Attached files
file | filename |
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EX-32.1 - Intellect Neurosciences, Inc. | v185394_ex32-1.htm |
EX-32.2 - Intellect Neurosciences, Inc. | v185394_ex32-2.htm |
EX-31.1 - Intellect Neurosciences, Inc. | v185394_ex31-1.htm |
EX-31.2 - Intellect Neurosciences, Inc. | v185394_ex31-2.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
|
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended March 31, 2010
|
|
Or
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period
from to
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Commission
File Number: 333-128226
INTELLECT
NEUROSCIENCES, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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20-2777006
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
|
Incorporation)
|
Identification
Number)
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7
West 18th Street
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|
New
York, New York
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10011
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(Address
of Principal Executive Offices)
|
(Zip
Code)
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(212)
448-9300
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by checkmark whether the Registrant has submitted electronically and posted on
its corporate website, if any, any Interactive Data File required to be
submitted and posted pursuant to Rule 405 of regulation S-T (Section 232.405) of
this chapter during the preceding 12 months or for such shorter period that the
Registrant was required to submit and post such files. Yes£ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer
£
|
Non-accelerated
filer
£
|
Smaller
reporting company
R
|
(Do
not check if a
smaller
reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R
The
registrant had 580,720,990 shares of Common Stock, par value $.001 par value per
share, outstanding as of May 10, 2010.
Index
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|
PAGE
|
||
PART I. | FINANCIAL INFORMATION | |||
Item
1.
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Financial
Statements: (Unaudited)
|
|||
Consolidated
Condensed Balance Sheet as of June 30, 2009 and March 31,
2010
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3
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|||
Consolidated
Condensed Statements of Operations for the three and nine months ended
March 31, 2010 and 2009 and for the period April 25, 2005 (inception)
through March 31, 2010.
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4
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|||
Consolidated
Condensed Statement of Changes in Capital Deficiency for the period ended
March 31, 2010
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6
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|||
Consolidated
Condensed Statements of Cash Flows for the nine months ended March 31,
2010 and 2009 and for the period April 25, 2005 (inception) through March
31, 2010
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7
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|||
Notes
to Consolidated Condensed Financial Statements
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8
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|||
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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||
Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
25
|
||
Item 4T.
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Controls
and Procedures
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25
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||
PART II.
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OTHER
INFORMATION
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|||
Item
6.
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Exhibits
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26
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||
SIGNATURES
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27
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|||
CERTIFICATIONS
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|
|
2
Intellect
Neurosciences, Inc.
(a
development stage company)
Consolidated Condensed
Balance Sheet
March 31, 2010
|
June 30, 2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 3,627 | $ | 270,589 | ||||
Prepaid
expenses & other current assets
|
8,859 | 14,390 | ||||||
Deferred
debt costs, net
|
12,024 | 19,239 | ||||||
Total
current assets
|
$ | 24,510 | $ | 304,218 | ||||
Fixed
assets, net
|
58,046 | 162,760 | ||||||
Security
deposits
|
70,652 | 70,652 | ||||||
Restricted
cash
|
21,524 | - | ||||||
Total
Assets
|
$ | 174,732 | $ | 537,630 | ||||
LIABILITIES
AND CAPITAL DEFICIENCY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 4,061,384 | $ | 4,192,008 | ||||
Convertible
promissory notes
|
200,000 | - | ||||||
Convertible
promissory notes (past due)
|
5,855,118 | 5,305,088 | ||||||
Accrued
interest - convertible promissory notes
|
2,975,613 | 2,052,497 | ||||||
Derivative
instruments
|
436,614 | 307,905 | ||||||
Preferred
stock liability
|
551,171 | 872,867 | ||||||
Preferred
stock dividend payable
|
1,942,439 | 1,574,035 | ||||||
Total
Current liabilities
|
$ | 16,022,339 | $ | 14,304,400 | ||||
Commitments
and Contingencies
|
||||||||
Notes
payable (long term; net of debt discount of $99,101)
|
2,127,071 | 2,104,777 | ||||||
Notes
payable, due to shareholder
|
3,872,828 | 3,773,828 | ||||||
Deferred
lease liability
|
3,650 | 11,489 | ||||||
Other
long-term liabilities
|
26,285 | |||||||
Total
Liabilities
|
$ | 22,052,173 | $ | 20,194,494 | ||||
Capital
deficiency:
|
||||||||
Preferred
stock, $0.001 per share, 15,000,000 shares authorized
|
||||||||
Series
B Convertible Preferred stock - 459,309 shares designated and 459,309
shares issued (classified as liability above) (liquidation preference
$9,980,357)
|
||||||||
Common
stock, par value $0.001 per share, 100,000,000 shares authorized;
30,843,873 issued and outstanding
|
$ | 30,844 | $ | 30,844 | ||||
Additional
paid in capital
|
22,507,182 | 22,488,585 | ||||||
Deficit
accumulated during the development stage
|
(44,415,467 | ) | (42,176,294 | ) | ||||
Total
Capital Deficiency
|
$ | (21,877,440 | ) | $ | (19,656,865 | ) | ||
Total
Liabilities and Capital Deficiency
|
$ | 174,732 | $ | 537,630 |
See notes
to condensed consolidated financial statements
3
Intellect
Neurosciences, Inc.
(a
development stage company)
Consolidated
Statements of Operations
(Unaudited)
Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues:
|
||||||||
License
fees
|
$ | - | $ | - | ||||
Total
revenue
|
$ | - | $ | - | ||||
Costs and Expenses:
|
||||||||
Research
and development
|
$ | 2,400 | $ | 145,294 | ||||
General
and administrative
|
230,302 | 786,482 | ||||||
Total
cost and expenses
|
$ | 232,702 | $ | 931,775 | ||||
Income
/(loss) from operations
|
$ | (232,702 | ) | $ | (931,775 | ) | ||
Other income/(expenses):
|
||||||||
Interest
expense
|
$ | (584,577 | ) | $ | (474,025 | ) | ||
Changes
in value of derivative instruments and preferred stock
liability
|
(134,936 | ) | (1,546,355 | ) | ||||
Other
|
- | - | ||||||
Total
other income/(expense):
|
$ | (719,513 | ) | $ | (2,020,380 | ) | ||
Net
income/(loss)
|
$ | (952,214 | ) | $ | (2,952,155 | ) | ||
Basic
income/(loss) per share
|
$ | (0.03 | ) | $ | (0.10 | ) | ||
Diluted
income/(loss) per share
|
$ | (0.01 | ) | $ | (0.06 | ) | ||
Weighted
average number of shares outstanding:
|
||||||||
Basic
|
30,843,873 | 30,843,873 | ||||||
Diluted
|
42,045,904 | 41,772,009 |
See notes
to condensed consolidated financial statements
4
Intellect
Neurosciences, Inc.
(a
development stage company)
Consolidated
Statements of Operations
(Unaudited)
Nine Months Ended
|
||||||||||||
March 31,
|
April 25, 2005
(inception) through
March 31, 2010
|
|||||||||||
2010
|
2009
|
|||||||||||
Revenues:
|
||||||||||||
License
fees
|
$ | - | $ | 4,016,667 | $ | 4,016,667 | ||||||
Total
revenue
|
$ | - | $ | 4,016,667 | $ | 4,016,667 | ||||||
Costs
and Expenses:
|
||||||||||||
Research
and development
|
$ | 43,108 | $ | 510,290 | $ | 13,314,905 | ||||||
General
and administrative
|
1,108,858 | 2,672,152 | 29,458,250 | |||||||||
Total
cost and expenses
|
$ | 1,151,966 | $ | 3,182,442 | $ | 42,773,155 | ||||||
Net
income/ (loss) from operations
|
$ | (1,151,966 | ) | $ | 834,225 | $ | (38,756,488 | ) | ||||
Other
income/(expenses):
|
||||||||||||
Interest
expense
|
$ | (980,256 | ) | $ | (1,334,439 | ) | $ | (13,329,350 | ) | |||
Changes
in value of derivative instruments and preferred stock
liability
|
594,918 | 2,891,906 | $ | 15,105,977 | ||||||||
Loss
on extinguishment of debt
|
(701,869 | ) | (701,869 | ) | $ | (701,869 | ) | |||||
Other
|
- | 32,752 | $ | (6,583,736 | ) | |||||||
Write
off of investment
|
$ | (150,000 | ) | |||||||||
Total
other income/(expense):
|
$ | (1,087,207 | ) | $ | 888,350 | $ | (5,658,978 | ) | ||||
Net
income/(loss)
|
$ | (2,239,173 | ) | $ | 1,722,575 | $ | (44,415,467 | ) | ||||
Basic
income/(loss) per share
|
$ | (0.07 | ) | $ | 0.06 | |||||||
Diluted
income/(loss) per share
|
$ | (0.02 | ) | $ | 0.04 | |||||||
Weighted
average number of shares outstanding:
|
||||||||||||
Basic
|
30,843,873 | 30,843,873 | ||||||||||
Diluted
|
41,973,807 | 41,740,617 |
See notes
to condensed consolidated financial statements
5
Intellect
Neurosciences, Inc.
(a
development stage company)
Consolidated
Statement of Changes in Capital Deficiency
Common Stock
|
||||||||||||||||||||
Number of
Shares
|
Amount
|
Additional
paid in capital
|
Deficit
accumulated
during the
development
stage
|
Total
|
||||||||||||||||
Balance
as of June 30, 2009
|
30,843,873 | $ | 30,844 | $ | 22,488,585 | $ | (42,176,294 | ) | $ | (19,656,864 | ) | |||||||||
Stock
based compensation
|
||||||||||||||||||||
-
Clinical and Advisory Board
|
(1,625 | ) | (1,625 | ) | ||||||||||||||||
-
Extension of Director options
|
12,522 | 12,522 | ||||||||||||||||||
-
Employees and Directors
|
7,700 | 7,700 | ||||||||||||||||||
Net
loss for the period
|
(2,239,173 | ) | (2,239,173 | ) | ||||||||||||||||
Balance
as of March 31, 2010
|
$ | 30,843,873 | $ | 30,844 | $ | 22,507,182 | $ | (44,415,467 | ) | $ | (21,877,440 | ) |
See notes
to condensed consolidated financial statements
6
Consolidated
Condensed Statements of Cash Flows
Nine Months Ended
|
||||||||||||
March 31,
|
||||||||||||
April 25, 2005
|
||||||||||||
(inception) through
|
||||||||||||
2010
|
2009
|
March 31, 2010
|
||||||||||
Cashflows
from operating activities:
|
||||||||||||
Net
cash used by operating activities:
|
(1,043,397 | ) | (348,085 | ) | (17,464,642 | ) | ||||||
Cashflows
from investing activities:
|
||||||||||||
Security
deposit
|
- | - | (70,649 | ) | ||||||||
Acquistion
of property and equipment
|
- | (12,619 | ) | (1,059,699 | ) | |||||||
Restricted
cash
|
(21,524 | ) | (12,059 | ) | (21,524 | ) | ||||||
Investment
in Ceptor
|
- | - | (150,000 | ) | ||||||||
Net
cash provided by investing activities:
|
(21,524 | ) | (24,678 | ) | (1,301,872 | ) | ||||||
Cashflows
from financing activities:
|
||||||||||||
Borrowings
from stockholders
|
119,000 | 485,000 | 5,598,828 | |||||||||
Proceeds
from sale of common stock
|
- | - | 21,353 | |||||||||
Proceeds
from sale of preferred stock
|
- | - | 6,761,150 | |||||||||
Preferred
stock issuance costs
|
- | - | (814,550 | ) | ||||||||
Proceeds
from sale of Convertible Promissory Notes
|
698,960 | 843,500 | 10,720,460 | |||||||||
Repayment
of borrowings from stockholder
|
(20,000 | ) | (100,000 | ) | (1,726,000 | ) | ||||||
Convertible
Promissory Notes issuance cost
|
- | - | (466,100 | ) | ||||||||
Repayment
of borrowings from noteholders
|
- | (426,000 | ) | (1,325,000 | ) | |||||||
Warrants
issued for extensions
|
- | - | - | |||||||||
Net
cash provided by financing activities:
|
797,960 | 802,500 | 18,770,141 | |||||||||
Net
increase in cash and cash equivalents
|
(266,961 | ) | 429,737 | 3,627 | ||||||||
Cash
and cash equivalents beginning of period
|
270,588 | 210,758 | - | |||||||||
Cash
and cash equivalents end of period
|
$ | 3,627 | $ | 640,495 | $ | 3,627 | ||||||
Supplemental
disclosure of cash flow informations:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest
|
$ | - | $ | 71,737 | ||||||||
Non-cash
investing and financing tranactions:
|
||||||||||||
Common
Stock Subscription Receivable
|
- | |||||||||||
Conversion
of Convertible Notes payable and accrued interest into Series B preferred
stock
|
||||||||||||
Conversion
of Series B preferred into common
|
3,114,115 | |||||||||||
Conversion
of Series A preferred into common
|
198,868 | |||||||||||
Accrued
dividend on Series B prefs treated as capital contribution
|
387,104 | |||||||||||
Exchange
of common stock for note
|
23,400 |
7
1.
Nature of Operations and Liquidity
Intellect
Neurosciences, Inc. a Delaware corporation, (“Intellect”, “our”, “us”, “we” or
the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) is a
biopharmaceutical company, which together with its subsidiaries Intellect
Neurosciences, USA, Inc. (“Intellect USA”) and Intellect Neurosciences, (Israel)
Ltd. (“Intellect Israel”), is conducting research and developing proprietary
drug candidates to treat Alzheimer’s disease (“AD”) and other diseases
associated with oxidative stress. In addition, we have developed and are
advancing a patent portfolio related to specific therapeutic approaches for
treating AD. Since inception of Intellect USA in 2005, we have devoted
substantially all of our efforts and resources to research and development
activities and advancing our patent estate. We operate under a single segment.
Our fiscal year end is June 30. We have had no product sales through
March 31, 2010 but we have received $4,050,000 in license fees from inception
through March 31, 2010. Our losses from operations have been funded primarily
with the proceeds of equity and debt financings and fees from license
arrangements.
As of
March 31, 2010, we had approximately $3,627 in cash and investments, a capital
deficit of approximately $21.9 million and a deficit accumulated during the
development stage of our Company of approximately $44.4 million. Our net loss
from operations for the three months ended March 31, 2010 and 2009 was
approximately $232,702 and $931,775, respectively. As described more fully below
in Note 13, Subsequent
Events, on April 23, 2010, we issued and sold (i) Secured Convertible
Promissory Notes with an aggregate principal amount of $580,000, (ii) 58,000,000
shares of Common Stock at a per share price of $0.03 and (iii) 77,333,334 Class
A Warrants, 77,333,334 Class B Warrants and 77,333,334 Class C Warrants for an
aggregate purchase price of $2,320,000. Net proceeds from the sale of
the securities was approximately $2,220,000 and is being held in escrow and
distributed to us on a monthly basis pursuant to the terms of an Escrow
Agreement. As a result of this financing transaction, we anticipate
that our existing capital resources will enable us to continue operations for
the next twelve months.
We have
taken actions to reduce the rate of our cash burn and preserve our existing cash
resources. We have sublet approximately 75% of our office space at our New York
City office facility, closed our research laboratory in Israel and terminated
employees both in Israel and New York. The lease is held by our wholly-owned
subsidiary, Intellect Israel. On July 16, 2009, Intellect Israel
entered into an agreement with the landlord of the Israeli facilities pursuant
to which the lease was terminated in exchange for surrender of amounts available
under certain lease guarantees and an agreement by Intellect Israel to pay the
landlord certain costs related to rewiring the facilities, estimated at up to
approximately $4,800. . We will continue to conduct
research through outsourced facilities and arrangements. Currently, we have a
total of two employees.
We
continue to seek additional funding through various financing alternatives. If
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities will result in dilution to our
existing stockholders. We cannot assure you that financing will be available on
favorable terms or at all.
The
previously disclosed engagement with HFP Capital Markets LLC to assist the
Company to obtain equity funding terminated in accordance with its terms as of
January 16, 2010.
As
described more fully below in Note 6, Convertible Promissory
Notes, as of March 31, 2010, we were in default on convertible promissory
notes with an aggregate carrying value of approximately $5.8 million. As
described more fully below in Note 13, Subsequent Events, as
of April 23, 2010, all but one of our note holders accepted common stock in
repayment of their convertible promissory notes. As described more
fully below in Note 5,
Material Agreements, we
are in default with respect to certain payment obligations arising from various
research agreements. We have entered into discussions with the counterparties to
the research agreements and with the remaining note holder to obtain their
agreement to accept common stock in repayment of their debt.
Effective
January 24, 2010, Mr. William Keane, Mr. Harvey Kellman and Dr. Kelvin Davies
resigned as members of the Board of Directors of the Company (the
“Board”). Effective January 22, 2010, Ms. Kathleen Mullinix resigned
as a member of the Board. The Directors advised the Company that they
were resigning because of inadequate funds to renew the Directors and Officers
Liability insurance coverage. The resignations were not motivated by any
disagreement with the Company on any matter relating to the Company’s
operations, policies or practices.
Effective
as of May 4, 2010, pursuant to the authority granted by the Company’s Bylaws,
the Company appointed Mr. Isaac Onn as a member of its Board of Directors (the
“Board”) to fill an existing vacancy on the Board. The appointment of Mr. Onn
was taken by the affirmative unanimous vote of the directors of the Board then
in office.
8
We are a
development stage company and our core business strategy is to leverage our
intellectual property estate through license arrangements and to develop our
proprietary compounds that we have purchased, developed internally or
in-licensed from universities and others, through human proof of concept (Phase
II) studies or earlier if appropriate and then seek to enter into collaboration
agreements, licenses or sales to complete product development and commercialize
the resulting drug products. Our objective is to obtain revenues from licensing
fees, milestone payments, development fees and royalties related to the use of
our intellectual property estate and the use of our proprietary compounds for
specific therapeutic indications or applications. As of March 31,
2010, we had no products approved for sale by the U.S. Food and Drug
Administration (“FDA”). There can be no assurance that our research and
development efforts will be successful, that any products developed by any of
our licensees will obtain necessary government regulatory approval or that any
approved products will be commercially viable. In addition, we operate in an
environment of rapid change in technology and are dependent upon the continued
services of our current employees, consultants and subcontractors.
A key
asset of the Company is our ANTISENILIN patent estate. We have
entered into two license agreements and one license option agreement with major
global pharmaceutical companies. To-date, we have received $4,050,000
in license fees and milestone payments and the agreements provide for potential
future milestone and royalty payments.
The
Company’s proprietary internal pipeline includes:
|
•
|
OXIGON
(OX1), an orally administered, small molecular weight, copper-binding
compound that prevents oxidative stress and blocks formation of toxic Aß
aggregates. Phase I trials in Europe have been completed and the drug
candidate is planned to enter Phase II trials in AD patients, provided the
Company obtains sufficient
financing.
|
|
•
|
IN-N01,
an Aß specific, humanized monoclonal antibody generated using the
Company’s ANTISENILIN® platform technology. The prototype drug candidate
is in preclinical optimization-stage. The antibody product would be
administered to AD patients by
infusion.
|
|
•
|
RECALL-VAX,
an active vaccine against Aß based on the Company’s RECALL-VAX™
technology. The prototype drug candidate is ready for preclinical
optimization. The vaccine product would be used to inoculate individuals
by injection with a modified non-toxic form of Aß so that they become
“immunized” to the naturally occurring
toxin.
|
Intellect
USA was incorporated on April 25, 2005 under the name Eidetic Biosciences, Inc.
It changed its name to Mindset Neurosciences, Inc. on April 28, 2005, to Lucid
Neurosciences, Inc. on May 17, 2005 and finally to Intellect Neurosciences, Inc.
on May 20, 2005. Intellect Israel was incorporated in Israel as a
private limited company in July 2005 for the purpose of conducting research
relating to our proprietary compounds. Currently, Intellect Israel is dormant
and we conduct our research activities through third party outsourcing
arrangements.
2.
Basis of Presentation
The
unaudited consolidated condensed financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and note disclosures required by accounting principles generally
accepted in the United States. The consolidated condensed financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto contained in the Company’s Current Report on Form 10-K for the
fiscal year ended June 30, 2009 filed with the Securities and Exchange
Commission (the “SEC”) on October 13, 2009. The consolidated financial
statements include the accounts of our wholly owned subsidiary, Intellect Israel
and the accounts of
Mindgenix, Inc. (“Mindgenix”), a wholly-owned subsidiary of Mindset
Biopharmaceuticals, Inc. (“Mindset”). We consolidate Mindgenix because we have
agreed to absorb certain costs and expenses incurred that are attributable to
its research. Dr. Chain, our CEO, is a controlling shareholder of Mindset and
the President of Mindgenix. All inter-company transactions have been
eliminated in consolidation.
In the
opinion of management, this interim information includes all material
adjustments, which are of a normal and recurring nature, necessary for fair
presentation. No adjustment has been made to the carrying amount and
classification of assets and the carrying amount of liabilities based on the
going concern uncertainty.
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. We adopted ASC 105 as of
September 30, 2009 and thus have incorporated the new Codification citations in
place of the corresponding references to legacy accounting
pronouncements.
3.
Stock-Based Compensation Plans
Total compensation expense recorded
during the three months ended March 31, 2010 and 2009 for share-based payment
awards was $5,799 and $88,687, respectively, of which $0 and $10,003,
respectively, is shown in research and development costs and $5,799 and $76,684,
respectively, is shown in general and administrative expenses in the condensed
statement of operations.
9
At March
31, 2010, total unrecognized estimated compensation expense related to
non-vested stock options granted prior to that date was approximately
$0.0.
Summary
of all option plans at March 31, 2010:
Year Ended
June 30, 2009
|
Weighted
Average
Exercise Price
|
Instrinisic
value
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||||||||
Options
outstanding at June 30, 2009
|
12,205,478 | $ | 0.74 | $ | - | |||||||||||
Granted
|
- | $ | - | |||||||||||||
Cancelled/Forfeited
|
- | $ | - | - | ||||||||||||
Expired
|
(375,000 | ) | $ | 0.73 | ||||||||||||
Balance
at the end of period
|
11,830,478 | $ | 0.74 | - | 6.56 | |||||||||||
Options
excercisable at March 31, 2010
|
11,814,228 | $ | 0.74 | - | 6.56 | |||||||||||
Options
vested or expected to vest
|
11,830,478 | $ | 0.74 | - | 6.56 |
A summary
of the status of the Company’s non-vested shares as of March 31,
2010:
Number of
Awards
|
Weighted
Average
Exercise Price
|
Weighted
Average
Grant Date
Fair Value
|
Weighted
Average
Remaining
Amortization
Period
|
|||||||||||||
Balance,
beginning of the period
|
47,500 | $ | 0.43 | $ | 0.33 | |||||||||||
Granted
|
- | |||||||||||||||
Vested
|
(31,250 | ) | $ | 0.38 | $ | 0.29 | ||||||||||
Cancelled
|
- | |||||||||||||||
Forfeited
|
- | |||||||||||||||
Balance
at March 31, 2010
|
16,250 | $ | 0.52 | $ | 0.45 | 0.60 |
A summary of the Company’s stock
options at March 31, 2010 is as follows:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Range of Exercise Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise Price
|
|||||||||||||||
$0.08
- $0.40
|
575,000 | 7.86 | $ | 0.18 | 568,750 | $ | 0.17 | |||||||||||||
$0.41
- $0.78
|
11,255,478 | 6.50 | $ | 0.77 | 11,245,478 | $ | 0.77 | |||||||||||||
11,830,478 | 6.56 | 0.74 | 11,814,228 | 0.74 |
10
4.
Convertible Promissory Notes Payable
Convertible Promissory Notes and
Warrants issued through the fiscal year ended June 30, 2006.
During
the period beginning on May 10, 2005 through January 10, 2006, Intellect USA
issued Convertible Promissory Notes in a private placement to accredited
investors. Each investor purchased an investment unit consisting of a
convertible promissory note (the "2006 Notes") and a warrant to purchase shares
of our common stock (the "2006 Warrants"). The 2006 Notes were due on the
earlier of May 10, 2006 or the closing of an equity financing or financings with
one or more third parties with gross proceeds to us of not less than $5,000,000
(the "Next Equity Financing") except for one Note with a face amount of
$250,000, which was due on the earlier of January 5, 2006 or the closing of the
Next Equity Financing. This Note was repaid on February 16, 2006. The
Next Equity Financing occurred on or about May 12, 2006.
On May
12, 2006, Intellect USA issued the 2006 Warrants, entitling the holders to
purchase up to 2,171,424 shares of our common stock. The 2006 Warrants expire
five years from date of issuance of the related 2006 Note. We valued the 2006
Warrants as of May 12, 2006, the measurement date, and recorded a charge to
interest expense and a corresponding derivative liability of $746,972. See Note 6, Derivative Instrument
Liability, for a further discussion of the liability related to the
issuance of the 2006 Warrants.
As of
March 31, 2010, all of the original 2006 Notes have been repaid or converted
into shares of our Series B Preferred Stock and warrants to purchase up to
2,282,574 shares of our common stock are issued and outstanding. Also, an
additional note with a face amount of $75,000 issued in connection with the
extension of the maturity date of certain of the 2006 Notes is outstanding and
past due. As described more fully below in Note 10, Subsequent Events, on
April 23, 2010, this note holder accepted common stock in repayment of his
note.
Convertible
Promissory Notes and Warrants issued during the fiscal year ended June 30, 2007
(“2007 Notes”).
During
the fiscal year ended June 30, 2007, we issued $5,678,000 aggregate face amount
of Convertible Promissory Notes (the “2007 Notes”) together with warrants to
purchase up to 3,236,000 shares of our common stock at a price of $1.75 per
share. All of the 2007 Notes bear interest at 10% and are unsecured obligations.
Certain of the 2007 Notes are due no later than 6 months from the date of
issuance and others are due no later than one year from the date of
issuance.
We
determined the initial fair value of the warrants issued to the purchasers of
the 2007 Notes to be $3,425,861 based on the Black-Scholes option pricing model,
which we treated as a liability with a corresponding decrease in the carrying
value of the 2007 Notes. This difference has been amortized over the term of the
2007 Notes as interest expense, calculated using an effective interest method.
See Note 6, Derivative
Instrument Liability, for a further discussion of the liability related
to the issuance of the warrants.
During
the fiscal year ended June 30, 2007, we incurred placement fees of $340,000 and
issued 485,714 warrants to a placement agent in connection with the issuance of
2007 Notes with an aggregate face amount of $3.4 million. We recorded
the $340,000 placement fee and the value of the warrants as deferred financing
costs, which have been amortized over the term of these 2007 Notes, without
regard to any extension of the maturity date of such Notes. We determined the
initial fair value of the warrants on the closing date of July 5, 2007 to be
$1,116,250 using the Black Scholes option pricing model. This amount was
recorded as a warrant liability with an offset to deferred financing costs. The
warrant liability will be marked to market at each future reporting date. See
Note 6, Derivative Instrument
Liability, for a further discussion of the liability related to the
issuance of the 2007 Warrants.
As of
March 31, 2010, we are in default with all of the remaining 2007 Notes, which
have an aggregate carrying value of $5,305,088. In addition, warrants to
purchase 3,837,546 shares of our common stock are issued and outstanding in
connection with the issuance of the 2007 Notes. As described
more fully below in Note 10,
Subsequent Events, as of April 23, 2010, all but one of our note holders
accepted common stock in repayment of their convertible promissory notes and
agreed to the cancellation of their warrants. The remaining outstanding 2007
Notes have an aggregate principle amount of $300,000.
Convertible
Promissory Notes and Warrants issued during the fiscal year ended June 30, 2008
(“2008 Notes”).
During
the fiscal year ended June 30, 2008, we issued convertible promissory notes with
an aggregate face amount of $325,000 (“the 2008 Notes”) due 12 months from date
of issuance. The 2008 Notes bear interest at 10% and are unsecured liabilities,
except for one Note with a face amount of $100,000 that bears interest at 17%
and is due six months from the date of issuance. In connection with the 2008
Notes, we issued 185,744 warrants.
11
We
determined the initial fair value of the warrants issued with the 2008 Notes to
be $52,740 based on the Black-Scholes option pricing model, which has been
treated as a liability with a corresponding decrease in the carrying value of
the 2008 Notes. See Note 6,
Derivative Instrument Liability, for a further discussion of the
liability related to the issuance of the warrants. This difference will be
amortized over the term of the 2008 Notes as interest expense calculated using
an effective interest method.
As of
March 31, 2010, we are in default with respect to 2008 Notes with an aggregate
face amount of $180,000. The maturity dates of 2008 Notes with an aggregate face
amount of $135,000 have been extended until July 31, 2013 pursuant to the
royalty transaction described below and are now included as part of the Senior
Notes described below. As described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, all of the holders of the 2008 Notes accepted common stock in
repayment of their convertible promissory notes and agreed to the cancellation
of their warrants.
Convertible
Promissory Notes Issued Without Warrants.
Through
the fiscal year ended June 30, 2008, we issued Convertible Promissory Notes
without warrants with an aggregate face amount of $5,984,828 that are due one
year from date of issuance (the “Warrantless Notes”). The Notes bear interest at
8% and are unsecured obligations. Through the fiscal year ended June
30, 2008, we repaid Warrantless Notes with an aggregate principal amount of
$1,286,000.
During
July 2008, we issued additional Warrantless Notes with identical terms and an
aggregate principal amount of $268,500, of which $75,000 was provided by related
parties. As more fully described below, on July 31, 2008, the Warrantless Notes
effectively were exchanged for Senior Notes.
Royalty
Participation Transaction
Effective
as of July 31, 2008, holders of Warrantless Notes with an aggregate face amount
of $4,967,328 and holders of 2008 Notes with an aggregate face amount of
$107,672 exchanged their Warrantless Notes and Convertible Notes, respectively,
for senior promissory notes (the “Senior Notes”). In addition, unrelated party
lenders advanced $650,000 to us in exchange for a Senior Note. Each
Senior Note has a maturity date of five years and bears interest at 10% per
annum. We issued to the holders of the Warrantless Notes and the other lenders
new Senior Notes with an aggregate face amount of $5,725,000 dated as of July
31, 2008, together with 3,271,429 warrants, and granted these holders and
lenders the right to receive 25% of future royalties that we receive from the
license of our ANTISENILIN patent estate.
We
accounted for the exchange of the Convertible Promissory Notes, as described
above, as an extinguishment of debt in accordance with authoritative guidance
issued by FASB and concluded that it was necessary to reflect the Senior Notes
at fair market value and record a loss on extinguishment of debt of
approximately $702,000 in the three-month period ended September 30, 2008. We
accounted for the issuance of the Senior Note with a face amount of $650,000 to
an unrelated party as a new issuance. We accounted for the 371,429 Royalty
Warrants issued to this holder as a liability, measured at fair value, which has
been offset by a reduction in the carrying value of the associated Senior Note.
See Note 6, Derivative
Instrument Liability.)
On March
22, 2009, in connection with the settlement of certain litigation relating to a
convertible promissory note in default, one of our shareholders who is a related
party purchased the note in default from the original note holder and agreed to
cancel the note. In exchange, we issued to the related party shareholder an
additional Senior Note with a face amount of $310,000 and repaid $100,000 of
Notes held by the shareholder. We did not issue any additional warrants to the
shareholder. At March 31, 2010, Senior Notes Payable to related parties of
$3,753,828 and Senior Notes Payable to unrelated parties with a carrying value
of $2,127,071 remain outstanding. As described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, all of the holders of the Senior Notes Payable accepted
common stock in repayment of their notes and agreed to the cancellation of their
warrants.
Bridge
Note Financing
On August
12, 2009, we issued and sold a 10% Senior Promissory Note (the “August Note”)
with a principal amount of $450,000, resulting in net proceeds of approximately
$360,000. The August Note bears interest at 10% annually and matures upon the
earlier of 6 months from the date of the Note or the closing of an equity
financing with gross proceeds to us of at least $1,125,000 (the “Liquidity
Event”). The payment and performance obligations of the Company under
the Note are guaranteed by Margie Chassman, a principal shareholder of the
Company. In consideration of the guaranty provided by Ms. Chassman,
we paid her a fee of $30,000. As of March 31, 2010, we are in default with
respect to the August Note, which has a face amount of $450,000. As described
more fully below in Note 10,
Subsequent Events, on April 23, 2010, the holder of the August Note
accepted common stock in repayment of his note.
12
As
additional consideration to repayment of the August Note and interest in cash,
the purchaser of the August Note will receive at maturity or early repayment of
the August Note either (1) a number of shares of common stock, par value $0.001,
of the Company (the “Shares”), equal to the quotient of the principal amount of
the August Note divided by 0.15; or (2) warrants to purchase a number of shares
of common stock, par value $0.001, of the Company (the “Purchaser Warrants”),
equal to the quotient of the principal amount of the August Note divided by
0.15, at an exercise price equal to $1.75 per share, as adjusted upon the
occurrence of certain events as set forth in the Purchaser Warrant. If the
Liquidity Event occurs on or prior to the maturity date of the August Note, the
purchaser will receive Shares. If the Liquidity Event has not occurred on or
prior to the maturity date of the August Note, the purchaser will receive
Purchaser Warrants.
We
determined at the time of issuance of the August Note that it was probable that
the holder of the August Note would receive Purchaser Warrants rather than the
Shares at maturity of the Note. We based this determination on our estimate of
the likelihood that the Liquidity Event would occur on or before the maturity
date of the August Note. We determined the initial fair value of the
warrants issued to the purchaser of the August Note to be $151,930 based on the
Black-Scholes option pricing model, which we treated as a liability with a
corresponding decrease in the carrying value of the August Note. This difference
will be amortized over the term of the August Note as interest expense,
calculated using an effective interest method. See Note 6, Derivative Instrument
Liability, for a further discussion of the liability related to the
Purchaser Warrants. As described more fully below in Note 10, Subsequent Events, on
April 23, 2010, we issued to the purchaser of the August Note 15 million shares
of our common stock in lieu of Purchaser Warrants.
Sandgrain
Securities Inc. acted as placement agent for the offering of the August
Note. We paid to Sandgrain a commission of $45,000 (10% of the
principal amount of the Note sold) plus reimbursement of expenses. We
are obligated to issue to Sandgrain (or its designees) warrants (the “Sandgrain
Warrants”) to purchase 750,000 shares of the Company’s common stock, exercisable
for 5 years from their date of issuance. The Sandgrain Warrants will
be issued to Sandgrain (or its designees) at the time that we issue to the
purchaser of the August Note either the Shares or the Purchaser
Warrants. The exercise price of the Sandgrain Warrants will be $$0.15
per share if we issue Shares to the Purchasers or $1.75 per share if we issue
Purchaser Warrants to the Purchasers. The Sandgrain Warrants may be
exercised on a cashless basis and will have registration, anti-dilution and
other rights similar to the Purchaser Warrants. In addition, we have
agreed to extend the expiration date of warrants to purchase 485,714 shares of
our common stock, which were issued to Sandgrain (or its designees) in July 2007
in connection with a previous financing transaction by the
Company. The expiration date of all such warrants will be extended
from July 16, 2012 until the expiration date of the Sandgrain Warrants to be
issued in connection with this offering of August Note.
On
November 17, 2009, we issued and sold 14% Convertible Promissory Notes (the
“November Notes”) with an aggregate principal amount of $200,000, resulting in
net proceeds to the Company of approximately $192,500. The November Notes bear
interest at 14% annually and mature 3 months from the issue date of the November
Notes. Interest is payable quarterly in arrears on the last day of each calendar
quarter, commencing December 31, 2009. Each November Note may be
converted into shares of Company common stock equal to the sum of the principal
owed and interest that has accrued on such Note divided by the conversion price
of $1.75. The November Notes are not entitled to dividends, distributions or
other payments and carry no registration rights related to the underlying common
stock. As described more fully below in Note 13, Subsequent Events, on
April 23, 2010, the holders of the November Notes accepted common stock in
repayment of their notes.
In
connection with the sale of the November Notes, the purchasers of the November
Notes will receive at maturity of the November Notes 2.5 million shares of
Company common stock (the “Purchaser Shares”). Daniel Chain, CEO of the Company,
has transferred to an escrow agent, 2.5 million shares of Company common stock
issued to him at the time that he founded the Company in 2005 as collateral for
the purchasers’ right to receive such shares.
We
calculated the initial fair value of the Purchaser Shares to be $250,000 based
on the closing price of the Company’s common stock on the date of issuance of
the November Notes. We treated this amount as a liability with a
corresponding decrease in the carrying value of the November Notes, with any
excess treated as interest expense for the current period. The decrease in the
carrying value of the November Notes will be amortized over the term of the
November Notes as interest expense, calculated using an effective interest
method. See Note 6, Derivative
Instrument Liability, for a further discussion of the liability related
to the Purchaser Shares. As described more fully below in Note 10, Subsequent Events, on
April 23, 2010, the escrow agent released the Purchaser Shares to the holders of
the November Notes.
5.
Series B Convertible Preferred Stock
In
February 2006, Intellect USA’s Board of Directors authorized the issuance of up
to 7,164,445 shares of convertible preferred stock to be designated as "Series B
Convertible Preferred Stock" ("Old Series B Preferred") with a par value per
share of $0.001. The shares carry a cumulative dividend of 6% per annum. The
initial conversion price of the Old Series B Preferred is $1.75 and is subject
to certain anti-dilution adjustments to protect the holders of the Old Series B
Preferred in the event that we subsequently issue share of common stock or
warrants with a price per share or exercise price less than the conversion price
of the Old Series B Preferred. In addition, Intellect USA’s Board of
Directors authorized the issuance of warrants to purchase our common stock in
connection with each sale of Series B Preferred.
13
During
the period February 8, 2006 through December 31, 2006, Intellect USA issued
4,593,091 shares of Series B Convertible Preferred Stock ("Old Series B
Preferred") with a par value per share of $0.001 and warrants to purchase up to
3,046,756 shares of our common stock. The shares carry a cumulative dividend of
6% per annum and carry a stated value of 1.75 per share. Each share of Old
Series B Preferred is convertible into the Company’s common share at an initial
conversion price of 1.75 per share. Each investor purchased an investment unit
consisting of a share of Old Series B Preferred and a warrant to purchase 0.5
shares of our common stock (the "Series B Warrants"). Total proceeds from
issuance of the Old Series B Preferred for the year ended June 30, 2006 were
$6,384,794, which included the cancellation of Notes with an aggregate face
amount of $1,100,000 and accrued interest of $67,294 and for the year ended June
30, 2007 was $1,653,122, which included the cancellation of Notes with an
aggregate face amount of $100,000 and accrued interest of $9,472. See Note 6, Derivative Instrument
Liability, for a further discussion of the liability related to the
issuance of the Series B Warrants.
In May,
2007, we effectively exchanged the Old Series B Preferred for 459,309 shares of
new Series B Convertible Preferred Stock (the “New Series B Preferred”),
containing the same designations, preferences rights and qualifications as the
Old Series B Preferred Stock, except that each share of New Series B Preferred
carries a stated value of $17.50 rather than 1.75 and is convertible into 10
shares rather than one share of the Company’s common stock.
Based on
authoritative guidance, we accounted for the Series B Preferred and the Series B
Warrants as derivative liabilities at the time of issuance using the Black
Scholes Option pricing model. We recorded the amount received in consideration
for the Series B Preferred as a liability for the Series B Preferred shares with
an allocation to the Series B Warrants and the difference recorded as additional
paid in capital. The liability related to the Series B preferred stock and the
Warrants will be marked to market for all future periods they remain outstanding
with an offsetting charge to earnings. At March 31, 2010 the Series B Preferred
stock liability was $551,171 with an increase in fair value of $91,862 for the
three months ended March 31, 2010, recorded in other income. See Note 8, Derivative Instrument
Liability, for a further discussion of the liability related to the
issuance of the Series B Preferred Warrants. As of March 31, 2010, we have
accrued Series B Preferred Stock dividends payable of $1,942,459 which are
recognized as interest expense.
As
described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, almost all of the holders of the Series B Preferred Stock
converted their shares into Company common stock and agreed to the cancellation
of their warrants. Series B Preferred Stock with an aggregate liquidation
preference of $887,000 excluding accrued dividends remains
outstanding.
6.
Derivative Instrument Liability
Derivative instruments consist of
the following:
March 31, 2010
|
||||
Warrants
and shares related to Convertible Promissory Notes:
|
$ | 434,496 | ||
Warrants
issued with Series B Convertible Preferred Stock:
|
2,118 | |||
Total
|
$ | 436,614 |
Warrants
issued with Convertible Promissory Notes.
As described above in Note 4.
Convertible Promissory Notes Payable, in connection with the issuance of
Convertible Promissory Notes, we issued warrants to purchase up to 6,677,267
shares of our common stock, of which 2,282,574 were issued in connection with
Notes issued during fiscal year ended June 30, 2006; 3,837,546 were issued in
connection with Notes issued during fiscal year June 30, 2007; 185,714 were
issued in connection with Notes issued during fiscal year June 30,
2008; 371,429 were issued in connections with a Note issued
during fiscal year ended June 30, 2009; and 3,000,000 were issued in connection
with a Note issued during the fiscal year ended June 30, 2010.
Based on
authoritative guidance, we have accounted for the Convertible Note Warrants as
liabilities. The liability for the Convertible Note Warrants, measured at fair
value as determined in the manner described below, has been offset by a
reduction in the carrying value of the Notes. The liability for the Convertible
Note Warrants will be marked to market for each future period they remain
outstanding.
14
The weighted average
exercise price of the outstanding Warrants is $1.47 per common share and the
weighted average remaining life of the warrants is 1.58
years. At March 31, 2010, the Convertible Note Warrant
liability was $434,496 with an increase in fair value of the outstanding
warrants of $43,723 and $211,303 for the three months and nine months ended
March 31, 2010, recorded in other income.
As
described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, all but one of our note holders accepted common stock in
repayment of their convertible promissory notes and agreed to the cancellation
of their warrants. 462,856 Warrants remaining outstanding, which consist of
171,428 held by such note holder and 291,428 held by certain other former note
holders.
Warrants
issued with the Series B Convertible Preferred Stock (the “Series B
Warrants”).
As
described above in Note
5.
Series B Convertible Preferred Stock, in
connection with the issuance of the Old Series B Preferred, we issued warrants
to purchase up to 3,046,756 shares of our common stock for the year ended June
30, 2006 and 186,692 shares of our common stock for the year ended June 30,
2007.
Based on
authoritative guidance, we have accounted for the Series B Warrants as
liabilities. The liability for the Series B Warrants, measured at fair value as
determined in the manner described below, has been offset by a charge to
earnings rather than as a discount from the carrying value of the Series B
Preferred. The liability for the Series B Warrants will be marked to market for
each future period they remain outstanding.
As of
March 31, 2010, we had 3,046,756 Series B Warrants outstanding. The weighted
average strike price of the Series B warrants is $1.75 per common share and the
weighted average remaining life of the warrants is .91 years. At March 31, 2010 the
Series B Warrant liability was $2,118 with a decrease in fair value of $649 and
$41,662 for the three months and six months ended March 31, 2010 recorded in
other income.
As
described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, almost all of the holders of the Series B Preferred Stock
converted their shares into Company common stock and agreed to the cancellation
of their warrants. 333,429 Series B Warrants remain outstanding.
Warrants
issued in connection with the Royalty Participation Transaction (the “Senior
Note Warrants”).
As
described above in Note
6,
Convertible Promissory Notes Payable, we issued warrants to purchase up
to 3,271,429 of our common shares (the “Senior Note Warrants”) to the lenders
who participated in the Royalty Participation Transaction. We issued
approximately 371,429 warrants to the lender who advanced new funds of $650,000
to us and issued the remaining 2,900,000 warrants to the other lenders. The
Senior Note Warrants contain the same terms as the warrants issued together with
the Convertible Notes described above.
Based on
authoritative guidance, we have accounted for the 371,429 Senior Note Warrants
as a liability. The carrying value of the associated Senior Notes has been
reduced by the initial fair value of these Senior Note Warrants. The Senior
Notes will be accreted back up to their face value over the term of the
Notes. The Senior Note Warrants have been valued at the date of the
exchange and the resulting liability will be marked to market for each future
period the Senior Note Warrants remain outstanding with the resulting gain or
loss being recorded in the statement of operations. The weighted average
exercise price of these outstanding Senior Note Warrants is $1.75 per common
share and the weighted average remaining life of the warrants is 3.3
years. At March 31, 2010, the Warrant liability for these Senior Note
Warrants was $31,123.
We have
accounted for the remaining 2,900,000 Senior Note Warrants as interest expense
incurred in exchange for an extension of the maturity dates of the Notes
exchanged in the transaction. We calculated the fair value of these remaining
warrants on the issue date of the warrants to be $1,172,062, using a Black
Scholes pricing model. We recorded this amount as additional interest expense
incurred in the period ending September 30, 2008.
As
described more fully below in Note 10, Subsequent Events, as
of April 23, 2010, all of the holders of the Senior Notes accepted common stock
in repayment of their notes and agreed to the cancellation of their Senior Note
Warrants.
15
Warrants
to be issued in connection with the August Notes (the “Purchaser
Warrants”).
As
described above in Note
6,
Convertible Promissory Notes Payable, we expect to issue warrants to
purchase up to 3.0 million of our common shares (the Purchaser Warrants) to the
purchaser of the August Note. Based on authoritative guidance, we have accounted
for the Purchaser Warrants as a liability. The carrying value of the associated
August Note has been reduced by the initial fair value of these Purchaser
Warrants. The August Note will be accreted back up to its face value over the
term of the Note. The Purchaser Warrants have been valued at the date
of the issuance of the August Note and the resulting liability will be marked to
market for each future period the August Note remains outstanding with the
resulting gain or loss being recorded in the statement of
operations. At March 31, 2010, the Warrant liability for these
Purchaser Warrants was $99,516 As described more fully below in Note 13, Subsequent Events, on
April 23, 2010, we issued to the purchaser of the August Note 15 million shares
of our common stock in lieu of Purchaser Warrants.
Shares
to be issued in connection with the November Notes (the “Purchaser
Shares”).
As
described above in Note
6,
Convertible Promissory Notes Payable, we expect to issue a total of 2.5
million of our common shares (the Purchaser Shares) to the purchasers of the
November Notes. We have accounted for the Purchaser Shares as a liability for
the reasons described above. The carrying value of the associated November Notes
has been reduced by the initial fair value of these Purchaser Shares, with the
excess treated as interest expense for the current period. The November Notes
will be accreted back up to their face value over the term of the
Notes. The Purchaser Shares have been valued at the date of the
issuance of the November Notes and the resulting liability will be marked to
market for each future period the November Notes remain outstanding with the
resulting gain or loss being recorded in the statement of
operations. At March 31, 2010, the liability for these Purchaser
Shares was $300,000. As described more fully below in Note 13, Subsequent Events, on
April 23, 2010, the escrow agent released the Purchaser Shares to the holders of
the November Notes.
7.
Related Party Transactions
Our AD
research activities require that we test our drug candidates in a certain type
of transgenic mouse that exhibits the human AD pathology. Mindgenix, Inc., a
wholly-owned subsidiary of Mindset, holds a license on the proprietary
intellectual property related to these particular mice from the University of
South Florida Research Foundation (“USFRF”). We have engaged Mindgenix to
perform testing services for us using these transgenic mice. Dr. Chain, our CEO,
is a controlling shareholder of Mindset. We consolidate the results of
operations of Mindgenix with our results of operations because we have agreed to
absorb certain costs and expenses incurred that are attributable to their
research.
In
December of 2006, we entered into an agreement with USFRF as a co-obligor with
Mindgenix, pursuant to which USFRF agreed to reinstate the license with
Mindgenix in exchange for our agreement to pay to USFRF $209,148 plus accrued
interest of $50,870 in installments. We have paid $184,151 through June 30, 2008
and established a liability for the remainder of the payments.
Related Party Consulting
Fees. On January 3, 2007, we entered into a consulting
contract with a former member of our Board of Directors and significant
shareholder pursuant to which he is to provide us with consulting services
related to identifying, soliciting and procuring collaboration agreements on
behalf of Intellect. Under the agreement, Intellect is obligated to
pay this former director and shareholder consulting fees of $10,000 per month
beginning in January 2007. In addition, to the extent permitted under
our applicable group health insurance policy, we are obligated to provide health
insurance to this individual and his family without any reimbursement from
him. In further consideration of the provision of services by this
individual, he is entitled to receive cash payments in an amount equal to 2.5%
of all revenues received by us, including payments we receive from collaboration
agreements, as we realize the revenue through the receipt of cash payments from
third parties. Total amounts payable to this former director and
shareholder under the Consulting Agreement are limited to $1 million, calculated
by taking into account all consulting fees paid to this director, cost of health
insurance and revenue participation payments. The agreement may be
terminated by us with or without cause at any time, provided however, that we
have fulfilled our monetary obligations described above. During the three months
ended March 31, 2010, we accrued $30,000 of consulting expense for this former
director and shareholder.
8.
Commitments and Contingencies
In the
ordinary course of business, we enter into agreements with third parties that
include indemnification provisions which, in our judgment, are normal and
customary for companies in our industry sector. These agreements are typically
with business partners, clinical sites, and suppliers. Pursuant to these
agreements, we generally agree to indemnify, hold harmless, and reimburse
indemnified parties for losses suffered or incurred by the indemnified parties
with respect to our product candidates, use of such product candidates, or other
actions taken or omitted by us. The maximum potential amount of future payments
we could be required to make under these indemnification provisions is
unlimited. We have not incurred material costs to defend lawsuits or settle
claims related to these indemnification provisions. As a result, the estimated
fair value of liabilities relating to these provisions is minimal. Accordingly,
we have no liabilities recorded for these provisions as of March 31,
2010.
16
In the
normal course of business, we may be confronted with issues or events that may
result in a contingent liability. These generally relate to lawsuits, claims,
environmental actions or the action of various regulatory agencies. If
necessary, management consults with counsel and other appropriate experts to
assess any matters that arise. If, in management’s opinion, we have incurred a
probable loss as set forth by accounting principles generally accepted in the
United States, an estimate is made of the loss, and the appropriate accounting
entries are reflected in our financial statements. After consultation with legal
counsel, we do not anticipate that liabilities arising out of currently pending
or threatened lawsuits and claims will have a material adverse effect on our
financial position, results of operations or cash flows.
9.
Per Share Data
The
following table sets forth the information needed to compute basic and diluted
earnings per share:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
March 31,
2010
|
March 31,
2009
|
March 31,
2010
|
March 31,
2009
|
|||||||||||||
Basic
EPS
|
||||||||||||||||
Net
(loss) income attributable to common stockholders, basic
|
$ | (952,214 | ) | $ | (2,952,155 | ) | $ | (2,239,173 | ) | $ | 1,722,575 | |||||
Weighted
average shares outstanding
|
30,843,873 | 30,843,873 | 30,843,873 | 30,843,873 | ||||||||||||
Basic
(loss) earnings per share
|
$ | (0.03 | ) | $ | (0.10 | ) | $ | (0.07 | ) | $ | 0.06 | |||||
Diluted
EPS
|
||||||||||||||||
Net
(loss) income attributable to common stockholders, basic
|
$ | (952,214 | ) | $ | (2,952,155 | ) | $ | (2,239,173 | ) | $ | 1,722,575 | |||||
Preferred
stock dividends
|
121,908 | 120,569 | 368,404 | 367,065 | ||||||||||||
Interest
on convertible notes
|
314,137 | 244,446 | 923,016 | 876,192 | ||||||||||||
Net (loss)
income attributable to common stockholders, diluted
|
$ | (516,169 | ) | $ | (2,587,140 | ) | $ | (947,753 | ) | $ | 2,965,832 | |||||
Weighted
average shares outstanding
|
30,843,873 | 30,843,873 | 30,843,873 | 30,843,873 | ||||||||||||
Dilutive
effect of stock options
|
94,542 | 72,000 | 72,833 | 92,000 | ||||||||||||
Dilutive
effect of warrants
|
- | - | - | - | ||||||||||||
Dilutive
effect of Series B preferred shares
|
4,593,091 | 4,593,091 | 4,593,091 | 4,593,091 | ||||||||||||
Dilutive
effect of convertible notes
|
6,514,398 | 6,263,045 | 6,464,010 | 6,211,653 | ||||||||||||
Diluted
weighted average shares outstanding
|
42,045,904 | 41,772,009 | 41,973,807 | 41,740,617 | ||||||||||||
Diluted
earnings (loss) per share
|
$ | (0.01 | ) | $ | (0.06 | ) | $ | (0.02 | ) | $ | 0.04 |
10. Subsequent
Events
Issuance of Promissory
Notes, Common Stock and Warrants. Pursuant to a Subscription Agreement
between Intellect Neurosciences, Inc. (the “Company”) and the signers thereto,
on April 23, 2010 (the “Closing Date”), the Company issued and
sold for an aggregate purchase price of $2,320,000: (i) Secured
Convertible Promissory Notes (the “Notes”) with an aggregate principal amount of
$580,000, (ii) 58,000,000 shares of the Company’s Common Stock at a per share
price of $.03 and (iii) 77,333,334 Class A Warrants, 77,333,334 Class
B Warrants and 77,333,334 Class C Warrants. Net proceeds from the
sale of the securities of approximately $2,220,000 is being held in escrow and
distributed to the Company on a monthly basis pursuant to the terms of an Escrow
Agreement executed by the parties.
17
Each Note
may be converted into shares of the Company’s common stock, $0.001 par value per
share (“Common Stock”), at a conversion price per share of $0.03, subject to
certain adjustments as provided in the terms of the Notes. The Notes bear
interest at 14% annually and mature on April 22, 2013. The Notes are not
entitled to dividends, distributions or other payments. The number of shares
issuable upon conversion of the Notes is subject to adjustment for subdivision,
combination, recapitalization, reclassification, exchange or substitution, as
well as in the event of merger or sale of all or substantially all of the
Company’s assets. The Notes also benefit from anti-dilution adjustments upon
issuances of shares of Common Stock (or securities convertible into or
exchangeable or exercisable for such stock). If the Company issues common stock
at a price that is less than $0.03 (or if the Company issues rights, warrants or
other securities having an exercise, conversion or exchange price that is less
than $0.03), the conversion price of the Notes will be reduced to a price equal
to the issuance, conversion, exchange or exercise price, as applicable, of any
such securities so issued. Additional reductions of the conversion price of the
Notes will be made if the Company issues securities at a price (or having an
exercise, conversion or exchange price) less than the conversion price of the
Notes at the time of such issuances.
Each
Warrant entitles the holder to purchase 77,333,334 shares of Common Stock. The
Series A Warrants and the Series C Warrants contain cashless exercise features.
The exercise price of the Series B Warrants is payable in cash.
The
Series A Warrants expire on the fifth anniversary of their issue date; the
Series B Warrants expire on the nine monthly anniversary of their issue date;
and the Series C Warrants expire on the sixty ninth monthly anniversary of their
issue date. The Series C Warrants are exercisable only upon the prior or
simultaneous exercise of the Series B Warrants issued by the Company to the
original holder on the issue date.
The
number of shares issuable upon exercise of the Warrants is subject to adjustment
for subdivision, combination, recapitalization, reclassification, exchange or
substitution, as well as in the event of merger or sale of all or substantially
all of the Company’s assets. The Warrants also benefit from anti-dilution
adjustments upon issuances of shares of Common Stock (or securities convertible
into or exchangeable or exercisable for such stock). If the Company issues
common stock at a price that is less than $0.03 (or if the Company issues
rights, warrants or other securities having an exercise, conversion or exchange
price that is less than $0.03), the exercise price of the Warrants will be
reduced to a price equal to the issuance, conversion, exchange or exercise
price, as applicable, of any such securities so issued. In addition, upon any
reduction of the exercise price of the Warrants, the number of shares of Common
Stock that the holder of the Warrant shall thereafter, on the exercise, be
entitled to receive shall be adjusted to a number determined by multiplying the
number of shares of Common Stock that would otherwise be issuable on such
exercise by a fraction of which (a) the numerator is the exercise price that
would otherwise be in effect, and (b) the denominator is the exercise price in
effect on the date of such exercise. Additional reductions of the exercise price
of the Warrants and adjustments to the number of shares of Common Stock issuable
upon exercise will be made if the Company issues securities at a price (or
having an exercise, conversion or exchange price) less than the exercise price
of the Warrants at the time of such issuances..
In
connection with the sale of the Notes, the Company, all the subsidiaries of the
Company and the holders of the Notes entered into a Security Agreement (the
“Security Agreement”). Pursuant to the Security Agreement, the Company granted
the holders a security interest in all of the Company’s tangible and intangible
assets, including its patent estate.
Repayment of Outstanding
Promissory Notes. On April 23, 2010, the Company issued or agreed to
issue to holders of all of its outstanding Convertible Promissory Notes and
Senior Notes Payable (except as described below), a total of 342,351,768 shares
of Common Stock in repayment of the full principal amount plus all accrued and
unpaid interest on such Notes. Each holder is entitled to a number of shares of
Common Stock equal to the sum of the full principal amount of the Notes, plus
all accrued and unpaid interest on such holder’s Notes, divided by 0.05. Holders
of Notes who purchased Common Stock and Notes for total consideration of at
least $500,000 in the financing transactions described above that occurred on
April 23, 2010 are entitled to a number of shares of Common Stock equal to the
sum of the full principal amount of the Notes held by such Purchasers, plus all
accrued and unpaid interest on such holders’ Notes, divided by
0.03.
In
connection with the repayment of the Notes, each holder agreed to the
cancellation of his or her existing warrants that were issued in connection with
the original issuance of the Notes. In addition, each holder agreed not to sell,
transfer or pledge any shares of Common Stock received upon repayment of the
Notes for a period of one year. Holders of Notes who purchased Common
Stock and Notes for total consideration of at least $500,000 in the financing
transactions described above that occurred on April 23, 2010 are not subject to
this “lockup”.
A holder
of Convertible Promissory Notes issued during the fiscal year ended June 30,
2007 with an aggregate principal amount of $300,000 refused to accept repayment
of his Notes by delivery of Common Stock and continues to hold his Notes, which
remain outstanding and overdue.
18
Conversion of Series B
Preferred Stock. On April 23, 2010, the Company accepted conversion
notices from each of the holders of the Company’s outstanding Series B
Convertible Preferred Stock (except as described below), and issued or agreed to
issue a total of 195,105,502 shares of Common Stock in conversion of the Series
B Preferred Stock plus all accrued and unpaid dividends on the Series B
Preferred Stock. Each holder is entitled to a number of shares of Common Stock
equal to the sum of the Stated Value of each share of Series B Preferred Stock
($17.50), plus all accrued and unpaid dividends, divided by 0.05. Holders of
Series B Preferred Stock who purchased Common Stock and Notes for total
consideration of at least $500,000 in the financing transactions described above
that occurred on April 23, 2010 are entitled to a number of shares of Common
Stock equal to the sum of the full Stated Value of the Series B Preferred Stock
held by such Purchasers, plus all accrued and unpaid dividends on such holders’
Series B Preferred Stock, divided by 0.03.
In
connection with the conversion of the Series B Preferred Stock, each holder
agreed to the cancellation of his or her existing warrants that were issued in
connection with the original issuance of the Series B Preferred Stock. In
addition, each holder agreed not to sell, transfer or pledge any shares of
Common Stock received upon conversion of the Series B Preferred Stock for a
period of one year. Holders of Series B Preferred Stock who purchased
Common Stock and Notes for total consideration of at least $500,000 in the
financing transactions described above that occurred on April 23, 2010 are not
subject to this “lockup”.
Holders
of Series B Prefs with an aggregate Stated Value of $887,000 did not submit
conversion notices and continue to hold their Series B Prefs and
warrants.
ITEM
2. MANAGEMENTS’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations contains information that management believes is relevant to an
assessment and understanding of our results of operations. You should read this
discussion in conjunction with the Financial Statements and Notes included
elsewhere in this report and with Management’s Discussion and Analysis of
Financial Condition and Results of Operations for the period ended June 30, 2009
and Risk Factors contained in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission (the “SEC”) on October 16,
2009. Certain statements set forth below constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See
“Special Note Regarding Forward-Looking Statements”. References to “Intellect,”
the “Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and
its subsidiaries.
General
We are a
biopharmaceutical company conducting research and developing our own proprietary
drug candidates to treat Alzheimer’s disease (“AD”) and other diseases
associated with oxidative stress. In addition, we have developed and are
advancing a patent portfolio related to specific therapeutic approaches for
treating AD. Since our inception in 2005, we have devoted substantially all of
our efforts and resources to research and development activities and advancing
our intellectual property portfolio. We have no product sales through September
30, 2009. We operate under a single segment. Our fiscal year end is June
30.
Our core
business strategy is to leverage our intellectual property estate through
license and other arrangements and to develop our proprietary compounds that we
have purchased, developed internally or in-licensed from universities and
others, through human proof of concept (Phase II) studies or earlier if
appropriate and then seek to enter into collaboration agreements, licenses or
sales to complete product development and commercialize the resulting drug
products. Our objective is to obtain revenues from licensing fees, milestone
payments, development fees and royalties related to the use of our intellectual
property estate and the use of our proprietary compounds for specific
therapeutic indications or applications.
In May,
2008, we entered into a License Agreement with AHP MANUFACTURING BV, acting
through its Wyeth Medica Ireland Branch, (“Wyeth”) and ELAN PHARMA INTERNATIONAL
LIMITED (“Elan”) to provide Wyeth and Elan (the “Licensees”) certain license
rights under our ANTISENILIN patent estate, which relates to certain antibodies
that may serve as potential therapeutic products for the treatment for
Alzheimer’s Disease (the “Licensed Products”) and for the research, development,
manufacture and commercialization of Licensed Products. In exchange for the
licenses, the Licensees have agreed to collectively pay us an up-front payment,
and we may be entitled to milestone and royalty payments in the
future.
In
October, 2008, we entered into an Option Agreement with a global pharmaceutical
company regarding the right to obtain a license to our ANTISENILIN patent
estate. Pursuant to the Option Agreement, we received a non-refundable option
fee upon execution of the Agreement. In addition, upon exercise of the Option by
the licensee, we will be entitled to fees, and we may be entitled to milestone
payments and royalties from potential future drug sales. Effective as of
December 19, 2008, the Option Holder became the Licensee of the Subject Patents
by paying us $1,550,000, which is the Exercise Fee described in the Option
Agreement as adjusted by subsequent discussions between the parties to the
Option Agreement
19
Our most
advanced drug candidate, OXIGON, is a chemically synthesized form of a small,
potent, dual mode of action, naturally occurring molecule. We
commenced human Phase I clinical trials for OXIGON on December 1, 2005 in the
Netherlands and completed Phase I clinical trials on November 15, 2006. We have designed a Phase IIa
clinical trial to test OXIGON in 80 to 100 mild to moderate AD patients and plan
to initiate that trial during 2009 if we have sufficient financial resources. We
plan to orally administer OXIGON to evaluate the drug’s activity in patients as
measured by changes in certain biomarkers that correlate with the condition of
AD.
Our
pipeline includes drugs based on our immunotherapy platform technologies,
ANTISENILIN and RECALL-VAX. These
immunotherapy programs are based on monoclonal antibodies and therapeutic
vaccines, respectively, to prevent the accumulation and toxicity of the amyloid
beta toxin. Both are in pre-clinical development. Our lead product candidate in
our immunotherapy programs is IN-N01, a monoclonal antibody that is
undergoing the humanization process at MRCT in the UK.
OXIGON, RECALL-VAX and ANTISENILIN are
our trademarks. Each trademark, trade name or service mark of any other company
appearing in this Quarterly
Report on Form 10-Q belongs
to its respective holder.
Our current business is focused
on granting licenses to our
patent estate to large pharmaceutical companies and on research and development of
proprietary therapies for the treatment of AD. We expect research and
development, including
patent related costs, to
continue to be the most significant expense of our business for the foreseeable
future. Our research and development activity is subject to change as we develop
a better understanding of our projects and their prospects. Research and Development costs from
inception through March 31,
2010 were $13,314,905, which exclude patent related
expenses.
We have
taken actions to reduce the rate of our cash burn and preserve our existing cash
resources. We have sublet approximately 75% of our office space at our New York
City office facility, closed our research laboratory in Israel and terminated
employees both in Israel and New York. The lease is held by our wholly-owned
subsidiary, Intellect Israel. On July 16, 2009, Intellect Israel
entered into an agreement with the landlord of the Israeli facilities pursuant
to which the lease was terminated in exchange for surrender of amounts available
under certain lease guarantees and an agreement by Intellect Israel to pay the
landlord certain costs related to rewiring the facilities, estimated at up to
approximately $4,800. We will continue to conduct research through
outsourced facilities and arrangements. Currently, we have a total of two
employees.
We are
seeking additional funding through various financing alternatives. If additional
capital is raised through the sale of equity or convertible debt securities, the
issuance of such securities will result in dilution to our existing
stockholders. We cannot assure you that financing will be available on favorable
terms or at all.
The
previously disclosed engagement with HFP Capital Markets LLC to assist the
Company to obtain equity funding terminated in accordance with its terms as of
January 16, 2010.
Liquidity and Capital
Resources
Since our inception in 2005, we have
generated losses from operations and we anticipate that we will continue to
generate significant losses from operations for the foreseeable future. As of
March 31, 2010 and March 31, 2009, our accumulated deficit was
approximately $44.4 million and $42.3 million, respectively. Our net
loss before other income/ (expense) from operations for the three months ended
March 31, 2010 and 2009 was approximately $232,702 and $931,775, respectively.
Our capital shows a deficit of
approximately $21.9 million and $19.8 million as of March 31, 2010 and March 31, 2009, respectively. We are eligible to
receive certain milestones and royalties based on sales of Licensed Products as
set forth in our Licensing Agreement with Elan Pharma International Limited and
Wyeth and the Option Agreement with another top tier global pharmaceutical
company, however, achievement of these milestones
is uncertain.
We have limited capital resources and
operations to date have been funded with the proceeds from equity and debt
financings. As of March 31, 2010, we had cash and cash equivalents of
approximately $3,627. As described more fully above
in Note 10 to our financial statements, Subsequent Events, on April
23, 2010, we issued and sold (i) Secured Convertible Promissory Notes with an
aggregate principal amount of $580,000, (ii) 58,000,000 shares of Common Stock
at a per share price of $0.03 and (iii) 77,333,334 Class A Warrants, 77,333,334
Class B Warrants and 77,333,334 Class C Warrants for an aggregate purchase price
of $2,320,000. Net proceeds from the sale of the securities was
approximately $2,220,000 and is being held in escrow and distributed to us on a
monthly basis pursuant to the terms of an Escrow Agreement. As a
result of this financing transaction, we anticipate that our existing capital
resources will enable us to continue operations for the next twelve
months.
20
As
described above in Note 4 to our financial statements, Convertible Promissory Notes,
as of March 31, 2010, we were in default on convertible promissory notes with an
aggregate carrying value of approximately $5.8 million. As described above in
Note 10 to our financial statements, Subsequent Events, as of
April 23, 2010, all but one of our note holders accepted common stock in
repayment of their convertible promissory notes. In addition, we are
in default with respect to certain payment obligations arising from various
research agreements. We have entered into discussions with the counterparties to
the research agreements and with remaining note holder to obtain their agreement
to accept common stock in repayment of their debt.
The audit report prepared by our
independent registered public accounting firm relating to our consolidated
financial statements for
the period ended June 30, 2009 includes an explanatory paragraph
expressing the substantial doubt about our ability to continue as a going
concern.
Our
business will require substantial additional investment that we have yet to
secure. We are uncertain as to how much we will need to spend in order to
develop, manufacture and market new products and technologies in the future. We
expect to continue to spend substantial amounts on research and development,
including amounts that will be incurred to conduct clinical trials for our
product candidates. Further, we will have insufficient resources to fully
develop any new products or technologies unless we are able to raise substantial
additional financing on acceptable terms or secure funds from new or existing
partners. Our failure to raise capital when needed will adversely affect our
business, financial condition and results of operations, and could force us to
reduce or discontinue our operations at some time in the future, even if we
obtain financing in the near term.
Results
of Operations
Three Months Ended March 31,
2010 Compared to Three Months Ended March 31, 2009:
Three Months Ended March 31,
2010
|
||||||||||||
(in
thousands)
|
||||||||||||
2010
|
2009
|
Change
|
||||||||||
Net
income/(loss) from operations
|
(232 | ) | (932 | ) | 700 | |||||||
Net
other income (expenses):
|
(720 | ) | (2,020 | ) | 1,300 | |||||||
Net
income/(loss)
|
$ | (952 | ) | $ | (2,952 | ) | $ | 2,000 |
Net
operating costs decreased by approximately $0.7 million as a result of the
following:
(in thousands)
|
||||
Decrease
in salaries, benefits and Board compensation
|
(331 | ) | ||
Decrease
in clinical expenses and R&D fees and expenses
|
(74 | ) | ||
Decrease
in professional fees
|
(172 | ) | ||
Decrease
in other G&A expenses
|
(123 | ) | ||
$ | (700 | ) |
|
·
|
The
decrease in compensation and benefit costs is related to a decrease in
staff levels in our New York headquarters and Israeli research
laboratory.
|
|
·
|
The
decrease in clinical fees and expenses is related to the termination of
research and clinical activity.
|
|
·
|
The
decrease in professional fees is due to a decrease in accounting and legal
costs.
|
|
·
|
The
decrease in other G&A expenses is due to a
decrease in overall office expenses plus a decrease in rent costs due to
the subletting of a portion of the New York
office.
|
Other
income decreased by approximately $1.3 million as a result of the
following:
This
decrease is mainly due to changes in the fair value of derivative instruments
and preferred stock liability of $1.4 million related to the valuation of the
warrants associated with the Series B Preferred stock, Convertible Promissory
Notes, and the New Series B Preferred Stock liability, offset by an increase in
interest expense.
21
Nine Months Ended March 31,
2010 Compared to Nine Months Ended March 31, 2009:
Nine Months Ended March 31,
2010,
|
||||||||||||
(in
thousands)
|
||||||||||||
2010
|
2009
|
Change
|
||||||||||
Net
income/(loss) from operations
|
(1,152 | ) | 834 | (1,986 | ) | |||||||
Net
other income (expenses):
|
(1,087 | ) | 888 | (1,975 | ) | |||||||
Net
income/(loss)
|
$ | (2,239 | ) | $ | 1,722 | $ | (3,961 | ) |
Net
operating costs decreased by approximately $1.9 million as a result of the
following:
(in thousands)
|
||||
Increase
in license fee revenue
|
$ | 4,016 | ||
Decrease
in clinical expenses and R&D fees and expenses
|
(110 | ) | ||
Decrease
in salaries, benefits and Board compensation
|
(1,089 | ) | ||
Decrease
in professional fees
|
(518 | ) | ||
Decrease
in other G&A expenses
|
(313 | ) | ||
$ | 1,986 |
|
·
|
The decrease in license fee
revenue is related to certain research milestone payments that we received
from Elan and Wyeth following grant of the European patent for our
ANTISENILIN platform technology last
year.
|
|
·
|
The
decrease in compensation and benefit costs is related to a decrease in
staff levels in our New York headquarters and Israeli research
laboratory.
|
|
·
|
The
decrease in clinical fees and expenses is related to the termination of
research and clinical activity.
|
|
·
|
The
decrease in professional fees is due to a decrease in accounting,
consulting and legal costs.
|
|
·
|
The
decrease in other G&A expenses is due to a
decrease in overall office expenses plus a decrease in rent costs due to
the subletting of a portion of the New York
office.
|
Other
income decreased by approximately $1.9 million as a result of the
following:
This
decrease is mainly due to changes in the fair value of derivative instruments
and preferred stock liability related to the valuation of the warrants
associated with the Series B Preferred stock, Convertible Promissory Notes, and
the New Series B Preferred Stock liability offset by amortization and interest
expenses.
Off-Balance Sheet
Arrangements
As
of March 31, 2010, we had no off-balance sheet arrangements, other than
operating leases and obligations under
various strategic agreements as set out below. There were no changes in
significant contractual obligations during the six months ended March 31,
2010.
|
·
|
Under
a License Agreement with New York University (“NYU”) and a similar License
Agreement with University of South Alabama Medical Science Foundation
(“SAMSF”) related to our OXIGON program, we are obligated to make future
payments totaling approximately $1.5 million to each of NYU and SAMSF upon
achievement of certain milestones based on phases of clinical development
and approval of the FDA (or foreign equivalent) and also to pay each of
NYU and SAMSF a royalty based on product sales by Intellect or royalty
payments received by Intellect.
|
22
|
·
|
Pursuant
to a Letter Agreement executed in January 2006 between Intellect USA and
the Institute for the Study of Aging (the “ISOA”), we are obligated to pay
a total of $225,500 of milestone payments contingent upon future clinical
development of OXIGON.
|
|
·
|
Under
a Research Agreement with MRCT as amended, we are obligated to make future
research milestone payments totaling approximately $560,000 to MRCT
related to the development of the 82E1 humanized antibody and to pay
additional milestones related to the commercialization, and a royalty
based on sales, of the resulting drug products. MRCT has achieved three of
the research milestones and we have included $350,000 of the total
$560,000 in accrued expenses at March 31,
2009.
|
|
·
|
Under
the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody
Purchase and Sale Agreement with IBL we agreed to pay IBL a total of
$2,125,000 upon the achievement of certain milestones plus a specified
royalty based on sales of any pharmaceutical product derived from the
82E1or 1A10 antibodies. We have paid $40,000 to
date.
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·
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Under
the terms of our License Agreement with Wyeth and Elan, which we entered
into in May, 2008, effectively we have an obligation to incur $50,000 in
patent or program research related expenses during any six month period
that the Agreement is in effect. Failure to incur these costs could be
treated as an abandonment of the Licensed Patents, resulting in
termination of the License Agreement and a discharge of the Licensees’
obligations to pay us any milestone or royalty payments. As described in
Note 5 above, effective as of December 19, 2008, the Licensed Patents
became the subject of a second non-exclusive license to another party and
as a result, the Licensees’ option to receive ownership of all of our
right, title and interest in and to the Licensed Patents and our
corresponding obligation to incur $50,000 in patent or program research
related expenses during any six month period that the Agreement is in
effect has terminated as of December 19,
2008.
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·
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Under
the terms of a Royalty Participation Agreement, which was approved by our
Board of Directors as of May 2, 2008, but which became effective as of
July 31, 2008, certain of our lenders are entitled to an aggregate share
of 25% of future royalties that we receive from the license of our
ANTISENILIN patent estate.
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Critical
Accounting Estimates and New Accounting Pronouncements
Critical Accounting
Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect reported amounts and related disclosures in the
financial statements. Management considers an accounting estimate to be critical
if it requires assumptions to be made that were uncertain at the time the
estimate was made, and changes in the estimate or different estimates that could
have been selected could have a material impact on our consolidated results of
operations or financial condition.
Share-Based Payments - As of
July 1, 2006, we adopted authoritative accounting guidance which establishes
standards for share-based transactions in which an entity receives employee's
services for equity instruments of the entity, such as stock options, or
liabilities that are based on the fair value of the entity's equity instruments
or that may be settled by the issuance of such equity instruments. These
authoritative accounting standards require that companies expense the fair value
of stock options and similar awards, as measured on the awards' grant date, date
of adoption, and to awards modified, repurchased or cancelled after that
date.
We
estimate the value of stock option awards on the date of grant using the
Black-Scholes-Merton option-pricing model (the “Black-Scholes model”). The
determination of the fair value of share-based payment awards on the date of
grant is affected by our stock price as well as assumptions regarding a number
of complex and subjective variables. These variables include our expected stock
price volatility over the term of the awards, expected term, risk-free interest
rate, expected dividends and expected forfeiture rates.
If
factors change and we employ different assumptions in the application of the
relevant accounting guidance in future periods, the compensation expense that we
record may differ significantly from what we have recorded in the current
period. There is a high degree of subjectivity involved when using option
pricing models to estimate share-based compensation under the relevant
accounting guidance. Consequently, there is a risk that our estimates of the
fair values of our share-based compensation awards on the grant dates may bear
little resemblance to the actual values realized upon the exercise, expiration,
early termination or forfeiture of those share-based payments in the future.
Employee stock options may expire worthless or otherwise result in zero
intrinsic value as compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively, value may be
realized from these instruments that are significantly in excess of the fair
values originally estimated on the grant date and reported in our financial
statements. During the three months ended March 31, 2010, we do not believe that
reasonable changes in the projections would have had a material effect on
share-based compensation expense.
23
Research and Development Costs and
Clinical Trial Expenses - Research and development costs include costs
directly attributable to the conduct of research and development programs,
including the cost of salaries, payroll taxes, employee benefits, materials,
supplies, maintenance of research equipment, costs related to research
collaboration and licensing agreements, the cost of services provided by outside
contractors, including services related to our clinical trials, clinical trial
expenses, the full cost of manufacturing drugs for use in research, preclinical
development, and clinical trials. All costs associated with research and
development are expensed as incurred.
Warrants - Warrants issued in
connection with our Series B Preferred Stock and Convertible Promissory Notes
have been classified as liabilities due to certain provisions that may require
cash settlement in certain circumstances. At each balance sheet date, we adjust
the warrants to reflect their current fair value. We estimate the fair value of
these instruments using the Black-Scholes option pricing model which takes into
account a variety of factors, including historical stock price volatility,
risk-free interest rates, remaining term and the closing price of our common
stock. Changes in the assumptions used to estimate the fair value of these
derivative instruments could result in a material change in the fair value of
the instruments. We believe the assumptions used to estimate the fair values of
the warrants are reasonable. See Item 3, Quantitative and Qualitative
Disclosures about Market Risk, for additional information on the volatility in
market value of derivative instruments.
Restructuring Related Assessments -
During the fourth quarter of fiscal 2008, we effectively closed our
Israeli laboratory and terminated all but three of the remaining employees. In
accordance with authoritative accounting guidance, we have estimated the future
sublease income from our Israeli laboratory through the end of the lease period,
which ends in October 2011, and have recorded rent expense based on the present
value of the excess of our rental commitment in Israel through October 2011 over
the estimated future sublease income from the laboratory during that period. In
addition, we have written down the cost basis of the remaining laboratory
equipment to zero, which is our estimate of fair value for such
equipment.
Revenue Recognition - We
recognize revenue in accordance with authoritative accounting guidance, which
provides that non-refundable upfront and research and development milestone
payments and payments for services are recognized as revenue as the related
services are performed over the term of the collaboration.
New Accounting
Pronouncements
In
December 2007, FASB issued guidance related to Business Combinations under ASC
805, Business Combinations, and guidance related to the accounting and reporting
of non-controlling interest under ASC 810-10-65-1, Consolidation. This guidance
significantly changes the accounting for and reporting of business combination
transactions and non-controlling (minority) interests in consolidated financial
statements. This guidance became effective January 1, 2009.
In March
2008, the FASB issued guidance related to the disclosures about derivative
instruments and hedging activities under FASB ASC 815-10-50, Derivatives and
Hedging. This guidance requires companies to provide enhanced disclosures about
(a) how and why they use derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under applicable guidance, and (c)
how derivative instruments and related hedged items affect a company's financial
position, financial performance, and cash flows. These disclosure requirements
are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Our adoption of ASC 815-10-50 on
January 1, 2009 did not have a material impact on our consolidated condensed
financial statements.
In June
2008, the FASB issued guidance to evaluate whether an instrument (or embedded
feature) is indexed to an entity’s own stock under ASC 815-40-15, Derivatives
and Hedging. The guidance requires entities to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock in order
to determine if the instrument should be accounted for as a derivative under the
scope of ASC 815-10-15. This guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. We adopted ASC 815-40-15 beginning January 1, 2009.
Our adoption of ASC 815-10-15 on January 1, 2009 did not have a material impact
on our consolidated condensed financial statements.
In May
2009, the FASB issued guidance related to subsequent events under ASC 855-10,
Subsequent Events. This guidance sets forth the period after the balance sheet
date during which management or a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date, and the disclosures that an entity
should make about events or transactions that occurred after the balance sheet
date. It requires disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, whether that date represents the
date the financial statements were issued or were available to be issued. This
guidance is effective for interim and annual periods ending after June 15, 2009.
We adopted ASC 855-10 beginning June 30, 2009 and have included the required
disclosures in our consolidated condensed financial statements.
24
In June
2009, the FASB issued Accounting Standards Update No. 2009-01 which amends ASC
105, Generally Accepted Accounting Principles. This guidance states that the ASC
will become the source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. Once the Codification is
effective, its content will carry the same level of authority. Thus, the U.S.
GAAP hierarchy will be modified to include only two levels of U.S. GAAP:
authoritative and non-authoritative. This is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. We
adopted ASC 105 as of September 30, 2009 and thus have incorporated the new
Codification citations in place of the corresponding references to legacy
accounting pronouncements.
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Measuring
Liabilities at Fair Value, which amends ASC 820, Fair Value Measurements and
Disclosures. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a
reporting entity is required to measure the fair value using one or more of the
following techniques: a valuation technique that uses the quoted price of the
identical liability or similar liabilities when traded as an asset, which would
be considered a Level 1 input, or another valuation technique that is consistent
with ASC 820. This Update is effective for the first reporting period (including
interim periods) beginning after issuance. Thus, we adopted this guidance as of
September 30, 2009, which did not have a material impact on our consolidated
condensed financial statements.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM
4T. CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
We performed an evaluation under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of March 31, 2010. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
it will detect or uncover failures within our company to disclose material
information otherwise required to be set forth in our periodic
reports.
Following the evaluation described
above, our management, including our chief executive and chief financial
officer, concluded that based on the evaluation, our disclosure controls and
procedures were effective as of the date of the period covered by this quarterly
report.
Changes in Internal Controls Over
Financial Reporting
There has been no change in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the quarter ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
25
PART
II
ITEM 6. EXHIBITS
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
32.1
|
Certification
of Chief Executive Officer pursuant to Rule 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
32.2
|
Certification
of Chief Financial Officer pursuant to Rule 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
26
SIGNATURES
Pursuant to the requirements of the Exchange Act, the
registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 17,
2010
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Intellect Neurosciences, Inc. | |
/s/ Daniel
Chain
|
||
Daniel
Chain
|
||
Chief Executive
Officer
|
||
/s/ Elliot
Maza
|
||
Elliot
Maza
|
||
Chief Financial
Officer
|
27