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. 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 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.
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
March 31, 2018
, the Company had an accumulated deficit of
$117,468,640
. 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
March 31, 2018
and for the
three
-month periods ended
March 31, 2018
and
2017
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, 2017
have been derived from the Company’s audited financial statements included in its Form 10-K for the year ended
December 31, 2017
filed with the Securities and Exchange Commission (SEC) on March 14, 2018.
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, 2017
. 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
March 31, 2018
, the Company has incurred accumulated losses of
$117,468,640
and as of
March 31, 2018
, the Company had
$5,026,602
of cash and working capital of
$4,147,640
. The Company believes that it will not have enough cash resources to fund the business for the next 12 months from the issuance of these financial statements. 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 condensed consolidated 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 to wind down the phase 3 trial of ICT-107 and support the Stem-to-T cell program. 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
March 31, 2018
and
December 31, 2017
, the Company had
$467,144
and
$466,875
, 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.
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 non-discounted 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
three
months ended
March 31, 2018
or March 31, 2017.
When issuing stock options, the Company estimates the risk-free interest rate based upon 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 the Company's stock-based awards are expected to be outstanding and is determined based on projected holding periods for the remaining unexercised options. Consideration is given to the contractual terms of the 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, it is the Company's policy is to issue reserved but previously unissued shares of common stock to satisfy share option exercises. As of
March 31, 2018
, the Company had
3,393,266
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
March 31, 2018
and
December 31, 2017
, 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
March 31, 2018
, 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, 2014.
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 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.
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
1,727,565
shares and
1,727,017
shares at
March 31, 2018
and
2017
, respectively.
Recently Issued Accounting Standards
–
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize in the balance sheets, 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, 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. The adoption of this ASU did not 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:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Computers
|
$
|
16,907
|
|
|
$
|
16,907
|
|
Accumulated depreciation
|
(16,445
|
)
|
|
(16,339
|
)
|
|
$
|
462
|
|
|
$
|
568
|
|
Depreciation expense was
$106
and
$16,595
for the three months ended
March 31, 2018
and
2017
, 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
$1.1 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.
No
licensing fees were incurred during the
three
months ended
March 31, 2018
and
March 31, 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. During the
three
months ended
March 31, 2018
and
2017
, 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. On November 10, 2017, the Company filed a motion to dismiss the SAC. The parties completed briefing on December 21, 2017 and the motion to dismiss is currently under submission. 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. On January 9, 2018, the parties agreed to stay the derivative class action until resolution of the securities class action. The court granted the stay on January 25, 2018.
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.
Licensing Agreements
The Johns Hopkins University Licensing Agreement
On February 23, 2012, the Company entered into an Exclusive License Agreement 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.
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
$920,000
and the potential bonus is approximately
$280,000
. During the
three
months ended
March 31, 2018
, the Company did
not
issue any stock options or restricted stock units.
6.
Shareholders’ Equity
Common Stock
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. During the quarter ended March 31, 2018,
no
shares of Preferred Stock were converted into common stock.
The Company performed a valuation of the Preferred Stock and associated warrants. The warrants were valued using a Monte Carlo simulation model. 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. 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. There were
no
Warrant exercises during the three months ended March 31, 2018.
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
. The Company did
not
sell any shares of common stock during the three months ended
March 31, 2018
and
March 31, 2017
. As of
March 31, 2018
, 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
58,562
common shares have been granted under the Plan and are outstanding as of
March 31, 2018
. 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
three
months ended
March 31, 2018
,
no
equity compensation was granted by the Company. As of March 31, 2018, options to purchase
31,843
shares of common stock remain outstanding.
The following table summarizes stock option activity for the Company during the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding December 31, 2017
|
91,656
|
|
|
$
|
42.31
|
|
|
—
|
|
|
—
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
(1,250
|
)
|
|
$
|
90.00
|
|
|
—
|
|
|
—
|
|
Outstanding March 31, 2018
|
90,406
|
|
|
$
|
41.65
|
|
|
5.51
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Vested at March 31, 2018
|
74,637
|
|
|
$
|
46.38
|
|
|
5.18
|
|
|
$
|
—
|
|
As of
March 31, 2018
, the total unrecognized compensation cost related to unvested stock options amounted to
$146,382
, which will be recognized over the weighted average remaining requisite service period of approximately
10 months
.
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
|
)
|
Additionally, the Company restated its statement of operations for the three months ended March 31, 2017, to eliminate the gain of
$102,776
previously recognized due to the revaluation of the Company's warrant derivatives. As a result of this restatement, the Company's net loss for the three months ended March 31, 2017 increased from
$5,824,394
to
$5,927,763
.
In connection with an underwritten public offering in January 2012, 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 an underwritten public offering in October 2012, 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. In October 2017, the remaining
111,119
warrants expired.
In connection with an underwritten public offering in February 2015, 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 allocated
$4,197,375
of the underwritten public offering to the freestanding warrants. 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
March 31, 2018
, warrants to purchase
466,369
shares of the Company's common stock remain outstanding.
In connection with an 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 an underwritten public offering in August 2016, 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 of
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
March 31, 2018
, 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 an
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 March 31, 2018, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Exercised
|
|
Expired
|
|
Remaining
|
Series 1 warrants
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Series 2 warrants
|
3,000,000
|
|
|
2,845,200
|
|
|
154,800
|
|
|
—
|
|
Series 3 warrants
|
3,000,000
|
|
|
2,073,200
|
|
|
—
|
|
|
926,800
|
|
Totals
|
$
|
9,000,000
|
|
|
$
|
7,918,400
|
|
|
$
|
154,800
|
|
|
$
|
926,800
|
|
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. 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 year ended December 31, 2017, the Company recognized a gain of
$7,719,440
as derecognition of the CIRM award liability including accrued interest.
No
amounts are owed to CIRM as of March 31, 2018.
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
three
months ended
March 31, 2018
and
March 31, 2017
.
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:
|
|
|
|
|
|
|
|
March 31, 2018
|
|
March 31, 2017
|
Income tax benefit at the federal statutory rate
|
(21
|
)%
|
|
(34
|
)%
|
State income tax benefit, net of federal tax benefit
|
(7
|
)%
|
|
(6
|
)%
|
Change in fair value of warrant liability
|
—
|
%
|
|
1
|
%
|
Change in valuation allowance for deferred tax assets
|
28
|
%
|
|
32
|
%
|
Other
|
—
|
%
|
|
7
|
%
|
Total
|
—
|
%
|
|
—
|
%
|
Deferred taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Net operating loss carryforwards
|
1,138,628
|
|
|
851,633
|
|
Stock-based compensation
|
2,264,634
|
|
|
2,251,184
|
|
Less valuation allowance
|
(3,403,262
|
)
|
|
(3,102,817
|
)
|
Net deferred tax asset
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance increased by
$300,445
and
$1,868,607
during the
three
months ended
March 31, 2018
and
2017
, respectively.
As of
March 31, 2018
, the Company had federal and California income tax net operating loss carry forwards of approximately
$4.0 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. Generally, a Section 382 ownership change occurs if one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. Similar rules may apply under state tax laws. Based upon management's calculations, in 2017 the Company experienced a change in ownership under Section 382 of the Internal Revenue Code and will result in the limitation of the Company's ability to utilize net operating losses. In addition, the Company may experience future ownership changes as a result of future offerings or other changes in ownership of the Company's stock. As a result, the amount of the net operation losses presented in our financial statements could be limited and may expire unutilized. The net operating losses presented above, reflect the reduction in the amounts available for carryforward based upon the Section 382 change in ownership that occurred in 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.
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, 2017 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 have terminated further patient randomization in the ICT-107 trial while we continue to seek a collaborative arrangement or acquisition of our ICT-107 program. The termination of the phase 3 registrational 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 other immunotherapies, including 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, which will become the basis for the product development program. In December 2017, we announced that we were able to package a TCR DNA sequence into a lentiviral factor, which was then used to transfect human hematopoietic stem cells. In April 2018, we announced that we were able to verify successful transfer of selected T cell receptor genetic material into human hematopoietic stem cells.
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
March 31, 2018
, the Company had an accumulated deficit of
$117,468,640
. 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
three
months ended
March 31, 2018
and
2017
, we recorded an expense of
$290,616
and $4,685,720, 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 condensed 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 are generally
no
longer subject to examination for the years before December 31, 2014.
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. 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 year ended December 31, 2017, the Company recognized a gain of
$7,719,440
as derecognition of the CIRM award liability including accrued interest. As of March 31, 2018, no amounts are owed 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. Effective July 1, 2017, the Company 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.
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. We 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 March 31, 2018 and 2017
Net Loss
We incurred a net loss of
$1,024,981
and
$5,927,763
for the three months ended March 31, 2018 and 2017, respectively.
Revenues
We did not have any revenue during the three months ended March 31, 2018 and 2017 and we do not expect to have any revenue in 2018.
Expenses
Research and development expenses for the three months ended March 31, 2018 were
$290,616
compared to
$4,685,720
in the same period in 2017. In June 2017, we suspended the phase 3 trial of ICT-107 and during the quarter ended March 31, 2018, our trial related expenses were limited to costs associated with winding down the trial and the costs to develop our Stem-to-T-cell program. During the same quarter ended March 31, 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 as we treated more patients. Additionally, during the quarter ended March 31, 2017, we incurred expenses to complete our ICT-121 trial in recurrent glioblastoma. We will 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 we will continue to incur research and development expenses at a reduced level in future periods with the termination of the phase 3 ICT-107 and reductions made in our clinical staff.
General and administrative expenses for the three months ended March 31, 2018 and 2017 were
$734,581
and
$793,178
respectively. This decrease was primarily due to reductions in compensation expense, reduction in the number of members of our Board of Directors and board compensation and the downsizing of our corporate offices.
Liquidity and Capital Resources
As of
March 31, 2018
, we had working capital of
$3,671,066
, compared to working capital of $4,647,903 as of December 31, 2017. 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 in future periods to continue at this reduced rate. 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. Accordingly, our independent registered accounting firm has expressed in its report on our 2017 consolidated financial statements substantial doubt about our ability to continue as a going concern. 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 underwriting 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 March 31, 2018, holders of Preferred Stock converted 4,998 shares of the Preferred Stock into 13,899,219 shares of the Company’s Common Stock. Additionally, investors exercised Warrants for the issuance of 7,918.38 shares of Preferred Stock and simultaneously converted those shares into 24,433,834 shares of common stock. The Company received gross proceeds of $7,918,380 from the exercise of the Warrants.
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. 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 year ended December 31, 2017, the Company recognized a gain of
$7,719,440
as derecognition of the CIRM award liability including accrued interest. No amounts are owed to CIRM as of March 31, 2018.
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. We 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) we 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 three months ended March 31, 2018, we did not sell any shares of our common stock under the Sales Agreement. As of March 31, 2018, 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
March 31, 2018
, 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.
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 $
1,603,268
of cash in our operations for the three months ended March 31, 2018, compared to
$6,070,357
for the three months ended March 31, 2017. During the quarter ended March 31, 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 terminated the trial. We continue to incur expenses related to our Stem-to-T-cell immunotherapies, and we expect these expenses to increase in 2018. Our ICT-140 program remains on hold until we find a partner for this program.
During the three months ended March 31, 2018, we incurred $48,144 of non-cash expenses consisting of $
106
of depreciation and $
48,038
of stock based compensation. During the three months ended March 31, 2017, we incurred $641,220 of non-cash expenses consisting of $452,659 of accrued interest on the CIRM award, $16,595 of depreciation and $171,966 of stock based compensation.
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.