans and outstanding warrants. No fractional shares were issued as a result of the reverse stock split. Stockholders who would otherwise have been entitled to receive a fractional share received cash payments in lieu thereof. In addition, the 2016 Amendment reduced the number of authorized shares of common stock to
25.0 million
.
In June 2017, the Company's stockholders approved a certificate of amendment to its amended and restated certificate of incorporation to increase the number of authorized shares of common stock from
25.0 million
to
50.0 million
, which was effective on June 16, 2017.
Use of Estimates
– The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions about the future outcome of current transactions, which may affect the reporting and disclosure of these transactions. Accordingly, actual results could differ from those estimates used in the preparation of these condensed consolidated financial statements.
Warrant Liability
-
The fair value of the Company's derivative warrants that are not traded on the NYSE American was previously estimated using the Binomial Lattice option valuation model. The use of the Binomial Lattice option valuation model requires estimates including the volatility of the Company’s stock, risk-free rates over the expected term of warrants and early exercise of the warrants. The Company determined the warrant derivative liability of its publicly traded warrants based upon the last trading price as of the balance sheet date. As described below, the Company adopted ASU No. 2017-11 effective July 1, 2017, and reclassified its warrant derivatives from liabilities to equity.
Basic and Diluted Loss per Common Share –
Basic and diluted loss per common share
are computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of options and warrants) are excluded from the computation, since the effect would be antidilutive. Common share equivalents which could
potentially
dilute earnings per share, and which were excluded from the computation of diluted loss per share, totaled
1,712,687
shares and
1,917,224
shares at
September 30, 2017
and
2016
, respectively.
Recently Issued Accounting Standards
–
In August
2014
, the FASB issued ASU No. 2014-15,
which applies to entities that have substantial doubt about their ability to continue as a going concern. This update requires management to perform interim and annual assessments of the probability about the entity’s ability to remain as a going concern for a period of one year from the date the financial statements are issued. Depending on management’s conclusions about the entity’s ability to remain as a going concern, the entity must make certain disclosures in its financial statements. This ASU is effective for annual periods ending after December 15, 2016. The adoption of this ASU did not have a material impact on the Company’s consolidated results of operations, financial condition or liquidity.
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize in the balance sheet, a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term (the lease asset). For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This ASU is effective for fiscal years beginning after December 15, 2018. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, finance condition or liquidity.
In March 2016, the FASB issued ASU No. 2016-09, which simplifies some of the rules relating to the accounting for stock options. Among other items, this update permits entities to account for stock option forfeitures when they occur unlike the current practice that requires estimation of forfeitures at the time of issuance. This ASU is effective for annual periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this ASU, which has not had a material impact on the Company’s consolidated results of operations, financial condition or liquidity.
In May 2017, the FASB issued ASU No. 2017-09, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity is required to apply modification accounting unless, 1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, 2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, and 3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This ASU is effective for annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated results of operations, finance condition or liquidity.
In July 2017, the FASB issued ASU No. 2017-11, which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU No. 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU No. 2017-11 requires entities to recognize the effect of the down round feature when calculating earnings per share. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. ASU No. 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU No. 2017-11 in an interim period, adjustments should be reflected as of the beginning of the interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU No. 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting. The Company has elected to adopt ASU No. 2017-11 effective July 1, 2017 retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017. (See Note 6).
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force) and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
3. Property and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Computers
|
$
|
16,907
|
|
|
$
|
70,960
|
|
Research equipment
|
305,066
|
|
|
305,066
|
|
|
321,973
|
|
|
376,026
|
|
Accumulated depreciation
|
(262,313
|
)
|
|
(266,203
|
)
|
|
$
|
59,660
|
|
|
$
|
109,823
|
|
Depreciation expense was
$13,941
and
$17,256
for the three months ended
September 30, 2017
and
2016
, respectively. Additionally, depreciation expense was
$47,131
and
$58,219
for the nine months ended
September 30, 2017
and
2016
, respectively.
4. Related-Party Transactions
Cedars-Sinai Medical Center License Agreement
Dr. John Yu, the Company's founder and member of the Company's Board of Directors, is a neurosurgeon at Cedars-Sinai Medical Center (Cedars-Sinai).
On May 13, 2015, the Company entered into an Amended and Restated Exclusive License Agreement (the Amended License Agreement) with Cedars-Sinai. Pursuant to the Amended License Agreement, the Company acquired an exclusive, worldwide license from Cedars-Sinai to certain patent rights and technology developed in the course of research performed at Cedars-Sinai into the diagnosis of diseases and disorders in humans and the prevention and treatment of disorders in humans utilizing cellular therapies, including dendritic cell-based vaccines for brain tumors and other cancers and neurodegenerative disorders. Under the Amended License Agreement, the Company will have exclusive rights to, among other things, develop, use, manufacture, sell and grant sublicenses to the licensed technology.
The Company has agreed to pay Cedars-Sinai specified milestone payments related to the development and commercialization of ICT-107, ICT-121 and ICT-140. The Company will be required to pay to Cedars-Sinai
$1.0 million
upon first commercial sale of the Company’s first product. The Company will pay Cedars-Sinai single digit percentages of gross revenues from the sales of products and high-single digit to low-double digit percentages of the Company’s sublicensing income based on the licensed technology. During the
nine
months ended
September 30, 2016
, the Company incurred
$100,000
of licensing fees to Cedars-Sinai.
No
licensing fees were incurred during the
nine
months ended
September 30, 2017
.
The Amended License Agreement will terminate on a country-by-country basis on the expiration date of the last-to-expire licensed patent right in each such country. Either party may terminate the Amended License Agreement in the event of the other party’s material breach of its obligations under the Agreement if such breach remains uncured 60 days after such party’s receipt of written notice of such breach. Cedars-Sinai may also terminate the Amended License Agreement upon 30 days’ written notice to the Company that a required payment by the Company to Cedars-Sinai under the Amended License Agreement is delinquent.
The Company has also entered into various sponsored research agreements with Cedars-Sinai and has paid an aggregate of approximately
$1.2 million
. The last agreement concluded on March 19, 2014 at an incremental cost of
$126,237
. During the
nine
months ended
September 30, 2017
and
2016
, Cedars-Sinai did not perform any research activities on behalf of the Company.
5. Co
mmitments and Contingencies
Legal Proceedings
On May 1, 2017, a purported securities class action lawsuit was filed in the United States District Court for the Central District of California, captioned
Arthur Kaye IRA FCC as Custodian DTD 6-8-00 v. ImmunoCellular Therapeutics, Ltd. et al
(Case No. 2:17-cv-03250) against the Company, certain of its current and former officers and directors and others. On July
21, 2017, the court appointed lead plaintiffs in the matter. On August 24, 2017, lead plaintiffs filed Consolidated First Amended Complaint. On September 26, 2017, the court granted the parties’ stipulation to allow lead plaintiffs to file a Consolidated Second Amended Complaint (the “SAC”). The SAC asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5 promulgated thereunder, related to allegedly materially false or misleading statements made between May 1, 2012 and May 30, 2014. The SAC alleges, among other things, that the Company failed to disclose that it purportedly paid for articles to be published about ICT-107. Lead plaintiffs seek an award of unspecified damages, prejudgment and post-judgment interest, as well as reasonable attorneys’ fees, and other costs. The Company’s motion to dismiss the SAC is due on November 10, 2017. The Company intends to vigorously defend against the claims. It is possible that similar lawsuits may yet be filed in the same or other courts that name the same or additional defendants.
On July 27, 2017, a shareholder filed a derivative class action lawsuit in the Superior Court for the State of California in the County of Los Angeles, captioned
David Wiener, Derivatively and on Behalf of ImmunoCellular Therapeutics, Ltd. v. certain former and current officers and directors
(Case No. BC670134)
.
The complaint sets forth violations of, 1) breach of duty, 2) unjust enrichment, 3) abuse of control, 4) gross mismanagement and 5) waste of corporate assets. The complaint alleges that the lack of oversight allowed the publication of articles about ICT-107 without disclosing that the articles were either directly, or indirectly, paid for by the Company. The complaint further alleges that from May 1, 2012 to April 2017, certain of its current and former officers and directors failed to disclose that the stock promotion scheme in fact occurred or was occurring, the extent of it, as well as the Company's involvement. The plaintiff seeks an award of unspecified damages, prejudgment and post-judgment interest, as well as reasonable attorneys’ fees, and other costs. The Company intends to vigorously defend against the claims. The Company may be obligated to indemnify its officers and directors in connection with this matter.
Commitments
In an effort to expand the Company’s intellectual property portfolio to use antigens to create personalized vaccines, the Company has entered into various intellectual property and research agreements. Those agreements are long-term in nature and are discussed below. In addition to the vendors described below, the Company has deposits with other vendors.
Sponsored Research Agreements
Novella Clinical LLC
On June 30, 2015, the Company entered into a Master Clinical Research Services Agreement with Novella Clinical LLC (Novella Clinical) to conduct the phase
3
registration trial of IC
T-107.
Novella Clinical is a full-service, global clinical research organization providing clinical trial services to small and mid-sized oncology companies. Novella Clinical was engaged to supervise the trial in the United States, Europe and Canada and recruit
542
patients with newly diagnosed glioblastoma. As described above, the Company suspended the trial in June 2017, and applied deposits of
$1,740,937
against the final amounts owed to Novella Clinical. As of September 30, 2017, the Company has a remaining obligation to Novella Clinical of
$451,447
, which in included in accounts payable.
Licensing Agreements
The Johns Hopkins University Licensing Agreement
On February 23, 2012, the Company entered into an Exclusive License Agreement, effective as of February 16, 2012, with The Johns Hopkins University (JHU) under which it received an exclusive, worldwide license to JHU’s rights in and to certain intellectual property related to mesothelin-specific cancer immunotherapies. The Company is advancing a cancer immunotherapy program using JHU and other intellectual property according to commercially reasonable development timeline. If successful and a product ultimately is registered, the Company will either sell the product directly or via a third-party partnership.
Pursuant to the License Agreement, the Company agreed to pay an upfront licensing fee in the low hundreds of thousands of dollars, payable half in cash and half in shares of its common stock in two tranches, within
30 days
of the effective date of the License Agreement and upon issuance of the first U.S. patent covering the subject technology. Annual minimum royalties or maintenance fees increase over time and range from low tens of thousands to low hundreds of thousands of dollars. In addition, the Company has agreed to pay milestone license fees upon completion of specified milestones, totaling single digit millions of dollars if all milestones are met. Royalties based on a low single digit percentage of net sales are also due on direct sales, while third party sublicensing payments will be shared at a low double-digit percentage.
The Company and JHU each have termination rights that include termination for any reason and for reasons relating to specific performance or financial conditions. Effective September 24, 2013, the Company entered into an Amendment No. 1
to the Exclusive License Agreement that updated certain milestones. Effective August 7, 2015, the Company entered into a Second Amendment to the Exclusive License Agreement that amended certain sections of the License Agreement and further updated certain milestones.
California Institute of Technology
On September 9, 2014, the Company entered into an Exclusive License Agreement with the California Institute of Technology under which the Company acquired exclusive rights to novel technology for the development of certain antigen specific stem cell immunotherapies for the treatment of cancers.
Pursuant to the License Agreement, the Company agreed to pay a one-time license fee, a minimum annual royalty based on a low single digit percentage of net revenues and an annual maintenance fee in the low tens of thousands of dollars. In addition, the Company has agreed to make certain milestone payments upon completion of specified milestones.
Cedars-Sinai Medical Center
In connection with the Cedars-Sinai Medical Center License Agreement and sponsored research agreement, the Company has certain commitments as described in Note 4.
Manufacturing
PharmaCell B.V.
In March 2015, the Company entered into an agreement for GMP manufacturing of ICT-107 with PharmaCell B.V. (PharmaCell), pursuant to which PharmaCell provided contract manufacturing services for the European production of ICT-107, a dendritic cell
immunotherapy
for the treatment of newly diagnosed glioblastoma.
In connection with the June 2017 suspension of the Phase 3 trial of ICT-107, the Company unilaterally terminated the agreement. Pursuant to the terms of the agreement, the Company was required to provide
90 days
written notice to PharmaCell. As a result, the Company is obligated to make future payments to Pharmacell of
$1,954,409
, of which
$477,007
is included in accounts payable and
$1,477,402
is included in accrued liabilities as of September 30, 2017.
PCT, LLC
On June 11, 2015, the Company entered into an agreement with PCT Cell Therapy Services, LLC (PCT). Pursuant to the terms of the agreement, PCT provided current good manufacturing practice (cGMP) services for the Phase
3 manufacture of ICT-107 and Phase 1 manufacture of ICT-121.
In connection with the June 2017 termination of the Phase 3 trial of ICT-107, the Company unilaterally terminated the agreement. Pursuant to the terms of the agreement, the Company was required to provide
120 days
written notice to PCT.
As a result, the Company is obligated to make future payments to PCT of
$1,769,854
, of which
$509,946
is included in accounts payable and
$1,259,908
is included other current liabilities as of September 30, 2017.
Employment Agreements
The Company has employment agreements with its remaining management that provide for a base salary, bonus and stock option grants. The aggregate annual base salary payable to this group is approximately
$830,000
and the potential bonus is approximately
$250,000
. During the
nine
months ended
September 30, 2017
, the Company did not issue any stock options or restricted stock units.
Operating Lease
The Company entered into a lease for office space effective June 15, 2013 and continuing through August 31, 2016 at an initial monthly rental of
$8,063
. During 2016, the Company extended this lease through
August 31, 2017
, at a monthly rental of
$8,554
. The Company did not renew its lease at August 31, 2017. Rent expense was approximately
$63,000
and
$81,000
for the
nine
months ended
September 30, 2017
and
2016
, respectively.
6.
Shareholders’ Equity
Underwritten Public Offerings
July 2017 Financing
In July 2017, the Company entered into an underwriting agreement with Maxim Group, LLC, pursuant to which the Company sold
5,000
shares of Series B
8%
Mandatorily Convertible Preferred Stock (the "Preferred Stock") and related warrants (the “Warrants”) to purchase up to
9,000
shares of Preferred Stock for net proceeds of approximately
$4.0 million
excluding proceeds from the exercise of the Warrants. In addition to the
8%
cumulative dividend, each share of Preferred Stock includes an
8%
original issue discount such that the public offering price of each share of Preferred Stock was
$1,000
, compared to a stated value of
$1,080
. The Preferred Stock is convertible into common stock by dividing the stated value by the conversion price. The conversion price equal to the lesser of (i)
$1.22
, subject to certain adjustments, and (ii)
87.5%
of the lowest volume weighted average price of our common stock during the
ten
trading days ending on, and including, the date of the notice of conversion. The conversion price described in (ii) is subject to a floor of
$0.35
, except in the event of anti-dilution adjustments.
The Warrants consist of
three
tranches with expirations in October 2017, January 2018 and July 2018. Each tranche allows the holders to purchase up to
3,000
shares of Preferred Stock at a price of
$1,000
per share. If fully exercised, each tranche would provide the Company with
$3.0 million
of additional financing (
$9.0 million
in total) before underwriting discounts and commissions. Upon exercise, the Warrant holders receive shares of Preferred Stock that are convertible into common stock on the same terms described above.
Through September 30, 2017, holders of Preferred Stock converted
4,898
shares of the Preferred Stock into
13,590,648
shares of the Company’s common stock. Additionally, investors exercised Warrants for the issuance of
2,148.18
shares of Preferred Stock and simultaneously converted those shares into
6,628,699
shares of common stock. The Company received gross proceeds of
$2,148,180
from the exercise of the Warrants. See Note 10 for information on warrant exercises after September 30, 2017.
The Company assessed the warrants as meeting the criteria for equity classification and allocated the proceeds based on the relative fair values of the base instruments (the Series B preferred stock and the warrants). The Company obtained a valuation of the Preferred Stock and associated warrants. Based upon that valuation, the Company allocated the net proceeds between the Preferred Stock and Warrants of approximately
$3.5 million
and
$500,000
, respectively.
In addition, the Company evaluated the conversion feature of the Preferred Stock to assess whether it met the definition of a beneficial conversion feature (“BCF”). Assuming all
5,000
shares of Preferred Stock will convert into common stock at the
$0.35
floor price, and taking the
8%
original issue discount into consideration, the Company will issue
15,428,571
shares of common stock, which provides an effective conversion price of
$0.28
for accounting purposes. As the fair value of a share of common stock of
$0.38
exceeded the effective conversion price of
$0.28
at the issuance date, the Preferred Stock contained a BCF. The intrinsic value of the BCF of
$1,548,544
was recorded as a discount to the Preferred Stock and a credit to additional paid in capital. The BCF was immediately recorded as a dividend. To the extent that warrant holders exercise their warrants and the conversion price of the Preferred Stock is less than the market price of the stock on the date of exercise, the Company recognizes a BCF. For warrant exercises between the initial closing and September 30, 2017, the Company recognized an additional BCF of
$28,442
. The total BCF recognized during the three months ended September 30, 2017 was
$1,576,986
.
The Company also recognized a dividend related to the
8%
original issue discount as the investors are entitled to received
$5,400,000
in common stock, which exceeded their
$5,000,000
investment. Accordingly, the Company recognized a
$400,000
dividend at closing. Additionally, as Warrants are exercised and shares of Preferred Stock are issued the investors benefit from the
8%
original issue discount and the Company records a dividend to reflect the original issue discount. For warrant exercises and related conversions of preferred stock between the initial closing and September 30, 2017, the Company recognized an additional dividend of
$171,854
. The total original issue discount recognized during the three months ended September 30, 2017 was
$571,854
.
August 2016 Financing
In August 2016, the Company entered into an underwriting agreement with Maxim Group LLC, pursuant to which the Company received net proceeds of approximately
$6.6 million
(after deducting the underwriting discount and offering expenses) from the initial sale of
863,750
shares of the Company’s common stock, base warrants to purchase
881,250
shares of
common stock at an exercise price of
$7.68
per share, and pre-funded warrants to purchase
311,250
shares of common stock at an exercise price of
$0.40
per share. The underwriters partially exercised their option to purchase additional shares and warrants and purchased an additional
37,500
shares of the Company’s common stock at a price of
$6.00
per share and warrants to purchase
111,965
shares of common stock at an exercise price of
$0.40
per warrant. The pre-funded warrants have a term of
ten years
, and the base warrants have a term of
five years
from the date of issuance. They also provide for a weighted average adjustment to the exercise price if the Company issues, or is deemed to issue, additional shares of common stock at a price per share less than the then effective price of the warrants, subject to certain exceptions (see “Warrant Liability” below). Due to the potential variability of their exercise price, these warrants do not qualify for equity treatment, and therefore are recognized as a liability. The pre-funded warrants were substantially paid for at the time of the offering and have an exercise price of
$0.40
per share. These warrants qualify for equity treatment. Through
December 31, 2016
,
208,750
pre-funded warrants were exercised and resulted in proceeds to the Company of
$83,500
. During the
nine
months ended
September 30, 2017
, the remaining
102,500
pre-funded warrants were exercised and resulted in proceeds to the Company of
$41,000
.
Controlled Equity Offering
On April 18, 2013, the Company entered into a Controlled Equity Offering
SM
Sales Agreement (the Sales Agreement) with Cantor Fitzgerald & Co. (Cantor), as agent, pursuant to which the Company may offer from time to time through Cantor, shares of our common stock having an aggregate offering price of up to
$25.0 million
(of which only
$17.0 million
was initially registered for offer and sale). Under the Sales Agreement, Cantor may sell shares by any method permitted by law and deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, as amended, including sales made directly on the NYSE MKT, on any other existing trading market for our common stock or to or through a market maker. The Company may instruct Cantor not to sell shares if the sales cannot be effected at or above the price designated by us from time to time. The Company is not obligated to make any sales of the shares under the Sales Agreement. The offering of shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by Cantor or the Company, as permitted therein. Cantor will receive a commission rate of
3.0%
of the aggregate gross proceeds from each sale of shares and the Company has agreed to provide Cantor with customary indemnification and contribution rights. The Company will also reimburse Cantor for certain specified expenses in connection with entering into the Sales Agreement. On April 22, 2013, NYSE MKT approved the listing of
264,831
shares of our common stock in connection with the Sales Agreement.
As of September 21, 2015, the registration statement previously filed with the SEC to facilitate the sale of registered shares of the Company's common stock under the Controlled Equity Offering expired.
The Company filed a new registration statement with the SEC that was declared effective on
January 19, 2016
to facilitate the sale of additional shares under the Controlled Equity Offering. Under the terms of the prospectus, the Company may sell up to
$15,081,494
of the Company’s common stock through the aforementioned Controlled Equity Offering. Pursuant to Instruction I.B.6 to Form S-3 (the Baby Shelf Rules), the Company may not sell more than the equivalent of one-third of its public float during any
12
consecutive months so long as the Company's public float is less than
$75 million
. During the
nine
months ended
September 30, 2016
, the Company sold
77,141
shares of common stock that resulted in net proceeds of
$691,187
, of which
$48,977
represented the recovery of deferred offering costs that had been incurred as of
December 31, 2015
. The Company did not sell any shares of common stock during the nine months ended
September 30, 2017
. As of
September 30, 2017
, the Company had
$14.3 million
available to be sold under the Sales Agreement. The Company's ability to use this Controlled Equity Offering may be impacted as a result of the going concern opinion it received from our auditors.
Stock Options
In February 2005, the Company adopted an Equity Incentive Plan (the Plan). Pursuant to the Plan, a committee appointed by the Board of Directors may grant, at its discretion, qualified or nonqualified stock options, stock appreciation rights and may grant or sell restricted stock to key individuals, including employees, nonemployee directors, consultants and advisors. Option prices for qualified incentive stock options (which may only be granted to employees) issued under the plan may
not be less than 100%
of the fair value of the common stock on the date the option is granted (unless the option is granted to a person who, at the time of grant, owns
more than 10%
of the total combined voting power of all classes of stock of the Company; in which case the option price may not be
less than 110%
of the fair value of the common stock on the date the option is granted). Option prices for nonqualified stock options issued under the Plan are at the discretion of the committee and may be equal to, greater or less than fair value of the common stock on the date the option is granted. The options vest over periods determined by the Board of Directors and are exercisable no later than
ten years
from date of grant (unless they are qualified incentive stock options granted to a person owning
more than 10%
of the total combined voting power of all classes of stock of the Company, in which case the options are exercisable no later than
five years
from date of grant). Initially, the Company reserved
150,000
shares of common stock for issuance under the Plan, which was subsequently increased by the Company's shareholders to
300,000
shares. Options to purchase
98,895
common shares have been granted under the Plan and
are outstanding as of
September 30, 2017
. Additionally,
6,500
shares of restricted common stock have been granted to management and
1,000
shares of restricted common stock have been granted to members of the Company’s Board of Directors under the Plan. This plan expired in January 2016.
On March 11, 2016, the Company's Board of Directors adopted the 2016 Equity Incentive Plan (the 2016 Plan) and reserved
250,000
shares of common stock for issuance under the 2016 Plan. The 2016 Plan was approved by the Company's stockholders at its 2016 Annual Meeting of Stockholders. During the
nine
months ended
September 30, 2017
, no equity compensation was granted by the Company. As of
September 30, 2017
, options to purchase
43,189
common stock shares have been granted and are outstanding under the plan.
The following table summarizes stock option activity for the Company during the
nine
months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding December 31, 2016
|
162,665
|
|
|
$
|
43.11
|
|
|
—
|
|
|
—
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
(20,581
|
)
|
|
$
|
108.42
|
|
|
—
|
|
|
—
|
|
Outstanding September 30, 2017
|
142,084
|
|
|
$
|
44.11
|
|
|
5.81
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017
|
116,624
|
|
|
$
|
48.51
|
|
|
5.51
|
|
|
$
|
—
|
|
As of
September 30, 2017
, the total unrecognized compensation cost related to unvested stock options amounted to
$244,046
, which will be recognized over the weighted average remaining requisite service period of approximately
11 months
.
On March 11, 2016, the Company issued an aggregate of
7,862
restricted stock units to certain officers and employees. The restricted stock units are outstanding as of
September 30, 2017
and are subject to cliff vesting on March 10, 2018. For accounting purposes, these shares were valued at
$13.20
, which was the stock price on the date of grant, and will be expensed over the service period of
two
years from the date of grant. As of
September 30, 2017
,
3,937
restricted stock units are unvested.
Warrants
In July 2017, the FASB issued ASU No. 2017-11, which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU No. 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU No. 2017-11 requires entities to recognize the effect of the down round feature when calculating earnings per share. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. ASU No. 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU No. 2017-11 in an interim period, adjustments should be reflected as of the beginning of the interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU No. 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting. The Company has elected to adopt ASU No. 2017-11 effective July 1, 2017 retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017. The January 1, 2017 cumulative-effect adjustment to the Company’s financial position is as follows
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Cumulative Effect Adjustment
|
|
Adjusted
|
Derivative Liability
|
$
|
573,560
|
|
|
$
|
(573,560
|
)
|
|
$
|
—
|
|
Additional Paid in Capital
|
$
|
102,354,844
|
|
|
$
|
6,481,770
|
|
|
$
|
108,836,614
|
|
Accumulated Deficit
|
$
|
(96,223,442
|
)
|
|
$
|
(5,908,210
|
)
|
|
$
|
(102,131,652
|
)
|
In connection with the January 2012 underwritten public offering, the Company issued to the investors warrants to purchase
118,618
shares of the Company’s common stock at
$56.40
per share. The warrants had a
five
-year term from the date of issuance. In January 2017, the remaining
35,454
warrants expired.
In connection with the October 2012 underwritten public offering, the Company issued to the investors warrants to purchase
112,500
shares of the Company’s common stock at
$106.00
per share. The warrants have a
five
-year term from the date of issuance. As of
September 30, 2017
, warrants to purchase
111,119
shares of the Company’s common stock remain outstanding relating to this public offering. Subsequent to
September 30, 2017
, these warrants expired (Note 10).
In connection with the August 2016 underwritten public offering, the Company issued pre-funded warrants to purchase
311,250
shares of common stock to certain investors. These pre-funded warrants were substantially paid for at the time of the offering, have a ten-year term and an exercise price of
$0.40
per share. During 2016, pre-funded warrants to purchase
208,750
shares of common stock were exercised. In June 2017, the remaining pre-funded warrants to purchase
102,500
shares of common stock were exercised.
In connection with the February 2011 common stock private placement, the Company issued warrants to purchase
70,467
shares of the Company’s common stock at
$90.00
per share. The warrants had a term of
five years
and contained a provision whereby the warrant exercise price would be decreased in the event that certain future common stock issuances are made at a price less than
$62.00
. Due to the potential variability of their exercise price, these warrants did not qualify for equity treatment, and therefore were recognized as a liability. As a result of the January 2012, October 2012, and February 2015 financings and shares sold through the Company's Controlled Equity Offering, the exercise price of the warrants was adjusted to
$57.60
and the number of warrants was proportionately increased to
91,670
net of exercises. On February 24, 2016, the remaining warrants to purchase
91,670
shares of the Company's common stock expired.
In connection with the February 2015 underwritten public offering, the Company issued warrants to purchase
466,369
shares of the Company’s common stock at
$26.40
per share. The warrants have a term of
five years
and contain a provision whereby the warrant exercise price will be decreased in the event that certain future common stock issuances are made at a price less than
$26.40
. Due to the potential variability of their exercise price, these warrants did not qualify for equity treatment, and therefore were recognized as a liability. During 2016, the exercise price of these warrants was adjusted to
$20.00
to reflect the shares sold under the Company's controlled equity offering and the August 2016 public offering. The Company initially valued these warrants using a binomial lattice simulation model assuming (i) dividend yield of
0%
; (ii) expected volatility of
97.0%
; (iii) risk free rate of
1.53%
and (iv) expected term of
5 years
. Based upon these calculations, the Company calculated the initial valuation of the warrants to be
$4,197,375
. For the three and nine months ended
September 30, 2016
, the Company revalued these warrants using the binomial lattice simulation model and recorded a credit to other income of
$820,447
and
$1,747,118
, respectively. As of the July 1, 2017 adoption of ASU No. 2017-11, the Company reclassified the remaining warrant liability of
$7,302
to additional paid in capital. As a result of the July 2017 financing, the exercise price of these warrants was adjusted to
$10.55
and the Company recorded a dividend of
$6,984
. As of
September 30, 2017
, warrants to purchase
466,369
shares of the Company's common stock remain outstanding.
In connection with the August 2016 underwritten public offering, the Company issued warrants to purchase
993,115
shares of common stock with an initial exercise price of
$7.68
per share. The warrants have a term
five years
and contain a provision whereby the warrant exercise price would be proportionately decreased in the event that future common stock issuances are made at a price less than
$7.68
per share. Due to the potential variability of their exercise price, these warrants did not qualify for equity treatment, and therefore were recognized as a liability. These warrants are traded on the NYSE American (symbol IMUC.WS). The Company initially valued these warrants using the closing price on August 12, 2016 of
$2.30
, which was the first day the warrants were traded on the NYSE American. Accordingly, the Company allocated
$2,284,395
of the total proceeds from the August 2016 offering to the base warrants. As of the July 1, 2017 adoption of ASU No. 2017-11, the Company reclassified the remaining warrant liability of
$20,560
to additional paid in capital. As a result of the July 2017 financing, the exercise price of these warrants was adjusted to
$4.15
and the Company recorded a
dividend of
$16,327
. As of
September 30, 2017
, warrants to purchase
993,115
shares of the Company's common stock remain outstanding.
In connection with the July 2017 underwritten public offering, the Company issued
three
tranches of warrants with expirations in October 2017, January 2018 and July 2018. Each tranche allows the holders to purchase up to
3,000
shares of Preferred Stock at a price of
$1,000
per share. If fully exercised, each tranche would provide the Company with
$3.0 million
of additional financing (
$9.0 million
in total). Upon exercise, the Warrant holders receive shares of Preferred Stock that are subject to the
8%
original issue discount. The Preferred Stock is convertible into common stock using a conversion price equal to the lesser of (i)
$1.22
, subject to certain adjustments, and (ii)
87.5%
of the lowest volume weighted average price of our common stock during the ten trading days ending on, and including, the date of the notice of conversion. The conversion price described in (ii) is subject to a floor of
$0.35
, except in the event of anti-dilution adjustments.
The warrant exercises through September 30, 2017, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Exercised
|
|
Remaining
|
Series 1 warrants
|
|
$
|
3,000,000
|
|
|
$
|
1,589,000
|
|
|
$
|
1,411,000
|
|
Series 2 warrants
|
|
3,000,000
|
|
|
475,580
|
|
|
2,524,420
|
|
Series 3 warrants
|
|
3,000,000
|
|
|
83,600
|
|
|
2,916,400
|
|
Totals
|
|
$
|
9,000,000
|
|
|
$
|
2,148,180
|
|
|
$
|
6,851,820
|
|
The following reconciliation of the beginning and ending balances for all warrant liabilities measured at fair market value on a recurring basis during the nine months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Balance – January 1
|
$
|
573,560
|
|
|
$
|
1,958,775
|
|
Issuance of warrants and effect of repricing
|
—
|
|
|
2,427,183
|
|
Exercise of warrants
|
—
|
|
|
—
|
|
(Gain) or loss included in earnings
|
—
|
|
|
(2,045,082
|
)
|
Cumulative effect of adoption of ASU No. 2017-11
|
$
|
(573,560
|
)
|
|
$
|
—
|
|
Balance – September 30
|
$
|
—
|
|
|
$
|
2,340,876
|
|
During the
nine
months ended
September 30, 2016
, the Company recorded a charge to financing expense of
$142,788
to reflect the repricing of previously issued warrants
.
As a result of the adoption of ASU No. 2017-11 the Company did
not
incur a financing expense during the
nine
months ended
September 30, 2017
as a result of the July 2017 financing, but did record a dividend in the amount of
$23,311
associated with the repricing of the February 2015 and August 2016 warrants.
7. California Institute of Regenerative Medicine Award
On September 18, 2015, the Company received an award in the amount of
$19.9 million
from the California Institute of Regenerative Medicine (CIRM) to partially fund the Company’s Phase 3 trial of ICT-107. The award originally provided for a
$4.0 million
project initial payment that was received during the fourth quarter of 2015, and up to
$15.9 million
in future milestone payments that were primarily dependent on patient randomization in the ICT-107 Phase 3 trial. In August 2016, the Company and CIRM modified the award such that the Company received an additional
$1.5 million
initial payment. The total amount of the award and other award conditions remained unchanged. Under the terms of the CIRM award, the Company was obligated to share future ICT-107 related revenue with CIRM. The percentage of revenue sharing was dependent on the amount of the award received by the Company and whether the revenue is from product sales or license fees. The maximum revenue sharing amount the Company may have been required to pay to CIRM is equal to nine (
9
) times the total amount awarded and paid to the Company. The Company had the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, the Company had the option to convert the award to a loan, which such option the Company must exercise on or before ten (10) business days after the FDA notifies the Company that it has accepted the Company’s application for marketing authorization. In the event the Company exercised its right to convert the award to a loan, it would have been obligated to repay the loan within ten (10) business days of making such election, including interest at the rate of the
three-month LIBOR rate
plus
25%
per annum. Since the Company may have been required to repay some or all of the amounts awarded by CIRM, the Company accounted for this award as a liability rather than revenue and accrued interest through June
20, 2017, at the aforementioned rates. During the three and nine months ended
September 30, 2017
, the Company accrued interest of
$0
and
$882,683
respectively. For the three and nine months ended
September 30, 2016
, the Company recorded accrued interest of
$342,323
and
$889,146
, respectively. As described in Note 1, the Company suspended the Phase 3 trial of ICT-107 and will not be required to return the CIRM funds that were spent on the trial. Consequently, during the nine months ended September 30, 2017, the Company recognized a gain of
$7,719,440
as derecognition of the CIRM award liability including accrued interest. As of
September 30, 2017
, the Company had
$108,984
of unused CIRM funds. The Company is required to return these funds to CIRM.
8. 401(k) Profit Sharing Plan
During 2011, the Company adopted a Profit Sharing Plan that qualifies under Section 401(k) of the Internal Revenue Code. Contributions to the plan are at the Company’s discretion. The Company did not make any matching contributions during the
nine
months ended
September 30, 2017
or
September 30, 2016
.
9. Income Taxes
Deferred taxes represent the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. Temporary differences result primarily from the recording of tax benefits of net operating loss carry forwards and stock-based compensation.
A valuation allowance is required if the weight of available evidence suggests it is more likely than not that some portion or all of the deferred tax asset will not be recognized. Accordingly, a valuation allowance has been established for the full amount of the deferred tax assets.
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
Income tax benefit at the federal statutory rate
|
(34
|
)%
|
|
(34
|
)%
|
State income tax benefit, net of federal tax benefit
|
(6
|
)%
|
|
(6
|
)%
|
Change in fair value of warrant liability
|
—
|
%
|
|
7
|
%
|
Statutory rate differential attributable to foreign operations
|
19
|
%
|
|
—
|
%
|
Change in valuation allowance for deferred tax assets
|
21
|
%
|
|
33
|
%
|
Total
|
—
|
%
|
|
—
|
%
|
Deferred taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Net operating loss carryforwards
|
30,012,377
|
|
|
27,267,545
|
|
Stock-based compensation
|
3,267,926
|
|
|
3,090,903
|
|
Less valuation allowance
|
(33,280,303
|
)
|
|
(30,358,448
|
)
|
Net deferred tax asset
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance increased by
$2,921,855
and
$5,349,725
during the
nine
months ended
September 30, 2017
and
2016
, respectively.
As of
December 31, 2016
, the Company had federal and California income tax net operating loss carry forwards of approximately
$68.2 million
, and as of
September 30, 2017
, management has estimated federal and California income tax net operating loss carry forwards of approximately
$75.0 million
. These net operating losses will begin to expire in taxable years
2027 through 2036
and
2017 through 2036
, respectively, unless previously utilized.
Section 382 of the Internal Revenue Code can limit the amount of net operating losses, which may be utilized if certain changes to a company’s ownership occur. Management previously estimated that the Company has not incurred any
limitations on its ability to utilize its net operating losses under Section 382 of the Internal Revenue Code as a result of its February 2015 and August 2016 financings. In light of the July 2017 financing and the subsequent shares of common stock issued as a result of the exercise of warrants and conversion of the preferred shares, the Company has not undertaken an analysis of possible Section 382 limitations as of September 30, 2017. Management will undertake a Section 382 analysis after the end of the year to determine compliance as of December 31, 2017.
During 2014, the Company licensed the non-U.S. rights to a significant portion of its intellectual property to its Bermuda-based subsidiary for approximately
$11.0 million
. The fair value of the intellectual property rights was determined by an independent third party. The proceeds from this sale represent a gain for U.S. tax purposes and are offset by current year losses and net operating loss carryforwards. However, the Internal Revenue Service, or the IRS, or the California Franchise Tax Board, or the CFTB, could challenge the valuation of the intellectual property rights and assess a greater valuation, which would require the Company to utilize a portion, or all, of its available net operating losses. If an IRS or a CFTB valuation exceeds the available net operating losses, the Company would incur additional income taxes. The Company’s ability to use its net operating losses is subject to the potential future limitations of IRS Section 382, as well as expiration of federal and state net operating loss carryforwards.
10. Subsequent Events
Warrant Expiration
On October 22, 2017, warrants to purchase
111,119
shares of the Company's common stock issued in connection with the October 2012 common stock private placement expired unexercised.
Warrant Exercises
Subsequent to September 30, 2017, warrants issued in conjunction with the July 2017 underwritten public offering were exercised for
$3,648,200
, resulting in the issuance of
3,648.2
shares of convertible preferred stock. Additionally,
3,588.2
shares of convertible preferred stock were converted into
11,072,122
shares of common stock.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Throughout this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and “our company” refer to ImmunoCellular Therapeutics, Ltd., a Delaware corporation and its subsidiaries.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements, which reflect the views of our management with respect to future events and financial performance. These forward-looking statements are subject to a number of uncertainties and other factors that could cause actual results to differ materially from such statements. Forward-looking statements are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on the information available to management at this time and which speak only as of this date. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2016 and in this quarterly report on Form 10-Q. The identification in this Quarterly Report of factors that may affect future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Overview
ImmunoCellular Therapeutics, Ltd. and its subsidiaries (the Company) is a biotechnology company that is seeking to develop and commercialize new therapeutics to fight cancer using the immune system. We are primarily engaged in the acquisition of certain intellectual property, together with development of our product candidates and the recent clinical testing for its immunotherapy product candidates, and have not generated any recurring revenues.
In June 2017, we announced that we were unable to secure sufficient additional financial resources to complete the phase 3 registration trial of ICT-107, our patient-specific, dendritic cell-based immunotherapy for patients with newly diagnosed glioblastoma, which was previously our lead product candidate. As a result, we suspended the trial while we
continue to seek a collaborative arrangement or acquisition of our ICT-107 program. The suspension of the phase 3 registration trial of ICT-107 has reduced the amount of cash used in operations.
We are developing Stem-to-T-Cell immunotherapies for the treatment of cancer based on rights to novel technology we exclusively licensed from the California Institute of Technology (Caltech). The technology originated from the labs of David Baltimore, Ph.D., Nobel Laureate and President Emeritus at Caltech, and utilizes the patient’s own hematopoietic stem cells to create antigen-specific killer T cells to treat cancer. We plan to utilize this technology to expand and complement our DC-based cancer immunotherapy platform, with the goal of developing new immunotherapies that kill cancer cells in a highly directed and specific manner and that can function as monotherapies or in combination therapy approaches.
Caltech’s technology potentially addresses the challenge, and limitation, that TCR (T cell receptor) technologies have faced of generating a limited immune response and having an unknown persistence in the patient’s body. We believe that by inserting DNA that encodes T cell receptors into hematopoietic stem cells rather than into T cells, the immune response can be transformed into a durable and more potent response that could effectively treat solid tumors. This observation has been verified in animal models by investigators at Caltech and the National Cancer Institute.
In March 2017, we announced the successful completion of the first milestone of our Stem-to-T-cell program, the sequencing of a selected TCR, that will become the basis for the product development program. In November 2015, we entered into a sponsored research agreement with The University of Texas MD Anderson Cancer Center with the goal of identifying a TCR sequence.
In addition, in 2015 we acquired an option from Stanford University to evaluate certain technology related to the identification of TCRs that could prove useful in supporting our Stem-to-T-Cell research efforts. In March 2017, a TCR sequence for our Stem-to-T-Cell program became available. In addition, we have entered into a sponsored research agreement with the University of Maryland, Baltimore (UMB). As part of this collaboration, UMB researchers are undertaking three projects to explore potential enhancements to our dendritic cell and Stem-to-T-Cell immunotherapy platforms.
The Company has incurred operating losses and, as of
September 30, 2017
, the Company had an accumulated deficit of
$116,012,364
. The Company expects to incur significant research, development and administrative expenses before any of its products can be launched and recurring revenues generated.
Critical Accounting Policies
Management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are summarized in Note 2 of our condensed consolidated financial statements. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
Research and Development Costs
Although we believe that our research and development activities and underlying technologies have continuing value, the amount of future benefits to be derived from them is uncertain. Research and development costs are expensed as incurred. During the
nine
months ended
September 30, 2017
and
2016
, we recorded an expense of
$17,802,980
and $13,734,693, respectively, related to research and development activities.
Stock-Based Compensation
Stock-based compensation expense is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally equals the vesting period, based on the number of awards that are expected to vest. Estimating the fair value for stock options requires judgment, including the expected term of our stock options, volatility of our stock, expected dividends, risk-free interest rates over the expected term of the options and
the expected forfeiture rate. In connection with our performance-based programs, we make assumptions principally related to the number of awards that are expected to vest after assessing the probability that certain performance criteria will be met.
Income Taxes
The Company accounts for federal and state income taxes under the liability method, with a deferred tax asset or liability determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates. The Company’s provision for income taxes represents the amount of taxes currently payable, if any, plus the change in the amount of net deferred tax assets or liabilities. A valuation allowance is provided against net deferred tax assets if recoverability is uncertain on a more likely than not basis. The Company recognizes in its consolidated financial statements the impact of an uncertain tax position if the position will more likely than not be sustained upon examination by a taxing authority, based on the technical merits of the position. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company is not currently under examination by any taxing authority nor has it been notified of an impending examination. The Company’s tax returns for the years ended December 31, 2013 through 2016, remain open for possible review.
California Institute of Regenerative Medicine
On September 18, 2015, the Company received an award in the amount of
$19.9 million
from the California Institute of Regenerative Medicine (CIRM) to partially fund the Company’s Phase 3 trial of ICT-107. The award originally provided for a
$4.0 million
project initial payment that was received during the fourth quarter of 2015, and up to
$15.9 million
in future milestone payments that were primarily dependent on patient randomization in the ICT-107 Phase 3 trial. In August 2016, the Company and CIRM modified the award such that the Company received an additional
$1.5 million
initial payment. The total amount of the award and other award conditions remained unchanged. Under the terms of the CIRM award, the Company was obligated to share future ICT-107 related revenue with CIRM. The percentage of revenue sharing was dependent on the amount of the award received by the Company and whether the revenue is from product sales or license fees. The maximum revenue sharing amount the Company may have been required to pay to CIRM is equal to nine (
9
) times the total amount awarded and paid to the Company. The Company had the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, the Company had the option to convert the award to a loan, which such option the Company must exercise on or before ten (10) business days after the FDA notifies the Company that it has accepted the Company’s application for marketing authorization. In the event the Company exercised its right to convert the award to a loan, it would have been obligated to repay the loan within ten (10) business days of making such election, including interest at the rate of the
three-month LIBOR rate
plus
25%
per annum. Since the Company may have been required to repay some or all of the amounts awarded by CIRM, the Company accounted for this award as a liability rather than revenue and accrued interest through June 20, 2017, at the aforementioned rates. During the three and nine months ended
September 30, 2017
, the Company accrued interest of
$0
and
$882,683
respectively. For the three and nine months ended
September 30, 2016
, the Company recorded accrued interest of
$342,323
and
$889,146
, respectively. As described in Note 1, the Company suspended the Phase 3 trial of ICT-107 and will not be required to return the CIRM funds that were spent on the trial. Consequently, during the nine months ended September 30, 2017, the Company recognized a gain of
$7,719,440
as derecognition of the CIRM award liability including accrued interest. As of
September 30, 2017
, the Company had
$108,984
of unused CIRM funds. The Company is required to return these funds to CIRM.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, cash equivalents, and accounts payable approximate their fair values due to their quick turnover. The fair value of our warrant liability that is not listed on the NYSE American was estimated using the Binomial Lattice option valuation model for periods prior to July 1, 2017.
Reverse Stock Split
On November 18, 2016, the Company effected a one-for-forty reverse stock split of its common stock through an amendment to its amended and restated certificate of incorporation (the 2016 Amendment). As of the effective time of the reverse stock split, every forty shares of the Company’s issued and outstanding common stock were converted into one issued and outstanding share of common stock, without any change in par value per share. The reverse stock split affected all shares of the Company’s common stock outstanding immediately prior to the effective time of the reverse stock split, as well as the number of shares of common stock available for issuance under the Company’s equity incentive plans and outstanding warrants. No fractional shares were issued as a result of the reverse stock split. Stockholders who would otherwise have been entitled to receive a fractional share received cash payments in lieu thereof. In addition, the 2016 Amendment reduced the number of authorized shares of common stock to 25.0 million.
As the par value per share of the Company’s common stock remained unchanged at $0.0001 per share, a total of $8,805 was reclassified from common stock to additional paid-in capital. All references to shares of common stock and per share data for all periods presented in the accompanying financial statements and notes thereto have been adjusted to reflect the reverse stock split on a retroactive basis.
In June 2017, the Company's stockholders approved a certificate of amendment to its amended and restated certificate of incorporation to increase the number of authorized shares of common stock from 25.0 million to 50.0 million, which was effective on June 16, 2017.
Warrants with down round price protection
In July 2017, the FASB issued ASU No. 2017-11, which changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. ASU No. 2017-11 also clarifies existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, ASU No. 2017-11 requires entities to recognize the effect of the down round feature when calculating earnings per share. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic earnings per share. ASU No. 2017-11 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts ASU No. 2017-11 in an interim period, adjustments should be reflected as of the beginning of the interim period in either of the following ways: 1. Retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which ASU No. 2017-11 is effective or 2. Retrospectively to outstanding financial instruments with a down round feature for each prior reporting. The Company has elected to adopt ASU No. 2017-11 effective July 1, 2017 retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit as of January 1, 2017.
Results of Operations
Three months ended September 30, 2017 and 2016
Net Loss
We incurred a net loss of
$3,900,879
and $4,797,825 for the three months ended September 30, 2017 and 2016, respectively.
Revenues
We did not have any revenue during the three months ended September 30, 2017 and 2016 and we do not expect to have any revenue in 2017.
Expenses
Research and development expenses for the three months ended September 30, 2017 were
$2,763,659
compared to $4,563,896 in the same period in 2016. In June 2017, we suspended the phase 3 trial of ICT-107 and during the quarter ended September 30, 2017, our trial related expenses were limited to costs associated with winding down the trial. During the same quarter ended September 30, 2016, we incurred expenses associated with patient enrollment and screening in North America and site selection expenses in Europe. Additionally, during the quarter ended September 30, 2017, we incurred less expenses for our ICT-121 trial that ended during the first quarter in 2017. We continue to incur expenses related to our Stem-to-T-cell immunotherapies. However, given the early nature of this project, these expenses are significantly less than the amounts incurred related to our clinical trials. Our ICT-140 program remains on hold until we find a partner for this program. We anticipate that our research and development expenses will be significantly reduced in future periods with the suspension of the phase 3 ICT-107 and reductions made in our clinical staff during the most recent quarter.
General and administrative expenses for the three months ended September 30, 2017 and 2016 were
$1,137,329
and $908,380, respectively. The increase was primarily due to additional legal expenses related to certain litigation. This increase was partially offset by reductions compensation expense, the number of members of our Board of Directors and board compensation and the downsizing of our corporate offices.
Nine months ended September 30, 2017 and 2016
Net Loss
We incurred a net loss of
$13,880,712
and $15,760,741 for the nine months ended September 30, 2017 and 2016, respectively.
Revenues
We did not have any revenue during the nine months ended September 30, 2017 and 2016 and we do not expect to have any revenue in 2017.
Expenses
Research and development expenses for the nine months ended September 30, 2017 and June 30, 2016 were
$17,802,980
and $13,734,693, respectively. During the nine months ended September 30, 2017, we incurred additional expenses related to the Phase 3 trial of ICT-107. During the second half of 2016, we expanded the number of North America sites participating in the trial and began patient screening. As a result, during the nine months ended September 30, 2017, we incurred more patient related expenses compared to the same period in the prior year. We suspended the ICT-107 trial in June 2017 after determining that we were unable to obtain sufficient financing to continue. As a result, we wrote off our remaining supply inventories of approximately $2.6 million as we determined there were no alternative uses and the salvage value was estimated to be zero. We also expensed certain contractual obligation costs to wind down the trial. These costs include approximately $1.8 million to our manufacturing vendors and $80,000 to our contract research organization. We also incurred additional expenses related to our Stem-to-T cell immunotherapies. These increases were offset by significant reductions in expenses related to the wind down of the ICT-107 Phase 2 and ICT-121 trials. Our ICT-140 program remains on hold until we find a partner for this program. We anticipate that our research and development expenses will be significantly reduced in future periods with the suspension of the phase 3 ICT-107 trial and the wind down of the ICT-121 trial. We continue to pursue our Stem-to-T-cell immunotherapies.
General and administrative expenses for the six months ended September 30, 2017 and 2016 were
$2,918,773
and $3,058,027, respectively. This decrease was primarily due to reductions in compensation expense, the number of members of our Board of Directors and board compensation and the downsizing of our corporate offices. The decrease was partially offset by additional legal expenses related to certain litigation.
During the nine months ended September 30, 2017, the Company recorded a credit of $7,719,440 to account for derecognition of the CIRM award liability. This amount represents $5,391,016 of funds advanced by CIRM to the Company and spent on the ICT-107 trial and the reversal of $2,219,440 of accrued interest. As of
September 30, 2017
, the Company had
$108,984
of unused CIRM funds. The Company is required to return these funds to CIRM.
Liquidity and Capital Resources
As a result of the suspension of our phase 3 trial of ICT-107, the winding down of ICT-121, reductions in operating expenses associated with the reduction in personnel, board structure and compensation and occupancy, we expect our cash used in operations to decrease in future periods. However, as of
September 30, 2017
, we had working capital deficit of
$582,967
, compared to working capital of $10,175,846 as of December 31, 2016 and we expect that we will not have enough cash resources to fund the business for the next 12 months. The proceeds from the July 2017 financing will provide us with enough capital to wind down the phase 3 ICT-107 trial. We previously suspended payments to certain vendors in an effort to conserve our remaining cash. Currently, we are attempting to work out payment programs that involve discounts and delayed payments. As a result, our accounts payable and accrued expense balances increased in relation to prior periods, and were $6,863,956 as of September 30, 2017 compared to $6,005,298 of cash and cash equivalents. In order to adequately fund the Company's remaining Stem-to-T cell program, we will need additional capital resources, either from the exercise of existing warrants, new sources of capital, or a combination, none of which can be assured.
Successful completion of our research and development activities, and our transition to attaining profitable operations, is dependent upon obtaining financing. Additional financing may not be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds, we might be forced to restructure our business and operations. These factors raise substantial doubt about our ability to continue as a going concern.
In July 2017, we entered into an underwriting agreement with Maxim Group, LLC, pursuant to which we sold 5,000 shares of Series B 8% Mandatorily Convertible Preferred Stock (the Preferred Stock) and related warrants (the “Warrants”) to purchase up to 9,000 shares of Preferred Stock for net proceeds of approximately $4.0 million excluding proceeds from the exercise of the Warrants. In addition to the 8% cumulative dividend, each share of Preferred Stock includes an 8% original issue discount such that upon conversion into common stock, the face amount of the preferred stock is increased by 8%. The Preferred Stock is convertible into common stock using a conversion price equal to the lesser of (i) $1.22, subject to certain adjustments, and (ii) 87.5% of the lowest volume weighted average price of our common stock during the ten trading days ending on, and including, the date of the notice of conversion. The conversion price described in (ii) is subject to a floor of $0.35, except in the event of anti-dilution adjustments.
The Warrants consist of three tranches with expirations in October 2017, January 2018 and July 2018. Each tranche allows the holders to purchase up to 3,000 shares of Preferred Stock at a price of $1,000 per share. If fully exercised, each tranche would provide the Company with $3.0 million of additional financing ($9.0 million in total), before underwrting discounts and commissions. Upon exercise, the Warrant holders receive shares of Preferred Stock that are convertible into common stock on the same terms as discussed above.
Through September 30, 2017, holders of Preferred Stock converted 4,898 shares of the Preferred Stock into 13,590,648 shares of the Company’s Common Stock. Additionally, investors exercised Warrants for the issuance of 2,148.18 shares of Preferred Stock and simultaneously converted those shares into 6,628,699 shares of common stock. The Company received gross proceeds of $2,148,180 from the exercise of the Warrants. Subsequent to September 30, 2017, investors exercised warrants for the issuance of
3,648.2
shares of Preferred Stock and simultaneously converted
3,588.2
shares of preferred stock into
11,072,122
shares of common stock. The Company received gross proceeds from the warrant exercises of
$3,648,200
. Warrants to purchase
3,203.6
shares of Preferred Stock remain outstanding.
On September 18, 2015, the Company received an award in the amount of
$19.9 million
from the California Institute of Regenerative Medicine (CIRM) to partially fund the Company’s Phase 3 trial of ICT-107. The award originally provided for a
$4.0 million
project initial payment that was received during the fourth quarter of 2015, and up to
$15.9 million
in future milestone payments that were primarily dependent on patient randomization in the ICT-107 Phase 3 trial. In August 2016, the Company and CIRM modified the award such that the Company received an additional
$1.5 million
initial payment. The total amount of the award and other award conditions remained unchanged. Under the terms of the CIRM award, the Company was obligated to share future ICT-107 related revenue with CIRM. The percentage of revenue sharing was dependent on the amount of the award received by the Company and whether the revenue is from product sales or license fees. The maximum revenue sharing amount the Company may have been required to pay to CIRM is equal to nine (
9
) times the total amount awarded and paid to the Company. The Company had the option to decline any and all amounts awarded by CIRM. As an alternative to revenue sharing, the Company had the option to convert the award to a loan, which such option the Company must exercise on or before ten (10) business days after the FDA notifies the Company that it has accepted the Company’s application for marketing authorization. In the event the Company exercised its right to convert the award to a loan, it would have been obligated to repay the loan within ten (10) business days of making such election, including interest at the rate of the
three-month LIBOR rate
plus
25%
per annum. Since the Company may have been required to repay some or all of the amounts awarded by CIRM, the Company accounted for this award as a liability rather than revenue and accrued interest through June 20, 2017, at the aforementioned rates. During the three and nine months ended
September 30, 2017
, the Company accrued interest of
$0
and
$882,683
respectively. For the three and nine months ended
September 30, 2016
, the Company recorded accrued interest of
$342,323
and
$889,146
, respectively. As described in Note 1, the Company suspended the Phase 3 trial of ICT-107 and will not be required to return the CIRM funds that were spent on the trial. Consequently, during the nine months ended September 30, 2017, the Company recognized a gain of
$7,719,440
as derecgonition of the CIRM award liability including accrued interest. As of
September 30, 2017
, the Company had
$108,984
of unused CIRM funds. The Company is required to return these funds to CIRM.
In August 2016, we entered into an underwriting agreement with Maxim Group LLC, pursuant to which we received net proceeds of approximately $6.6 million (after deducting the underwriting discount and offering expenses) from the initial sale of 863,750 shares of the Company’s common stock, base warrants to purchase 881,250 shares of common stock at an
exercise price of $7.68 per share, and pre-funded warrants to purchase 311,250 shares of common stock at an
exercise price of $0.40 per share. The underwriters partially exercised their option to purchase additional shares and warrants, and purchased an additional 37,500 shares of our common stock at a price of $6.00 per share and base warrants to purchase 111,965 shares of common stock at $0.40 per warrant. The pre-funded warrants have a term of ten years and the base warrants have a term of five years from the date of issuance. They also provide for a weighted average adjustment to the exercise price if we issue, or are deemed to issue, additional shares of common stock at a price per share less than the then effective price of the warrants, subject to certain exceptions. Accordingly, these warrants were accounted for as derivative liabilities and $2.2 million of the net proceeds was allocated to the warrant derivative. The pre-funded warrants were substantially paid for at the time of the offering and have an exercise price of $0.40 per share. Through December 31, 2016, 208,750 pre-funded warrants were exercised and resulted in proceeds to the Company of $83,500. During the quarter ended June 30, 2017, the remaining 102,500 pre-funded warrants were exercised and resulted in proceeds to the Company of $41,000.
On April 18, 2013, we entered into a Controlled Equity Offering
SM
Sales Agreement (the Sales Agreement) with Cantor Fitzgerald & Co., as agent (Cantor), pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock having an aggregate offering price of up to $25.0 million (of which only $17.0 million was initially registered for offer and sale). Under the Sales Agreement, Cantor may sell shares by any method permitted by law and deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act, as amended, including sales made directly on the NYSE American, on any other existing trading market for our common stock or to or through a market maker. We may instruct Cantor not to sell shares if the sales cannot be effected at or above the price designated by us from time to time. We are not obligated to make any sales of the shares under the Sales Agreement. The offering of shares pursuant to the Sales Agreement will terminate upon the earlier of (a) the sale of all of the shares subject to the Sales Agreement or (b) the termination of the Sales Agreement by Cantor or the Company, as permitted therein. We will pay Cantor a commission rate of 3.0% of the aggregate gross proceeds from each sale of shares and have agreed to provide Cantor with customary indemnification and contribution rights. We will also reimburse Cantor for certain specified expenses in connection with entering into the Sales Agreement. On April 22, 2013, NYSE American approved the listing of 264,831 shares of our common stock in connection with the Sales Agreement. As of September 21, 2015, the registration statement previously filed with the SEC to facilitate the sale of registered shares of the Company’s stock under the Controlled Equity Offering expired. The Company filed a new registration statement with the SEC that was declared effective on January 19, 2016 to facilitate the sale of additional shares under the Controlled Equity Offering. Under the terms of the prospectus, the Company may sell up to $15,081,494 of the Company’s common stock through the aforementioned Controlled Equity Offering. Pursuant to Instruction I.B.6 to Form S-3 (the Baby Shelf Rules) the Company may not sell more than the equivalent of one-third of our public float during any 12 consecutive months so long as our public float is less than $75.0 million. During the year ended December 31, 2016, the Company sold 77,141 shares of our common stock under the Sales Agreement that resulted in net proceeds to the Company of approximately $691,187, of which $48,977 represented the recovery of deferred offering costs that had been incurred as of December 31, 2015. During the nine months ended September 30, 2017, we did not sell any shares of our common stock under the Sales Agreement. As of September 30, 2017, the Company had approximately $14.3 million available to be sold under the Sales Agreement. Our ability to use this Controlled Equity Offering may be impacted as a result of the going concern opinion we received from our auditors.
We may also in the future seek to obtain funding through strategic alliances with larger pharmaceutical or biomedical companies. We cannot be sure that we will be able to obtain any additional funding from either financings or alliances, or that the terms under which we may be able to obtain such funding will be beneficial to us. If we are unsuccessful or only partly successful in our efforts to secure additional financing, we may find it necessary to suspend or terminate some or all of our product development and other activities.
As of
September 30, 2017
, we had no long-term debt obligations, no capital lease obligations, or other similar long-term liabilities. We have no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of our assets, and we do not engage in trading activities involving non-exchange traded contracts.
As a result of the suspension of phase 3 ICT-107 trial, wind down of our ICT-121 trial and other expense reductions, we expect to reduce our future cash used in operations.
We may in the future seek to obtain funding through strategic alliances with larger pharmaceutical or biomedical companies. We cannot be sure that we will be able to obtain any additional funding from either financings or alliances, or that the terms under which we may be able to obtain such funding will be beneficial to us. If we are unsuccessful or only partly successful in our efforts to secure additional financing, we may find it necessary to suspend or terminate some or all of our product development and other activities.
Cash Flows
We used $
11,742,903
of cash in our operations for the nine months ended September 30, 2017, compared to $16,123,449 for the nine months ended September 30, 2016. During the first half of 2017, we incurred additional expenses related to the Phase 3 trial of ICT-107 as we increased the number of sites participating in the trial and began treating patients. In June 2017, after determining that we were unable to finance the trial, we suspended the trial and incurred expenses to wind down the trial. We also incurred additional expenses related to our Stem-to-T-cell immunotherapies. These increases were partially offset by reductions in expenses related to the wind down of the ICT-107 Phase 2 and ICT-121 trials. Our ICT-140 program remains on hold until we find a partner for this program. With the termination of our phase 3 trial of ICT-107, we expect our future cash needs will decrease. We previously suspended payments to certain vendors in an effort to conserve our remaining cash. Currently, we are attempting to work out payment programs that involve discounts and delayed payments. As a result, our accounts payable and accrued expense balances increased in relation to prior periods.
During the nine months ended September 30, 2017, we incurred $3,721,776 of non-cash expenses consisting of $
47,131
of depreciation and $
442,558
of stock based compensation and $2,349,404 write-off of our supplies and $882,683 of accrued interest on the CIRM award. We also recorded a non-cash credit of
$7,719,440
for the derecognition of the CIRM award liability. During the nine months ended September 30, 2016, we incurred $1,849,577 of non-cash expenses consisting of $889,146 of accrued interest on the CIRM award, $58,129 of depreciation, $142,788 of financing expenses and $759,424 of stock based compensation. We also recorded a non-cash credit of $2,045,082 related to the revaluation of our warrant derivatives.
During the nine months ended September 30, 2017, we completed the aforementioned underwritten public offering and we received initial net proceeds of $4,120,577 from the sale of 5,000 shares of convertible preferred stock and warrants to acquire up to $9 million of additional convertible preferred stock. Prior to September 30, 2017, we received $2,189,180 of net proceeds from the exercise of warrants issued as part of the July 2017 and August 2016 financings. Subsequent to September 30, 2017, we received
$3,648,200
in gross proceeds from the exercise of warrants from the July 2017 financing.
In August 2016, we entered into an underwriting agreement with Maxim Group LLC, pursuant to which we received net proceeds of approximately $6.6 million (after deducting the underwriting discount and offering expenses) from the initial sale of 863,750 shares of the Company’s common stock, base warrants to purchase 881,250 shares of common stock at an
exercise price of $7.68 per share, and pre-funded warrants to purchase 311,250 shares of common stock at an exercise price of $0.40 per share. The underwriters partially exercised their option to purchase additional shares and warrants, and purchased an additional 37,500 shares of our common stock at a price of $6.00 per share and base warrants to purchase 111,965 shares of common stock at $0.40 per warrant. The pre-funded warrants have a term of ten years and the base warrants have a term of five years from the date of issuance. They also provide for a weighted average adjustment to the exercise price if we issue, or are deemed to issue, additional shares of common stock at a price per share less than the then effective price of the warrants, subject to certain exceptions. Accordingly, these warrants were accounted for as derivative liabilities and $2.2 million of the net proceeds was allocated to the warrant derivative. The pre-funded warrants were substantially paid for at the time of the offering and have an exercise price of $0.40 per share. Through December 31, 2016, 208,750 pre-funded warrants were exercised and resulted in proceeds to the Company of $83,500. During the quarter ended June 30, 2017, the remaining 102,500 pre-funded warrants were exercised and resulted in proceeds to the Company of $41,000.
During the nine months ended September 30, 2016, we received $691,187, net of commissions and professional fees, through the sale of our common stock in our Controlled Equity Offering.
Inflation and changing prices have had no effect on our income or losses from operations over our two most recent fiscal years.
Off-Balance Sheet Arrangements
We are not party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.