EOM Pharmaceutical Holdings, Inc. - Quarter Report: 2009 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 033-17264-NY
ImmunoCellular Therapeutics, Ltd.
(Exact name of registrant as specified in its charter)
DELAWARE | 93-1301885 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
21900 Burbank Boulevard, 3rd Floor
Woodland Hills, California 91367
(Address of principal executive offices)
(818) 992-2907
(Registrants 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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.
Large accelerated filer | ¨ | Accelerated Filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The Issuer had 12,682,493 shares of its common stock outstanding as of May 14, 2009.
Table of Contents
ImmunoCellular Therapeutics, Ltd.
FORM 10-Q
Page | ||||||
1 | ||||||
Item 1. |
Financial Statements | 1 | ||||
Condensed Balance Sheets as of December 31, 2008 and March 31, 2009 (unaudited) |
1 | |||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
16 | ||||
Item 3. |
20 | |||||
Item 4. |
20 | |||||
PART II OTHER INFORMATION | 21 | |||||
Item 1. |
Legal Proceedings | 21 | ||||
Item 1A. |
Risk Factors | 21 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 21 | ||||
Item 3. |
Defaults Upon Senior Securities | 21 | ||||
Item 4. |
Submission of Matters to a Vote of Security Holders | 21 | ||||
Item 5. |
Other Information | 21 | ||||
Item 6. |
Exhibits | 22 | ||||
SIGNATURES | 23 | |||||
EXHIBIT LIST | 24 |
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FINANCIAL INFORMATION
Item 1. | Financial Statements |
ImmunoCellular Therapeutics, Ltd.
(A Development Stage Company)
December 31, 2008 |
March 31, 2009 |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and short-term investments |
$ | 3,085,290 | $ | 2,559,091 | ||||
Other assets |
27,642 | 64,501 | ||||||
Total current assets |
3,112,932 | 2,623,592 | ||||||
Fixed assets, net |
8,012 | 7,172 | ||||||
Other assets |
7,438 | 7,687 | ||||||
Total assets |
$ | 3,128,382 | $ | 2,638,451 | ||||
Liability and Shareholders Equity (Deficit) |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 132,949 | $ | 103,301 | ||||
Accrued liabilities |
55,097 | 117,032 | ||||||
Total current liabilities |
188,046 | 220,333 | ||||||
Commitments and contingencies |
| | ||||||
Shareholders equity (deficit): |
||||||||
Common stock, $0.0001 par value; 74,000,000 shares authorized; 12,682,493 shares and 12,682,493 shares issued and outstanding as of December 31, 2008 and March 31, 2009, respectively. |
12,682 | 12,682 | ||||||
Preferred stock $0.0001 par value, 1,000,000 shares authorized; 0 shares outstanding as of December 31, 2008 and March 31, 2009. |
| | ||||||
Additional paid in capital |
15,012,595 | 15,089,960 | ||||||
Deficit accumulated during the development stage |
(12,084,941 | ) | (12,684,524 | ) | ||||
Total shareholders equity |
2,940,336 | 2,418,118 | ||||||
Total liabilities and shareholders equity |
$ | 3,128,382 | $ | 2,638,451 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
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ImmunoCellular Therapeutics, Ltd.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
For the Three Months Ended March 31, 2008 |
For the Three Months Ended March 31, 2009 |
February 25, 2004 (Inception) to March 31, 2009 |
||||||||||
Revenues |
$ | | $ | | $ | | ||||||
Expenses: |
||||||||||||
Research and development |
754,393 | 157,844 | 2,462,955 | |||||||||
Merger costs |
| | 73,977 | |||||||||
Stock based compensation |
194,166 | 77,365 | 5,991,081 | |||||||||
General and administrative |
250,880 | 379,748 | 3,211,524 | |||||||||
Total expenses |
1,199,439 | 614,957 | 11,739,537 | |||||||||
Loss before other income and income taxes |
(1,199,439 | ) | (614,957 | ) | (11,739,537 | ) | ||||||
Interest income |
49,701 | 15,374 | 324,013 | |||||||||
Change in fair value of warrant liability |
| | (1,269,000 | ) | ||||||||
Loss before income taxes |
(1,149,738 | ) | (599,583 | ) | (12,684,524 | ) | ||||||
Income taxes |
| | | |||||||||
Net loss |
$ | (1,149,738 | ) | $ | (599,583 | ) | $ | (12,684,524 | ) | |||
Weighted average number of shares: |
||||||||||||
Basic and diluted |
12,191,382 | 12,682,493 | 9,341,158 | |||||||||
Loss per share: |
||||||||||||
Basic and diluted |
$ | (0.09 | ) | $ | (0.05 | ) | $ | (1.36 | ) | |||
The accompanying notes are an integral part of these unaudited condensed financial statements.
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ImmunoCellular Therapeutics, Ltd.
(A Development Stage Company)
Condensed Statements of Shareholders Equity (Deficit)
Common Stock | Additional Paid In Capital |
Deficit Accumulated During the Development Stage |
Total | ||||||||||||||||
Shares | Amount | ||||||||||||||||||
Initial capitalization at $0.00002 per share |
6,256,500 | $ | 97 | $ | | $ | | $ | 97 | ||||||||||
Common stock issued for cash during 2004 at $0.00078 per share |
193,500 | 150 | | | 150 | ||||||||||||||
Net loss |
| | | (11,741 | ) | (11,741 | ) | ||||||||||||
Balance at December 31, 2004 |
6,450,000 | 247 | | (11,741 | ) | (11,494 | ) | ||||||||||||
Common stock issued for cash during 2005 at $0.19 per share |
387,000 | 6,590 | 68,410 | | 75,000 | ||||||||||||||
Common stock issued for cash during 2005 at $0.32 per share |
154,800 | 155 | 49,845 | | 50,000 | ||||||||||||||
Common stock issued for research and development during 2005 at $0.99 per share |
154,800 | 155 | 152,605 | | 152,760 | ||||||||||||||
Net loss |
| | | (246,004 | ) | (246,004 | ) | ||||||||||||
Balance at December 31, 2005 |
7,146,600 | 7,147 | 270,860 | (257,745 | ) | 20,262 | |||||||||||||
Common stock issued for services during 2006 at $0.50 per share |
73,093 | 73 | 36,473 | | 36,546 | ||||||||||||||
Common stock issued for cash during 2006 in private placements at $1.00 per share, net of redemptions |
1,510,000 | 1,510 | 547,890 | | 549,400 | ||||||||||||||
Common stock issued for research and development during 2006 at $1.00 per share |
694,000 | 694 | 693,306 | | 694,000 | ||||||||||||||
Shares issued in connection with reverse merger |
825,124 | 825 | (825 | ) | | | |||||||||||||
Shares cancelled in connection with the sale of OMI |
(2,059,100 | ) | (2,059 | ) | (62,941 | ) | | (65,000 | ) | ||||||||||
Exercise of stock options |
10,062 | 10 | 3,512 | | 3,522 | ||||||||||||||
Stock based compensation (options) |
| | 4,103,645 | | 4,103,645 | ||||||||||||||
Net loss |
| | | (5,152,713 | ) | (5,152,713 | ) | ||||||||||||
Balance at December 31, 2006 |
8,199,779 | 8,200 | 5,591,920 | (5,410,458 | ) | 189,662 | |||||||||||||
Common stock issued for cash during 2007 in private placements at $1.50 per share |
3,531,603 | 3,531 | 4,888,955 | | 4,892,486 | ||||||||||||||
Exercise of stock options |
51,111 | 51 | (51 | ) | | | |||||||||||||
Reclassification of warrant derivative liability |
| | 2,233,600 | | 2,233,600 | ||||||||||||||
Stock based compensation (options) |
| | 1,296,714 | | 1,296,714 | ||||||||||||||
Net loss |
| | | (3,614,753 | ) | (3,614,753 | ) | ||||||||||||
Balance at December 31, 2007 |
11,782,493 | 11,782 | 14,011,138 | (9,025,211 | ) | 4,997,709 | |||||||||||||
Common stock issued for research and development during 2008 at $0.53 per share |
800,000 | 800 | 423,200 | | 424,000 | ||||||||||||||
Common stock issued for research and development during 2008 at $0.65 per share |
100,000 | 100 | 64,900 | | 65,000 | ||||||||||||||
Stock based compensation (options) |
| | 513,357 | | 513,357 | ||||||||||||||
Net loss |
| | | (3,059,730 | ) | (3,059,730 | ) | ||||||||||||
Balance at December 31, 2008 |
12,682,493 | 12,682 | 15,012,595 | (12,084,941 | ) | 2,940,336 | |||||||||||||
Stock based compensation (options) (unaudited) |
| | 77,365 | | 77,365 | ||||||||||||||
Net loss (unaudited) |
| | | (599,583 | ) | (599,583 | ) | ||||||||||||
Balance at March 31, 2009 (unaudited) |
12,682,493 | $ | 12,682 | $ | 15,089,960 | $ | (12,684,524 | ) | $ | 2,418,118 | |||||||||
The accompanying notes are an integral part of these condensed financial statements.
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ImmunoCellular Therapeutics, Ltd.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
For the Three Months Ended March 31, 2008 |
For the Three Months Ended March 31, 2009 |
February 25, 2004 (Inception) to March 31, 2009 |
||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (1,149,738 | ) | $ | (599,583 | ) | $ | (12,684,524 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||||||
Depreciation and amortization |
| 840 | 2,915 | |||||||||
Change in fair value of warrant liability |
| | 1,269,000 | |||||||||
Stock-based compensation |
194,166 | 77,365 | 5,991,081 | |||||||||
Common stock issued for services |
| | 36,546 | |||||||||
Common stock issued for research and development |
424,000 | | 1,335,760 | |||||||||
Changes in assets and liabilities: |
||||||||||||
Other assets |
(79,625 | ) | (37,108 | ) | (72,188 | ) | ||||||
Accounts payable |
18,780 | (29,648 | ) | 103,301 | ||||||||
Accrued liabilities |
1,364 | 61,935 | 117,032 | |||||||||
Net cash used in operating activities |
(591,053 | ) | (526,199 | ) | (3,901,077 | ) | ||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property and equipment |
(2,265 | ) | | (50,087 | ) | |||||||
Cash paid for sale of OMI |
| | (25,000 | ) | ||||||||
Net cash used in investing activities |
(2,265 | ) | | (75,087 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Exercise of stock options |
| | 3,522 | |||||||||
Proceeds from issuance of common stock under private placements |
| | 6,406,486 | |||||||||
Proceeds from issuance of common stock |
| | 125,247 | |||||||||
Net cash provided by financing activities |
| | 6,535,255 | |||||||||
Increase (decrease) in cash and short-term investments |
(593,318 | ) | (526,199 | ) | 2,559,091 | |||||||
Cash and short-term investments at beginning of period |
5,040,824 | 3,085,290 | | |||||||||
Cash and short-term investments at end of period |
$ | 4,447,506 | $ | 2,559,091 | $ | 2,559,091 | ||||||
Supplemental cash flows disclosures: |
||||||||||||
Interest expense paid |
$ | | $ | | $ | | ||||||
Income taxes paid |
$ | | $ | | $ | | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
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ImmunoCellular Therapeutics, Ltd.
(A Development Stage Company)
Notes to Unaudited Condensed Financial Statements
1. Nature of Organization and Development Stage Operations
In January 2006, Spectral Molecular Imaging, Inc., a Nevada corporation (SMI) that was incorporated and commenced operations on February 25, 2004, merged with Patco Industries, Ltd., which had no operations, assets or liabilities at the time of the merger. For accounting purposes, the financial statements of Patco Industries, Ltd. (now known as ImmunoCellular Therapeutics, Ltd.) reflect the operations of SMI (the Company).
On January 31, 2006, the Company completed a merger under an Agreement and Plan of Reorganization (the Agreement) dated as of May 5, 2005 with Patco Industries, Ltd., a Delaware corporation (Patco), pursuant to which Patco agreed to acquire the Company as a wholly-owned subsidiary. The acquisition was accomplished through the merger (the Merger) of a newly formed subsidiary of Patco with and into the Company, with the Company as the surviving corporation and with Patco issuing shares of Patco common stock to the stockholders of the Company. Pursuant to the Agreement, Patco effected a reverse stock split of approximately .00434 for one of the outstanding shares of Patco common stock so that Patco had approximately 825,000 shares of Patco common stock issued and outstanding immediately prior to the Merger.
Each share of the Companys common stock issued and outstanding immediately prior to the Merger was converted into one share of Patco common stock and each outstanding option or warrant to purchase the Companys common stock, whether or not then exercisable, was converted into an option or warrant to purchase one share of Patco common stock at a price equal to the exercise price in effect immediately prior to the Merger.
In May 2006, the Company decided to suspend its research and development activities on its spectral imaging technology, and on September 11, 2006, the Company sold all of the outstanding capital stock of SMI to Dr. Daniel Farkas, a co-founder of SMI and inventor of this technology. In November 2006, the Company acquired from Cedars-Sinai Medical Center (Cedars-Sinai) an exclusive, worldwide license for a cancer vaccine therapy technology that the Company is now developing.
In February 2008, the Company entered into an Agreement with Molecular Discoveries LLC (Molecular Discoveries), covering the Companys acquisition of certain monoclonal antibody related technology owned by Molecular Discoveries and completed the acquisition of the technology on that date. The Molecular Discoveries agreement also was acknowledged and agreed to by Dr. Cohava Gelber, an inventor of the technology acquired by the Company under this agreement and an equity owner of Molecular Discoveries.
The technology acquired under the Molecular Discoveries agreement and now owned by the Company consists of (i) a platform technology referred to by Molecular Discoveries as DIAAD for the potentially rapid discovery of monoclonal antibodies to detect and treat cancer and other chronic diseases and (ii) certain monoclonal antibody candidates for the potential detection and treatment of multiple myeloma, small cell lung, pancreatic and ovarian cancers. The monoclonal antibodies are covered by issued patents and pending patent applications in the fields of multiple myeloma, small cell lung and ovarian cancers.
As provided in the Molecular Discoveries agreement, the consideration for the intellectual property and related assets comprising the technology acquired by the Company consisted of (i) the issuance of 800,000 shares of the Companys common stock to Molecular Discoveries and (ii) the reimbursement by the Company to Molecular Discoveries or its managing member of $250,000 of previously incurred patent expenses. Molecular Discoveries has agreed that it will not publicly resell more than 100,000 shares in any 90-day period. To secure Molecular Discoveries potential obligations to the Company under the Molecular Discoveries agreement, all of the shares were placed in escrow, with 400,000 shares subject to release after one year and the balance after two years from the closing of the transaction.
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Interim Results
The accompanying condensed financial statements at March 31, 2009 and for the three month periods ended March 31, 2008 and 2009 are unaudited, but include all adjustments, consisting of normal recurring entries, which the Companys management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2008 have been derived from our audited financial statements as of that date.
The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to such rules and regulations. Certain prior year amounts have been reclassified to conform to the 2009 financial statement presentation. The financial statements should be read in conjunction with the Companys audited financial statements in its Form 10-K for the year ended December 31, 2008. The Companys operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.
2. Summary of Significant Accounting Policies
Cash and Short-Term Investments The Company considers all highly liquid debt instruments with an original maturity of 90 days or less to be cash equivalents. As of December 31, 2008 and March 31, 2009, the Company has $3,000,000 and $2,519,231, respectively, of Certificates of Deposit. These securities are fully covered by FDIC insurance and mature within the next six months. They are classified as held-to-maturity and under Statement of Financial Accounting Standards No. 115, Investments in Debt Securities, are measure at cost since the Company has the intent and ability to hold these securities to maturity.
Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line methods based on the estimated useful lives (generally three to five years) of the related assets. Management continuously monitors and evaluates the realizability of recorded long-lived assets to determine whether their carrying values have been impaired. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the nondiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. Any impairment loss is measured by comparing the fair value of the asset to its carrying amount.
Research and Development Costs Research and development expenses consist of costs incurred for direct research and are expensed as incurred.
Stock Based Compensation In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123R, Share Based Payment: An Amendment of FASB Statements No. 123 and 95 (SFAS 123R). This statement requires that the cost resulting for all share-based payment transactions be recognized in the Companys consolidated financial statements. In addition, in March 2005 the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107 provides the SECs staffs position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the staffs views regarding the valuation of share-based payment arrangements for public companies. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition, as prescribed under SFAS 123, is no longer an alternative.
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In the first quarter of 2006, the Company adopted the fair value recognition provisions of SFAS 123R utilizing the modified-prospective-transition method, as prescribed by SFAS 123R. Under this transition method, compensation cost recognized during the year ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123, and (b) compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated.
The following table illustrates the pro forma effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation:
Year Ended December 31, 2005 |
February 25, 2004 (Inception) to December 31, 2005 |
|||||||
Net loss as reported |
$ | (246,004 | ) | $ | (257,745 | ) | ||
Deduct: Total employee stock-based compensation expense determined under the fair value method |
(23,405 | ) | (23,405 | ) | ||||
Pro forma net loss |
$ | (269,409 | ) | $ | (281,150 | ) | ||
Fair value was estimated at the date of grant using the Black-Scholes pricing model, with the following weighted average assumptions:
Three Months Ended March 31, 2008 |
Three Months Ended March 31, 2009 |
|||||
Risk-free interest rate |
2.76 | % | 1.38 | % | ||
Expected dividend yield |
None | None | ||||
Expected life |
3.8 years | 3.78 years | ||||
Expected volatility |
92.0 | % | 118.0 | % |
The weighted-average grant-date fair value of options granted during the three months ended March 31, 2008 and 2009 was $0.38 and $0.13, respectively.
The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not declared or paid any dividends and does not currently expect to do so in the future. The expected term of options represents the period that our stock-based awards are expected to be outstanding and was determined based on projected holding periods for the remaining unexercised shares. Consideration was given to the contractual terms of our stock-based awards, vesting schedules and expectations of future employee behavior. Expected volatility is based on market prices of traded options for comparable entities within our industry.
The Companys stock price volatility and option lives involve managements best estimates, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option.
When options are exercised, our policy is to issue previously unissued shares of common stock to satisfy share option exercises. As of March 31, 2009, the Company had 61.3 million shares of authorized but unissued common stock.
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No tax benefits were attributed to the stock-based compensation expense because a valuation allowance was maintained for substantially all net deferred tax assets.
Income Taxes The Company accounts for federal and state income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, a deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities, as measured by the enacted tax rates. The Companys provision for income taxes represents the amount of taxes currently payable, if any, plus the change in the amount of net deferred tax assets or liabilities. A valuation allowance is provided against net deferred tax assets if recoverability is uncertain on a more likely than not basis. In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material impact on the Companys financial position or results of operations. Upon adoption of FIN 48 and as of December 31, 2007, the Company had no unrecognized tax benefits recorded.
The Company recognizes interest and penalties for uncertain tax positions in income tax expense. Upon adoption and as of March 31, 2009, the Company had no interest and penalty accrual or expense.
Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash and accounts payable approximate their fair values.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions about the future outcome of current transactions which may affect the reporting and disclosure of these transactions. Accordingly, actual results could differ from those estimates used in the preparation of these financial statements.
Basic and Diluted Loss per Common Share Basic and diluted loss per common share are computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of options and warrants) are excluded from the computation of diluted loss per share since the effect would be antidilutive. Common share equivalents which could potentially dilute basic earnings per share in the future, and which were excluded from the computation of diluted loss per share, totaled 14,934,919 shares and 18,113,917 shares as of March 31, 2008 and March 31, 2009, respectively.
Recently Issued Accounting Standards In January 2009, the FASB issued FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP EITF 99-20-1). FSP EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, to achieve more consistent determinations of whether an other-than-temporary impairment has occurred. FSP EITF 99-20-1 also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and other related guidance. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The implementation of this standard did not have a material impact on our consolidated financial statements.
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In April 2009 the FASB issued FSP No. 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141R-1. FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We expect FSP 141R-1 will not have an impact on our consolidated financial statements.
In April 2009 the FASB issued three related Staff Positions: (i) FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4, (ii) SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP 115-2 and FSP 124-2, and (iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP 107 and APB 28-1, which will be effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual periods. We are currently evaluating these Staff Positions and do not expect their adoption to have a material impact on our consolidated financial position, results of operations or cash flows.
Reclassifications Certain prior year items have been reclassified to conform to current year presentation.
3. Property and Equipment
As of December 31, 2008 and March 31, 2009, $10,087 of equipment had been placed into service. Depreciation expense was zero and $840 for the three months ended March 31, 2008 and March 31, 2009, respectively. Depreciation expense was $2,915 for the period from February 25, 2004 (date of inception) to March 31, 2009. On September 11, 2006, the Company sold all of the outstanding capital stock of SMI, which owned all of the research equipment that had been previously acquired by SMI for $40,000 from a third party.
4. Related-Party Transactions
Cedars-Sinai Medical Center License Agreement
In November 2006, the Company entered into a license agreement with Cedars-Sinai Medical Center (Cedars-Sinai) under which the Company acquired an exclusive, worldwide license to its technology for use as cellular therapies, including cancer stem cell and dendritic cell-based vaccines for neurological disorders that include brain tumors and neurodegenerative disorders and other cancers. This technology is covered by a number of pending U.S. and foreign patent applications, and the term of the license will be until the last to expire of any patents that are issued covering this technology.
As an upfront licensing fee, the Company issued Cedars-Sinai 694,000 shares of its common stock and paid Cedars-Sinai $62,000. Additional specified milestone payments will be required to be paid to Cedars-Sinai when the Company initiates patient enrollment in its first Phase III clinical trial and when it receives FDA marketing approval for its first product.
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The Company has agreed to pay Cedars-Sinai specified percentages of all of its sublicensing income and gross revenues from sales of products based on the licensed technology, subject to a reduction if it must make any payments to any third party whose proprietary rights would be infringed by sale of the products. To maintain its rights to the licensed technology, the Company must meet certain development and funding milestones. These milestones include, among others, commencing a Phase I clinical trial for a product candidate by March 31, 2007 and raising at least $5,000,000 in funding from equity or other sources by December 31, 2008. The Company satisfied the foregoing funding requirement in 2007 and commenced a Phase I clinical trial in May 2007, which was within the applicable cure period for the milestone requirement. Through March 31, 2009, the Company has paid Cedars-Sinai a total of $166,660 in connection with the Phase I clinical trial. The Company also was required to commence a Phase II clinical trial for a product candidate by December 31, 2008 and will be seeking a waiver or modification of this requirement from Cedars-Sinai.
On June 16, 2008, the Company entered into a First Amendment to Exclusive License Agreement (the Amendment) with Cedars-Sinai. The Amendment amended the License Agreement to include in the Companys exclusive license from Cedars-Sinai under that agreement an epitope to CD133 and certain related intellectual property. This technology will be covered by a U.S. patent application that will be filed by the parties. Pursuant to the Amendment, the Company issued Cedars-Sinai 100,000 shares of the Companys common stock as an additional license fee for the licensed CD133 epitope technology, which will be subject to the royalty and other terms of the License Agreement.
Technomedics Management & Systems Agreement
In July 2006, the Company retained Technomedics Management & Systems, Inc. (Technomedics) to assist it in identifying and acquiring new technologies and agreed to pay Technomedics a total of $80,000 in four equal monthly installments commencing upon the closing of the Cedars-Sinai licensing transaction. Dr. Manfred Mosk, the controlling shareholder of Technomedics, was not an officer or director of the Company at the time it retained Technomedics and the services were performed. He voluntarily resigned as interim part-time president in April 2005 and as a director in November 2005 of the predecessor company, and rejoined the Board of the Company in November 2006. He was a greater than 5% shareholder of the Company at the time it retained Technomedics.
The Company and Technomedics entered into an Agreement, dated as of November 17, 2006, pursuant to which Dr. Mosk agreed to serve as the Companys Non-Executive Chairman of the Board on a part-time basis for a one-year term. Dr. Mosk was permitted to step down upon 30 days written notice to the Company. Pursuant to the terms of this Agreement, Technomedics was granted options with a seven-year term to purchase a total of 300,000 shares of common stock at an exercise price of $1.00 per share, with the option fully vested upon grant as to 150,000 shares and the option for the balance of the shares to vest in four equal quarterly installments following the date of grant. His fully vested options will be exercisable during their term for up to two years following his ceasing to serve as a director. Dr. Mosk voluntarily resigned as Non Executive Chairman of the Board in January 2007 but remained a director until March 2008. The balance of Technomedics 150,000 unvested shares from the November 2006 option grant were cancelled as a result of Dr. Mosks voluntary resignation. Dr. Mosk did not receive a further grant of options covering 50,000 shares of common stock that were granted to certain other directors during the fourth quarter of 2006 for their future service as directors. On November 5, 2007, the Company granted a seven year non-qualified option to Technomedics to purchase 75,000 shares of common stock at an exercise price of $1.30 per share, which vested upon the signing of the Molecular Discoveries Agreement.
CDI Agreement
In November 2004, the Company entered into an assignment and license agreement (the CDI Agreement) with ChromoDynamics, Inc. (CDI), Dr. Daniel Farkas, who was at that time the Chairman, Chief Scientist, and a principal shareholder of SMI, and certain other individuals. Under this agreement
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Dr. Farkas and the other individuals assigned an invention in the spectral imaging field to the Company and CDI granted an exclusive worldwide sublicense to SMI of rights under United States Patents Nos. 5,796,512 issued in 1998 to Carnegie Mellon University to use the optical imaging technology covered by such patents for medical imaging clinical applications. In September 2005, the Company reached an agreement with Carnegie Mellon University to receive a direct license of the technology from that institution in lieu of the sublicense from CDI. Under the CDI Agreement, the Company was obligated to pay Dr. Farkas and the other individuals a royalty based on the Companys sales of products incorporating their technology.
In April 2005, the Company purchased from CDI $40,000 of research equipment. In September 2006 in connection with the sale of OMI, the Company sold the research equipment purchased from CDI.
Legal Costs
As of December 31, 2008 and March 31, 2009, the Company was indebted to TroyGould PC, a shareholder, for legal services of $36,987 and $31,924, respectively, which are included in accrued expenses and accounts payable on the accompanying balance sheets. Legal services provided by the shareholder for the period from February 25, 2004 (date of inception) to March 31, 2009 was approximately $861,000.
Rent
From February 25, 2004 (date of inception) to December 31, 2007, the Company used on a rent-free basis office space of a shareholder. Such costs are immaterial to the financial statements and, accordingly, have not been reflected therein.
5. Commitments and Contingencies:
Operating Lease
In January 2009, the Company renewed its one-year lease through February 28, 2010 at a monthly rental rate of $2,894. Prior to 2008, the Company utilized a portion of the office space of a related party at no cost and without a lease agreement so that either party could terminate this arrangement at any time. Total rent expense was zero for the periods from February 25, 2004 (date of inception) to December 31, 2007.
Employment Agreements
Effective as of February 18, 2009, the Company entered into an employment agreement with Dr. Manish Singh pursuant to which Dr. Singh will continue to serve on a full-time basis as the Companys President and Chief Executive Officer for a one-year term commencing February 18, 2009. The Company is required under the Employment Agreement to use its commercially reasonable efforts to have Dr. Singh continue to serve as a member of the Companys Board of Directors during the term of the Employment Agreement.
The Employment Agreement provides for an annual base salary of $250,000, payable bi-weekly, and cash bonuses of (1) $50,000 if the Company completes a financing, a strategic alliance or a merger or acquisition that generates at least $2,500,000 of net proceeds (after commissions) during the term of the agreement; (2) $100,000 if the Company completes a financing, a strategic alliance or a merger or acquisition that generates at least $5,000,000 of net proceeds (after commissions) during the term of the agreement; or (3) $200,000 if the Company completes a financing, a strategic alliance or a merger or acquisition that generates at least $10,000,000 of net proceeds (after commissions) during the term of the agreement. The total cash bonus payable shall not exceed $200,000. Pursuant to the Employment Agreement, the Company granted Dr. Singh a seven-year nonqualified stock option on February 18, 2009 under the Companys Equity Plan (the Plan) to purchase 700,000 shares of the Companys common stock at an exercise price of $0.15 per share. The option shall vest (i) as to 300,000 shares in twelve equal monthly installments of 25,000 shares each over the
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twelve-month period from and immediately following the grant date, (ii) as to 200,000 shares if the Company achieves during term of the agreement either (a) a volume weighted average trading price for its common stock of greater than $1.00 for any 30-day period during the term of the agreement on average daily trading volume of at least 10,000 shares, or (b) working capital at the end of the term of the agreement of at least $5,000,000; and (iii) as to 200,000 shares if the Company achieves during term of the agreement either (a) a volume weighted average trading price for its common stock of greater than $1.50 for any 30-day period during the term of the agreement on average daily trading volume of at least 10,000 shares or (b) working capital at the end of the term of the agreement of at least $8,000,000. The option may be exercised during the period that Dr. Singh provides services to the Company and for 24 months after termination for any reason except termination for cause by the Company, provided that such exercise is within the seven-year term of the option.
In the event that the Company terminates the Employment Agreement without cause or does not extend the Employment Agreement upon its expiration for an additional one-year term or Dr. Singh terminates the Employment Agreement due to (1) his principal place of work for the Company being relocated by more than 50 miles, (2) a material change in his duties, (3) a failure by the Company to pay him any of his contractual compensation, or (4) a constructive termination of Dr. Singh or unlawful harassment or retaliation against him, then the Company upon such termination will be required to make a lump sum payment to Dr. Singh equal to six months of his base annual salary and 50% of the shares covered by his option (or 100% of all such shares if the Company is not the surviving entity in a Corporate Transaction (as defined by the Plan) that have not yet vested will immediately become vested.
In the event the Company completes a merger in which Dr. Singh is offered an executive position with the Company or surviving corporation for at least a one-year term, with an annual base salary of $250,000 and a cash bonus and option compensation package having an aggregate value of at least $75,000 (as determined in good faith by the Company or surviving corporation), Dr. Singh will not be entitled to terminate the Employment Agreement based on a change in duties and responsibilities or a location change.
Consulting Agreements
Effective as of October 30, 2008, the Company renewed, under similar terms, the consulting agreement with C. Kirk Peacock under which Mr. Peacock agreed to serve as Chief Financial Officer for a one-year term, subject to earlier termination by the Company or Mr. Peacock on 30 days notice. Mr. Peacock will provide his services to the Company on a part-time basis. Under the agreement with Mr. Peacock, Mr. Peacock will be paid $8,000 per month and was granted an option to purchase 50,000 shares of common stock, which will vest monthly over a one-year period, and exercisable within its term during the period Mr. Peacock provides services to the Company and for 24 months after the grantee ceases providing services for any reason other than termination by the Company for cause.
Effective September 1, 2008, the Company entered into a consulting agreement with James Bender, Ph.D. under which Dr. Bender agreed to serve as Vice President Clinical Development for a one-year term, subject to earlier termination by the Company or Dr. Bender on 15 days notice. Dr. Bender will provide his services to the Company on a part-time basis. For these services, the Company (i) will pay $6,000 per month, (ii) will pay Dr. Bender a success payment of $10,000 if Dr. Bender is able to have the Companys IND for a Phase I cancer stem cell vaccine trial cleared by March 31, 2009 and $20,000 if Dr. Bender is able to have the Companys Phase II clinical trial for dendritic cell-based vaccine initiated by June 30, 2009, (iii) issued Dr. Bender a five-year option under the Companys stock option plan to purchase 66,000 shares of the Companys common stock at a purchase price of $0.68 per share (the closing price of the Companys common stock on the grant date), with such option to vest at the rate of 3,000 shares each month during the term of the consulting agreement and with 10,000 shares to vest if Dr. Bender is able to have the Companys IND for a Phase I cancer stem cell vaccine trial cleared by March 31, 2009 and 20,000 shares to vest if Dr. Bender is able to have the Companys Phase II clinical trial for a dendritic cell-based vaccine initiated by June 30, 2009. Dr. Bender did not reach the milestone for vesting 10,000 shares upon the Companys IND for a Phase I cancer stem cell vaccine trial by March 31, 2009.
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As contemplated by the Molecular Discoveries agreement, the Company entered into a consulting agreement with Dr. Gelber concurrently with the Companys acquisition of the monoclonal antibody related technology from Molecular Discoveries under which she will provide certain consulting services to the Company on a part-time basis in connection with its development of the acquired technology during the ten-month period from the closing of the acquisition. For these services, the Company (i) paid Dr. Gelber $30,000 per month for February 2008 and March 2008 and $10,000 per month for April 2008, and $10,000 per month for May 2008, June 2008 and July 2008 (a total of $100,000 unless the Company terminates the consulting agreement prior to the expiration of its ten-month term), (ii) will pay Dr. Gelber a success payment of $50,000 if Dr. Gelber is able during the term of the consulting agreement to generate an interim analysis of pre-clinical data satisfactory to the Company that demonstrates the feasibility of a small cell lung cancer product candidate as a medical diagnostic and predictor of responders for this indication and (iii) issued Dr. Gelber a five-year option under the Companys stock option plan to purchase 75,000 shares of the Companys common stock at a purchase price of $0.53 per share (the closing price of the Companys common stock on the date of the closing of the acquisition), with such option to vest at the rate of 5,000 shares each month during the term of the consulting agreement and with 25,000 shares to vest upon generation of the interim analysis of pre-clinical data described above. Effective August 1, 2008, the Company entered into a new consulting agreement with Dr. Gelber terminating and replacing the existing agreement. Under the new consulting agreement, Dr. Gelber will continue to provide her services to the Company on a part-time basis for one-year. For these services, the Company (i) will pay Dr. Gelber $4,166 per month, (ii) will pay Dr. Gelber a success payment of $28,000 if Dr. Gelber is able during the term of the consulting agreement to meet certain milestones and (iii) issued Dr. Gelber a five-year option under the Companys stock option plan to purchase 84,000 shares of the Companys common stock at a purchase price of $0.68 per share (the closing price of the Companys common stock on the grant date), with such option to vest at the rate of 3,000 shares each month during the term of the consulting agreement and with 48,000 shares to vest upon meeting certain milestones described above.
Research and Development
In connection with the Cedars-Sinai Medical Center License Agreement, the Company has certain commitments as described in Note 4.
6. Shareholders Equity (Deficit)
Equity Investments
In April 2005, three individuals purchased a total of 541,800 shares of the Companys common stock for an aggregate purchase price of $125,000.
In September 2005, the Company issued 154,800 shares of the Companys common stock in connection with a licensing agreement valued at $152,760. These shares were cancelled in November 2006 in connection with the Companys sale to Dr. Daniel Farkas of all of the outstanding stock of its SMI subsidiary.
Private Placements
In May 2007, the Company raised $2,262,252 (before offering expenses) from the sale of 1,508,168 shares of common stock and warrants to purchase 1,508,168 shares of common stock at $2.50 per share, to various investors in a private placement. The warrants have a term of two years from the date of issuance.
In April 2007, the Company raised $1,535,153 (before offering expenses) from the sale of 1,023,435 shares of common stock and warrants to purchase 1,023,435 shares of common stock at $2.50 per share, to various investors in a private placement. The warrants have a term of two years from the date of issuance.
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In April 2007, the Company raised $300,000 (before offering expenses) from the sale of 200,000 shares of common stock and warrants to purchase 333,334 shares of common stock at $2.50 per share, to an institutional investor in a private placement. The warrants have a term of two years from the date of issuance.
In February 2007, the Company raised $1,200,000 (before offering expenses) from the sale of 800,000 shares of common stock and warrants to purchase 1,333,334 shares of common stock at $2.50 per share, to an institutional investor in a private placement. The warrants have a term of two years from the date of issuance.
In accordance with FAS 133 Accounting for Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock and EITF 05-04 The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, the Company did not allocate amounts to the warrants issued in connection with the 2007 private placements that represent a derivative liability as no monetary damages will result as long as the Company uses its best efforts to register the shares underlying the warrants.
On January 30, 2006, the Company raised $1,400,000 (before offering expenses) from the sale of 1,400,000 of its units, each unit after the Companys stock split consisting of one share of common stock and one warrant, to accredited investors in a private placement. The Company granted warrants to purchase 300,000 shares of its common stock for services rendered by two individuals who located investors to make investments in the private placement. During 2006, two investors elected to have their units repurchased by the Company, and the Company acquired the 40,000 shares of common stock and warrants to purchase an additional 40,000 shares of common stock included in their units for $36,000. In October and November 2006, the Company raised an additional $150,000 (before offering expenses) from the sale of 150,000 additional units having the same terms as the units sold in January 2006.
Sale of SMI
On September 11, 2006, the Company sold all of the outstanding capital stock of its SMI subsidiary to Dr. Daniel Farkas, a co-founder of SMI, in exchange for $25,000 in cash and research equipment with a net book value of $40,000 and return of 1,904,300 shares of common stock of the Company held by Dr. Daniel Farkas. No gain or loss was recognized on this transaction.
Stock Options
In February 2005, the Company adopted an Equity Incentive Plan (Plan). Pursuant to the Plan, a committee appointed by the Board of Directors may grant, at its discretion, qualified or nonqualified stock options, stock appreciation rights and may grant or sell restricted stock to key individuals, including employees, nonemployee directors, consultants and advisors. Option prices for qualified incentive stock options (which may only be granted to employees) issued under the plan may not be less than 100% of the fair market value of the common stock on the date the option is granted (unless the option is granted to a person who, at the time of grant, owns more than 10% of the total combined voting power of all classes of stock of the Company; in which case the option price may not be less than 110% of the fair market value of the common stock on the date the option is granted). Option prices for nonqualified stock options issued under the Plan are at the discretion of the committee and may be equal to, greater or less than fair market value of the common stock on the date the option is granted. The options vest over periods determined by the Board of Directors and are exercisable no later than ten years from date of grant (unless they are qualified incentive stock options granted to a person owning more than 10% of the total combined voting power of all classes of stock of the Company, in which case the options are exercisable no later than five years from date of grant.) As of March 31, 2009, the Company has reserved 3,400,000 shares of common stock for issuance under the Plan and options to purchase 3,217,910 common shares have been granted under the Plan that are currently outstanding.
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The following is a summary of stock option grants issued outside the Plan:
In January 2007, the Company granted an option to purchase 1,500,000 shares of its common stock at an exercise price of $1.10 per share to the Chairman of the Companys Scientific Advisory Board.
In November 2006, the Company granted an option to purchase 300,000 shares of its common stock at an exercise price of $1.00 per share to a Board member.
In November 2006, the Company granted an option to purchase 5,933,424 shares of its common stock at an exercise price of $1.00 per share to a Board member in connection with the Cedars-Sinai license acquisition.
The following table summarizes stock option activity for the Company during the three months ended March 31, 2009:
Options | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value | |||||||
Outstanding December 31, 2008 |
9,701,334 | $ | 0.99 | |||||||
Granted |
1,000,000 | $ | 0.18 | |||||||
Exercised |
| $ | | |||||||
Forfeited or expired |
| $ | | |||||||
Outstanding March 31, 2009 |
10,701,334 | $ | 0.91 | 7.0 | $ | 70,000 | ||||
Vested or expected to vest at March 31, 2009 |
9,505,798 | $ | 1.00 | 7.1 | $ | 2,500 | ||||
As of March 31, 2009, the total unrecognized compensation cost related to unvested stock options amounted to $153,600, which will be amortized over the weighted-average remaining requisite service period of less than one year. During 2005 the Company recorded no stock based compensation under APB 25. For the three months ended March 31, 2008 and March 31, 2009 the Company recorded stock based compensation of $194,166 and $77,365, respectively.
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Warrants
In January 2009, the Company delivered notice to warrant holders in connection with the reduction from $2.50 to $0.25 per share of the exercise price of warrants to purchase a total of 6,112,583 shares of the Companys common stock and in connection with the extension of the expiration date of warrants to purchase a total of 6,412,583 shares of common stock of the Company from earlier dates in 2009 to June 30, 2009. The Company has valued the warrant modification at $611,258 using the Black-Scholes pricing model and the following assumptions: contractual term of 0.45 years, an average risk-free interest rate of 0.29% a dividend yield of 0% and volatility of 118%. In our December 31, 2008 Annual Report we disclosed in the Subsequent Events disclosure (Note 8) that we anticipated taking a non-cash charge of approximately $500,000 in the first quarter of 2009. In the first quarter 2009, the Company determined that the warrant modification would not affect operating results as it exclusively related to equity instruments.
As of March 31, 2009, the Company had a total of 6,412,583 outstanding stock purchase warrants issued to investors with a weighted-average exercise prices of $0.25 per share and a remaining weighted-average contractual life of 0.25 years.
Warrant Derivatives
In connection with the Companys January 2006 private placement, the Company issued to the investors warrants to purchase 1,400,000 shares of the Companys common stock at $2.50 per share and paid a finders fee in the form of warrants to purchase 300,000 shares of the Companys common stock at $0.15 per share. Of the total proceeds from the January 2006 private placement, net of repurchases, $964,600 was allocated to the freestanding warrants associated with the units based upon the fair value of the warrants. The assumptions used in the Black Scholes model for determining the initial fair value of the warrants were as follows: (1) dividend yield of 0%; (2) expected volatility of 100%, (3) risk-free interest rate of 4.50%, and (4) contractual life of 3 years. In accordance with FAS 133 Accounting for Derivative Instruments and Hedging Activities, EITF 00-19 Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock and EITF 05-04 The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, the amounts allocated to the warrants represented a derivative liability that was recorded in the Companys prior balance sheets. For the years ended December 31, 2006 and 2007, the Company recorded a change in fair value of warrant derivatives of $187,200 and $(1,456,200), respectively. Upon the declaration of effectiveness of the registration of the common shares underlying the warrants in June 2007, the carrying value of warrant derivatives was reclassified to additional paid in capital in the accompanying balance sheet, as the warrants no longer required derivative liability treatment under EITF Issue No. 00-19.
7. Subsequent Event
Effective May 2009, the consulting agreement dated October 30, 2008 with C. Kirk Peacock was amended to reduce the amount to be paid to $6,000 per month. No other terms of the agreement were changed.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Throughout this Quarterly Report on Form 10-Q, the terms we, us, our, and our company refer to ImmunoCellular Therapeutics, Ltd., a Delaware corporation formerly known as Optical Molecular Imaging, Inc.
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Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report contains forward-looking statements, which reflect the views of our management with respect to future events and financial performance. These forward-looking statements are subject to a number of uncertainties and other factors that could cause actual results to differ materially from such statements. Forward-looking statements are identified by words such as anticipates, believes, estimates, expects, plans, projects, targets and similar expressions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on the information available to management at this time and which speak only as of this date. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a discussion of some of the factors that may cause actual results to differ materially from those suggested by the forward-looking statements, please read carefully the information in the Risk Factors section in our Form 10-K for the year ended December 31, 2008 and the Risk Factors section set forth in Item 1A of Part II of this Report. The identification in this Quarterly Report of factors that may affect future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
Overview
On January 31, 2006, we completed a merger pursuant to which Spectral Molecular Imaging, Inc. became our wholly owned subsidiary. At the time of the merger, we had virtually no assets or liabilities, and we had not conducted any business operations for several years. In connection with the merger, we changed our name from Patco Industries, Ltd. to Optical Molecular Imaging, Inc. and replaced our officers and directors with those of Spectral Molecular Imaging. Although we acquired Spectral Molecular Imaging in the merger, for accounting purposes the merger was treated as a reverse merger since the stockholders of Spectral Molecular Imaging acquired a majority of our outstanding shares of common stock and the directors and executive officers of Spectral Molecular Imaging became our directors and executive officers. Accordingly, our financial statements contained in this Annual Report and the description of our results of operations and financial condition reflect the operations of Spectral Molecular Imaging.
In May 2006, we decided to suspend our research and development activities on Spectral Molecular Imagings spectral imaging technology, and on September 11, 2006, we sold all of the outstanding capital stock of Spectral Molecular Imaging to Dr. Daniel Farkas, a co-founder of Spectral Molecular Imaging and inventor of its technology.
In November 2006, we acquired an exclusive, worldwide license from Cedars-Sinai Medical Center for certain cellular-based therapy technology that we are developing for the potential treatment of brain tumors and other forms of cancer and neurodegenerative disorders. We recently completed a Phase I clinical trial of a vaccine product candidate for the treatment of glioblastoma multiforme based on this technology.
In February 2008, we acquired certain monoclonal antibody related technology owned by Molecular Discoveries LLC. This technology consists of (1) a platform technology referred to by Molecular Discoveries as DIAAD for the potentially rapid discovery of targets (antigens) and monoclonal antibodies for diagnosis and treatment of diverse human diseases and (2) certain monoclonal antibody candidates for the potential detection and treatment of multiple myeloma, small cell lung, pancreatic and ovarian cancers.
Plan of Operation
We are a development stage company that is seeking to develop and commercialize new therapeutics to fight cancer using the immune system.
Since our companys inception on February 25, 2004, we have been primarily engaged in the acquisition of certain intellectual property, together with the recent clinical testing activities for our lead vaccine product candidate, and have not generated any revenues. As a result, we have incurred operating losses and, as of March 31, 2009, we had an accumulated deficit of $12,684,524. We expect to incur significant research, development and administrative expenses before any of our products can be launched and revenues generated.
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Critical Accounting Policies
Managements discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are summarized in Note 2 of our audited financial statements for the period from February 25, 2004 to March 31, 2009. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Development Stage Enterprise
We are a development stage enterprise as defined by the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. We are devoting substantially all of our present efforts to research and development. All losses accumulated since inception have been considered as part of our development stage activities.
Research and Development Costs
Although we believe that our research and development activities and underlying technologies have continuing value, the amount of future benefits to be derived from them is uncertain. Research and development costs are therefore expensed as incurred rather than capitalized. During the three months ended March 31, 2008 and March 31, 2009, we recorded an expense of $754,393 and $157,844, respectively, related to research and development activities.
Stock-Based Compensation
In December 2004, the FASB issued SFAS 123R, Share Based Payment: An Amendment of FASB Statements No. 123 and 95 (SFAS 123R). This statement requires that the cost resulting from all share-based payment transactions be recognized in our consolidated financial statements. In addition, in March 2005 the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). SAB 107 provides the SEC staffs position regarding the application of SFAS 123R and certain SEC rules and regulations, and also provides the SEC staffs views regarding the valuation of share-based payment arrangements for public companies. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. Pro forma disclosure of fair value recognition, as prescribed under SFAS 123, is no longer an alternative.
In the first quarter of 2006, we adopted the fair value recognition provisions of SFAS 123R utilizing the modified-prospective-transition method, as prescribed by SFAS 123R. Under this transition method, compensation cost recognized during the twelve months ended December 31, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123, and (b) compensation expense for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated.
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Results of Operations
Revenues
We had no revenues during the period for the three months ended March 31, 2008 and 2009, respectively. We incurred a net loss of $1,149,738 and $599,583 for the three months ended March 31, 2008 and 2009, respectively. We do not expect to generate any operating revenues during 2009.
Expenses
General and administrative expenses for the three months ended March 31, 2008 and 2009 were $250,880 and $379,749 respectively. The increase in general and administrative expenses is primarily due to increased personnel and occupancy costs.
Research and development expenses for the three months ended March 31, 2008 and 2009 were $754,393 and $157,844, respectively. The decrease in research and development expenses is primarily due to $424,000 of in-process research & development costs associated with the acquired Molecular Discoveries technologies in 2008.
We had $78,206 of non-cash expense for the three months ended March 31, 2009, consisting of $77,365 of stock based compensation and $841 of depreciation expense, compared to $618,166 of non-cash expense consisting of $194,166 of stock based compensation and $424,000 paid in common stock for in-process research & development costs for the three months ended March 31, 2008.
Loss
We incurred a net loss of $1,149,738 and $599,583 for the three months ended March 31, 2008 and 2009, respectively.
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Liquidity and Capital Resources
As of March 31, 2009, we had working capital of $2,403,259, compared to working capital of $2,924,886 as of December 31, 2008.
The estimated cost of completing the development of our lead vaccine product candidate and of obtaining all required regulatory approvals to market that product candidate is substantially greater than the amount of funds we currently have available. We believe that our existing cash balances will be sufficient to fund our currently planned level of operations through at least June 2010, although there is no assurance that such proceeds will be sufficient for this purpose.
We do not have any bank credit lines. We currently plan to attempt to obtain additional financing through the sale of additional equity, although we may also in the future seek to obtain funding through strategic alliances with larger pharmaceutical or biomedical companies. We have not yet identified, and cannot be sure that we will be able to obtain any additional funding from either of these sources, or that the terms under which we may be able to obtain such funding will be beneficial to us. If we are unsuccessful or only partly successful in our efforts to secure additional financing, we may find it necessary to suspend or terminate some or all of our product development and other activities.
As of March 31, 2009, we had no long-term debt obligations, no capital lease obligations, no material purchase obligations or other similar long-term liabilities. In addition, we have no financial guarantees, debt or lease agreements or other arrangements that could trigger a requirement for an early payment or that could change the value of our assets, and we do not engage in trading activities involving non-exchange traded contracts.
Cash Flows
We used $526,199 of cash in our operations for the three months ended March 31, 2009, compared to $591,053 for the three months ended March 31, 2008, as the non-cash portion of our net loss for the 2009 period was $78,206 and the non-cash portion of our net loss for the 2008 period was $618,166. We used no cash in our investing activities for the three months ended March 31, 2009 and $2,265 for this purpose for the three months ended March 31, 2008. We received no cash from financing activities for the three months ended March 31, 2008 and March 31, 2009.
Inflation and changing prices have had no effect on our net sales and revenues or on our income from continuing operations over our two most recent fiscal years.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Applicable.
Item 4. | Controls and Procedures |
As of the end of the fiscal quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures pursuant to SEC Rule 15d-15(b) of the Exchange Act. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2009, (i) our disclosure controls and procedures were effective to ensure that information that is required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported or submitted within the time period specified in the rules and forms of the SEC and (ii) our disclosure controls and procedures were effective to provide reasonable assurance that material information required to be disclosed by us in the reports we file or submit under the Exchange Act was accumulated and communicated to our management as appropriate to allow
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timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls also is based in part upon assurance that any design will succeed in achieving its stated goals under all potential future conditions. However, controls may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
OTHER INFORMATION
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
There has been no material change in the Risk Factors set forth in the Risk Factors section of the Companys Form 10-K for the year ended December 31, 2008.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
The Company did not issue any unregistered securities during the three-month period ended March 31, 2009 that were not previously reported in a Current Report on Form 8-K, and the Company did not repurchase any securities during that period.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. | Other Information |
None.
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Item 6. | Exhibits |
Exhibit No. |
Description | |
4.1 | Form of Notice of Exercise of Warrants delivered by ImmunoCellular Therapeutics, Ltd. in January 2009 in connection with the reduction from $2.50 to $0.25 per share of the exercise price of warrants to purchase a total of 6,112,583 shares of common stock of ImmunoCellular Therapeutics, Ltd. and in connection with the extension of the expiration date of warrants to purchase a total of 6,412,583 shares of common stock of ImmunoCellular Therapeutics, Ltd. (previously filed by the Registrant on March 30, 2009 as an exhibit to its Annual Report on Form 10-K and incorporated herein by reference). | |
10.1 | Employment Agreement dated as of February 18, 2009 between Dr. Manish Singh and ImmunoCellular Therapeutics, Ltd. (previously filed by the Registrant on March 30, 2009 as an exhibit to its Annual Report on Form 10-K and incorporated herein by reference).* | |
31.1 | Certification of the Registrants Principal Executive Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Registrants Principal Financial Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Registrants Principal Executive Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Registrants Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Indicates a management contract or compensatory plan or arrangement. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 2009 | IMMUNOCELLULAR THERAPEUTICS, LTD. | |||||
By: | /s/ Manish Singh | |||||
Name: | Manish Singh, Ph.D. | |||||
Title: | President and Chief Executive Officer (Principal Executive Officer) |
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IMMUNOCELLULAR THERAPEUTICS, LTD.
FORM 10-Q FOR QUARTER ENDED MARCH 31, 2009
Exhibit No. |
Description | |
4.1 | Form of Notice of Exercise of Warrants delivered by ImmunoCellular Therapeutics, Ltd. in January 2009 in connection with the reduction from $2.50 to $0.25 per share of the exercise price of warrants to purchase a total of 6,112,583 shares of common stock of ImmunoCellular Therapeutics, Ltd. and in connection with the extension of the expiration date of warrants to purchase a total of 6,412,583 shares of common stock of ImmunoCellular Therapeutics, Ltd. (previously filed by the Registrant on March 30, 2009 as an exhibit to its Annual Report on Form 10-K and incorporated herein by reference). | |
10.1 | Employment Agreement dated as of February 18, 2009 between Dr. Manish Singh and ImmunoCellular Therapeutics, Ltd. (previously filed by the Registrant on March 30, 2009 as an exhibit to its Annual Report on Form 10-K and incorporated herein by reference).* | |
31.1 | Certification of the Registrants Principal Executive Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Registrants Principal Financial Officer under Exchange Act Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Registrants Principal Executive Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Registrants Principal Financial Officer under 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Indicates a management contract or compensatory plan or arrangement. |
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