Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Intellect Neurosciences, Inc.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - Intellect Neurosciences, Inc.v367781_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Intellect Neurosciences, Inc.v367781_ex32-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
(Mark One)
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2013
  
Or
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from          to
 
Commission File Number: 333-128226
 
INTELLECT NEUROSCIENCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
20-8329066
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation)
Identification Number)
 
 
550 Sylvan Ave.
 
Englewood Cliffs, New Jersey
07632
(Address of Principal Executive Offices)
(Zip Code)
 
(201) 608-5101
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate website, if any, any Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (Section 232.405) of this chapter during the preceding 12 months or for such shorter period that the Registrant was required to submit and post such files. Yes ¨ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
þ
 
 
(Do not check if a
smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
The registrant had 350,215,676 shares of Common Stock, par value $.001 par value per share, outstanding as of February 14, 2014.
 
 
 
Index
 
 
 
PAGE
PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements: (Unaudited)
 
 
 
 
 
Consolidated Balance Sheets as of December 31, 2013 (unaudited) and June 30, 2013
3
 
 
 
 
Consolidated Statements of Operations for the three and six months ended December 31, 2013 and 2012, and for the period April 25, 2005 (inception) through December 31, 2013 (unaudited)
4
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended December 31, 2013 and 2012 and for the period April 25, 2005 (inception) through December 30, 2013 (unaudited)
5
 
 
 
 
Notes to Unaudited Consolidated Financial Statements
6
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
23
 
 
 
Item 4.
Controls and Procedures
23
 
 
 
PART II.
OTHER INFORMATION
23
 
 
 
Item 5.
Other
24
 
 
 
Item 6.
Exhibits
24
 
 
 
SIGNATURES
 
25
 
 
 
CERTIFICATIONS
 
 
 
 
2

 
Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
 
Consolidated Balance Sheets
 
 
 
December 31, 2013
 
June 30, 2013
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
685
 
$
5,138
 
Total current assets
 
 
685
 
 
5,138
 
 
 
 
 
 
 
 
 
Security deposits
 
 
4,715
 
 
4,715
 
Total Assets
 
$
5,400
 
$
9,853
 
 
 
 
 
 
 
 
 
LIABILITIES AND CAPITAL DEFICIENCY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
2,435,525
 
$
2,487,410
 
Accrued interest - convertible promissory notes
 
 
640,236
 
 
482,298
 
Derivative instruments
 
 
7,582,213
 
 
3,833,457
 
Preferred stock liability
 
 
172,874
 
 
172,874
 
Preferred stock dividend payable
 
 
6,677,338
 
 
5,350,503
 
Total Current liabilities
 
$
17,508,186
 
$
12,326,542
 
 
 
 
 
 
 
 
 
Long Term Debt
 
 
 
 
 
 
 
Convertible promissory notes
 
 
1,795,143
 
 
1,231,737
 
 
 
 
 
 
 
 
 
Total Liabilities
 
$
19,303,329
 
$
13,558,279
 
 
 
 
 
 
 
 
 
Capital deficiency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Series B Convertible Preferred stock - 1,000,000 shares designated and
     106,878 shares issued at December 31, 2013, and June 30, 2013 (classified
     as liability above) (liquidation preference $1,870,380)
 
 
-
 
 
-
 
Series C Convertible Preferred stock, $.001 par value - 25,000 shares
     designated and 18,329 and 19,790 shares issued at December 31, 2013 and
      June 30, 2013 respectively (liquidation preference $18,329,000 and
$19,790,000 respectively)
 
$
18
 
$
20
 
Series D Convertible Preferred stock, $.001 par value - 25,000 shares
     designated and 3,876 and 5,466 shares issued at December 31, 2013 and
     June 30, 2013 respectively (liquidation preference $3,876,000 and
     $5,466.000 respectively)
 
 
4
 
 
5
 
Series E Convertible Preferred stock, $.001 par value - 25,000 shares
      designated and 2,000 and 2,000 shares issued at September 30, 2013
      and June 30, 2013 respectively (liquidation preference $2,000,000 and
      $2,000,000 respectively)
 
 
2
 
 
2
 
Common stock, par value $0.001 per share, 2,000,000,000 shares authorized;
     317,715,676 and 209,015,899 issued and outstanding at December 31, 2013,
     and June 30, 2013, respectively
 
 
317,716
 
 
209,016
 
Additional paid in capital
 
 
70,502,631
 
 
70,134,497
 
Deficit accumulated during the development stage
 
 
(90,118,300)
 
 
(83,891,966)
 
 
 
 
 
 
 
 
 
Total Capital Deficiency
 
$
(19,297,929)
 
$
(13,548,426)
 
 
 
 
 
 
 
 
 
Total Liabilities and Capital Deficiency
 
$
5,400
 
$
9,853
 
 
See notes to consolidated financial statements
 
 
3

 
 
Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
 
Consolidated Statements of Operations
 
 
 
Three Months Ended
 
Six Months Ended
 
April 25, 2005
 
 
 
December 31,
 
December 31,
 
(inception) through
 
 
 
2013
 
2012
 
2013
 
2012
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
License fees
 
$
-
 
$
-
 
$
-
 
$
-
 
$
10,516,667
 
Total revenue
 
$
-
 
$
-
 
$
-
 
$
-
 
$
10,516,667
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
 
 
58,921
 
 
16,062
 
 
68,400
 
 
183,982
 
 
14,723,489
 
General and administrative
 
 
289,545
 
 
386,097
 
 
646,668
 
 
765,505
 
 
46,001,853
 
Total cost and expenses
 
 
348,466
 
 
402,159
 
 
715,068
 
 
949,487
 
 
60,725,342
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss from operations
 
 
(348,466)
 
 
(402,159)
 
 
(715,068)
 
 
(949,487)
 
 
(50,208,675)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income/(expenses):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
 
(1,791,030)
 
 
(1,048,453)
 
 
(5,527,908)
 
 
(1,926,175)
 
 
(75,462,772)
 
Interest income
 
 
-
 
 
-
 
 
-
 
 
-
 
 
18,525
 
Changes in value of derivative instruments and preferred stock liability
 
 
10,181
 
 
1,313,688
 
 
16,642
 
 
2,592,469
 
 
44,550,035
 
Loss on extinguishment of debt
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(627,809)
 
Other
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(6,587,604)
 
Write off of investment
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(150,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other income/(expense):
 
 
(1,780,849)
 
 
265,235
 
 
(5,511,266)
 
 
666,294
 
 
(38,259,625)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
(2,129,315)
 
 
(136,924)
 
 
(6,226,334)
 
 
(283,193)
 
 
(88,468,300)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deemed preferred stock dividend
 
 
-
 
 
-
 
 
-
 
 
-
 
 
1,650,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss allocable to Common Shareholders
 
$
(2,129,315)
 
$
(136,924)
 
$
(6,226,334)
 
$
(283,193)
 
$
(90,118,300)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic loss per share
 
$
(0.01)
 
$
(0.00)
 
$
(0.02)
 
$
(0.00)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted loss per share
 
$
(0.01)
 
$
(0.00)
 
$
(0.01)
 
$
(0.00)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
306,036,582
 
 
107,990,020
 
 
268,069,713
 
 
105,655,781
 
 
 
 
Diluted
 
 
306,036,582
 
 
107,990,020
 
 
268,069,713
 
 
105,655,781
 
 
 
 
 
See notes to consolidated financial statements
 
 
4

 
Intellect Neurosciences Inc. and Subsidiary
(a development stage company)
 
Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
 
April 25, 2005
 
 
 
Six Months Ended
 
(inception)
 
 
 
December 31,
 
through December 31,
 
 
 
2013
 
2012
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
Cashflows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(6,226,334)
 
$
(283,193)
 
$
(90,118,300)
 
Adjustments to reconcile net income (loss) to net
     cash used in operating activities:
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
-
 
 
 
 
 
836,769
 
Amortization of financing costs
 
 
-
 
 
 
 
 
2,403,966
 
Change in unrealized (gain) loss of derivative instruments
 
 
(16,642)
 
 
(2,592,469)
 
 
(43,848,174)
 
Stock and warrant based compensation
 
 
345,000
 
 
231,265
 
 
18,432,586
 
Interest expense related to warrants
 
 
3,156,484
 
 
319,136
 
 
47,575,527
 
Write-off of investment
 
 
-
 
 
-
 
 
150,000
 
Shares issued in connection with merger
 
 
-
 
 
-
 
 
7,020,000
 
Shares issued for note extensions and compensation
 
 
-
 
 
 
 
 
753,453
 
Conversion of common stock to new Series B preferred shares
 
 
-
 
 
-
 
 
6,606,532
 
Non-cash interest expense
 
 
2,371,424
 
 
1,607,041
 
 
22,485,682
 
Non-cash expense related to Series B dividends
 
 
-
 
 
-
 
 
1,802,610
 
Disposition of fixed assets
 
 
-
 
 
-
 
 
43,412
 
Loss on sale of fixed assets
 
 
-
 
 
-
 
 
179,516
 
Loss on extinguishment of debt
 
 
-
 
 
-
 
 
(74,060)
 
 
 
 
 
 
 
-
 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
-
 
Prepaid expenses and other assets
 
 
-
 
 
16,132
 
 
(898)
 
License fee receivable
 
 
-
 
 
-
 
 
(6,963)
 
Accounts payable and accrued expenses
 
 
(51,885)
 
 
81,287
 
 
3,387,610
 
Other long term liabilities
 
 
-
 
 
-
 
 
(71,152)
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities:
 
 
(421,953)
 
 
(620,801)
 
 
(22,441,885)
 
 
 
 
 
 
 
 
 
 
 
 
Cashflows from investing activities:
 
 
 
 
 
 
 
 
 
 
Security deposit
 
 
-
 
 
-
 
 
(3,912)
 
Acquisition of property and equipment
 
 
-
 
 
-
 
 
(1,059,699)
 
Cash paid for acquisition
 
 
-
 
 
-
 
 
(150,000)
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in investing activities:
 
 
-
 
 
-
 
 
(1,213,611)
 
 
 
 
 
 
 
 
 
 
 
 
Cashflows from financing activities:
 
 
 
 
 
 
 
 
 
 
Borrowings from stockholders
 
 
-
 
 
-
 
 
6,153,828
 
Proceeds from sale of common stock
 
 
-
 
 
-
 
 
1,761,353
 
Proceeds from sale of preferred stock
 
 
-
 
 
-
 
 
7,711,150
 
Preferred stock issuance costs
 
 
-
 
 
-
 
 
(814,550)
 
Proceeds from sale of Convertible Promissory Notes
 
 
417,500
 
 
662,500
 
 
12,541,500
 
Repayment of borrowings from stockholder
 
 
-
 
 
-
 
 
(1,706,000)
 
Convertible Promissory Notes issuance cost
 
 
-
 
 
-
 
 
(466,100)
 
Repayment of borrowings from noteholders
 
 
-
 
 
(32,500)
 
 
(1,725,000)
 
Proceeds from excersise of stock warrants
 
 
-
 
 
-
 
 
200,000
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities:
 
 
417,500
 
 
630,000
 
 
23,656,181
 
 
 
 
 
 
 
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
(4,453)
 
 
9,199
 
 
685
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents beginning of period
 
 
5,138
 
 
2,307
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents end of period
 
$
685
 
$
11,506
 
$
685
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow informations:
 
 
 
 
 
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
 
 
 
 
 
Interest
 
 
-
 
 
-
 
$
145,115
 
Non-cash investing and financing transactions:
 
 
 
 
 
 
 
 
 
 
Conversion of Convertible Notes payable and accrued interest into Common Stock (including derivative liability)
 
 
131,831
 
 
-
 
$
16,417,567
 
Conversion of Preferred Stock to Common Stock
 
 
51,017
 
 
5,000
 
 
6,911,468
 
Common Stock issued in repayment of debt
 
 
-
 
 
-
 
 
248,000
 
Accrued dividend on Series B prefs treated as capital contribution
 
 
-
 
 
-
 
 
387,104
 
Cashless excersise of Warrant for Common Stock
 
 
-
 
 
-
 
 
18,843,360
 
Debt discount from warrants and beneficial conversion feature
 
 
342,500
 
 
620,654
 
 
1,884,697
 
Deemed preferred stock dividend from beneficial conversion feature
 
 
-
 
 
-
 
 
1,650,000
 
Issuance of warrants for repayment of accrued expenses
 
 
-
 
 
560,000
 
 
704,085
 
 
See notes to consolidated financial statements
 
 
5

 
Intellect Neurosciences, Inc. (a development stage company)
Notes to Unaudited Consolidated Condensed Financial Statements
December 31, 2013
 
Note 1. Basis of Presentation
 
The accompanying unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission (the “SEC”) on October 15, 2013. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for fair presentation.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change include assumptions used in determining the fair value of securities owned and non-readily marketable securities.
 
The results of operations for the three and six months ended December 31, 2013, are not necessarily indicative of the results to be expected for the entire year or for any other period.

2. Business Description and Going Concern
  
Intellect Neurosciences, Inc. (“Intellect”, “our”, “us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiaries) a Delaware corporation, is a biopharmaceutical company, which together with its subsidiary Intellect Neurosciences, USA, Inc. (“Intellect USA”), is conducting research regarding proprietary drug candidates to treat Alzheimer’s disease (“AD”) and other diseases associated with oxidative stress. In addition, we have developed and are advancing a patent portfolio related to specific therapeutic approaches for treating AD. Since our inception in 2005, we have devoted substantially all of our efforts and resources to research and development activities and advancing our patent estate. We operate under a single segment. Our fiscal year end is June 30. We have had no product sales through September 30, 2013 though we have received $10,516,667 in up-front and milestone license fees from inception through December 31, 2013. Our losses from operations have been funded primarily with the proceeds of equity and debt financings and fees due under license agreements.
 
We are a development stage company and our core business strategy is to leverage our intellectual property estate through license arrangements and to 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, 2013, we had no self-developed or licensed products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that any products developed by any of our licensees will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.
 
We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of December 31, 2013, we had cash and cash equivalents of $685. We anticipate that our existing capital resources will enable us to continue operations for the next few months. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential shareholders or partners within the next few months, we may be forced to cease operations.
 
 
6

 
Our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners, we will be unable to successfully develop and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all. No adjustment has been made to the carrying amount and classification of assets and the carrying amount of liabilities based on the going concern uncertainty.

3. Summary of Significant Accounting Policies
 
Revenue Recognition
 
Upfront License Fees. Consideration that we receive pursuant to patent license agreements is recognized as income when (a) the licensee obtains a license to one or more of our patents, (b) the licensee is responsible for all of the development work on the product candidate, (c) the licensee has the technical ability to perform the development, (d) the licensee requires a license from us to sell the resulting drug product without infringing our patents, (e) payment due under the license agreement is reasonably assured and (f) we have no future performance obligations under the license agreement.
 
Milestones. We enter into patent license agreements, which contain milestones related to reaching particular stages in product development. We recognize revenues from milestones when we have no further obligation with respect to the activities under the agreement and when we have confirmed that the milestone has been achieved. Where we have continuing involvement obligations in the form of development efforts, we recognize revenues from milestones ratably over the development period.
 
Principles of Consolidation. The consolidated financial statements include the accounts of our wholly owned subsidiary, Intellect 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 by Mindgenix 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 and balances have been eliminated in consolidation
 
Convertible Instruments. We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
 
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
 
 
7

 
Common Stock Purchase Warrants. We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
 
Preferred Stock. We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
 
Derivative Instruments. Our derivative financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded within our convertible debt. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date. If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.
 
During the six month periods ended December 31, 2013, we recognized other income of $16,642, relating to recording the derivative liabilities at fair value. At December 31, 2013 and June 30, 2013, there were $7,582,213 and $3,833,457 of derivative liabilities, respectively.
 
Our derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions during the quarter ended December 31, 2013:
 
Estimated dividends:
 
None
 
Expected volatility:
 
331
%
Risk-free interest rate:
 
1.45
%
Expected term (years):
 
0.25 to 5 years
 

4. ViroPharma License Transaction
 
On and effective as of September 29, 2011, we entered into an Exclusive License Agreement (the “License Agreement”) with ViroPharma Incorporated, a Delaware corporation (“ViroPharma”), pursuant to which, among other things, we granted an exclusive license to ViroPharma regarding certain of our licensed patents and patent applications related to our clinical stage drug candidate, OX1, an antioxidant molecule containing indole-3-propionic acid. We expect ViroPharma to develop and commercialize OX1 as a treatment of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
 
Under the terms of the License Agreement, we agreed to transfer to ViroPharma all of our intellectual property rights, data and know-how related to our OX1 research and development program in exchange for payment by ViroPharma of a $6.5 million up-front licensing fee which was received in October 2011, and additional regulatory milestone payments based upon defined events in the United States and the European Union. The aggregate maximum of these milestone payments assuming successful advancement of the product to market could amount to $120 million. In addition, ViroPharma will pay us a tiered royalty of up to an aggregate maximum of low double digits based on annual net sales. NYU School of Medicine and South Alabama Medical Science Foundation, which own certain patents in relation to OX1, are entitled to a portion of the royalties and revenues received by us from any sale or license of OX1 pursuant to an exclusive license agreement between the universities and us.
 
 
8

 
The term of the License Agreement will continue in effect on a licensed product-by-licensed product and country-by-country basis until the expiration of the last royalty obligation with respect to a licensed product in such country. Once the royalty obligation has terminated in a particular country, the license will become non-exclusive and fully paid-up with respect to licensed products in that country.
 
Either party may terminate the License Agreement upon an uncured material breach of the other party. In addition, if ViroPharma determines that it is not feasible or desirable to develop or commercialize licensed products, it may terminate the License Agreement in whole or on a product-by-product basis at any time upon ninety (90) days prior written notice to us. In the event of a termination of the License Agreement, other than ViroPharma’s termination of the License Agreement for our uncured material breach, we will have an exclusive, perpetual, irrevocable, worldwide, royalty-bearing license to exploit the licensed products.

5. Notes Payable
 
The December 2010 Notes
 
On December 15, 2010, we sold investment units for an aggregate purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “December 2010 Notes”), shares of Series C Convertible Preferred Stock (“Series C Prefs”) and warrants (the “December 2010 Warrants”). Total proceeds from the sale of these investment units were $500,000.
 
The December 2010 Notes have an aggregate face amount of $500,000, are due on December 15, 2013 and bear interest at 14%, payable at maturity. Principal and accrued interest on the Notes are convertible into shares of our common stock at an initial conversion price of $.125 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Notes. As a result of the ratchet provisions contained in the Notes, the holders are entitled to purchase up to 50 million shares of our Common Stock.
 
The December 2010 Warrants initially entitle the holders to purchase up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share. As a result of the ratchet provisions contained in the December 2010 Warrants, the holders are entitled to purchase up to 10 million shares of our Common Stock at an exercise price of $0.001 per share. Also, we issued an aggregate of 10,000 shares of Series C Prefs with an initial aggregate liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained in the Certificate of Designation of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at a conversion price of $0.05 per share.
 
We allocated the $500,000 of proceeds to the December 2010 Notes and Series C Preferred shares based on their relative fair values at date of issuance, which resulted in an allocation of $25,000 and $475,000, respectively. We determined the initial fair value of the December 2010 Warrants to be $378,017 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the December 2010 Notes. Under authoritative guidance, the carrying value of the December 2010 Notes may not be reduced below zero. Accordingly, we recorded the excess of the value of the December 2010 Warrants over the allocated fair value of the December 2010 Notes as interest expense incurred at the time of issuance of the December 2010 Notes in the amount of $353,017.  The discount related to of the December 2010 Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method.
 
The guidance provided in ASC 470-20-30-5 has been applied to the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to measure the intrinsic value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible instrument.  The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price and the market price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial conversion feature has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the Series C Preferred stock is immediately convertible upon issuance and has no stated redemption date.
 
 
9

 
As a result of the “ratchet” provisions contained in the April 2010 Notes and outstanding Warrants, the conversion price of the remaining outstanding April 2010 Notes and exercise price of our outstanding Warrants and Series B Convertible Preferred Stock were adjusted to $0.001 per common share. The conversion price of previously issued and outstanding Series B Convertible Preferred Stock held by holders other than the purchasers of the April 2010 Notes is not subject to adjustment as a result of the issuance of the December 2010 Notes.
 
 In January 2011, as a result of the “ratchet” provisions contained in the April 2010 Notes, we issued to purchasers of the April 2010 Notes remaining outstanding an additional 2,000 shares of our Series C Prefs with an initial aggregate liquidation preference equal to $2 million, which are convertible into 40 million shares of our common stock at an exercise price of $0.001 per share. In addition, in May 2011, we issued 429,000 shares of our Common Stock as additional compensation to certain holders of the April 2010 Notes as a result of the “ratchet” provisions contained in those Notes.
 
The Company has determined that the conversion feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
 
The “March 2011 Notes”
 
On March 15, 2011, we sold investment units for an aggregate purchase price of $500,000. Each unit consisted of a Convertible Promissory Note (the “March 2011 Notes”), shares of Series C Prefs and warrants (the “March 2011 Warrants”). Total proceeds from the sale of these investment units were $500,000.  The terms of the March 2011 Notes and Warrants are the same as the terms contained in the December 2010 Notes and Warrants.
 
The March 2011 Notes have an aggregate face amount of $500,000, are due on March 15, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on the Notes are convertible into shares of our common stock at an initial conversion price of $.125 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Notes. As a result of the ratchet provisions contained in the March 2011Notes, the holders are entitled to purchase up to 10 million shares of our Common Stock.
 
The March 2011 Warrants initially entitle the holders to purchase up to a total of 4 million shares of our common stock at an initial exercise price of $0.125 per share. As a result of the ratchet provisions contained in the March 2011 Warrants, the holders are entitled to purchase up to 10 million shares of our Common Stock at an exercise price of $0.001 per share. Also, we issued an aggregate of 10,000 shares of Series C Prefs with an initial aggregate liquidation preference equal to $10 million, which, as a result of the ratchet provisions contained in the Certificate of Designation of series C Preferred Stock, are convertible into 200 million shares of our Common Stock at a conversion price of $0.001 per share.
 
We allocated the $500,000 of proceeds to the March 2011 Notes and Series C Prefs based on their relative fair values at date of issuance, which resulted in an allocation of $25,000 and $475,000, respectively. We determined the initial fair value of the March 2011 Warrants to be $378,017 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the March 2011 Notes. Under authoritative guidance, the carrying value of the March 2011 Notes may not be reduced below zero. Accordingly, we recorded the excess of the value of the March 2011Warrants over the allocated fair value of the March 2011 Notes as interest expense incurred at the time of issuance of the March 2011 Notes in the amount of $353,017.  The discount related to of the March 2011 Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method.
 
The guidance provided in ASC 470-20-30-5 has been applied to the amount allocated to the Series C Preferred Stock, and the effective conversion price has been used to measure the intrinsic value of the embedded conversion option, and limited to the amount of proceeds allocated to the convertible instrument.  The intrinsic value of the beneficial conversion feature was calculated by comparing the effective conversion price and the market price of the Company’s common stock on the date of issuance. The fair value of $475,000 of the beneficial conversion feature has been recognized as a deemed dividend on the preferred stock for the year ended June 30, 2011, since the Series C Preferred stock is immediately convertible upon issuance and has no stated redemption date.
 
 
10

 
The Company has determined that the conversion feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
 
The “June and July 2011 Notes”
 
On June 30, 2011, we sold investment units (“June 2011 Investment Units”) for an aggregate purchase price of $100,000. Each unit consisted of a Convertible Promissory Note (the “June 2011 Notes”) and warrants (the “June 2011 Warrants”). Total proceeds from the sale of these investment units were $100,000.
 
The June 2011 Notes have an aggregate face amount of $100,000, are due on June 30, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on the June 2011 Notes are convertible into shares of our common stock at an initial conversion price of $.05 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the June 2011 Notes. The June 2011 Warrants entitle the holders to purchase up to a total of 10 million shares of our Common Stock at an initial exercise price of $0.05 per share.
 
We determined the initial fair value of the June 2011 Warrants to be $817,151 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the June 2011 Notes by $100,000 with the excess of $717,151 charged to interest expense. This difference was amortized over the term of the June 2011 Notes as interest expense, calculated using an effective interest method.
 
During July and August, 2011, we sold additional investment units for an aggregate purchase price of $150,000. Each unit consisted of a Convertible Promissory Note (the “July 2011 Notes”) and warrants (the “July 2011 Warrants”). Total proceeds from the sale of these investment units were $150,000.
 
The June 2011 Notes issued in July have an aggregate face amount of $150,000, are due on various dates during July and August, 2014 and bear interest at 14%, payable at maturity. Principal and accrued interest on the July 2011 Notes are convertible into shares of our common stock at an initial conversion price of $.05 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Notes. The July 2011 Warrants entitle the holders to purchase up to a total of 20 million shares of our Common Stock at an initial exercise price of $0.05 per share.
 
We determined the initial fair value of the July 2011 Warrants to be $1,626,973 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the July 2011 Notes by $150,000 with the excess of $1,476,973 charged to interest expense.
 
In April 2012, we issued 500,000 shares of our common stock to one of the holders of July 2011 Notes upon his conversion of $25,000 principal amount due with respect to such Notes (Note 8.)
 
In October 2013, we issued 13,183,055 shares of our common stock to one of the holders of our “June and July 2011 Notes” upon conversion of $100,000 principal amount due and $31,830.55 in accrued interest with respect to such Note (Note 8).
 
The Company has determined that the conversion feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
 
 
11

 
The “April and May 2012” Financing
 
During April and May 2012, we sold investment units for an aggregate purchase price of $201,500. Each unit consisted of a Convertible Promissory Note (the April and May 2012 Notes”) and warrants (the “April and May 2012 Warrants”). Total proceeds from the sale of these investment units were $201,500.
 
The April and May 2012 Notes have an aggregate face amount of $201,500, are due in April and May 2015 and bear interest at 14%, payable at maturity. Principal and accrued interest are convertible into shares of our common stock at an initial conversion price of $0.05 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less than the effective conversion price of the April 2012 Notes. The April and May 2012 Warrants entitle the holders to purchase up to 25,150,000 shares of our Common Stock at an initial exercise price of $0.05 per share.
 
We determined the initial fair value of the April and May 2012 warrants to be $1,100,650 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the April and May 2012 Notes by $201,500 with the excess of $899,150 charged to interest expense. The discount related to the April and May 2012 Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method.
 
During July through November 2012, we sold additional investment units for an aggregate purchase price of $662,500. Each unit consisted of a Convertible Promissory Note and Warrants. Total proceeds from the sale of these investment units were $662,500.
 
The Company has determined that the conversion feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
 
January 2013 Financing
 
During January, February, March, and May through December 2013, we sold investment units for an aggregate purchase price of $921,000. Each unit consisted of a Convertible Promissory Note (the January 2013 Notes”) and warrants (the “January 2013 Financing Warrants”). Total proceeds from the sale of these investment units were $921,000.
 
The January 2013 Notes have an aggregate face amount of $921,000, are due in January, February, March, and May through October 2016 and bear interest at 14%, payable at maturity. Principal and accrued interest are convertible into shares of our common stock at an initial conversion price of $0.01 per share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalent by us at a price less than the effective conversion price of the April 2012 Notes. The January 2013 Financing Warrants entitle the holders to purchase up to 590,000,000 shares of our Common Stock at an initial exercise price of $0.01 per share.
 
We determined the initial fair value of the January 2013 Financing warrants to be $5,825,029 based on the Black-Scholes option pricing model, which we treated as a liability with a corresponding decrease in the carrying value of the January 2013 Financing Notes by $846,000 with the excess of $4,979,029 charged to interest expense. The discount related to the January 2013 Financing Notes will be amortized over the term of the notes as interest expense, calculated using an effective interest method.
 
The Company has determined that the conversion feature embedded in the convertible notes constitute a derivative and have been bifurcated from the note and recorded as a derivative liability, with a corresponding discount recorded to the associated debt or a charge to interest expense where the derivative exceeds the carrying value of the note, on the accompany balance sheet, and revalued to fair market value at each reporting period.
 
 
12

 
The following table sets forth a summary of all of the outstanding convertible promissory notes at December 31, 2013:
 
Convertible promissory notes issued
 
$
4,075,000
Allocated to preferred stock
 
 
(950,000)
Accretion of notes allocated to preferred stock
 
 
948,000
Notes repaid
 
 
(400,000)
Less amounts converted to common stock
 
 
(725,000)
 
 
 
2,948,000
Less debt discount
 
 
1,152,857
Balance December 31, 2013
 
$
1,795,143

6. Convertible Preferred Stock and Derivative Liability
 
Series B Convertible Preferred Stock
 
During the fiscal year ended June 30, 2007, we issued 459,309 shares of Series B Convertible Preferred Stock (the “Series B Prefs”). The shares carry a cumulative dividend of 6% per annum. The initial conversion price is 1.75 per share subject to certain anti-dilution adjustments. Each Series B Preferred share carries a stated value of $17.50 and is convertible into 10 shares of our Common Stock. We issued 3,046,756 warrants in connection with the issuance of the Series B Prefs (the “Series B Warrants”).
 
Based on authoritative guidance, we accounted for the Series B Prefs and the Series B Warrants as derivative liabilities at the time of issuance using the Black Scholes option pricing model. We recorded the amount received in consideration for the Series B Prefs as a liability for the Series B Prefs with an allocation to the Series B Warrants and the difference recorded as additional paid in capital. The liability related to the Series B Prefs and the Series B Warrants will be marked to market for all future periods they remain outstanding with an offsetting charge to earnings.
 
At June 30, 2013, the aggregate liquidation value of the Series B Prefs was $1,870,380, with a fair value of $172,874. As of December 31, 2013, we have accrued Series B Preferred Stock dividends payable of $648,737 which has been recognized as interest expense.
 
As a result of the “ratchet” provisions contained in the Certificate of Designation of the Series B Prefs, the conversion price of the remaining Series B Prefs, as subsequently amended by a majority in interest of the holders of the series B Prefs, was reduced to $0.05 per common share as a result of the December 2010 Financing transaction described above. The conversion price of previously issued and outstanding Series B Prefs held by holders other than the purchasers of the April 2010 Notes is not subject to adjustment as a result of the issuance of the December 2010 Notes or March 2011 Notes.
 
Series C Convertible Preferred Stock
 
Effective December 15, 2010, our Board of Directors approved a Certificate of Designation of Series C Convertible Preferred Stock. Each share of Series C Convertible Preferred Stock carries a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Series C Preferred Stock. We issued to the purchasers of the December 2010 Notes 12,000 shares of our Series C Convertible Preferred Stock with an initial aggregate liquidation preference equal to $12 million, which are convertible into 240 million shares of our common stock.
 
On March 15, 2011, we issued to certain purchasers of the March 2011 Notes an additional 10,000 shares of our Series C Convertible Preferred Stock with an initial aggregate liquidation preference equal to $10 million, which are convertible into 200 million shares of our common stock, in exchange for $500,000 (Note 5).
 
During the six months ended December 31, 2013, we issued 29,214,500 shares of our common stock to holders of Series C Preferred upon conversion of their shares.
 
 
13

 
Series D Convertible Preferred Shares
 
Effective October 24, 2010, our Board of Directors approved a Certificate of Designation of Series D Convertible Preferred Stock. Each share of Series D Convertible Preferred Stock carries a stated value of $1,000 and a conversion price of $0.05 per common share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Series D Preferred Stock. The Series D Preferred Stock was issued to holders of our warrants in exchange for cancellation of those warrants. The number of shares of Series D Preferred Stock issued to each warrant holder is an amount equal to the number of Series D Preferred Shares that would be convertible into an amount of common shares equal to 50% of the number of warrants held by such holder. Based on this formula, we issued 6,716 shares of Series D Preferred stock, which are convertible into 134,320,000 shares of our common stock.
 
During the six months ended December 31, 2013, we issued 31,802,222 shares of our common stock to holders of Series D Preferred upon conversion of their shares.
 
Series E Convertible Preferred Shares
 
Effective January 2, 2013, our Board of Directors approved a Certificate of Designation of Series E Convertible Preferred Stock. Each share of Series E Convertible Preferred Stock carries a stated value of $1,000 and a conversion price of $0.01 per common share, subject to customary anti-dilution protection in the case of stock dividends, stock splits, reverse splits, reorganizations and recapitalizations and subject to full ratchet protection in the case of any sale of common stock or common stock equivalents by us at a price less than the then effective conversion price of the Series E Preferred Stock. The Series E Preferred Stock was issued to holders of royalty rights with respect to the Company’s anti-senilin patent estate (the “Royalty Rights”) in exchange for the Royalty Rights held by them. On January 2, 2013, we issued 2,000 shares of Series E Preferred stock, which are convertible into 200,000,000 shares of our common stock.
 
The Company recognized this difference between the fair value per share of its common stock and the conversion price, multiplied by the number of shares issuable upon conversion. This Beneficial Conversion Feature of $700,000 was recorded as additional paid-in-capital for common shares, per EITF 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”. The offsetting amount was amortizable over the period from the issue date to the first conversion date. Since the Series E Preferred Stock is immediately convertible, a deemed dividend of $700,000 to the Series E Preferred Stock was recorded and immediately amortized. As the Company is in an accumulated deficit position, the deemed dividend was charged against additional paid-in-capital for common shares, there being no retained earnings from which to declare a dividend. The net loss attributable to common shareholders reflects both the net loss and the deemed dividend

7. Outstanding Warrants and Warrant Liability
 
The “Series B Warrants”
 
In connection with the issuance of the Series B Preferred, we issued Series B warrants to purchase up to 75,939 shares of our common stock. The initial exercise price of the Series B Warrants was $2.50 per common share, subject to anti-dilution adjustments. The strike price of the Series B Warrants was subsequently reduced to $1.75 per common share pursuant the anti-dilution adjustment. The Series B Warrants have a 5 year term.
 
The Series B Warrants provide for cashless exercise under certain circumstances. Accordingly, the amount of additional shares underlying potential future issuances of Series B Warrants is indeterminate. There is no specified cash payment obligation related to the Series B Warrants and there is no obligation to register the common shares underlying the Series B Warrants except in the event that we decide to register any of our common stock for cash (“piggyback registration rights”). Presumably, we would be obligated to make a cash payment to the holder if we failed to satisfy our obligations under these piggyback registration rights. Based on authoritative guidance, we have accounted for the Series B Warrants as liabilities. As of December 31, 2013, a total of 2,857 Series B Warrants remain outstanding, with a strike price of $0.001 per share.
 
 
14

 
The “April 2010 Warrants”.
 
In connection with the April 2010 Financing, we issued a total of 1,546,667 Class A, 1,546,667 Class B and 1,546,667 Class C Warrants (collectively, the “April 2010 Warrants”). The Class A Warrants have a 5 year term, an initial exercise price of $1.50 per common share, subject to anti-dilution adjustments and contain a “cashless exercise feature”. The Class B Warrants have a 9 month term and an initial exercise price of $1.50 per common share, subject to anti-dilution adjustments. The Class C Warrants have a 5 year and 9 month term, an initial exercise price of $1.50 per common share, subject to anti-dilution adjustments and contain a “cashless exercise feature”. The April 2010 Warrants provide the holder with “piggyback registration rights” as described above. Based on authoritative guidance, we have accounted for the April 2010 Warrants as liabilities. The liability, measured at fair value on the date of issuance using a Black-Scholes option pricing model has been offset by a reduction in the carrying value of the April 2010 Notes and will be marked to market for each future period they remain outstanding.
 
On June 28, 2010, holders of 1,013,333 Class A Warrants exercised their Warrants through the cashless exercise feature and received a total of 11,000 shares of Company common stock.
 
As a result of the “ratchet” provisions contained in the April 2010 Warrants, the number of warrants and the exercise price of the warrants are subject to adjustment as a result of the December 2010 Notes described above.
 
On March 15, 2011 holders of 4 million Class B Warrants exercised their Warrants for cash and received a total of 4 million shares of our Common Stock.  The remaining Class B Warrants expired in January 2011.
 
As of October 26, 2012, a total of 53,733,333 April 2010 A warrants were exchanged for Series D Preferred shares.
 
 “Consultant Warrants”
 
In connection with the April 2010 Financing, we issued 700,000 warrants to various consultants (the “Consultant Warrants”) with terms that are the same as those contained in the Class A Warrants. Based on authoritative guidance, we have accounted for the Consultant Warrants as liabilities.
 
On June 28, 2010, holders of all of the outstanding Consultant Warrants exercised their Warrants through the cashless exercise feature and received a total of 11,000 shares of Company common stock.
 
In August and October 2010, we issued an additional 6,000,000 warrants to consultants for investor relations and legal services. These warrants expire five years from the date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans. The terms of the warrants fail to specify a penalty if we fail to satisfy our obligation under these piggyback registration rights. Presumably we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for these consultant warrants as liabilities, measured at fair value, based on a Black-Scholes option pricing model.
 
As of October 26, 2012, 6,000,000 Consultant Warrants were exchanged for Series D Preferred shares.
 
 
15

 
“The December 2010 and March 2011 Warrants”
 
In connection with the sale of the December 2010 Notes and March 2011 Notes, we issued warrants, we issued a total of 20,000,000 warrants (the “December 2010 and March 2011 Warrants”). These warrants expire five years from the date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans. The terms of the warrants fail to specify a penalty if we fail to satisfy our obligation under these piggyback registration rights. Presumably we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for these consultant warrants as liabilities, measured at fair value, based on a Black-Scholes option pricing model.
 
As of October 26, 2012, 9,800,000 of December 2010 and March 2011 Warrants, were exchanged for Series D Preferred shares.
 
The “June and July 2011 Warrants”
 
In connection with the sale of the June Notes, we issued a total of 30 million warrants (the “June and July 2011 Warrants”). The June and July 2011 Warrants expire five years from date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the June and July Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for the June and July 2011 Warrants as liabilities. The liability for the June and July 2011 Warrants, measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes.
 
As of October 26, 2012, 30 million “June and July 2011” warrants were exchanged for Series D Preferred shares.
 
The “2011 Director Warrants”
 
In October 2011, we issued warrants to purchase 2,881,680 shares of our common stock to our former independent directors in partial satisfaction of outstanding fees owed to such directors (the “2011 Director Warrants”). The 2011 Director Warrants have a 5 year term, an initial exercise price of $0.05 per common share, subject to anti-dilution adjustments, and contain a “cashless exercise feature”. The 2011 Director Warrants provide the holder with “piggyback registration rights” as described above. Based on authoritative guidance, we have accounted for the 2011 Director Warrants as liabilities. The liability, measured at fair value on the date of issuance using a Black-Scholes option pricing model will be marked to market for each future period they remain outstanding. As of December 31, 2013, 2,881,680 warrants are outstanding 
 
The “April and May 2012” Warrants
 
In connection with the sale of the April and May 2012 Notes, we issued a total of 99,150,000 warrants (the “April and May 2012 Warrants”). The April and May 2012 Warrants expire five years from date of issuance. The exercise price of each warrant is $0.05 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the April and May 2012 Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for the April and May 2012 Warrants as liabilities. The liability for the April and May 2012 Warrants, measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes.
 
As of October 26, 2012, 53,150,000 “April and May 2012” warrants were exchanged for Series D Preferred shares, while 46,000,000 warrants were outstanding as of December 31, 2012. On March 13, 2013, all of the outstanding warrants were exchanged for common stock in a cashless exercise and 29,525,879 shares of common stock were issued.
 
 
16

 
The January 2013 Financing Warrants
 
In connection with the sale of the January 2013 Notes, we issued a total of 590,000,000 warrants. The January 2013 Financing Warrants expire five years from date of issuance. The exercise price of each warrant is $0.01 per share, subject to anti-dilution adjustments. These warrants provide the holder with “piggyback registration rights”, which obligate us to register the common shares underlying the warrants in the event that we decide to register any of our common stock either for our own account or the account of a security holder (other than with respect to registration of securities covered by certain employee option plans). The terms of the January 2013 Financing Warrants fail to specify a penalty if we fail to satisfy our obligations under these piggyback registration rights. Presumably, we would be obligated to make a cash payment to the holder to compensate for such failure. Based on authoritative guidance, we have accounted for the January 2013 Financing Warrants as liabilities. The liability for the January 2013 Financing Warrants, measured at fair value, based on a Black-Scholes option pricing model, has been offset by a reduction in the carrying value of the related Notes.
 
As of December 31, 2013, 590,000,000 warrants remain outstanding.

8. Capital Deficiency
 
Common stock
 
In August 2013, we issued 13,500,000 shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In August 2013, we issued 15,000,000 shares of our common stock in consideration for services rendered to the Company, which was valued at $150,000.
 
In September 2013, we issued 7,000,000 shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In September 2013, we issued 16,500,000 shares of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In October 2013, we issued 8,714,500 shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In October 2013, we issued 19,500,000 shares of our common stock in consideration for services rendered to the Company, which was valued at $195,000.
 
In October 2013, we issued 15,302,222 shares of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In October 2013, we issued 13,183,055 shares of common stock upon conversion of the principal and accrued interest of the holders convertible promissory note.
 
 
17

 
9. Per Share Data
 
The following table sets forth the information needed to compute basic earnings per share:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31.
 
December 31.
 
December 31.
 
December 31.
 
 
 
2013
 
2012
 
2013
 
2012
 
Basic EPS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders, basic
 
$
(2,129,315)
 
$
(136,924)
 
$
(6,226,334)
 
$
(283,193)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
306,036,582
 
 
107,990,020
 
 
268,069,713
 
 
105,655,781
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic income earnings per share (A)
 
$
(0.01)
 
$
(0.00)
 
$
(0.02)
 
$
(0.00)
 
 
(A)
For the three and six month periods ended December 31, 2013 and 2012, respectively, all common stock equivalents have been determined to be anti-dilutive and have not been considered in the calculation of diluted weighted average shares outstanding on the statement of operations.

10. Income Taxes
 
No provision for income taxes has been recorded due to the utilization of net operating losses for which a 100% valuation allowance had been provided.

11. Subsequent Events
 
Management has evaluated events occurring after the date of these financial statements through the date these financial statements were issued. There were no material subsequent events as of that date other than disclosed below.
 
In January 2014, we issued 10,000,000 shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In January 2014, we issued 20,000,000 shares of our common stock to holders of Series D Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.
 
In January 2014, we issued 2,500,000 shares of our common stock to a non-profit charitable organization as a charitable contribution.
 
On January 22, 2014, we issued a convertible promissory note for a face amount and proceeds of $30,000.
 
On February 11, 2014, we issued a convertible promissory note for a face amount and proceeds of $50,000.

ITEM 2. MANAGEMENTS’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations contains information that management believes is relevant to an assessment and understanding of our results of operations. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended June 30, 2013 and Risk Factors contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on October 15, 2013. Certain statements set forth below constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-Looking Statements”. References to “Intellect,” the “Company,” “we,” “us” and “our” refer to Intellect Neurosciences, Inc. and its subsidiaries.
 
General
 
We are a biopharmaceutical company developing and advancing a patent portfolio related to specific therapeutic approaches for treating Alzheimer’s disease (“AD”). In addition, we are developing proprietary drug candidates to treat AD and other diseases associated with oxidative stress.
 
Since our inception in 2005, we have devoted substantially all of our efforts and resources to advancing our intellectual property portfolio and research and development activities. We have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate under a single segment. Our fiscal year end is June 30.
 
 
18

 
Our core business strategy is the licensing of our intellectual property and development of innovative therapeutics that we have purchased, developed internally or in-licensed from universities and others. We seek to complete human proof of concept (Phase II) studies and then enter into collaboration agreements, licenses or sales to complete product development and commercialize the resulting drug products. We intend to obtain revenues from licensing fees, milestone payments, development fees, royalties and/or sales related to the use of our drug candidates or intellectual property for specific therapeutic indications or applications.
 
Our most advanced drug candidate, OX1 (OX1), is a chemically synthesized form of a small, potent, dual mode of action, naturally occurring molecule. In September 2011, we granted an exclusive license to ViroPharma Incorporated (“ViroPharma”) regarding certain of our licensed patents and patent applications related to OX1 and transferred to ViroPharma all of our data and know-how related to OX1 in exchange for payment by ViroPharma of a $6.5 million up-front licensing fee, which we received in October, 2011, and additional regulatory milestone payments based upon future defined events in the United States and the European Union. ViroPharma expects to develop and commercialize OX1 as a treatment of Friedreich’s Ataxia and possibly other diseases for which OX1 may qualify for orphan drug designation.
 
Our pipeline includes 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 has undergone certain procedures in the humanization process at MRCT in the UK.
 
Our current business is focused on granting licenses to our patent estate to large pharmaceutical companies and on research and development of proprietary therapies for the treatment of AD through outsourcing and other arrangements with third parties. We expect research and development, including patent related costs, to continue to be the most significant expense of our business for the foreseeable future. Our research and development activity is subject to change as we develop a better understanding of our projects and their prospects. Total research and development costs from inception through December 31, 2013 were $14,723,489.
 
Results of Operations
 
Three Months Ended December 31, 2013 Compared to Three Months Ended December 31, 2012:
 
 
 
Three Months Ended December 31,
 
 
 
2013
 
2012
 
Change
 
Research and Development Costs
 
 
58,921
 
 
16,062
 
 
(42,859)
 
General and Administrative
 
 
289,545
 
 
386,097
 
 
96,552
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
(348,466)
 
$
(402,159)
 
$
53,693
 
 
 
 
Three Months Ended December 31,
 
 
 
2013
 
2012
 
Change
 
Income (loss) from operations
 
 
(348,466)
 
 
(402,159)
 
 
53,693
 
Other income (expenses):
 
 
(1,780,849)
 
 
265,235
 
 
(2,046,084)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(2,129,315)
 
$
(136,924)
 
$
(1,992,391)
 
 
Our operating loss decreased $53,693 to a loss of $348,466 for the three months ended December 31, 2013 from an operating loss of $402,159 for the three months ended December 31, 2012. This was due to a decrease in our General and Administrative costs offset by a small increase in Research and Development expenses.
 
 
19

 
Research and Development costs increased by $42,859, from $16,062 for the three months ended December 31, 2012 to $58,921 for the three months ended December 31, 2013, due to a payment to The Regents of The University of California, on behalf of its Irvine campus ("University") for research and development work conducted by the University related to our Anti-Amyloid RECALL-VAX vaccine, Anti-Tau RECALL-VAX vaccine and the combination of Anti-Beta Amyloid and Anti-Tau RECALL-VAX vaccine.
 
General and Administrative expenses decreased by $96,552 to $289,545 for the three months ended December 31, 2013, from $386,097 for the three months ended December 31, 2012. The decrease in General and Administrative expenses was primarily due to a decrease in salary and related expenses of $124,259 due to all of our employees working on a consulting basis in the current year period, however this was offset by an increase in professional fees, primarily consulting fees of $68,779. We also recorded a savings of $44,040 in corporate and office expenses as we vacated our office space in New York and needed less supplies as our employees were no longer working full time for the Company.  This savings was offset by small increases in various other accounts.
 
Other expense was $1,780,849 for the three months ended December 31, 2013, compared to income of $265,235 for the three months ended December 31, 2012. This is due to the recording of a gain on the change in the fair market value of derivative instruments and preferred stock liability of $1,313,688, for the three months ended December 31, 2012, compared to a gain on the change in the fair market value of our derivative and preferred stock liability of $10,181 in the current year period, a decrease of expense of $1,303,507.  Interest expense was $1,791,030 for the three months ended December 31, 2013, compared to an expense of $1,048,453 for the period ended December 31, 2012, an increase of $742,577. The increase in interest expense was primarily due to a $552,439 increase in the cost for the amount of warrants granted with the convertible notes sold during the period ended December 31, 2013 compared to the period ended December 31, 2012, the remainder of the increase is due to interest for a larger balance of convertible notes outstanding in the period ended December 31, 2013.
 
 
 
Six Months Ended December 31,
 
 
 
2013
 
2012
 
Change
 
Research and Development Costs
 
 
68,400
 
 
183,982
 
 
115,582
 
General and Administrative
 
 
646,668
 
 
765,505
 
 
118,837
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
 
$
(715,068)
 
$
(949,487)
 
$
234,419
 
 
 
 
Six Months Ended December 31,
 
 
 
2013
 
2012
 
Change
 
Income (loss) from operations
 
 
(715,068)
 
 
(949,487)
 
 
234,419
 
Other income (expenses):
 
 
(5,511,266)
 
 
666,294
 
 
(6,177,560)
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
(6,226,334)
 
$
(283,193)
 
$
(5,943,141)
 
 
Our operating loss decreased $234,419 to a loss of $715,068 for the six months ended December 31, 2013 from an operating loss of $949,487 for the six months ended December 31, 2012.  This was due to a decrease in Research and Development costs of $115,582, and General and Administrative costs decreased $118,837.
 
Research and Development costs decreased by $115,582, from $183,982 for the six months ended December 31, 2012 to $68,400 for the six months ended December 31, 2013, primarily due to the payment of warrants for work performed on a project to humanize one of our beta-amyloid specific, monoclonal antibodies for the treatment of Alzheimer’s disease in the period ended December 31, 2012.
 
 
20

 
General and Administrative expenses decreased by $118,837 to $765,505 for the six months ended December 31, 2012, from $$765,505 for the six months ended December 30, 2011. The decrease in General and Administrative expenses was primarily due to a decrease in salary and related expenses of $229,145 due to all of our employees working on a consulting basis in the current year period, however this was offset by an increase in professional fees, primarily consulting fees of $202,276. We also recorded a savings of $53,055 in corporate and office expenses as we vacated our office space in New York and needed less supplies as our employees were no longer working full time for the Company.  The remainder of the decrease in General and Administrative expenses was primarily due to small decreases in various accounts.
 
Other expense was $5,511,266 for the six months ended December 31, 2013, compared to income of $666,294 for the six months ended December 31, 2012. Interest expense increased $3,601,733 to $5,527,908 for the six months ended December 31, 2013, compared to $1,926,175 for the six months ended December 31, 2012.  The increase in interest expense was due to a $3,066,177 increase in the amount charged for warrants issued with the convertible notes issued in the six months ended December 31, 2013, an increase of $138,134 in preferred stock interest due to the Series D and Series E shares outstanding for the entire six month period ending December 31, 2013, while the remainder was due to the an increase in the outstanding balance of convertible notes payable.  The gain on the change in the fair market value of derivative instruments and preferred stock liability decreased $2,575,827, to $16,642 for the six months ended December 31, 2013 compared to a gain on the change in the fair market value of our derivative and preferred stock liability of $2,592,469for the six months ended December 31, 2012. 
 
Liquidity and Capital Resources
 
Since our inception in 2005, we have mainly generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. As of September 30, 2013, our deficit accumulated during the development stage was $90,118,300.  Our loss from operations for the six months ended December 31, 2013 and 2012 was $715,068 and $949,487, respectively. Our cash used in operations was $421,953 and $620,801 for the six months ended December 31, 2013 and 2012, respectively. Our capital deficiency was $19,297,929 as of December 31, 2013.
 
We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of December 31, 2013, we had cash and cash equivalents of $685.  In September 2011, we granted an exclusive license to ViroPharma regarding certain of our licensed patents and patent applications related to OX1 in exchange for payment by ViroPharma of a $6.5 million up-front licensing fee which was received in October, 2011, and additional regulatory milestone payments based upon defined events in the United States and the European Union. Proceeds from this transaction were used to pay expenses related to the ViroPharma transaction, payment of accounts payable and fund working capital. We anticipate that our existing capital resources will enable us to continue operations for the next few months. However, our business will require substantial additional investment that we have not yet secured. We cannot be sure how much we will need to spend in order to develop new products and technologies in the future. Further, we will not have sufficient resources to develop fully any new products or technologies unless we are able to raise substantial additional financing on acceptable terms or secure funds from new or existing partners. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners within the next few months, we will be unable to successfully develop and commercialize our products. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.
 
The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended June 30, 2012 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.
 
Off-Balance Sheet Arrangements
 
As of December 31, 2013, we had no material off-balance sheet arrangements other than obligations under various agreements as follows:
 
Under a License Agreement with NYU and a similar License Agreement with University of South Alabama Medical Science Foundation (“SAMSF”) related to our OX1 program, we are obligated to make future payments totaling approximately $1.5 million to each of NYU and SAMSF upon achievement of certain milestones based on phases of clinical development and approval of the FDA (or foreign equivalent) and also to pay each of NYU and SAMSF a royalty based on product sales by Intellect or royalty payments received by Intellect. In September 2011, we granted a sublicense of the License Agreements to ViroPharma pursuant to which we received a $6.5 million up-front licensing fee and are entitled to receive additional regulatory milestone payments based upon defined events in the United States and the European Union. Pursuant to the terms of the License Agreements, we paid SAMS and NYU $650,000 of the up-front licensing fee and are obligated to pay a portion of future payments we may receive from ViroPharma.
 
 
21

 
Mindset acquired from Mayo Foundation for Medical Education and Research (“Mayo”) a non-exclusive license to use certain transgenic mice as models for AD and is obligated to pay Mayo a royalty of 2.5% of any net revenue that Mindset receives from the sale or licensing of a drug product for AD in which the Mayo transgenic mice were used for research purposes. The Mayo transgenic mice were used by the SAMSF to conduct research with respect to OX1. Pursuant to the Assignment that we executed with the SAMSF, we agreed to assume Mindset’s obligations to pay royalties to Mayo. We have not received any net revenue that would trigger a payment obligation to Mayo.
 
Pursuant to a Letter Agreement with the Institute for the Study of Aging, we are obligated to pay a total of $225,500 of milestone payments contingent upon future clinical development of OX1.
 
Under a Research Agreement with MRC Technology (“MRCT”), we are obligated to make future research milestone payments totaling approximately $560,000 to MRCT related to the development of the 82E1 humanized antibody and to pay additional milestones related to the commercialization, and a royalty based on sales, of the resulting drug products. MRCT has achieved their research milestones and we have included the total $560,000 in accrued expenses. On September 16, 2012 the Company issued to MRCT 11,200,000 warrants with an exercise price of $0.0625 in full consideration for the money owed to MRCT.
 
Under the terms of a Beta-Amyloid Specific, Humanized Monoclonal Antibody Purchase and Sale Agreement with Immuno-Biological Laboratories Co., Ltd (“IBL”), we agreed to pay IBL a total of $2,125,000 upon the achievement of certain milestones plus a specified royalty based on sales of any pharmaceutical product derived from the 82E1or 1A10 antibodies. We have paid $40,000 to date.
 
Under the terms of a Royalty Participation Agreement effective as of July 31, 2008, certain of our lenders are entitled to an aggregate share of 25% of future royalties that we receive from the license of our ANTISENILIN patent estate.
 
Under a License Agreement with Northwestern University (“NWU”) related to our TOC-01 program, we are obligated to make future payments totaling approximately $700,000 to NWU upon achievement of certain milestones based on phases of clinical development and also to pay NWU a royalty based on product sales.
 
Under the terms of a consulting agreement with a former member of our Board of Directors, we are obligated to pay $1,000,000 from revenue generated from product sales or licenses. We have paid $119,070 to date.
 
Under an Agreement with The Regents of The University of California, on behalf of its Irvine campus ("University") executed in April 2012, we are obligated to make future payments totaling approximately $176 thousand to the University as payment for research and development work to be conducted by the University related to our Anti-Amyloid RECALL-VAX vaccine, Anti-Tau RECALL-VAX vaccine and the combination of Anti-Beta Amyloid and Anti-Tau RECALL-VAX vaccine.
 
In the ordinary course of business, we enter into agreements with third parties that include indemnification provisions which, in our judgment, are normal and customary for companies in our industry sector. These agreements are typically with business partners, clinical sites, and suppliers. Pursuant to these agreements, we generally agree to indemnify, hold harmless, and reimburse indemnified parties for losses suffered or incurred by the indemnified parties with respect to our product candidates, use of such product candidates, or other actions taken or omitted by us. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. We have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of liabilities relating to these provisions is minimal. Accordingly, we have no liabilities recorded for these provisions as of December 31, 2013.
 
 
22

 
In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Critical Accounting Estimates and New Accounting Pronouncements
 
Critical Accounting Estimates
 
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.
 
Convertible Instruments We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
 
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
 
Common Stock Purchase Warrants  We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
 
Preferred Stock. We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity.
 
 
23

 
Derivative Instruments. Our derivative financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded within our convertible debt.  The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date.  Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.
 
Research and Development Costs and Clinical Trial Expenses.  Research and development costs include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, maintenance of research equipment, costs related to research collaboration and licensing agreements, the cost of services provided by outside contractors, including services related to our clinical trials, clinical trial expenses, the full cost of manufacturing drugs for use in research, preclinical development, and clinical trials. All costs associated with research and development are expensed as incurred.
 
Revenue Recognition. We recognize revenue in accordance with authoritative accounting guidance, which provides that non-refundable upfront and research and development milestone payments and payments for services are recognized as revenue as the related services are performed over the term of the collaboration.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not Applicable
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report. They have concluded that, based on such evaluation, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting as of December 31, 2012, as described in our Form 10-K for the year ended June 30, 2012 filed with the SEC on October 15, 2012.
 
Changes in Internal Controls Over Financial Reporting
 
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 5. OTHER
 
None
 
ITEM 6. EXHIBITS
 
31.1* Certification of Principal Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
32.1* Certification of Principal Executive Officer and Chief Financial Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
24

 
101.INS** XBRL Instance Document
 
101.SCH** XBRL Taxonomy Extension Schema
 
101.CAL** XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF** XBRL Taxonomy Extension Definition Linkbase
 
101.LAB** XBRL Taxonomy Extension Label Linkbase
 
101.PRE** XBRL Taxonomy Extension Presentation Linkbase
 
* Filed herewith
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.
 
 
25

 
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.
 
February 14, 2014
Intellect Neurosciences, Inc.
 
 
 
 
/s/ Elliot Maza
 
 
Elliot Maza
 
Principal Executive Officer and
Consulting Chief Financial Officer

 
26