Notes to Unaudited Condensed
Consolidated Financial Statements
Note 1. Description of Business
Immune Pharmaceuticals Inc., together with
its subsidiaries (collectively, “Immune” or the “Company”, or “us”, “we”, “our”)
is a clinical stage biopharmaceutical company specializing in the development of novel targeted therapeutic agents in the fields
of inflammation, dermatology and oncology.
Our lead product candidate is
bertilimumab, a first-in-class, human antibody that targets eotaxin-1, a key regulator of inflammation, Bertilimumab has
completed phase 2 trials in bullous pemphigoid (“BP”), our lead indication, as well as in allergic rhinitis and
allergic conjunctivitis, and is currently in a phase 2 clinical trial in ulcerative colitis (“UC”). Also, we are
developing a topical nano-encapsulated formulation of cyclosporine-A, which we refer to as “NanoCyclo,” for the
treatment of atopic dermatitis (“AD”) and psoriasis.
Our oncology portfolio includes
Ceplene, which is approved in the European Union for the maintenance of remission in patients with Acute Myeloid
Leukemia (“AML”) in combination with interleukin-2 (IL-2), and a nanotechnology combination platform, which we
refer to as “NanomAbs”, Azixa, and Crolibulin. In June 2018, we terminated the license agreement and returned all
rights relating to the bispecific antibody platform, which was included previously in our oncology portfolio.
In April 2017, we announced a corporate restructuring
with the objective of prioritizing and segregating our research and development efforts and strengthening our financial position.
Accordingly, we announced plans to separate our oncology business as a separate, stand-alone company, through a proposed spinoff
of our wholly-owned subsidiary Cytovia Inc. (“Cytovia”). The contemplated spin-off was subject to the satisfaction
of certain conditions, including separate capitalization from third-party sources to fund Cytovia’s start-up and operational
costs, expenses of the spin-off and other relevant items. In April 2018, following careful consideration and lack of sufficient
capital to support the spin-off, our board of directors determined that it was in the best interest of the Company and its shareholders
to terminate the spin-off process and pursue other strategic alternatives for Cytovia in order to monetize its assets through a
sale, disposition or similar transaction. In addition, on May 1, 2018, Dr. Daniel Teper, Chief Executive Officer of Cytovia and
member of the board of directors of both Immune and Cytovia, resigned from each of these positions, effective immediately. The
Board accepted his resignation, which was not due to any disagreement with the Company. See Risk Factors for risks and other matters
related to our oncology assets.
Our pain portfolio includes AmiKet and AmiKet
Nano, a topical analgesic cream containing amitriptyline and ketamine for the treatment of postherpetic neuralgia (“PHN”)
and diabetic peripheral neuropathy (“DPN”). We are determining the optimal path forward for this program.
As of June 30, 2018, we did not have any self-developed
or licensed products approved for sale by the United States Food and Drug Administration (“FDA”). There can be no assurance
that our research and development efforts will be successful, that any of our products will obtain necessary United States or foreign
government regulatory approval or that any approved products will be commercially viable.
On April 12, 2017, we announced a reverse stock
split of our shares of common stock at a ratio of 1-for-20. Our common stock began trading on a post-split basis beginning with
the opening of trading on April 13, 2017. Our shareholders ratified the effectiveness of the April 2017 reverse stock split at
our Annual Meeting of Stockholders, held and adjourned on February 15, 2018, and reconvened on February 23, 2018. All share and
per share amounts in this Form 10-Q have been reflected on a post-split basis.
On February 8, 2018, we announced on a Current
Report on Form 8-K that we failed to comply with certain listing requirements of Nasdaq Stockholm and, therefore, our shares of
common stock would no longer trade on Nasdaq First North Stockholm as of March 29, 2018; however, such delisting action did not
affect the Company's trading status on The Nasdaq Capital Market (“NASDAQ”) in the United States.
On June 4, 2018, we received a notice from
the Staff of the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq LLC”)
indicating that, based upon our continued non-compliance with the minimum $1.00 bid price requirement for continued listing on
NASDAQ, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Rule”) as of May 30, 2018, and notwithstanding our compliance
with the quantitative criteria necessary to obtain a second 180-day period within which to evidence compliance with the Rule, as
set forth in Nasdaq Listing Rule 5810(c)(3)(A), the Staff had determined to delist our securities from NASDAQ unless we timely
requested a hearing before the Nasdaq Hearings Panel (the “Panel”). We timely appealed the delisting notice and appeared
in front of the Panel on July 19, 2018. The Panel issued a decision on July 24, 2018 and affirmed the Staff’s decision to
delist our common stock from NASDAQ, with suspension of trading effective at the open of business on July 26, 2018. The
Panel indicated that NASDAQ will complete the delisting process by filing a Form 25 Notification of Delisting with the Securities
and Exchange Commission, after all applicable appeals periods have lapsed. In accordance with NASDAQ’s Listing Rules, we
have decided to appeal the delisting determination. Any such appeal would not stay the suspension of trading in our securities
on NASDAQ. There can be no guarantee as to the outcome of any appeal.
On July 26, 2018, our shares began trading
on the OTCQB Market ("OTCQB"), which is operated by OTC Market Groups Inc., under the symbol “IMNP”.
Note 2. Going Concern
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. Our ability to continue as a going concern despite insufficient
available cash as of the date of this filing to fund the anticipated level of operations for at least the next 12 months from the
issuance of this report is dependent on our ability to raise capital and monetize assets through the sale or licensing of drug
candidates under development or our oncology asset portfolio.
We have limited capital resources and our operations
have been funded by the proceeds of equity and debt offerings. We have devoted substantially all of our cash resources to research
and development (“R&D”) programs and have incurred significant general and administrative expenses to enable us
to finance and grow our business and operations. We have not generated any significant revenue to date and may not generate any
revenue for a number of years, if at all. If we are unable to raise additional funds in the future on acceptable terms, or at all,
we may be forced to curtail our drug development activities or cease operations.
We have generated losses from operations since
inception and we anticipate that we will continue to generate significant losses from operations for the foreseeable future. We
had negative working capital of approximately $10.9 million and an accumulated deficit of $122.6 million as of June 30, 2018. Our
net loss was $4.7 million and $4.9 million for the three months ended June 30, 2018 and 2017, respectively. Our net loss was $9.1
million and $8.7 million for the six months ended June 30, 2018 and 2017, respectively. Cash used in operations was $6.8 million
and $4.5 million for the six months ended June 30, 2018 and 2017, respectively. We had approximately $1.5 million in cash as of
June 30, 2018.
We will require additional financing over the
next twelve months to continue at our expected level of operations. We may be forced to delay, scale back, sell or out-license
or eliminate some or all of our R&D programs if we fail to obtain the needed capital on a timely basis. There is no assurance
that we will be successful in any capital-raising efforts that we may undertake to fund operations during the next twelve months.
We anticipate continuing to issue equity and/or debt securities as a source of liquidity, until we begin to generate positive cash
flow to support our operations. Any future sales of securities to finance operations will dilute existing stockholders' ownership.
We cannot guarantee when or if we will generate positive cash flow.
The forgoing factors, among others, raise substantial
doubt about our ability to continue as a going concern.
Note 3. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated
financial statements include the accounts of Immune and its subsidiaries: Immune Pharmaceuticals Ltd. (“Immune
Ltd.”), Immune Pharmaceuticals USA Corp., Maxim Pharmaceuticals, Inc., Cytovia, Inc. and Immune Oncology
Pharmaceuticals Inc. All material inter-company transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed
consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) and instructions to Form 10-Q and do not include all disclosures necessary for a
complete presentation of financial position, results of operations, and cash flows in conformity with U.S. GAAP. These
financial statements should be read in conjunction with the consolidated financial statements and related notes for the year
ended December 31, 2017 filed on April 2, 2018. The results of operations for the three and six months ended June 30,
2018 and 2017 are not necessarily indicative of the results that may be expected for the entire fiscal year or for any other
interim period. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain
all material adjustments, including normal and recurring accruals, necessary to present fairly the Company's consolidated
financial position as of June 30, 2018, the results of operations for the three and six months ended June 30, 2018 and 2017
and cash flows for the six months ended June 30, 2018 and 2017.
Use of Estimates
In preparing consolidated financial statements
in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and expenses during
the reported periods. Significant estimates include impairment of long lived assets (including intangible assets and In-Process
R&D (“IPR&D”)), amortization period of intangible assets, fair value of stock-based compensation, fair value
of warrants and derivative liabilities, and valuation of deferred tax assets and liabilities. Actual results could differ from
those estimates.
Cash and Cash Equivalents
We consider investments with original maturities
of three months or less to be cash equivalents. Restricted cash primarily represents cash not available to us for immediate and
general use. We maintain cash accounts with certain major financial institutions in the United States and Israel. Our cash on deposit
may exceed United States federally insured limits at certain times during the year.
Intangible Assets
We account for the purchases of intangible
assets in accordance with the provisions of
Accounting Standards Classification (“ASC”) 350, Intangibles.
We
recognize intangible assets based on their acquisition cost. Intangible assets determined to have indefinite lives are not amortized,
but rather tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying
amount may no longer be recoverable. If any of our intangible assets are considered to be impaired, the amount of impairment to
be recognized is the excess of the carrying amount of the assets over its fair value. Intangible assets with definitive lives are
reviewed for impairment only if indicators exist in accordance with
ASC 360, Property, Plant and Equipment
, and are amortized
or depreciated over the shorter of their estimated useful lives or the statutory or contractual term, and in the case of patents,
on a straight-line basis.
We perform an analysis annually to determine
whether an impairment of intangible assets has occurred. As of June 30, 2018, we evaluated our intangible assets for human antibodies
and anti-ferritin antibodies, because of events that occurred during the quarter, which indicate that the carrying amount may no
longer be recoverable. Based on this evaluation, these intangible assets have no value and were fully impaired. Additionally, we
evaluated the AmiKet IPR&D as of December 31, 2017 for impairment. There was no impairment as of December 31, 2017. See In-Process
Research and Development below for a further discussion regarding the valuation of the AmiKet IPR&D.
In-Process Research and Development
IPR&D represents the estimated fair value
assigned to R&D projects acquired in a purchased business combination that have not been completed at the date of acquisition
and which have no alternative future use. IPR&D assets acquired in a business combination are capitalized as indefinite-lived
intangible assets. These assets remain indefinite-lived until the completion or abandonment of the associated R&D efforts.
During the period prior to completion or abandonment, these acquired indefinite-lived assets are not amortized but are tested for
impairment annually, or more frequently, if events or changes in circumstances indicate that the asset might be impaired.
We recorded an asset, IPR&D, with an initial
book value of $27.5 million, related to the acquisition of AmiKet in August 2013 as part of the merger with Epicept. We completed
an impairment analysis of the IPR&D as of December 31, 2016 and concluded that the following factors indicate that the IPR&D
asset was impaired: a decision by management to delay indefinitely any further development of AmiKet; the failure to sell or license
AmiKet to a third party; and the significant reduction in our market capitalization. For the year ended December 31, 2016, we recorded
an impairment charge of $12.5 million in our consolidated statement of operations, which represents the excess of the IPR&D
asset’s carrying value over its estimated fair value. The estimated fair value of the IPR&D asset as of December 31,
2016 of $15 million was based upon the value ascribed to AmiKet in an arm’s length agreement, which we negotiated with an
unrelated third party.
The nano-encapsulation technology that we utilize
in our NanoCyclo product candidate is applicable to AmiKet and we are considering developing Amiket Nano as a next generation,
improved formulation of AmiKet with significant new patent protection. We are determining the optimal path forward for this program.
Research and Development
R&D expenses consist primarily of payroll
and related costs for our drug development and scientific personnel, clinical trials costs, manufacturing costs, and costs of outsourced
R&D services. R&D costs are expensed as incurred.
Translation into United States dollars
The United States dollar is our functional
currency. We conduct certain transactions in foreign currencies, particularly, the Israeli Shekel and the Euro, which are recorded
at the exchange rate as of the transaction date. All exchange gains and losses from re-measurement of monetary balance sheet items
denominated in non-dollar currencies are nominal and reflected as non-operating income or expense in the statements of operations,
as they arise.
Stock-based Compensation
We recognize compensation expense for all equity-based
payments. Stock based compensation issued to employees is accounted for under
ASC 718, Compensation - Share Compensation
(“ASC 718”). We utilize the Black-Scholes valuation method to recognize compensation expense over the vesting period.
The Black-Scholes valuation model requires the use of certain assumptions as inputs, including the expected life, volatility, risk-free
interest rate and anticipated forfeiture of the stock options. We utilize the short cut method per the provisions of ASC 718 to
calculate the expected life of the options. We base the risk-free interest rate on the rates paid on securities issued by the United
States Treasury with a term approximating the expected life of the options. We estimate expected stock price volatility for our
common stock by taking the average historical price volatility for industry peers combined with our historical data based on daily
price observations. Estimates of pre-vesting option forfeitures are based on our experience. We adjust our estimate of forfeitures
over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and
impacts the amount of compensation expense to be recognized in future periods.
We account for stock-based transactions with
non-employees based upon the fair value of the equity instruments issued, in accordance with
ASC 505-50, Equity-Based Payments
to Non-Employees
. Significant factors that affect the expense related to equity-based payments to non-employees include the
estimated fair market value of the common stock underlying the stock options and the estimated volatility of such fair market value.
The value of non-employee options is re-measured every quarter until performance is complete. Income or expense is recognized during
the vesting terms. Accounting for equity-based payments to non-employees requires fair value estimates of the equity instrument
grant, which we estimate based upon the value of our common stock at the date of grant.
Patents
We charge external patent costs, such as filing
fees and associated attorney fees and costs associated with maintaining and defending our patents subsequent to their issuance,
to expense as and when incurred.
Clinical Trial Accruals
We outsource the conduct of our pre-clinical
and clinical trials to third party contract research organizations (CROs) and clinical investigators. Our clinical supplies are
manufactured by third party contract manufacturing organizations (CMOs). Invoicing from these third parties may be monthly based
upon services performed or periodically based upon milestones achieved. We accrue these expenses based upon our assessment of the
status of each clinical trial and the work completed, and upon information obtained from the CROs and CMOs. Our estimates are dependent
upon the timeliness and accuracy of data provided by the CROs and CMOs regarding the status and cost of the studies and may not
match the actual services performed by the organizations. Discrepancies could result in adjustments to our research and development
expenses recorded in future periods. We have not had any significant adjustments to date.
Recently Issued Accounting Standards
From time to time, new accounting standards
are issued by the Financial Accounting Standards Board ("FASB") or other standard setting bodies. Unless otherwise discussed,
the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on
its consolidated financial position or results of operations upon adoption.
New accounting standards which have been
adopted
In January 2016, the FASB issued
Accounting
Standards Update No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities”
(“ASU 2016-01”). ASU 2016-01 changes accounting for equity investments,
financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. ASU
2016-01 does not apply to equity investments in consolidated subsidiaries or those accounted for under the equity method of accounting.
In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting
from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be
measured at fair value with changes in fair value recognized in net income. Companies have the option to either measure equity
investments without readily determinable fair values at fair value or at cost adjusted for changes in observable prices minus impairment.
The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement,
presentation and disclosure. ASU 2016-01 was effective for us beginning in the first quarter of 2018. Adoption of ASU 2016-01 did
not have a material effect on our consolidated financial statements as we do not hold any publicly traded equity investments.
In August 2016, the FASB issued
Accounting
Standards Update No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments"
(“ASU 2016-15”). ASU 2016-15 clarifies how companies present and classify certain cash receipts and cash payments in
the statement of cash flows where diversity in practice exists. ASU 2016-15 was effective for us in our first quarter of fiscal
2018. We did not have any changes to the presentation of our Consolidated Statement of Cash Flows upon adoption of the standard.
In October 2016, the FASB issued
Accounting
Standards Update No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory”
(“ASU 2016-16”).
ASU 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized as current
period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences of intra-entity
transfers. ASU 2016-16 was effective for us in our first quarter of fiscal 2018. Adoption of ASU 2016-16 did not have a material
effect on our consolidated financial statements as we did not have any intra-entity transfers of assets.
In November 2016, the FASB issued
Accounting
Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”
(“ASU 2016-18”).
The amendments of ASU No. 2016-18 were issued to address the diversity in classification and presentation of changes in restricted
cash and restricted cash equivalents on the statement of cash flows which is currently not addressed under Topic 230. The ASU requires
an entity to include amounts generally described as restricted cash and restricted cash equivalents with cash and cash equivalents
when reconciling the beginning of period and end of period total amounts on the statement of cash flows. ASU 2016-18 was effective
for us in our first quarter of fiscal 2018. Adoption of ASU 2016-18 resulted in reclassification of restricted cash in the consolidated
statements of cash flows for the six months ended June 30, 2017.
New accounting standards which have not yet been adopted
In February 2016, the FASB issued
Accounting
Standards Update No. 2016-02, "Leases (Topic 842)"
(“ASU 2016-02”). ASU 2016-02 provides accounting guidance
for both lessee and lessor accounting models. Among other things, lessees will recognize a right-of-use asset and a lease liability
for leases with a duration of greater than one year. For income statement purposes, ASU 2016-02 will require leases to be classified
as either an operating or finance lease. Operating leases will result in straight-line expense while finance leases will result
in a front-loaded expense pattern. The new standard will be effective for us on January 1, 2019. We expect the implementation of
this standard to have an impact on our consolidated financial statements and related disclosures as we expect to have aggregate
future minimum lease payments under future non-cancelable leased office space.
In July 2018, the FASB issued
Accounting
Standards Update 2018-11 “Leases (Topic 842) Targeted Improvements”
which provides entities with an alternative
transition method for adopting the new lease standard. Entities can elect to initially apply the new leases standard at the adoption
date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. Consequently, comparative periods
will continue to be accounted for in accordance with the current lease standard (Topic 840) and the disclosures will be in accordance
with ASC 840. We are assessing this option in conjunction with its analysis of ASU 2016-02.
In August 2017, the FASB issued
Accounting
Standards Update No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
”
(“ASU 2017-12”). ASU 2017-12 provides guidance for improving and more closely aligning a company’s financial
reporting of its hedging relationships with the objective of a company’s risk management activities. Among other provisions,
the new standard (1) eliminates the separate measurement and reporting of hedge ineffectiveness and (2) permits an entity to recognize
in earnings the initial value of an excluded component under a systematic and rational method over the life of the derivative instrument.
The new standard will be effective for us on January 1, 2019. We do not expect the adoption of ASU 2017-12 to have a material effect
on our consolidated financial statements as we do not anticipate engaging in any hedging activities.
In March 2018, the FASB Issued
Accounting
Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin
No. 118
("ASU 2018-05"). ASU 2018-05 was issued to incorporate into Topic 740 recent SEC guidance related to
the income tax accounting implications of the Tax Cut and Jobs Act (the "Tax Act"). The SEC issued Staff Accounting Bulletin
No. 118 ("SAB 118") to address concerns about reporting entities’ ability to timely comply with the accounting
requirements to recognize all of the effects of the Tax Act in the period of enactment. SAB 118 permits companies to disclose that
some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements, and if possible,
disclose a reasonable estimate of such tax effects. ASU 2018-05 is effective immediately. ASU 2018-05 permits companies to use
provisional amounts for certain income tax effects of the Tax Act during a one-year measurement period. The provisional accounting
impacts for us may change in future reporting periods until the accounting analysis is finalized, which will occur no later than
the first quarter of fiscal 2019.
In June 2018, the FASB issued
Accounting
Standards Update No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting"
(ASU 2018-07), to simplify
the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees,
with certain exceptions. This ASU is effective for public entities for fiscal years beginning after December 15, 2018, with early
adoption permitted. Prior to the adoption of ASU 2018-07, stock
-
based
compensation awarded to non
-
employees was subject to revaluation
over its vesting terms. Subsequent to the adoption of ASU 2018-07, non-employee share-based payment awards are measured on the
date of grant, similar to share-based payment awards granted to employees. We currently have not adopted this ASU as we are assessing
its effect.
Note 4. Derivative Financial Instruments
We account for derivative financial instruments
in accordance with
ASC 815-40, “Derivative and Hedging - Contracts in Entity’s Own Equity”
(“ASC
815-40”). Instruments that do not have fixed settlement provisions are deemed to be derivative instruments.
On July 17, 2017, we entered into an agreement
in principle with Carmelit 9 Nehassim Ltd (“Carmelit”) for the sale of original issue discount convertible notes (the
“Carmelit Notes”). Also, the holder is entitled to receive 75,000 shares of our common stock subject to approval by
our shareholders. We accounted for the obligation to issue Carmelit 75,000 shares as a derivative under ASC 815 because shareholder
approval is not within our control and failure to obtain the approval would trigger net-cash settlement. Therefore and because
shareholder approval has not been obtained to date, we classified the obligation as a derivative liability with an offset to debt
discount on the debt in our consolidated financial statements, recorded at fair value and subject to mark to market until the shares
are issued upon shareholder approval. We recorded the derivative liability of $207,750 at inception based on the closing price
of our shares on that date. As of June 30, 2018, the fair value of these shares was $14,250 based on the closing price of our shares
and we recorded the change in fair value of $28,500 for the six months ended June 30, 2018.
On October 27, 2017, we entered into an agreement
with a consultant providing for the issuance of 50,000 shares to the consultant as partial consideration for the performance of
investor relations services. We accounted for the obligation to issue the shares as a derivative because the issuance was subject
to Immune Board approval, which was not obtained as of December 31, 2017. We recorded a derivative liability of $40,500 at inception
based on the closing price of our shares on that date. Following receipt of board approval, in March 2018, we issued 50,000 shares
to the consultant and extinguished the derivative liability. The fair value of these shares was $19,000 based on the closing price
of our shares and we recorded the change in fair value of $9,500 for the six months ended June 30, 2018.
Note 5. Fair Value Measurements
Financial Instruments and Fair Value
We account for financial instruments in accordance
with
ASC 820, “Fair Value Measurements and Disclosures”
. ASC 820 establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1
- Unadjusted quoted prices in
active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
- Quoted prices in markets that
are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3
- Prices or valuations that
require inputs that are both significant to the fair value measurement and unobservable.
The financial instruments recorded in our consolidated
balance sheets consist primarily of cash, notes payable and accounts payable. The carrying amounts of our cash and accounts payable
approximate fair value due to their short-term nature. The fair value of our debt approximates its carrying value of approximately
$6.6 million. We had no other financial liabilities or assets that were measured at fair value as of June 30, 2018.
Note 6. Intangible Assets
Our intangible assets consist
of licenses and patents relating to our bertilimumab and oncology programs and were determined by management to have useful lives
ranging between seven and fifteen years. We amortize these intangible assets on a straight-line basis.
On June 15, 2017,
we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Meda Pharma SARL, a Mylan N.V. company
(“Meda”) to repurchase assets relating to Ceplene (histamine dihydrochloride) including the right to commercialize
Ceplene in Europe and to register and commercialize Ceplene in certain other countries, for a fixed consideration of $5.0 million
payable in installments over a three-year period
and additional contingent payments of $3.0 million which consists of $1.5
million due in year 4 upon the initial achievement of $12.0 million in revenue and $1.5 million due in year 5 upon the initial
achievement of $15.0 million in revenue. We sold certain of these Ceplene-related assets to Meda in 2012. The assets acquired
from Meda include rights to marketing authorizations, trademarks, patents, and other intellectual property related to Ceplene and
its use
.
In addition, on June 15, 2017,
substantially contemporaneous with the entry into the Asset Purchase Agreement, we entered into a Standby Financing Agreement (the
“Standby Financing Agreement”) with Daniel Kazado (the “Standby Financer”) a member of our board of directors
and a beneficial owner of our capital stock. See Note 13 for a further description of the Standby Financing Agreement. Currently,
we are contemplating the sale or other disposition of Cytovia and/or its assets, pursuant to which we intend to include the $5.0
million financial obligations contemplated by the Asset Purchase Agreement as part of such sale or other disposition on a basis
and on terms that are acceptable to our board of directors and, if attainable, without recourse to us. We intend to maintain the
regulatory status of Ceplene and our oncology assets while we pursue a strategic transaction, however, management and our board
of directors will make decisions in the best interest of its shareholders as this process progresses.
We treated the acquisition
as an asset acquisition in accordance with
ASC 805, “Business Combinations”
. We recorded the purchase price
for the underlying patents as intangible assets and recorded the present value of the future payments due under the Asset Purchase
Agreement of $4.2 million as a corresponding liability. The present value of future payments due under the Asset Purchase Agreement
was determined by using our then current borrowing rate of 15% as the relevant discount rate for present value calculations. As
of June 30, 2018, the amount due to Meda on a present value basis, classified as current and long term notes payable is $3.6 million
and $0.9 million, respectively. The estimated useful life of these intangible assets is seven years.
As of June 30, 2018, we evaluated our
intangible assets for human antibodies and anti-ferritin antibodies because of events that occurred during the quarter, which
indicate that the carrying amount may no longer be recoverable. Based on this evaluation (level 3 in the fair value hierarchy), these
intangible assets have no value and were fully impaired. As of June 30, 2018, we recorded an impairment of intangible assets
of $653,000.
The value of our amortizable
intangible assets including gross asset value and carrying value is summarized below ($ in thousands):
|
|
Bertilimumab
iCo
|
|
|
NanomAbs
Yissum
|
|
|
Human
Antibodies
Kadouche
|
|
|
Anti-ferritin
Antibody
MabLife
|
|
|
Ceplene
Acquisition
Intangibles
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
|
$
|
1,419
|
|
|
$
|
383
|
|
|
$
|
381
|
|
|
$
|
318
|
|
|
$
|
3,976
|
|
|
$
|
6,477
|
|
Amortization
|
|
|
(84
|
)
|
|
|
(24
|
)
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
|
(307
|
)
|
|
|
(461
|
)
|
Impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
(358
|
)
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
(653
|
)
|
Balance, June 30, 2018
|
|
$
|
1,335
|
|
|
$
|
359
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,669
|
|
|
$
|
5,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross asset value
|
|
$
|
2,509
|
|
|
$
|
694
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,310
|
|
|
$
|
7,513
|
|
Accumulated Amortization
|
|
|
(1,174
|
)
|
|
|
(335
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(641
|
)
|
|
|
(2,150
|
)
|
Balance, June 30, 2018
|
|
$
|
1,335
|
|
|
$
|
359
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,669
|
|
|
$
|
5,363
|
|
Amortization expense amounted to $461,000 and
$153,000 for the six months ended June 30, 2018 and 2017, respectively.
Estimated amortization expense for each of
the five succeeding years, based upon intangible assets at June 30, 2018 is as follows ($ in thousands):
Period Ending June 30,
|
|
Amount
|
|
2019
|
|
$
|
829
|
|
2020
|
|
|
829
|
|
2021
|
|
|
829
|
|
2022
|
|
|
829
|
|
2023
|
|
|
829
|
|
Thereafter
|
|
|
1,218
|
|
Total
|
|
$
|
5,363
|
|
Note 7. Accrued Expenses
Accrued expenses consist of the following ($
in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Professional fees
|
|
$
|
179
|
|
|
$
|
284
|
|
Consulting fees
|
|
|
918
|
|
|
|
832
|
|
License fees
|
|
|
240
|
|
|
|
421
|
|
Dividends
|
|
|
308
|
|
|
|
216
|
|
Salaries and employee benefits
|
|
|
63
|
|
|
|
105
|
|
Other
|
|
|
192
|
|
|
|
262
|
|
Total
|
|
$
|
1,900
|
|
|
$
|
2,120
|
|
Note 8. Notes and Loan Payable
We are party to loan agreements as follows ($ in thousands):
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Mablife Notes Payable
(1)
|
|
$
|
-
|
|
|
$
|
394
|
|
Asset Acquisition Payable, net of discount of $510
(2)
|
|
|
4,490
|
|
|
|
4,359
|
|
May 2018 Convertible Notes, net of discount of $649
(3)
|
|
|
3,244
|
|
|
|
-
|
|
Total notes and loans payable
|
|
$
|
7,734
|
|
|
$
|
4,753
|
|
|
|
|
|
|
|
|
|
|
Notes and loans payable, net of debt discount, current portion
|
|
$
|
6,864
|
|
|
$
|
3,296
|
|
Notes and loans payable, noncurrent portion
|
|
|
870
|
|
|
|
1,457
|
|
Total notes and loans payable, net of discount
|
|
$
|
7,734
|
|
|
$
|
4,753
|
|
Repayments under the Company’s
existing debt agreements consist of the following ($ in thousands):
Period Ending June 30,
|
|
Amount
|
|
2019
|
|
$
|
7,893
|
|
2020
|
|
|
1,000
|
|
Total
|
|
$
|
8,893
|
|
MabLife Notes Payable (1)
In March 2012, we acquired from MabLife SAS
(“MabLife”) through an assignment agreement, all rights, titles and interests in and to the patent rights, technology
and deliverables related to the anti-Ferritin mAb, AMB8LK, including its nucleotide and protein sequences and its ability to recognize
human acid and basic ferritins. The consideration was as follows: (i) $0.6 million payable in six annual installments (one of such
installments being an upfront payment made upon execution of the agreement), and (ii) royalties of 0.6% of net sales of any product
containing AMB8LK or the manufacture, use, sale, offering or importation of which would infringe on the patent rights with respect
to AMB8LK. In February 2014, the parties revised the payment arrangement for the purchase of the original assignment rights to
provide that the remaining payments of $0.1 million per year would be due each year in 2016 and 2017. We did not make those payments
on a timely basis.
In February 2014, we acquired from MabLife,
through an assignment agreement, all rights, titles and interests in and to the patent rights, technology and deliverables related
to the use of anti-ferritin monoclonal antibodies in the treatment of some cancers, nucleotide and protein sequences of an antibody
directed against an epitope common to human acidic and basic ferritins, monoclonal antibodies or antibody-like molecules comprising
these sequences. As full consideration for the secondary patent rights, we agreed to pay a total of $150,000 of which $15,000 and
$25,000 was paid in 2014 and 2013, respectively, and $25,000 would be paid on the second through fourth anniversary of the agreement
and an additional $35,000 on the fifth anniversary of the agreement. We did not make those payments on a timely basis.
During the first quarter of 2015, MabLife informed us that it had
filed for bankruptcy. On May 30, 2017, we received a summons from the bankruptcy court-liquidator to appear before the commercial
court of Evry, France on September 19, 2017. In December 2017, we reached an agreement with the bankruptcy court-liquidator to
settle all amounts due to Mablife for a payment of approximately $205,000. We paid the settlement amount in January 2018 and received
confirmation by the commercial court on May 28, 2018. Based on this approved settlement, we wrote off the remaining $181,000 of
debt to gain on extinguishment of debt in the three months ended June 30, 2018.
For the six months ended June 30, 2018 and
2017, interest expense was $0.
Asset Acquisition Payable (2)
In conjunction with the Asset Purchase Agreement
with Meda described in Note 6, we agreed to pay a fixed consideration of $5.0 million, payable in installments over a three-year
period as follows: (i) $1.5 million on the earlier of: (1) the successful transfer to us of all of the marketing authorizations
for the product or (2) the date which is six months after the Completion Date (as defined in the Asset Purchase Agreement); (ii)
$1.5 million on the first anniversary of the Completion Date; (iii) $1.0 million on the second anniversary of the Completion Date;
and (iv) $1.0 million on the third anniversary of the Completion Date. We recorded current and long-term debt of $3.0 million and
$1.4 million, respectively, representing the amount due to Meda calculated on a present value basis. For the six months ended June
30, 2018, interest expense was $130,000.
We are currently in default under the Asset
Purchase Agreement. If not cured, we bear significant risk to our business plan regarding Ceplene, including the loss of such rights.
Under the Asset Purchase Agreement, we were obligated to make payments to Meda of $1,500,000 (the “First Initial Consideration”)
no later than December 15, 2017 and $1,500,000 on June 15, 2018. Under that agreement, we had a 30-day grace period to make the
payment of the First Initial Consideration or agree to a payment plan with Meda. On January 31, 2018, Meda delivered to us a default
notice, demanding payment of the First Initial Consideration no later than February 15, 2018. We have yet to make any payments
to Meda. Accordingly, Meda could terminate the Asset Purchase Agreement and cause us to forfeit the European rights to Ceplene
without consideration to us and cancel our further obligations under the agreement except the First Initial Consideration would
remain due and payable. If such action were to occur, we would need to either agree to a new license with Meda or renegotiate
terms of a purchase from Meda of the European rights to Ceplene. There can be no guarantee that that we would be able to come to
terms with Meda. Loss of the European rights to Ceplene would impair our ability to execute our business plan with respect to our
oncology related assets and have a negative effect on our financial condition.
May 2018 Convertible Notes (3)
On May 14, 2018, we entered into a securities
purchase agreement (the “May 2018 Purchase Agreement”) with certain institutional investors for the sale of $2,781,000
in aggregate principal amount of original issue discount convertible notes with net proceeds of $2,007,000 (the “May 2018
Convertible Notes”) which was consummated on May 18, 2018. The May 2018 Convertible Notes included a 20% original issue discount
of $556,000, an 8% placement agent fee of $178,000 and other placement agent expenses of $40,000. In addition, the placement agent
received 474,667 warrants with an exercise price of $0.47 per share and are exercisable as of November 18, 2018. We calculated
the fair value of these warrants as $91,000 using the Black-Scholes model and recorded the fair value as debt discount with an
offset to additional paid-in capital. Original issue discount and debt issuance costs was $865,000 and is being amortized over
six months.
The May 2018 Convertible Notes are convertible at any time at a conversion price of $0.375 per share, subject
to adjustment upon an event of default or significant corporate transaction, provided that unless shareholder approval is obtained,
the maximum amount of shares of our common stock that may be issued upon conversion is 6,397,456 shares of common stock (or 19.99%
of the issued and outstanding shares of common stock on the closing date). The conversion price is not subject to adjustment for
future equity issuances at prices below the then prevailing conversion price and we are under no obligation to obtain shareholder
approval in connection with the offering.
The May 2018 Convertible Notes are due and
payable upon the earlier of (a) November 18, 2018 and (b) the closing by of one or more subsequent financings with gross proceeds
equal to at least $3,000,000 in the aggregate. The holders of the May 2018 Convertible Notes
have the option to extend the maturity date
of the notes through February 18, 2019. The May 2018 Convertible Notes represent senior indebtedness of the Company.
The May 2018 Convertible Notes are
immediately due at the Mandatory Default Amount, which is 140% of the outstanding principal amount of the note, plus all
accrued interest and unpaid interest, and all other amounts, costs, expenses and liquidated damages, due if our common
stock shall not be eligible for listing or quotation for trading on NASDAQ and shall not be eligible to resume listing or
quotation for trading thereon within five trading days. Additionally, interest on the May 2018 Convertible Notes would accrue
daily at an interest rate of 1.5% per month on the then outstanding principal amount. Also, the holder may to elect to
convert all or any portion of the remaining principal amount into shares of common stock at a price per share equal to the
lowest daily VWAP for the 15 days prior to conversion but in no event, at a conversion price below par value.
On June 4, 2018, we received a notice
from the Staff of Nasdaq LLC indicating that, based upon our continued non-compliance with the minimum $1.00 bid price
requirement for continued listing on NASDAQ, as set forth in the Rule as of May 30, 2018, the Staff had determined to delist
our securities from NASDAQ unless we timely requested a hearing before the Panel. We timely appealed the delisting notice and
appeared in front of the Panel on July 19, 2018. The Panel issued a decision on July 24, 2018 and affirmed the Staff’s
decision to delist our common stock from NASDAQ, with suspension of trading effective at the open of business on July 26,
2018. The suspension of trading on NASDAQ triggered a default on the May 2018 Convertible Notes. Accordingly, as of June 30,
2018, we recorded the Mandatory Default Amount of $1.1 million as liquidated damages, which represents an additional 40% of
principal but did not record an embedded derivative related to the lowest VWAP for the 15 days prior to conversion as this
amount was immaterial to the consolidated financial statements.
Upon the issuance of the May 2018 Convertible
Notes on May 18, 2018, the conversion price for the Series E Convertible Preferred Stock and the exercise price of warrants issued
with the Series E Convertible Preferred Stock (“Series E Warrants”) were adjusted to $0.30. On July 26, 2018, upon
the suspension of trading on NASDAQ, the conversion price for the Series E Convertible Preferred Stock and the exercise price of
warrants issued with the Series E Convertible Preferred Stock were adjusted to $0.20. Based on the above down round triggers, we
recorded a deemed dividend of $5,599,000, based on the change in fair value, in our consolidated statement of operations for the
three and six months ended June 30, 2018, of which $5,175,000 was related to the Series E Convertible Preferred Stock and $424,000
was related to the Series E Warrants.
For the three and six months ended June
30, 2018, interest expense was $216,000, related to the amortization of original issue discount and debt issuance costs, for
the May 2018 Convertible Notes and liquidated damages was $1,112,000 related to the Mandatory Default for the May 2018
Convertible Notes.
Note 9. Income Taxes
The Company has recognized a deferred tax liability
of $4.1 million as of June 30, 2018 and December 31, 2017 related to the purchase of the AmiKet IPR&D. This deferred tax liability
was recorded to account for the book vs. tax basis difference related to the IPR&D intangible asset, which was recorded in
connection with the merger with Epicept Ltd. This deferred tax liability was excluded from sources of future taxable income, as
the timing of its reversal cannot be predicted due to the indefinite life of this IPR&D. Accordingly, this deferred tax liability
cannot be used to offset the valuation allowance.
Deferred income taxes reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The Company’s deferred tax assets relate primarily to its net operating loss carryforwards
and other balance sheet basis differences. In accordance with
ASC 740, “Income Taxes,
” the Company recorded
a valuation allowance to fully offset the gross deferred tax asset, because it is not more likely than not that the Company will
realize future benefits associated with these deferred tax assets at June 30, 2018 and December 31, 2017.
Note 10. Stockholders’ Equity
(a) Stock options and stock award activity
The following table illustrates the common
stock options granted during the six months ended June 30, 2018:
Title
|
|
Grant
date
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Consultants
|
|
January - June 2018
|
|
|
15,000
|
|
|
$
|
0.34
|
|
|
$
|
0.29
|
|
|
Immediately
|
|
Volatility
|
|
|
114 -118%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.22 -2.82%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
Management,
|
|
January - June 2018
|
|
|
57,000
|
|
|
$
|
0.25
|
|
|
$
|
0.22
|
|
|
2 years
|
|
Volatility
|
|
|
118
|
%
|
Directors and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.96
|
%
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
The following table illustrates the common
stock options granted during the six months ended June 30, 2017:
Title
|
|
Grant
date
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Management,
|
|
January - June 2017
|
|
|
161,500
|
|
|
$
|
3.80
|
|
|
$
|
3.40
|
|
|
1-3 years
|
|
Volatility
|
|
|
109-115 %
|
|
Directors and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
2.22-2.53 %
|
|
Employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
6-10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
The following table illustrates the stock awards
during the six months ended June 30, 2018.
Title
|
|
Grant date
|
|
No. of
stock
awards
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultants
|
|
January - June 2018
|
|
|
100,000
|
|
|
$
|
0.38
|
|
|
Immediately
|
The fair value of stock awards was determined
using the share price on the date of grant.
There were no stock awards during the six months
ended June 30, 2017.
The following table summarizes information
about stock option activity for the six months ended June 30, 2018:
|
|
Options
|
|
|
|
No. of
options
|
|
|
Weighted
average
exercise
price
|
|
|
Exercise price
range
|
|
|
Weighted
average
grant date
fair value
|
|
|
Aggregate
Intrinsic
Value (in
thousands)
|
|
Outstanding at December 31, 2017
|
|
|
519,014
|
|
|
$
|
9.80
|
|
|
|
$0.80 - $80.00
|
|
|
$
|
9.40
|
|
|
$
|
-
|
|
Granted
|
|
|
72,000
|
|
|
$
|
0.27
|
|
|
|
$0.25-$0.34
|
|
|
$
|
0.23
|
|
|
$
|
-
|
|
Forfeited/cancelled
|
|
|
(15,417
|
)
|
|
$
|
15.78
|
|
|
|
$3.40-$80.00
|
|
|
$
|
11.96
|
|
|
|
-
|
|
Outstanding at June 30, 2018
|
|
|
575,597
|
|
|
$
|
8.40
|
|
|
|
$0.25 - $61.00
|
|
|
$
|
8.20
|
|
|
$
|
-
|
|
Exercisable at June 30, 2018
|
|
|
395,847
|
|
|
$
|
11.60
|
|
|
|
$0.34 - $61.00
|
|
|
$
|
11.40
|
|
|
$
|
-
|
|
As of June 30, 2018, unamortized stock-based
compensation for stock options was $0.2 million, with a weighted-average recognition period of approximately 1.5 years.
(b) Warrants
The following table illustrates warrants granted
during the six months ended June 30, 2018:
Title
|
|
Grant date
|
|
|
No. of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
|
Assumptions used in Black-Scholes
option pricing model
|
|
Investors
|
|
|
January - June 2018
|
|
|
|
474,667
|
|
|
$
|
0.47
|
|
|
$
|
0.19
|
|
|
|
Six months
|
|
|
|
Volatility
|
|
|
|
118
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
|
0.00
|
%
|
The following table illustrates warrants granted
during the six months ended June 30, 2017:
Title
|
|
Grant date
|
|
No. of
warrants
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
grant date
fair value
|
|
|
Vesting
terms
|
|
Assumptions used in Black-Scholes
option pricing model
|
Investors
|
|
January - June 2017
|
|
|
52,910
|
|
|
$
|
10.00
|
|
|
$
|
3.80
|
|
|
Immediately
|
|
Volatility
|
|
|
109
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noteholders
|
|
January - June 2017
|
|
|
83,333
|
|
|
$
|
4.00
|
|
|
$
|
2.16
|
|
|
Immediately
|
|
Volatility
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk free interest rate
|
|
|
1.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term, in years
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about warrants outstanding
at June 30, 2018:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Exercise
price range
|
|
Warrants outstanding at December 31, 2017
|
|
|
18,695,677
|
|
|
$
|
3.00
|
|
|
|
$0.86-$200.00
|
|
Warrants issued
|
|
|
474,667
|
|
|
|
0.47
|
|
|
$
|
0.47
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2018
|
|
|
19,170,344
|
|
|
$
|
2.90
|
|
|
|
$0.47-$200.00
|
|
The 83,333 warrants issued with the April 2017
Convertible Notes were valued using the Monte Carlo model, which is a pricing model that incorporates all of the required inputs
of a Black-Scholes model and Monte Carlo simulation process that capture additional features of the warrant related to its fair
value estimate, but are outside of the Black-Scholes model. The warrants contain a provision whereby if the Company completes a
transaction with an effective price per share lower than the exercise price of the warrants then the exercise price shall be reduced
and the number of warrant shares issuable shall be increased such that the aggregate exercise price payable after taking into account
the decrease in the exercise price, shall be equal to the aggregate exercise price prior to such adjustment. The allocated fair
value of the warrant of $180,000 is the mean of the present value of the future cash flows resulting from the Monte Carlo simulation
process. The fair value of $180,000 was calculated using the Monte Carlo model and the allocated value of $180,000 was recorded
as additional paid-in capital.
Stock-based compensation expense for
stock options and awards and warrants for the three months ended June 30, 2018 and 2017 was $40,000 and $(97,000),
respectively, which has not been tax-effected due to the recording of a full valuation allowance against net deferred tax
assets. Stock-based compensation expense for stock options and awards and warrants for the six months ended June 30, 2018 and
2017 was $122,000 and $165,000, respectively, which has not been tax-effected due to the recording of a full valuation
allowance against net deferred tax assets.
(c) Series E Convertible Preferred Stock
For the six months ended June 30, 2018, 7,699
shares of Series E Convertible Preferred Stock were converted into 14,634,268 shares of our common stock. For the six months ended
June 30, 2018, we recorded dividends of approximately $251,000.
Note 11. Loss Per Share
Basic and diluted loss per share is computed
by dividing loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted weighted average shares outstanding for the six months ended June 30, 2018 and 2017 excludes shares underlying
stock options, warrants, convertible notes and convertible preferred because the effects would be anti-dilutive. Accordingly, basic
and diluted loss per share is the same. Such excluded shares are summarized as follows:
|
|
Three month period
|
|
|
Six month period
|
|
|
|
ended June 30,
|
|
|
ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Common stock options
|
|
|
575,597
|
|
|
|
490,541
|
|
|
|
575,597
|
|
|
|
490,541
|
|
Shares issuable upon conversion of Series E Preferred Stock (not including dividends)
|
|
|
16,171,200
|
|
|
|
-
|
|
|
|
16,171,200
|
|
|
|
-
|
|
Shares potentially issuable upon conversion of May 2018 convertible notes (assuming $0.375 price)
|
|
|
7,416,667
|
|
|
|
-
|
|
|
|
7,416,667
|
|
|
|
-
|
|
Shares potentially issuable upon conversion of April 2017 convertible notes (assuming $1.00 floor price)
|
|
|
-
|
|
|
|
305,000
|
|
|
|
-
|
|
|
|
305,000
|
|
Shares potentially issuable upon conversion of May 2017 convertible notes (assuming $1.00 floor price)
|
|
|
-
|
|
|
|
2,344,354
|
|
|
|
-
|
|
|
|
2,344,354
|
|
Warrants
|
|
|
19,170,344
|
|
|
|
715,413
|
|
|
|
19,170,344
|
|
|
|
715,413
|
|
Total shares excluded from calculation
|
|
|
43,333,808
|
|
|
|
3,855,308
|
|
|
|
43,333,808
|
|
|
|
3,855,308
|
|
Note 12. Commitments and Contingencies
(a) Leases
Effective May 1, 2017, we relocated our headquarters
to 550 Sylvan Avenue, Englewood Cliffs, New Jersey under a lease agreement. Lease expense is $2,950 per month. The lease may be
terminated upon two months’ written notice to the landlord. Cytovia occupies shared office space on a month-to-month basis
at 12 E 49th Street, New York, New York through August 31, 2018. Rent expense is approximately $3,500 per month. Immune Ltd. occupies
shared office space on a month-to-month basis in Tel-Aviv and Jerusalem, Israel. Combined rent expense is approximately $2,900
per month.
In February 2018, we entered into a lease agreement
for our new headquarters at One Bridge Plaza, Fort Lee, New Jersey which will commence upon the completion of work by the landlord
for a term of seventy-five months with the first three months’ rent abated. We expect this to occur in the third quarter
of 2018. Annual fixed base rent for the first year is $74,000, the second year is $102,000, the third year is $105,000, the fourth
year is $108,000, the fifth year is $111,000, the sixth year is $115,000 and the final three months is $29,000.
We recorded rent expense of $53,000 and $364,000
for the six months ended June 30, 2018 and 2017, respectively.
(b) Licensing Agreements
We are a party to several research and licensing
agreements, including iCo, BNS, Yissum, Dalhousie and Shire Biochem, which may require us to make payments to the other party upon
the attaining certain milestones or as royalties as defined in the agreements.
(c) Litigation
Immune Pharmaceuticals Inc. was the defendant
in litigation involving a dispute with the plaintiffs, Kenton L. Crowley and John A. Flores. The complaint alleges breach of contract,
breach of covenant of good faith and fair dealing, fraud and rescission of contract with respect to the development of a topical
cream containing ketamine and butamben, known as EpiCept NP-2. A summary judgment in Immune’s favor was granted in January
2012 and the plaintiffs filed an appeal in the United States Court of Appeals for the Ninth Circuit in September 2012. A hearing
on the motion occurred in November 2013. In May 2014, the court scheduled the trial in November 2014 and a mandatory settlement
conference in July 2014. In July 2014, the parties failed to reach a settlement at the mandatory settlement conference. The case
was tried by a jury, which rendered a decision on March 23, 2015, in favor of us on all causes of action.
In April 2015, the plaintiffs filed a motion
for a new trial, which was heard by the Court on June 8, 2015. In October 2015, the court denied the plaintiff’s motion for
a new trial. On October 9, 2015, the plaintiffs filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit.
On February 13, 2018, the Appellate Court affirmed the district court’s judgment in favor us.
During the six months ended June 30, 2018 and
2017, we incurred no legal costs in connection with this litigation matter.
On May 9, 2018, we received a complaint against
us, Immune Pharmaceuticals, Ltd., our former CEO and Board Member, Daniel Teper and our former CFO, Serge Goldner, for approximately
$2.8 million that was filed in the Tel Aviv District Court based on an agreement with our subsidiary, from 2011, relating to a
loan of $260,000 which was repaid in full in 2011. The plaintiff claimed that the damages were based on certain warrants to purchase
shares of our common stock, to participate in a future public offering or merger of the Company, with certain discounted terms
and cash damages that it did not receive. In October 2014, we received a written demand from the plaintiff for damages and the
parties discussed a settlement of this matter; however, until receipt of the complaint, we had not heard from the plaintiff since
2015. At this very early stage, we are unable to assess the validity or merits of the claim. We will review the claims and intend
to vigorously defend against this action.
From time to time, we are involved in legal
proceedings arising in the ordinary course of business. We believe there is no other litigation pending that could have, individually
or in the aggregate, a material adverse effect on its results of operations or financial condition.
Note 13. Related Party Transactions
Dr. Teper, our former CEO and former member
of our Board, advanced cash to us of approximately $0.2 million, which remains owed as of June 30, 2018. This amount has been reflected
in advances from related parties in our consolidated balance sheets.
As of June 30, 2018, there is approximately
$0.1 million owed to our directors and management for directors’ fees and expense reimbursements.
On June 15, 2017, substantially contemporaneous
with the entry into the Asset Purchase Agreement (see Note 8), we entered into a Standby Financing Agreement (the “Standby
Financing Agreement”) with Daniel Kazado (the “Standby Financer”), a member of our board of directors and a beneficial
owner of our capital stock. Currently, we are contemplating the sale or other disposition of Cytovia and/or its assets, pursuant
to which we intend to include the $5.0 million financial obligations contemplated by the Asset Purchase Agreement as part of such
sale or other disposition on a basis and on terms that are acceptable to our board of directors and, if attainable, without recourse
to us. The Standby Financing Agreement remains in effect in order to support the financial obligations of the Company to pay the
fixed consideration installments, in the aggregate amount of $5,000,000, due under and in accordance with the terms of the
Asset Purchase Agreement. In the event that we cannot effectuate the sale or disposition of Cytovia or its assets on terms reasonably
acceptable to us and in a timeline necessary to satisfy the financial obligations of the Asset Purchase Agreement (including, without
limitation, that such funding be on a basis that is without recourse to us), then, pursuant to the terms of the Standby Financing
Agreement, the Standby Financer shall lend us or Cytovia (as determined in the discretion of our board of directors) an amount
in immediately available funds equal to the fixed consideration installment payment then due and payable under the Asset Purchase
Agreement (the “Standby Commitment”). The loan made by the Standby Financer in respect of such fixed payment shall
be evidenced by a promissory note in an aggregate principal amount equal to the amount of funds lent by the Standby Financer. The
Standby Commitment shall expire on the earliest of (a) satisfaction in full by the Standby Financer of his obligations under the
Standby Financing Agreement, (b) Cytovia having obtained funding on terms reasonably acceptable to us and (c) the Company having
been fully discharged of and released from all liability of all of its obligations under the Asset Purchase Agreement.
Note 14. Pint Licensing Agreement
On July 10, 2017, Cytovia entered into an exclusive
licensing agreement (the “Licensing Agreement”) with Pint Pharma International S.A. ("Pint"), a specialty
pharmaceutical company focused on Latin America and other markets, for the marketing, commercialization and distribution of Ceplene
throughout Latin America (the “Territory”, defined as Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba,
Dominican Republic, Ecuador, El Salvador, French Guiana, British Guiana, Suriname, Guatemala, Haiti, Honduras, Mexico, Nicaragua,
Panama, Paraguay, Peru, Uruguay and Venezuela) through Pint and one or more of its affiliates. Pursuant to the Licensing Agreement,
Pint will also pay Cytovia (i) 35% of net sales in the territory (ii) a milestone payment of $0.5 million when net sales of Ceplene
in the Territory first reach $10.0 million in any calendar year and (iii) a milestone payment of $1.25 million when net sales of
Ceplene in the Territory first reach $25.0 million in any calendar year. Cytovia further granted Pint and its affiliates certain
sub-licensing rights to Ceplene, and a right of first refusal on any new products of Cytovia within the Territory during the term
of the Licensing Agreement.
With regard to any regulatory approvals and
filings related to the commercialization of Ceplene within the Territory, Pint shall be the applicant, holder of such regulatory
approvals and will be responsible for the content of such regulatory submissions, as well as all costs and expenses related to,
among other items delineated in the Licensing Agreement, the fees, filings, compliance, registration and maintenance of such required
regulatory approval matters. Cytovia shall be responsible for providing (or if in the control of a third party, to ensure such
third party provides) all appropriate documentation, samples and other information in support of Pint in connection with its regulatory
submissions, compliance and maintenance matters in the Territory concerning the Ceplene products.
Additionally, in connection with the Licensing
Agreement, the parties thereto agreed that Pint Gmbh, an affiliate of Pint, will separately enter into an investment agreement
upon satisfaction of the condition that the commercialization of the Ceplene and the Combination Therapy has been met (defined
to mean when Ceplene is commercialized by Pint together with a new product in the Territory, pursuant to which, Pint Gmbh will
make to an investment of $4.0 million into Cytovia in exchange for an equity interest in Cytovia.. In July 2018, a global pharmaceutical
and services company announced that it acquired the ex-United States rights to the drug other than Ceplene comprising the Combination
Therapy. Accordingly, the condition for the investment from Pint can no longer be satisfied.
We are currently contemplating the sale, disposition
or other strategic transaction involving Cytovia and/or its assets. This process is in its early stages and, therefore, it is too
soon to definitively state how the Licensing Agreement will be impacted or addressed, or if a sale or other disposition will be
consummated.
Note 15. Subsequent Events
We have evaluated events and
transactions subsequent to June 30, 2018 and through the date these consolidated financial statements were included in this
Form 10-Q and filed with the SEC.
On June 4, 2018, we received a notice from
the Staff of the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq LLC”)
indicating that, based upon our continued non-compliance with the minimum $1.00 bid price requirement for continued listing on
The Nasdaq Capital Market (“NASDAQ”), as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Rule”) as of
May 30, 2018, and notwithstanding our compliance with the quantitative criteria necessary to obtain a second 180-day period within
which to evidence compliance with the Rule, as set forth in Nasdaq Listing Rule 5810(c)(3)(A), the Staff had determined to delist
our securities from NASDAQ unless we timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”). We
timely appealed the delisting notice and appeared in front of the Panel on July 19, 2018. The Panel issued a decision on July 24,
2018 and affirmed the Staff’s decision to delist our common stock from NASDAQ, with suspension of trading to become effective
at the open of business on July 26, 2018. The Panel indicated that NASDAQ will complete the delisting process by filing a Form
25 Notification of Delisting with the Securities and Exchange Commission, after all applicable appeals periods have lapsed. In
accordance with NASDAQ’s Listing Rules, we have decided to appeal the delisting determination. Any such appeal would not
stay the suspension of trading in our securities on NASDAQ. There can be no guarantee as to the outcome of any appeal.
On July 26, 2018, our shares began trading
on the OTCQB Market ("OTCQB"), which is operated by OTC Market Groups Inc., under the symbol “IMNP.”