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EX-31.01 - EXHIBIT 31.01 - Intellect Neurosciences, Inc.s100742_ex31-01.htm
EX-32.01 - EXHIBIT 32.01 - Intellect Neurosciences, Inc.s100742_ex32-01.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2014

  

Or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from          to

 

Commission File Number: 333-128226

 

INTELLECT NEUROSCIENCES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 20-8329066
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation) Identification Number)
   
550 Sylvan Ave.  
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 þ 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 2,574,048 (pre- reverse split, 643,512,076) shares of Common Stock, par value $.001 par value per share, outstanding as of February 11, 2015.

 

 
 

 

Index

    PAGE
PART I. FINANCIAL INFORMATION  
     
Item 1. Financial Statements: (Unaudited)  
     
  Consolidated Balance Sheets as of December 31, 2014 and June 30, 2014 3
     
  Consolidated Statements of Operations for the six and three months ended December 31, 2014 and 2013 4
     
  Consolidated Statements of Cash Flows for the six months ended December 31, 2014 and 2013 5
     
  Notes to Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
     
Item 4. Controls and Procedures 18
     
PART II. OTHER INFORMATION 19
     
Item 1. Legal Proceedings 19
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
     
Item 3. Defaults Upon Senior Securities 19
     
Item 4. Mine Safety Disclosures 19
     
Item 5. Other 19
     
Item 6. Exhibits 19
     
SIGNATURES 20
     
CERTIFICATIONS  

 

2
 

 

Intellect Neurosciences Inc. and Subsidiary

Consolidated Balance Sheets

(Unaudited)

 

   December 31, 2014   June 30, 2014 
ASSETS          
Current assets:          
Cash and cash equivalents  $60,466   $- 
Due from licensee   1,200,000      
Total current assets   1,260,466    - 
           
Security deposits   2,250    2,250 
Total Assets  $1,262,716   $2,250 
           
LIABILITIES AND CAPITAL DEFICIENCY          
           
Current Liabilities:          
Accounts payable and accrued expenses  $3,117,094   $2,682,272 
Accrued interest - convertible promissory notes   1,431,750    1,047,383 
Derivative instruments   830,347    7,209,188 
Preferred stock liability          
Preferred stock dividend payable   17,780,416    15,032,543 
Convertible promissory notes - current, net of debt discount of $233,536 and $167,408, respectively   1,097,964    1,464,452 
Total Current liabilities  $24,257,571   $27,435,838 
           
Long Term Debt          
Convertible promissory notes - long term, net of debt discount of $543,068 and $936,297, respectively   1,135,432    727,203 
           
Total Liabilities  $25,393,003   $28,163,041 
           
Capital deficiency:          
           
Series B Convertible Preferred Stock, $.001 par value - 459,309 shares designated and 75,751 shares issued and outstanding at December 31, 2014, and June 30, 2014 (liquidation preference $1,325,644)   75    75 
           
Series C Convertible Preferred Stock, $.001 par value - 25,000 shares designated and 10,327 and 20,977 shares issued and outstanding at December 31, 2014 and June 30, 2014, respectively (liquidation preference $10,327,000 and $20,977,000, respectively)   21    21 
           
Series D Convertible Preferred stock, $.001 par value - 25,000 shares designated and  2,533 shares issued and outstanding at December 31, 2014 and June 30, 2014 (liquidation preference $2,533,000 )   3    3 
           
Series E Convertible Preferred stock, $.001 par value - 25,000 shares designated and 20,805 shares issued and outstanding at December 31, 2014 and June 30, 2014 (liquidation preference $20,805,000)   21    21 
           
Series F Convertible Preferred stock, $.001 par value - 25,000 shares designated and 1,200 issued and outstanding at December 31, 2014 (liquidation preference $1,200,000)   1      
           
Common stock, par value $0.001 per share, 2,000,000,000 shares authorized; 2,493,648 and 1,638,048 (pre-reverse split, 623,512,076 and 409,512,076 ) issued and outstanding at December 31, 2014, and June 30, 2013, respectively   2,494    1,638 
           
Additional paid in capital   71,980,106    70,780,961 
           
Accumulated Deficit   (96,113,008)   (98,943,510)
           
Total Capital Deficiency  $(24,130,287)  $(28,160,791)
           
Total Liabilities and Capital Deficiency  $1,262,716   $2,250 

 

See notes to consolidated financial statements

 

3
 

 

Intellect Neurosciences Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited) 

 

   Six Months Ended   Three Months Ended 
   December 31,   December 31, 
   2014   2013   2014   2013 
                 
Revenues:                    
License fees  $1,200,000   $-   $1,200,000   $- 
Total revenue  $1,200,000   $-   $1,200,000   $- 
                     
Costs and Expenses:                    
Research and development   27,201    68,400    -    58,921 
General and administrative   1,257,430    646,668    789,263    289,545 
Total cost and expenses   1,284,631    715,068    789,263    348,466 
                     
Loss from operations  $(84,631)  $(715,068)  $410,737   $(348,466)
                     
Other income/(expenses):                    
                     
Interest expense, net of interest income   (3,463,708)   (5,527,908)   (1,736,913)   (1,791,030)
Changes in fair value of derivative instruments   6,378,841    16,642    782,582    10,181 
                     
Total other income/(expense):   2,915,133    (5,511,266)   (954,331)   (1,780,849)
                     
Net income/ (loss)  $2,830,502   $(6,226,334)  $(543,594)  $(2,129,315)
                     
Deemed preferred stock dividend   -         -      
                     
Net loss allocable to                    
common shareholders  $2,830,502   $(6,226,334)  $(543,594)  $(2,129,315)
                     
Basic and diluted loss per share  $1.42   $(0.02)  $(0.22)  $(0.02)
                     
Weighted average number of shares outstanding:                    
Basic and diluted   1,996,390    1,072,279    2,494,048    1,224,146 

 

See notes to consolidated financial statements

 

4
 

 

Intellect Neurosciences Inc. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited) 

 

   Six Months Ended 
   December 31, 
   2014   2013 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income/ (loss)  $2,830,502   $(6,226,334)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Change in fair value of derivative instruments  $(6,378,841)   (16,642)
Stock and warrant based compensation   -    345,000 
Non-cash interest expense   3,473,981    5,527,908 
           
Change in assets and liabilities          
Prepaid expenses          
Due from Licensee   (1,200,000)     
Accounts payable and accrued expenses   434,824    (51,885)
           
Net cash used in operating activities   (839,534)   (421,953)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of convertible notes   -    417,500 
Proceeds from issuance of preferred stock   1,200,000    - 
Repayments of convertible notes   (300,000)   - 
           
Net cash provided by financing activities   900,000    417,500 
           
NET INCREASE (DECREASE) IN CASH   60,466    (4,453)
           
CASH  - BEGINNING OF PERIOD   -    5,138 
           
CASH  - END OF PERIOD  $60,466   $685 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid during the period for:          
Interest  $-   $- 
Taxes  $-   $- 
           
Non-cash financing activities          
Conversion of convertible notes and interest to common stock  $131,929   $131,831 
Conversion of preferred stock to common stock  $-   $51,017 
Debt discount recognized as derivative liabiltiy  $637,500   $342,500 

 

See notes to consolidated financial statements

 

5
 

 

Intellect Neurosciences, Inc.

Notes to Unaudited Consolidated Condensed Financial Statements

December 31, 2014

 

Note 1. Basis of Presentation 

 

The accompanying unaudited consolidated condensed financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and note disclosures required by accounting principles generally accepted in the United States. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2014 filed with the Securities and Exchange Commission (the “SEC”) on October 14, 2014. 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 or issued and non-readily marketable securities. 

 

The results of operations for the six and three months ended December 31, 2014, are not necessarily indicative of the results to be expected for the entire year or for any other period.

 

On Aug. 12, 2014, the board of directors approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a 1-for-250 reverse stock split on the issued and outstanding common. All relevant information relating to numbers of shares and warrants and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods presented. The reverse split was effected on February 11, 2015.

 

We adopted early application of Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements effective June 30, 2014, therefore, we no longer present or disclose inception-to-date information and other remaining disclosure requirements of Topic 915.

 

2. Business Description and Going Concern

 

Intellect Neurosciences, Inc., a Delaware corporation, (“Intellect”, “our”, “us”, “we” or the “Company” refer to Intellect Neurosciences, Inc. and its subsidiary) is a biopharmaceutical company, which together with its subsidiary, Intellect Neurosciences, USA, Inc. (“Intellect USA”), is engaged in the discovery and development of disease-modifying therapeutic agents for the treatment and prevention of neurodegenerative conditions, collectively known as proteinopathies, which include Alzheimer’s (“AD”), Parkinson’s and Huntington disease. 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. We have had no product sales from inception through December 31, 2014 but we have received $10,516,667 in license fees from inception through December 31, 2014.

 

On December 31, 2014, the Company and Pfizer Inc. and Rinat Neuroscience Corp. (collectively, “Pfizer”) executed a Settlement Agreement (the “Settlement Agreement”) to resolve ongoing litigation in connection with In the matter of Intellect Neurosciences, Inc. v. Pfizer Inc. and Rinat Neuroscience Corp., Supreme Court for the State of New York, County of New York, Index No. 653320/2012 (the “Action”).

 

Pursuant to the terms of the Settlement Agreement, Pfizer agreed to pay the Company $1.2 million to settle the Action and to withdraw the IPR petition with respect to the associated Intellect patent filed by Pfizer with the USPTO on November 24, 2014. Each of the parties agreed to bear their own legal costs and attorneys’ fees. The Settlement Agreement constitutes a settlement of the disputed claims and is not in any way an admission of liability as to any claim, contention or cause of action.

 

6
 

 

Our core business strategy is to build a portfolio of compounds with the potential to treat or prevent neurodegenerative diseases, develop each to pre-determined milestones, and license them to pharmaceutical companies for advanced development and commercialization. To supplement our own work, we intend to license promising novel technologies and early stage compounds from academia and other biotechnology companies. 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.

 

As of December 31, 2014, we had no self-developed or licensed products approved for sale by the U.S. Food and Drug Administration (“FDA”). There can be no assurance that our research and development efforts will be successful, that any products developed by any of our licensees will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.

 

Since our inception in 2005, we have generated losses from operations and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. 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, 2014, we had approximately $60,000 of cash and cash equivalents. We anticipate that our existing capital resources will enable us to continue operations for the next six months, which takes into account the collection of amounts due from our former licensee of $1,200,000 less legal fees of $400,000 on January 20, 2015. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners within the next few months, we may be forced to cease operations. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.  

 

These consolidated financial statements are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business. No adjustment has been made to the carrying amount and classification of our assets and the carrying amount of our liabilities based on the going concern uncertainty.

 

3. Summary of Significant Accounting Policies

 

Principles of Consolidation. The consolidated financial statements include the accounts of our wholly owned subsidiary, Intellect USA.

 

Use of Estimates. The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States involves the use of estimates and assumptions that affect the recorded amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the fair value of derivative instruments, including stock options and warrants to purchase our common stock, recognition of clinical trial costs, certain consulting expenses and deferred taxes. Actual results may differ substantially from these estimates.

 

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.

 

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.

 

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 and three month period ended December 31, 2014, we recognized other income of $6,378,841 and $782,582, respectively, relating to the change in fair value of the derivative liabilities, which are recorded at fair value.  At December 31, 2014 and June 30, 2014, there were approximately $830,000 and $7.2 million of derivative liabilities outstanding, respectively.

 

Our derivative instruments were valued using the Black-Scholes option pricing model, using the following assumptions during the quarter ended December 31, 2014:

 

Estimated dividends     
Expected volatility   188%
Risk-free interest rate   1.73%
Expected term (years)   1.0 - 5.0 years 

 

8
 

 

4. Notes Payable 

 

The following table presents the components of Convertible Notes Payable at December 31, 2014 and June 30, 2014:

 

   December 31, 2014   June 30, 2014 
Convertible Notes issued during fiscal year ended June 30, 2010  $-   $80,000 
Convertible Notes issued during fiscal year ended June 30, 2011   880,000    1,100,000 
Convertible Notes issued during fiscal year ended June 30, 2012   451,500    451,500 
Convertible Notes issued during fiscal year ended June 30, 2013   1,136,000    1,136,000 
Convertible Notes issued during fiscal year ended June 30, 2014   527,500    527,500 
Convertible Notes issued during six months ended December 31, 2014   15,000      
Balance at End of Period  $3,010,000   $3,295,000 
Less debt discount:   776,604    1,103,345 
Convertible Notes Payable, Net  $2,233,396   $2,191,655 
           
Classified as follows on the accompanying consolidated balance sheets:          
Current portion of Convertible Notes Payable  $1,097,964   $1,464,452 
Long term portion of Convertible Notes Payable   1,135,432    727,203 
   $2,233,396   $2,191,655 

 

The conversion price of all the foregoing promissory notes is $1.25 (pre-reverse split, $0.005) but for two (2) of the holders holding an aggregate of $845,000 principal amount of Promissory Notes, the conversion price is equal to $0.08 (pre-reverse split, $0.00032) per share of Common Stock and $0.14 (pre-reverse split, $0.00055) per share of Common Stock. All of the notes carry interest at 14% annually and mature three years from the issue date.

 

Convertible Notes Payable are payable as follows:

 

Fiscal year ended June 30, 2015  $1,331,500 
Fiscal year ended June 30, 2016   1,136,000 
Fiscal year ended June 30, 2017   527,500 
Fiscal year ended June 30, 2018   15,000 
Total  $3,010,000 

 

5. Convertible Preferred Stock and Derivative Liability

 

Series B Convertible Preferred Stock

 

The Series B Convertible Preferred Stock carries a cumulative dividend of 6% per annum and a stated value of $17.50 per share. Each share is convertible into 0.05 (pre-reverse split, 11.67) common shares based on the current conversion price of $375 (pre-reverse split, 1.50).

 

Series C Convertible Preferred Stock

 

The Series C Convertible Preferred Stock carries a cumulative dividend of 14% per annum and a stated value of $1,000 per share. Each share is convertible into 800 (pre-reverse split, 200,000) common shares based on the current conversion price of $1.25 (pre-reverse split, $0.005). During the six month periods ended December 31, 2014 and June 30, 2014, 1,070 and 350 shares were converted into 856,000 and 140,000 (pre-reverse split, 214,000,000 and 35,000,000) common shares, respectively.

 

Series D Convertible Preferred Shares

 

The Series D Convertible Preferred Stock carries a cumulative dividend of 8% per annum and a stated value of $1,000 per share. Each share is convertible into 800 (pre-reverse split, 200,000) common shares based on the current conversion price of $1.25 (pre-reverse split, 0.005). During the six month periods ended December 31, 2014 and June 30, 2014, zero and 300 shares were converted into zero and 120,000 (pre-reverse split, 30,000,000) common shares, respectively.

 

9
 

 

Series E Convertible Preferred Shares

 

The Series E Convertible Preferred Stock carries a cumulative dividend of 8% per annum and a stated value of $1,000 per share. Each share is convertible into 400 (pre-reverse split, 100,000) common shares based on the current conversion price of $2.50 (pre-reverse split, $0.01).

 

Series F Convertible Preferred Shares

 

On July 25, 2014, we entered into a stock purchase agreement with certain accredited investors whereby we issued 1,200 shares of Series F Convertible Preferred Stock and warrants to purchase 9,600,000 (pre-reverse split, 2.4 billion) shares of common stock (the “Financing”).

 

Each share of Series F Preferred Stock has a stated value and liquidation preference of $1,000, and accrues a dividend of 8% of the Stated Value per annum, and is convertible at any time into 4,000 (pre-reverse split, 1,000,000) common shares. The Series F Preferred holders vote together with holders of Common Stock on an as converted basis. The Warrants are exercisable for a period of five (5) years from the date of issuance and are exercisable into shares of Common Stock at an exercise price of $.25 (Pre-reverse split, $0.001) per share.

 

In connection with the Financing, the Company filed a (i) Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, (ii) Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, (iii) Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock and (iv) Certificate of Amendment to the Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock.

 

In connection with the Financing, the Company and a majority of each Series B, Series C, Series D and Series E Preferred Stock, by written consent, agreed to the amendment of each respective series as follows:  

 

·Series B Preferred Stock · Eliminate the ratchet provision for subsequent issuances of securities.

 

·Series C Preferred Stock · The conversion price per share of Common Stock will be $0.005; and eliminate the ratchet provision for subsequent issuances of securities.

 

·Series D Preferred Stock · The conversion price per share of Common Stock will be $0.005; and eliminate the ratchet provision for subsequent issuances of securities.

 

·Series E Preferred Stock · Eliminate the ratchet provision for subsequent issuances of securities.

 

·Series B, Series C, Series D and Series E Preferred Stock · Waive the covenant of the Company to refrain from issuing any shares of capital stock senior to or on parity with each series of preferred stock, and to reserve and keep available unissued shares of Common Stock for the purpose of effecting the conversion of the shares of each series of preferred stock for a period of six (6) months from the Closing Date.

 

In connection with the Financing, pursuant to consents and waivers obtained from holders of the Company’s outstanding convertible promissory notes (the “Promissory Notes”) their respective Promissory Notes were amended as follows, effective upon the issuance of one or more shares of Series F Preferred Stock: (i) eliminate the ratchet provision for subsequent issuances of securities going forward, (ii) waive the covenant of the Company to reserve and keep available unissued shares of Common Stock for the purpose of effecting the conversion of the Promissory Notes and (iii) provide that the conversion price will be $1.25 (pre-reverse split, $0.005) but for two (2) of the holders holding an aggregate of $845,000 principal amount of Promissory Notes, the conversion price is equal to $0.08 (pre-reverse split, $0.00032) per share of Common Stock and $0.14 (pre-reverse split, $0.00055) per share of Common Stock

 

10
 

 

In connection with the Financing, the holders of the Company’s outstanding warrants, exclusive of the Warrants issued as part of the Financing, agreed as follows, effective upon the issuance of one or more Series F Preferred Stock: (i) eliminate the ratchet provision for subsequent issuances of securities going forward, (ii) waive the covenant of the Company to reserve and keep available unissued shares of Common Stock for the purpose of effecting the conversion of the Warrants for a period of six (6) months from the Closing Date and (iii) provide that the exercise price of the Warrants be the effective price per share, upon cashless exercise, shall be 50% of the fair market value of the Common Stock on the date of exercise.

 

In connection with the Financing, the Company repaid $300,000 of principal on outstanding promissory notes of a certain investor and purchased from such investor convertible preferred stock, and dividends accrued thereon, having an aggregate stated value of $16,750,000 for the total consideration of $100.

 

Based on authoritative guidance, the entire proceeds from the Financing were credited to preferred stock and additional paid in capital.

 

6. Outstanding Warrants and Warrant Liability

 

The following table presents the number of Warrants outstanding at the periods ended December 31, 2014 and June 30, 2014. All Warrants have a 5 year term and are exercisable at December 31, 2014. All Warrants other than the Series F Warrants have an exercise price of $2.50 (pre-reverse split, $0.01) per common share. The Series F Warrants have an exercise price of $.25 (pre-reverse split, $0.001) per common share.

 

   Post Reverse Split   Pre-Reverse Split 
Warrants outstanding at June 30, 2014   100    25,000 
Issued   9,600,000    2,400,000,000 
Exercised   -    - 
Expired   -    - 
Warrants outstanding at December 31, 2014   9,600,100    2,400,025,000 

 

7. Capital Deficiency 

 

Common stock 

 

In July 2014, we issued 200,000 (pre-reverse split, 50 million) 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 2014, we issued 396,000 (pre-reverse split, 99 million) 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 2014, we issued 260,000 (pre-reverse split, 65 million) shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities   

 

8. 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.

 

9. 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.

 

On Aug. 12, 2014, the board of directors approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a 1-for-250 reverse stock split on the issued and outstanding common. All relevant information relating to numbers of shares and warrants and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods presented. The reverse split was effected on February 11, 2015.

 

In January 2015, we issued 80,000 (pre-reverse split, 20 million) shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.

 

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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, 2014 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on October 14, 2014. 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 engaged in the discovery and development of disease-modifying therapeutic agents for the treatment and prevention of neurodegenerative conditions, collectively known as proteinopathies, which include Alzheimer’s (“AD”), Parkinson’s and Huntington disease. We have an internal diversified pipeline and have granted licenses related to our patent estate to major pharmaceutical companies. 

 

Since our inception in 2005, we have devoted substantially all of our efforts and resources to advancing our intellectual property portfolio and research and development activities. We have entered into license and other agreements with large pharmaceutical companies related to our patent estate, however, neither we nor any of our licensees have obtained regulatory approval for sales of any product candidates covered by our patents. We operate under a single segment. Our fiscal year end is June 30.

 

Our core business strategy is to build a portfolio of compounds with the potential to treat or prevent neurodegenerative diseases, develop each compound to pre-determined milestones, and license the compounds to pharmaceutical companies for advanced development and commercialization. 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. As an example, we developed OX1, a small molecule multi-modal antioxidant, completed preclinical and human safety trials, and then licensed the program to ViroPharma Inc. for development of a drug to treat Friedreich's Ataxia and other neurodegenerative diseases. ViroPharma subsequently merged with Shire plc. We could receive up to $120 million in milestone payments from Shire and significant royalties from sales if the resulting drug product is approved for sale by the US Food and Drug Administration (“FDA”). There can be no assurance that we will receive such milestone payments or royalties.

 

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 proteinopathies through outsourcing and other arrangements with third parties. 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, 2014 were $14,682,290.

 

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Results of Operations

 

Three Months Ended December 31, 2014 Compared to Three Months Ended December 31, 2013:

 

  

Three Months Ended December 31,

     
   2014   2013   Change 
             
Revenue  $1,200,000   $-   $1,200,000 
Research and Development Costs   -    58,921   $(58,921)
General and Administrative   789,263    289,545   $499,718 
                
Income (loss) from operations  $410,737   $(348,466)  $759,203 

 

   Three Months Ended December 31,     
   2014   2013   Change 
             
Income (loss) from operations  $410,737   $(348,466)  $759,203 
Other income (expenses):   (954,331)   (1,780,849)   826,518 
                
Net income (loss)  $(543,594)  $(2,129,315)  $1,585,721 

 

Revenue increased by $1,200,000 for the three months ended December 31, 2014 as compared to the three months ended December 31, 2013 due to the following:

 

On December 31, 2014, the Company and Pfizer Inc. and Rinat Neuroscience Corp. (collectively, “Pfizer”) executed a Settlement Agreement (the “Settlement Agreement”) to resolve ongoing litigation in connection with In the matter of Intellect Neurosciences, Inc. v. Pfizer Inc. and Rinat Neuroscience Corp., Supreme Court for the State of New York, County of New York, Index No. 653320/2012 (the “Action”).

 

Pursuant to the terms of the Settlement Agreement, Pfizer agreed to pay the Company $1.2 million to settle the Action and to withdraw the IPR petition with respect to the associated Intellect patent filed by Pfizer with the USPTO on November 24, 2014. Each of the parties agreed to bear their own legal costs and attorneys’ fees. The Settlement Agreement constitutes a settlement of the disputed claims and is not in any way an admission of liability as to any claim, contention or cause of action.

 

Research and Development costs decreased by $58,921, from $58,921 for the three months ended December 31, 2013 to zero for the three months ended December 31, 2014. The R&D expenses incurred during the three months ended December 31, 2013 related to one time fees incurred for our TauC3 antibody program.

 

General and Administrative expenses increased by $499,718 to $789,263 for the three months ended December 31, 2014, from $289,545 for the three months ended December 31, 2013. The increase in General and Administrative expenses was primarily due to the incurrence of additional fees, including, a contingent legal fee of $400,000 incurred in connection with the settlement of the Action described above and expenses incurred in connection with our proxy solicitation and request for approval of a reverse split of our stock.

 

As a result of the foregoing, we generated operating income of $410,737 for the three months ended December 31, 2014 as compared to an operating loss of $348,466 for the three months ended December 31, 2013, a change of $759,203.

 

Other expense was $738,272 for the three months ended December 31, 2014, compared to an expense of $1,780,849 for the three months ended December 31, 2013. This is due to the recording of a gain on the change in the fair market value of derivative instruments of $782,582 for the three months ended December 31, 2014 as compared to a gain of $10,181 for the three months ended December 31, 2013 and a reduction of $270,176 in interest expense, from $1,791,030 for the three months ended December 31, 2014, compared to an expense of $1,520,854 for the period ended December 31, 2013. The decrease in interest expense primarily is due to charges for interest expense recorded in the period ended December 31, 2013 for cost of warrants issued with convertible notes, which did not reoccur in the period ended December 31, 2014.

 

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As a result of the foregoing, we generated a net loss of $327,535 for the three months ended December 31, 2014 compared to a net loss of $2,129,315 for the three months ended December 31, 2013, a change of $1,801,780.

 

Six Months Ended December 31, 2014 Compared to Six Months Ended December 31, 2013:

  

   Six Months Ended December 31, 2014,     
   2014   2013   Change 
             
Revenue  $1,200,000.00   $-   $1,200,000 
Research and Development Costs   27,201    68,400   $(41,199)
General and Administrative   1,257,430    646,668   $610,762 
                
Income (loss) from operations  $(84,631)  $(715,068)  $630,437 

 

 

   Six Months Ended December 31, 2014,     
   2014   2013   Change 
             
Income (loss) from operations  $(84,631)  $(715,068)  $(630,437)
Other income (expenses):   2,915,133    (5,511,266)   8,426,399 
                
Net income (loss)  $2,830,502   $(6,226,334)  $9,056,836 

 

Revenue increased by $1,200,000 for the six months ended December 31, 2014 as compared to the six months ended December 31, 2013 due to the execution of the Settlement Agreement described above.

 

Research and Development costs decreased by $48,772, from $68,400 for the six months ended December 31, 2013 to $19,628 for the six months ended December 31, 2014, primarily due to a decrease in R&D fees of $58,921 incurred in 2013 in connection with our TauC3 antibody program offset in part by an increase in miscellaneous R&D fees.

 

General and Administrative expenses increased by $610,762 to $1,257,430 for the six months ended December 31, 2014, from $646,668 for the six months ended December 31, 2013. The increase in General and Administrative expenses was primarily due to the incurrence of additional fees, including, a contingent legal fee of $400,000 incurred in connection with the settlement of the Action described above; approximately $92,000 in license fees incurred in connection with the OX1 program licensed to Shire plc; an increase of approximately $100,000 in corporate legal and consulting fees incurred in connection with our proxy solicitation and request for approval of a reverse split of our stock; and an increase in patent fees.

 

As a result of the foregoing, our operating loss decreased by $638,010 to a loss of $77,058 for the six months ended December 31, 2014 from an operating loss of $715,068 for the three months ended December 31, 2013.

 

Other income was $3,131,192 for the six months ended December 31, 2014, compared to an expense of $5,511,266 for the six months ended December 31, 2013. The change of $8,642,458 primarily is due to the recording of a gain on the change in the fair market value of derivative instruments of $6,378,841 for the six months ended December 31, 2014 as compared to a gain of $16,642 for the six months ended December 31, 2013 and a reduction of $2,280,259 in interest expense, from $5,527,908 for the six months ended December 31, 2013, compared to an expense of $3,247,649 for the period ended December 31, 2014. The decrease in interest expense primarily is due to charges for interest expense recorded in the six month period ended December 31, 2013 for the cost of warrants issued with convertible notes and Series D and Series E preferred stock issued during the period, which did not reoccur in the six month period ended December 31, 2014.

 

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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 December 31, 2014, our accumulated deficit was $95,896,949.  Our loss from operations for the six months ended December 31, 2014 and 2013 was $77,058 and $715,068, respectively. Our cash used in operations was $839,534 and $421,953 for the six months ended December 31, 2014 and 2013, respectively. Our capital deficiency was $24, 130,287 as of December 31, 2014. 

 

We have limited capital resources and operations since inception have been funded with the proceeds from equity and debt financings and license fee arrangements. As of December 31, 2014, we had approximately $60,000 of cash and cash equivalents. We anticipate that our existing capital resources will enable us to continue operations for the next six months, which takes into account the collection of amounts due from our former licensee of $1,200,000 less legal fees of $400,000 on January 20, 2015. If we fail to raise additional capital or obtain substantial cash inflows from existing or potential partners within the next few months, we may be forced to cease operations. We cannot assure you that financing will be available in a timely manner, on favorable terms or at all.

 

On December 31, 2014, the Company and Pfizer Inc. and Rinat Neuroscience Corp. (collectively, “Pfizer”) executed a Settlement Agreement (the “Settlement Agreement”) to resolve ongoing litigation in connection with In the matter of Intellect Neurosciences, Inc. v. Pfizer Inc. and Rinat Neuroscience Corp., Supreme Court for the State of New York, County of New York, Index No. 653320/2012 (the “Action”).

 

Pursuant to the terms of the Settlement Agreement, Pfizer agreed to pay the Company $1.2 million to settle the Action and to withdraw the IPR petition with respect to the associated Intellect patent filed by Pfizer with the USPTO on November 24, 2014. Each of the parties agreed to bear their own legal costs and attorneys’ fees. The Settlement Agreement constitutes a settlement of the disputed claims and is not in any way an admission of liability as to any claim, contention or cause of action.

 

The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended June 30, 2014 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

 

On August 14, 2014, we filed a Certificate of Amendment (the “Amendment”) with the Secretary of State of the State of Delaware providing for a reverse stock split whereby for every two hundred and fifty (250) shares of common stock issued and outstanding, two hundred and fifty (250) shares of common stock shall be combined and converted into one (1) share of common stock. We filed the Amendment on the basis of approval of the Board of Directors of the Company following approval by a majority of the holders of all classes of convertible preferred stock, voting on an “as converted basis”. On October 30, 2014, we filed a preliminary proxy with the SEC in anticipation of putting the matter to a vote of all common shareholders. We filed a definitive proxy with the SEC pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, on November 14, 2014 describing the proposals to be presented to the shareholders in detail.

 

On December 19, 2014, the Company held a special meeting of stockholders, at which the Company’s stockholders approved four proposals.

 

Proposal 1 - The Company’s stockholders approved and authorized the Company to amend the Certificate of Incorporation to effect a reverse stock split (the “Reverse Stock Split”) of our issued and outstanding shares of common stock, par value $0.001 per share (the “Common Stock”), by a ratio of two hundred and fifty for one (250-for-1) such that each two hundred and fifty (250) shares of Common Stock will be combined into one (1) share of Common Stock at any time prior to December 31, 2014, with fractional shares being rounded-up to the nearest whole number.

 

Proposal 2 - The Company’s stockholders approved an amendment of the Company’s 2006 Equity Incentive Plan to add 6,000,000 shares to such plan (on a post Reverse Stock Split basis).

 

Proposal 3 - The Company’s stockholders approved, on an advisory basis, the compensation of the Company’s named executive officers.

 

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Proposal 4 - The Company’s stockholders approved, on an advisory basis, a three-year frequency with which the Company should conduct future stockholder advisory votes on named executive officer compensation.

 

On Aug. 12, 2014, the board of directors approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a 1-for-250 reverse stock split on the issued and outstanding common. All relevant information relating to numbers of shares and warrants and per share information have been retrospectively adjusted to reflect the reverse stock split for all periods presented. The reverse split was effected on February 11, 2015.

 

Off-Balance Sheet Arrangements

 

As of December 31, 2014, we had no material off-balance sheet arrangements other than obligations under various agreements as follows:

 

Under Research License Agreements with NYU and SAMSF (“RLA”), 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 RLAs to ViroPharma. Pursuant to the terms of the RLAs, we paid SAMSF and NYU $650,000 of the up-front licensing fee and are obligated to pay a portion of future payments we may receive from ViroPharma.

 

Mindset Biopharmaceuticals, Inc. (“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 SAMSF to conduct research with respect to OX1. Pursuant to an Assignment Agreement dated as of June 23, 2005, which we executed with 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 dated as of December 29, 2006, 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 MRCT dated as of September 16, 2012, 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.

 

Under the terms of the IBL Agreement with Immuno-Biological Laboratories Co., Ltd. dated as of December 26, 2006, 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.

 

Under a License Agreement with Northwestern University (“NWU”) dated as of May 3, 2012, 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. 

 

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 June 30, 2014 or 2013.

 

In the normal course of business, we may be confronted with issues or events that may result in a contingent liability. These generally relate to lawsuits, claims, environmental actions or the actions of various regulatory agencies. We consult with counsel and other appropriate experts to assess the claim. If, in our opinion, we have incurred a probable loss as set forth by accounting principles generally accepted in the United States, an estimate is made of the loss and the appropriate accounting entries are reflected in our consolidated financial statements. After consultation with legal counsel, we do not anticipate that liabilities arising out of currently pending or threatened lawsuits and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

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Critical Accounting Estimates and New Accounting Pronouncements

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it requires assumptions to be made that were uncertain at the time the estimate was made, and changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

 

Convertible Instruments. We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: We record when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. We also record when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.

 

Common Stock Purchase Warrants.  We classify as equity any contracts that require physical settlement or net-share settlement or provide us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) provided that such contracts are indexed to our own stock as defined in ASC 815-40 ("Contracts in Entity's Own Equity"). We classify as assets or liabilities any contracts that require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.

 

Preferred Stock. We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classified our preferred shares in stockholders’ equity. 

 

Derivative Instruments. Our derivative financial instruments consist of embedded derivatives related to the convertible debt, warrants and beneficial conversion features embedded within our convertible debt.  The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date.  Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, we recorded a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, we recorded non-operating, non-cash income.

 

17
 

 

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

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the Company’s principal executive and financial officer conducted an evaluation of the design and effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on this evaluation, our CEO and CFO concluded that as of December 31, 2014, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The conclusion was due to the presence of the following material weaknesses in disclosure controls and procedures due to our small size and limited resources: (i) inadequate segregation of duties and effective risk assessment; (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both U.S. GAAP and SEC Guidelines; (iii) inadequate security and restricted access to computer systems including insufficient disaster recovery plans; and (iv) no written whistleblower policy.

 

Our CEO and CFO plans to implement appropriate disclosure controls and procedures to remediate these material weaknesses, including (i) appointing additional qualified personnel to address inadequate segregation of duties and ineffective risk management; (ii) adopting sufficient written policies and procedures for accounting and financial reporting and a whistle blower policy; and (iii) implementing sufficient security and restricted access measures regarding our computer systems and implement a disaster recovery plan.

 

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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 September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.

 

Item 1A. Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

In July 2014, we issued 200,000 (pre-reverse split 50 million) shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.

 

On July 25, 2014, we entered issued 1,200 shares of Series F Convertible Preferred Stock and warrants to purchase 9,600,000 (pre-reverse split, 2.4 billion) shares of common stock pursuant to a stock purchase agreement with certain accredited investors.

 

In August 2014, we issued 396,000 (pre-reverse split, 99 million) 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 2014, we issued 260,000 (pre-reverse split, 65 million) shares of our common stock to holders of Series C Convertible Preferred Stock upon their exercise of the conversion feature contained in those securities.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

ITEM 5. OTHER

 

None

 

ITEM 6. EXHIBITS

 

31.1* Certification of Principal Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

32.1* Certification of Principal Executive Officer and Chief Financial Officer pursuant to Rule 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 

101.INS** XBRL Instance Document

 

101.SCH** XBRL Taxonomy Extension Schema

 

101.CAL** XBRL Taxonomy Extension Calculation Linkbase

 

101.DEF** XBRL Taxonomy Extension Definition Linkbase

 

101.LAB** XBRL Taxonomy Extension Label Linkbase

 

101.PRE** XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

 

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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 12, 2015 Intellect Neurosciences, Inc.
   
  /s/ Elliot Maza
  Elliot Maza
   
  Chief Executive Officer and
  Chief Financial Officer

 

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