U. S. 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 June 30, 2014

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________

 

Commission File Number

 

VACCINOGEN, inc.

(Name of small business issuer as specified in its charter)

 

Maryland	14-1997223
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

 5300 Westview Drive, Suite 406

Frederick, Maryland 21703

 

(Address of principal executive offices, including zip code)

 

 

Registrant’s telephone number, including area code: (301) 668-8400

 

Indicate by check mark whether the registrant(1) has filed all reports required 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 day. x Yes ¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x 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 if the Exchange Act.

 

Large accelerated filter ¨	Accelerated filter ¨
Non-accelerated filter ¨ (Do not check if a smaller reporting company)	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

 

As of August 15, 2014, 32,158,433 shares of our common stock were issued and outstanding.

 

 

VACCINOGEN, INC.

 

FORM 10-Q

 

June 30, 2014

 

TABLE OF CONTENTS

 

		Page
PART I— FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	3
	Unaudited Condensed Consolidated Statements of Operations  For the three and six months ended June 30, 2014 and June 30, 2013	4
	Unaudited Condensed Consolidated Statements of Comprehensive Loss  For the three and six months ended June 30, 2014 and June 30, 2013	5
	Unaudited Condensed Consolidated Statement of Changes in Stockholder’s Equity  For the six months ended June 30, 2014	6
	Unaudited Condensed Consolidated Statements of Cash Flows  For the six months ended June 30, 2014 and June 30, 2013	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8-35
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4	Control and Procedures	49
PART II— OTHER INFORMATION
Item 1	Legal Proceedings	49
Item 1A	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
SIGNATURES		52

 

  

ITEM 1 - FINANCIAL INFORMATION

VACCINOGEN, INC. AND SUBSIDIARY

 

Condensed Consolidated Balance Sheets 

		June 30, 2014				December 31, 2013
		(Unaudited)
Assets
Current Assets
Cash and cash equivalents		$	36,273			$	73,096
Restricted cash			44,224				44,394
Inventory			99,250				100,150
Prepaid expenses and other current assets			243,215				115,522
Total Current Assets			422,962				333,162
Property and equipment, net			176,632				198,790
Intangible assets, net			59,373,926				62,725,559
Total Assets		$	59,973,520			$	63,257,511
Liabilities and Stockholders' Equity
Current Liabilities
Financial instruments		$	7,419,596			$	11,794,790
Notes payable			4,274,117				4,831,217
Accounts payable			3,505,299				3,357,287
Accrued compensation			1,375,105				1,108,541
Accrued interest			933,507				863,637
Accrued expenses and other liabilities			781,789				639,448
Related party payable			10,000				54,099
Total Current Liabilities			18,299,413				22,649,019
Total Liabilities			18,299,413				22,649,019
Commitments and Contigencies
Stockholders' Equity
Preferred stock, $0.0001 par value: 50,000,000 shares authorized; 0 shares issued and outstanding			-				-
Common stock,  $0.0001 par value; 200,000,000  shares authorized; 32,106,373 and 31,568,629 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively.			3,211				3,157
Additional paid-in capital			147,784,620				143,920,855
Accumulated other comprehensive loss			(33,166	)			(36,199	)
Accumulated deficit			(106,080,558	)			(103,279,321	)
Total Stockholders' Equity			41,674,107				40,608,492
Total Liabilities and Stockholders' Equity		$	59,973,520			$	63,257,511

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

 

Unaudited Condensed Consolidated Statements of Operations

		Three Months ended June 30,								Six Months ended June 30,
		2014				2013				2014				2013
Revenues		$	-			$	-			$	-			$	-
Operating Expenses:
Research and Development			2,102,699				2,116,484				4,122,828				4,189,668
General and administrative expenses			986,842				1,042,931				1,694,768				7,972,691
Total Operating Expenses			3,089,541				3,159,415				5,817,596				12,162,359
Loss From Operations			(3,089,541	)			(3,159,415	)			(5,817,596	)			(12,162,359	)
Gain (Loss) on Financial Instruments			2,841,816				(809,301	)			4,744,639				(1,223,196	)
Interest Expense and Other Expenses			(875,395	)			(71,791	)			(1,728,280	)			(137,021	)
Net Loss		$	(1,123,120	)		$	(4,040,507	)		$	(2,801,237	)		$	(13,522,576	)
Provision for income taxes			-				-				-				-
Net Loss available to common stockholders		$	(1,123,120	)		$	(4,040,507	)		$	(2,801,237	)		$	(13,522,576	)
Less: Accretion of preferred stock			-				-				-				-
Net loss available to common stockholders		$	(1,123,120	)		$	(4,040,507	)		$	(2,801,237	)		$	(13,522,576	)
Net loss per Common Share
Basic		$	(0.04	)		$	(0.13	)		$	(0.09	)		$	(0.44	)
Diluted		$	(0.12	)		$	(0.13	)		$	(0.24	)		$	(0.44	)
Weighted average shares outstanding
Basic			32,048,075				30,963,706				31,777,420				30,843,886
Diluted			32,048,075				30,763,706				31,777,420				30,843,886

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Comprehensive Loss

 

		Three Months ended June 30,								Six Months ended June 30,
		2014				2013				2014				2013
Comprehensive Loss
Net loss		$	(1,123,120	)		$	(4,040,507	)		$	(2,801,237	)		$	(13,522,576	)
Foreign currency translation adjustments			2,946				(845	)			3,033				34,618
Total Comprehensive Loss		$	(1,120,174	)		$	(4,041,352	)		$	(2,798,204	)		$	(13,487,958	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity

For the Three Months Ended March 31, 2014

 

		Stockholders' Equity
		Common Stock																Accumulated Other				Total
		Shares				Amount				Additional Paid- In Capital				Accumulated Deficit				Comprehensive Loss				Stockholders' Equity
Balance, January 1, 2014			31,568,629			$	3,157			$	143,920,855			$	(103,279,321	)		$	(36,199	)		$	40,608,492
Issuance of common stock for cash			476,996				48				1,868,812				-				-				1,868,860
Conversion of 2012 Bridge Loan for common stock			56,075				6	#			227,933				-				-				227,939
Conversion of payable to common stock			4,673				-				18,967				-				-				18,967
Contingent Warrants			-				-				1,640,570				-				-				1,640,570
Stock-based compensation			-				-				107,483				-				-				107,483
Other comprehensive loss			-				-				-				-				3,033				3,033
Net Loss			-				-				-				(2,801,237	)			-				(2,801,237	)
Balance, June 30, 2014			32,106,373			$	3,211			$	147,784,620			$	(106,080,558	)		$	(33,166	)		$	41,674,107

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Unaudited Condensed Consolidated Statements of Cash Flows

 

Six Months ended June 30,		2014				2013
Cash Flows From Operating Activities
Net loss		$	(2,801,237	)		$	(13,522,576	)
Adjustments to reconcile net loss to  net cash used in operating activities:
Depreciation			22,940				13,865
Amortization of intangible assets			3,351,633				3,351,632
(Gain) Loss on financial instruments			(4,744,639	)			1,223,196
Other Stock based expense			-				5,954,545
Stock based compensation - employees			33,669				6,748
Warrants issued for services			73,814				-
Non-cash interest expense			1,640,570				-
Changes in operating assets and liabilities, net:
Accrued interest			69,870				(104,268	)
Changes in restricted cash			(133	)			(314	)
Prepaid expenses and other assets			5,687				(132,009	)
Accounts payable and accrued expenses and other liabilities			496,332				793,500
Net Cash Used In Operating Activities			(1,851,494	)			(2,415,681	)
Cash Flows From Investing Activities
Purchases of property and equipment			(1,500	)			(722	)
Net Cash Used In Investing Activities			(1,500	)			(722	)
Cash Flows From Financing Activities
Repayments of Abell Loan			(557,101	)			(222,448	)
Repayments of related party notes payable			(44,099	)			-
Proceeds from issuance of common stock and warrants			2,405,000				2,632,836
Net Cash Provided by Financing Activities			1,803,800				2,410,388
Impact of foreign currency translation on cash and cash equivalents			12,371				41,356
Net (Decrease) Increase in Cash and Cash Equivalents			(36,823	)			35,341
Cash and Cash Equivalents, beginning of period			73,096				113,840
Cash and Cash Equivalents, end of period		$	36,273			$	149,181

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

1.

Organization

 

The Business

 

Vaccinogen, Inc. (the “Company” or “Vaccinogen”), a biotechnology Company headquartered in Frederick, Maryland, was incorporated in the State of Delaware during 2007 for the purpose of developing therapies and vaccines to combat cancer by using the body’s own immune system. On November 23, 2010, the Company changed its domicile from Delaware to Maryland by means of a merger of the Company with and into its wholly owned subsidiary Vaccinogen I, Inc., a Maryland corporation.

 

On October 10, 2007, the Company entered into a license agreement with Intracel Holdings Corporation (“Intracel”), a related party, for the exclusive and indefinite rights to use the OncoVAX® technology platform. OncoVAX® is an active specific immunotherapy (“ASI”) that uses the patient’s own cancer cells to create a vaccine that in turn is used to block the return of cancer following surgery. On October 23, 2007, Vaccinogen acquired out of bankruptcy, certain tangible assets that had been previously owned and used by Intracel’s wholly owned subsidiary in the Netherlands. These assets will be used to conduct research and development and in the commercialization of OncoVAX® to produce vaccines. In connection with the acquisition of these assets, the Company formed a wholly owned subsidiary, Vaccinogen BV, for the purposes of continuing development of OncoVAX®. In June 2010, the Company entered into an agreement with Intracel (the “Asset Transfer Agreement”) whereby the Company acquired title to the patents associated with the OncoVAX® (See Note 4).

 

2.

Going Concern

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has recurring losses and as of June 30, 2014, the Company had an accumulated deficit of approximately $106.1 million and negative working capital of approximately $17.9 million.  Since inception, the Company has financed its activities principally from the proceeds from the issuance of equity and debt securities and loans from officers.

 

The Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.

 

We do not have sufficient capital to fund our plan of operations over the next twelve months. In order to address our capital needs, including our planned Phase IIIb clinical trial, we are continuing our private offering of Units, and we are actively pursuing additional equity or debt financing, in the form of either a private placement or a public offering. We have been in ongoing discussions with strategic institutional investors and investment banks with respect to such possible offerings. In April 2014, we entered into a binding agreement with a group of investors for the purchase of up to $80 million of our Series Units and Common Stock as set forth on Form 8-K dated April 24, 2014 and filed with the Securities and Exchange Commission (“SEC”) on April 28, 2014. Such additional financing opportunities might not be available to us, when and if needed, on acceptable terms or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected.

  

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

3. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements as of June 30, 2014 and for the three and six months months ended June 30, 2014 and 2013, respectively include the accounts of Vaccinogen, Inc. and its wholly owned subsidiary and have been prepared in accordance with the rules and regulations of the SEC and, therefore, omit or condense certain disclosures and other information required under generally accepted accounting principles in the United States of America (“US GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2013, filed with the SEC on March 28, 2014.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all the adjustments and reclassifications necessary for a fair presentation for the periods presented in accordance with US GAAP. The results for the three and six months months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include accounts of Vaccinogen and its wholly owned subsidiary, Vaccinogen BV (a company incorporated in the Netherlands). All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in its financial statements. On an ongoing basis, the Company evaluates the estimates used in recording common stock warrant related liabilities, derivative financial instruments, stock based compensation, and where applicable, the fair value of assets. The Company may base such estimates on various assumptions which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

  

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid securities with a maturity of three months or less at acquisition to be cash equivalents. Cash and cash equivalents include demand deposits with financial institutions and at times the amounts may exceed federally insured deposit limits. The Company has not experienced any losses and does not believe it is exposed to any significant credit risk related to demand deposits.

 

Restricted Cash

 

Restricted cash represents monies pledged by the Company’s foreign subsidiary for a lease obligation related to the manufacturing facility and to the Dutch government as required for companies with irradiator equipment.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-credit-quality financial institutions in the United States and the Netherlands.

 

Cash and cash equivalents in the United States are maintained at financial institutions and, at times, balances may exceed federally insured limits. All non-interest bearing cash balances were fully insured to $250,000 per depositor at each financial institution, and noninterest bearing cash balances may again exceed federally insured limits.

 

Cash and cash equivalents in The Netherlands are maintained at a financial institution and, at times, balances may exceed insured limits. Insurance coverage is limited to 100.000€ for all company accounts at each financial institution.

 

Inventory

 

Inventory is reported at the lower of cost or market value. The Company analyzes its inventory and writes down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. Inventory primarily consists of a product used in creating vaccines using the OncoVAX® technology platform to be utilized in the planned Phase IIIb clinical trial and for research and development activities.

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated or amortized over their estimated useful lives using the straight-line method. Estimated useful lives are as follows:

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Machinery and equipment			3 – 5 years
Automobile			3 – 5 years
Furniture and fixtures			5 years
Computers and software			3 years

 

Maintenance and repairs are charged to expense as incurred. Major betterments and improvements, which extend the useful life of the underlying assets, are capitalized and depreciated.

 

Intangible Assets

 

Intangible assets consist primarily of the cost of acquired patents associated with OncoVAX® to be used in research and development and the commercialization of cancer related vaccines. The Company has capitalized the cost of the acquired patents because the Company has identified alternative future research and development efforts for numerous forms of cancer which it intends to pursue and for which management believes will result in commercialization of related vaccines. Acquired patents are carried at cost less accumulated amortization. Amortization is calculated on a straight-line basis, over the estimated useful economic life of the patent, which is 12.3 years for OncoVAX®.

 

Impairment of Long-Lived Assets

 

Long-lived assets, including identifiable intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company has determined that no impairment has occurred as of June 30, 2014.

 

Foreign Currency Translation

 

The financial statements of foreign subsidiaries are maintained in their functional currency, which generally is the local currency. The assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Revenues, expenses and cash flows of these operations are translated using average exchange rates during the reporting period which they occur. The resulting translation adjustments are reflected in other comprehensive loss.

 

Revenue Recognition

 

To date, the Company has not earned any revenues as the use of OncoVAX® to create cancer related vaccines still requires additional clinical trials and has not received regulatory approval for commercialization and sale.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Research and Development Expense

 

Research and development costs are expensed as incurred. Research and development expenses primarily include the amortization of intangible assets, cost of conducting clinical trials, compensation and related overhead for employees, consultants, facilities costs and the cost of materials purchased for research and development.

 

Stock-Based Compensation

 

The Company measures the cost of employee services received in exchange for stock options or restricted stock awards based upon the fair value of the award on the date of the grant. The Company recognizes the estimated grant date fair value of the award as stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period.

 

The Company initially measures the cost of awards granted to non-employees based on the fair value of the award on the date of grant however such cost is re-measured at the end of each reporting period until performance is fully satisfied or services are rendered by the non-employee.

 

The fair value of stock options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The fair value of non-vested stock awards is determined based upon the estimated fair value of the Company's common stock.

 

Income Taxes

 

Deferred income tax assets and liabilities are determined based on differences between the financial statements and tax basis of assets and liabilities, as measured using the enacted tax rates, which are expected to be in effect when the differences reverse.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A full valuation allowance was recorded against its deferred tax assets for the periods ended June 30, 2014 and December 31, 2013 respectively.

 

As required under ASC 740-270 Interim Financial Reporting, the Company has estimated its annual effective tax rate for the full fiscal year and applied that rate to the year to date pretax book income to determine its provision for income taxes for the interim period. The Company had no provision for income taxes for the three month period ended June 30, 2014 and for the six month period ended June 30, 2014.

 

The tax effects of uncertain tax positions are recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that had greater than 50% likelihood of being realized. Management has not identified any uncertain tax positions with the exception of income tax return filing penalties and accordingly has established a liability of $100,000 and $130,000 under ASC 740-10 as of June 30, 2014 and December 31, 2013, respectively. It is the Company’s accounting policy to account for ASC 740-10 related penalties and interest by including those items in other liabilities/expenses and not in the income tax provision in the unaudited condensed consolidated statements of operations. The Company has identified its U.S. Federal income tax return, its state return in Maryland and Netherlands corporate income tax returns as its major tax jurisdictions. Tax returns for fiscal years 2007 and forward are still open for examination.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Financial Instruments

 

Warrants Accounted for as Liabilities

 

Abell Warrants

 

In October 2011, the Company entered into a borrowing arrangement with The Abell Foundation (“Abell”). In connection with that arrangement, the Company also issued warrants (the “Abell Warrants”) exercisable into common stock of the Company. In February 2012, the Company and Abell amended the agreement to provide for additional borrowings (the “Abell Loan”). In January 2013, the maturity of the Abell Loan was extended to March 31, 2013. In April 2013, the borrowing arrangement was further amended to extend the maturity date to May 31, 2013. On May 31, 2013, the borrowing arrangement was amended to extend the maturity date to July 31, 2013. During September 2013 the borrowing arrangement was amended effective July 31, 2013 to extend the maturity date to December 31, 2013. During January 2014 the borrowing arrangement was amended effective January 1, 2014 to extend the maturity date to January 31, 2014. During March 2014 the borrowing arrangement was amended effective February 1, 2014 to extend the maturity date to July 31, 2014. During July 2014 the maturity date was extended to August 16, 2014. The accounting treatment of these extensions are described within Note 8 to these unaudited condensed consolidated financial statements. In connection with the promissory note issued to The Abell Foundation, the Company granted The Abell Foundation a security interest in its patents related to OncoVAX®. 

 

The number of shares issuable pursuant to the Abell Warrants was originally determined based upon a fixed amount of $500,000 divided by 85% of the per share price of stock sold in the next qualifying round of venture capital financing (defined as a round that raised at least $20 million). In connection with the February 2012 amendment to the borrowing arrangement, the fixed amount used to determine the ultimate number of shares into which the Abell Warrants are exercisable was increased to $800,000. In connection with the January 2013 amendment to the borrowing arrangement, the fixed amount used to determine the ultimate number of shares into which the Abell Warrants are exercisable was increased to $1.1 million and the total proceeds of the next qualifying round of venture capital financing was increased to $35 million. There were no amendments to the Abell Warrants in connection with the April 2013, May 2013 and July 2014 modifications to the Abell Loan. The Abell Warrants have a contractual term of 10 years and were fully vested upon issuance.

 

The Abell Warrants represent a fixed obligation that is to be settled through the issuance of a variable number of shares of the Company’s common stock. Consistent with the provisions of ASC Topic 480, Distinguishing Liabilities from Equity, the Company has concluded that the Abell Warrants should be accounted for as a liability. The Company is required to record the Abell Warrants at their estimated fair value at the end of each reporting period, with changes in the estimated fair value recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of June 30, 2014 and December 31, 2013, the estimated fair value of the Abell Warrants was $990,399 and $1,615,835, respectively. The Company recorded a gain of $385,667 and $625,436 for the three and six months ended June 30, 2014, respectively. As of June 30, 2013 and December 31, 2012, the estimated fair value of Abell Warrants was $1,092,022 and $831,806, respectively. The Company recorded a loss of $107,404 and a gain of $15,597 for the three and six months ended the June 30, 2013, reporting.

 

Included in the change in the carrying value of the liability at June 30, 2013 is $275,813 representing the grant date fair value of the amended number of shares issuable in connection with the Abell Warrants pursuant to the January 2013 amendments to the Abell Loan. This amount has been included in the determination of the loss resulting from the deemed extinguishment of the Abell Loan triggered by the January 2013 amendments. The loss from the deemed extinguishment of the Abell Loan has been included as a component of Gain (Loss) on Financial Instruments in the accompanying unaudited condensed consolidated statements of operations, for the six months ended June 30, 2013.

 

Effective July 31, 2013, the Company and Abell agreed to amend the Abell Note (the “July Amendment”). In connection with the July Amendment, the Company and Abell also amended the terms and conditions of the Warrant. In addition to the continuation of the “fixed for variable” feature, if the Company has not repaid the outstanding debt in full by specified dates between July 31, 2013 and December 31, 2013, the Company will be required to issue additional warrants for incremental shares (“Contingent Warrants”). More specifically, since the debt remained outstanding as of August 31, September 30, October 31, November 30 and December 31, the Warrant will be exercisable into the number of shares as described above plus an additional 20,000, 40,000, 60,000, 80,000 and 100,000 respectively. It is understood that the exercise price related to the Contingent Warrants will be the same as that for those warrants subject to the Fixed for Variable provisions – that is it will depend upon a value equal to 85% of the lowest price paid on a qualified future raise of equity capital. The outstanding debt was not repaid in full by December 31, 2013 and 300,000 warrants were issued to Abell.

 

Effective February 1, 2014 the Company and Abell agreed to amend the Abell Note. In connection with the issuance of the Seventh Amended and Restated Promissory Note, the Company entered into an Amendment No. 7 to the Note and Warrant Purchase Agreement, which increases the amount of shares issuable to The Abell Foundation under the Warrant to be issued by up to 360,000 Warrant Shares (“Contingent Warrants”), calculated as follows: (i) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on March 1, 2014, (ii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on April 1, 2014, (iii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on May 1, 2014, (iv) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on June 1, 2014; (v) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 1, 2014 and (vi) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 31, 2014.

 

The outstanding debt was not repaid in full by June 30, 2014 and 180,000 and 300,000 warrants were issued to Abell for the three and six months ended June 30, 2014, respectively.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

  

The warrants were valued using the Black-Scholes method, and for the three and six months ended June 30, 2014 approximately $847,000 and $1.6 million, respectively, were included in Interest expense.

 

The Contingent Warrants provide for the issuance of a fixed number of shares that are known at inception. The Contingent Share warrants are not considered a derivative as they are considered indexed to the Company’s own stock as defined by ASC 815-40.

 

Abell Investment Option

 

On January 16, 2013, the Company entered into an investment agreement with Abell under which Abell was granted an option to acquire up to $5.0 million of common stock of the Company (the “Abell Option”). The number of shares to be issued will be based on the lowest price paid by any purchaser of shares in a subsequent round of equity financing meeting certain conditions defined in the agreement. The term of the agreement and Abell’s right to exercise is perpetual.

 

The Abell Option represents a fixed obligation that is to be settled through the issuance of a variable number of shares of the Company’s common stock. Consistent with the provisions of ASC Topic 480, the Company has concluded that the Abell Option should be accounted for as a liability and should be recorded as the conditions necessary to trigger the holders rights to exercise are considered by management to be probable of occurring as of June 30, 2014. The Company is required to record the Abell Option at its estimated fair value at the end of each reporting period. The Company recorded the grant date fair value as a component of general and administrative expenses. Changes in the estimated fair value of the Abell Option will be recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.

 

As of June 30, 2014 and December 31, 2013 the estimated fair value of the Abell Option was $4,373,834 and $7,392,528, respectively. The Company recorded a gain of $1,700,936 and $3,018,694 for the three and six months ended June 30, 2014, respectively.

 

The Company recorded a loss of $579,548 and $579,548 for the three and six months ended June 30, 2013.The Company has classified The Carrying value of the Abell Option in Financial instruments in the accompanying condensed consolidated balance sheet The initial value assigned to the Abell Option of $5,954,545 was recorded as a component of General & Administrative expense in the accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2013.

 

Derivative Financial Instruments

 

The Company may enter into transactions that represent free-standing or embedded derivative financial instruments as those terms are defined in ASC Topic 815 Derivatives and Hedging (“Topic 815”). The Company records the estimated fair value of derivative financial instruments in its consolidated balance sheets and records changes in the estimated fair value of derivative financial instruments as income or expense in its unaudited condensed consolidated statements of operations.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Round C Warrants

 

From October 2012 through December 2013 and then again from January 2014 through June 30, 2014, the Company issued warrants to certain investors in the common stock of the Company (the “Round C Warrants”). Round C Warrants to acquire 339,966 shares of common stock were issued through December 2013 and Round C Warrants to acquire 156,910 shares of common stock were issued during the six months ended June 30, 2014. The Round C Warrants have an exercise price of $6.05, a contractual term of 5 years and were fully vested upon issuance.

 

The terms of the Round C Warrants provide for "down-round" anti-dilution adjustments in certain situations whereby the Company sells or issues (a) stock at a price per share less than the exercise price of the Round C Warrants or (b) equity linked financial instruments with an exercise price less than the exercise price of the Round C Warrants. Consistent with the provisions of ASC Topic 815-40, the Round C Warrants are classified as derivative financial instruments. The Company is required to record the estimated fair value of derivative financial instruments at the end of each reporting period, with changes in the estimated fair value of such derivatives recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.

 

As of June 30, 2014 and December 31, 2013, the estimated fair value of the Round C Warrants was $1,335,363 and 1,796,427 respectively. The Company recorded a loss of $755,213 and again of $1,130,509 for the three and six months ended June 30, respectively.

 

The Company recorded a loss of $38,549 and a gain of $6,068 for the three and six months ended June 30, 2013.

 

2012 Bridge Loan

 

Between April 2012 and October 2012, the Company entered into transactions with various investors which resulted in the Company raising $1,019,000 from the issuance of unsecured notes payable (collectively the “Bridge Loan”). The Bridge Loan has no contractual maturity date, and is repayable only in the event that the Company closes on a future round of equity financing which results in gross proceeds of at least $20 million. If the Company fails to raise sufficient additional capital, there is no obligation to pay interest or repay any amount borrowed under the Bridge Loan. Should the Company be successful in raising sufficient equity capital, the Company must repay an amount to the investors equal to 2 times the amount originally raised.

 

The Company has classified the Bridge Loan as a derivative financial instrument, as it meets three qualifying criteria of ASC Topic 815 Derivatives and Hedging (“Topic 815”) including the contractual terms whereby the Company can be required to settle its obligation under the Bridge Loan by transferring cash to investors if and only when sufficient additional capital is raised. As of June 30, 2014, and December 31, 2013, the estimated fair value of the liability associated with the Bridge Loan was $720,000 and $990,000 respectively, which has been recorded and included in financial instruments in the accompanying condensed consolidated balance sheets.

  

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The change in the carrying value of the Bridge Loan includes a reduction of $270,000 representing the carrying value of the liability, as referenced in Note 8, related to those investors on the date of conversion. In April 2013, the board of directors authorized the Company to offer the investors in the 2012 Bridge Loan, the option to convert the amount otherwise due and payable to them in the event of a successful qualified offering, or $2,038,000, into common stock of the Company, at a per share price equal to that provided in the Round C common stock offering, or $5.50 per share plus 30% warrant coverage. In order to accommodate all Bridge Loan holders, the total dollar value of common stock issuable in the Round C offering was increased from $11 million to $13 million.

 

During 2013, certain investors in the Bridge Loan elected to convert their rights to receive cash under the Bridge Loan into shares of common stock and common stock warrants. The accounts for these investors were increased to 2 times the amount originally invested creating a loss on financial instruments for the year ended December 31, 2013 of $93,800. As a result, the Company issued 170,540 shares of common stock to certain holders of the Bridge Loan that had elected to convert their rights into common stock of the Company and an additional 4,787 adjustment shares as discussed in Note 10 of these unaudited condensed consolidated financial statements. The Company also issued additional Round C Warrants exercisable into 51,159 shares of common stock of the Company, with an exercise price of $6.05 per share.

 

During the six months ended June 30, 2014, certain investors in the Bridge Loan elected to convert their rights to receive cash under the Bridge Loan into shares of common stock and common stock warrants. The accounts for these investors were increased to 2 times the amount originally invested creating a loss on financial instruments for the six months ended June 30, 2014 of $30,000. As a result, the Company issued 54,545 shares of common stock to certain holders of the Bridge Loan that had elected to convert their rights into common stock of the Company and an additional 1,530 adjustment shares as discussed in Note 10 of these unaudited condensed consolidated financial statements. The Company also issued additional Round C Warrants exercisable into 16,363 shares of common stock of the Company, with an exercise price of $6.05 per share.

 

As of June 30, 2014 and December 31, 2013 the estimated fair value of the 2012 Bridge Loan was $720,000 and $990,000, respectively. The Company recorded a loss of $0 and $30,000 for the three and six months ended June 30, 2014, respectively.

 

The Company recorded a loss of $83,800 and $389,500 for the three and six months ended June 30, 2013, respectively.

 

The changes in the estimated fair value have been classified in Gain (Loss) on Financial Instruments in the accompanying unaudited condensed consolidated statements of operations for the three and six months periods ended June 30, 2014 and 2013.

 

Net Loss Per Share

 

Basic loss per share is determined by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. The following common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive:

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Six months ended June 30,		2014				2013
Stock Option Pool			77,000				-
Abell Investment Option			934,579				1,136,364
Convertible debt			106,838				91,324
Restricted stock awards			134,278				119,734
Warrants			3,820,769				2,917,210

 

Dilutive loss per share is determined by dividing loss attributable to common stockholders by the weighed-average number of common shares outstanding during the period, without consideration of common stock equivalent. The net loss attributable to common shareholders is adjusted for gains on financial instruments as it effect would be anti-dilutive.

 

		Three months ended June 30, 2014												Three months ended June 30, 2013
						Weighted				Loss								Weighted				Loss
						Average				Per								Average				Per
		Net Loss				Shares				Share				Net Loss				Shares				Share
Basic loss per share		$	(1,123,120	)			32,048,075			$	(0.04	)		$	(4,040,507	)			30,963,706			$	(0.13	)
Gain on derivatives			(2,841,816	)
Dilutive loss per share		$	(3,964,936	)			32,048,075			$	(0.12	)		$	(4,040,507	)			30,963,706			$	(0.13	)

 

		Six months ended June 30, 2014												Six months ended June 30, 2013
						Weighted				Loss								Weighted				Loss
						Average				Per								Average				Per
		Net Loss				Shares				Share				Net Loss				Shares				Share
Basic loss per share		$	(2,801,237	)			31,777,420			$	(0.09	)		$	(13,522,576	)			30,843,886			$	(0.44	)
Gain on derivatives			(4,774,639	)
Dilutive loss per share		$	(7,575,876	)			31,777,420			$	(0.24	)		$	(13,522,576	)			30,843,886			$	(0.44	)

 

4. Agreements with Intracel

 

License Agreement

 

On October 10, 2007, the Company entered into an agreement (the “License Agreement”) with Intracel Holdings Corporation (“Intracel”), for the exclusive and indefinite rights to license and use the OncoVAX® technology platform. OncoVAX® is an active specific immunotherapy (“ASI”) that uses the patient’s own cancer cells to block the return of cancer following surgery. In exchange for the rights to OncoVAX®, the Company (i) agreed to issue equity securities equal to 10% of the fully diluted capitalization of the Company, (ii) assumed liabilities of Intracel to Organon Teknika Corporation (“Organon”) totaling $4.0 million under an October 31, 2007 Letter Agreement between Intracel and Organon, (iii) agreed to pay $450,000 in cash for settling trade payable related to the OncoVAX intellectual property, and (iv) agreed to make royalty payments to Intracel based on future sales of OncoVAX®. The terms of the securities issued to Intracel provided Intracel with anti-dilution rights with respect to its 10% ownership interest (See Note 10). The License Agreement also contained a provision such that if the Company obtained specified levels of financing in a specified time period, that title to OncoVAX® would transfer to the Company without further consideration. If the Company did not reach the specified levels of financing in the specified period of time, Intracel could cancel the License Agreement and could re-purchase the rights to OncoVAX®. The Company did not obtain the necessary financing in the period specified.

 

In connection with the License Agreement, the Company issued 1,506,750 shares of common stock valued at approximately $984,000 and assumed liabilities with an estimated value of $4,450,000. The Company estimated the fair value of the liabilities assumed based upon their face amount as these liabilities were due currently and on demand.

 

Asset Transfer Agreement and Stock Exchange Agreement

 

As a result of the Company’s inability to raise the necessary capital under the License Agreement, the Company and Intracel negotiated amended terms to the License Agreement. On June 24, 2010, the Company and Intracel entered into the Asset Transfer Agreement pursuant to which the title to all of the intellectual property associated with OncoVAX® was transferred to the Company. Under the Asset Transfer Agreement, the Company also agreed to exchange the previously issued common stock and Series AA preferred stock representing a 10% interest in the Company for shares of its Series B preferred stock equal to a 20% interest in the Company on a fully diluted basis.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The terms and conditions of the Series B preferred stock provided Intracel with anti-dilution rights with respect to its 20% ownership interest (See Note 10). In addition, the Company agreed that Intracel’s ownership position (and corresponding anti-dilution rights) would increase to 50% upon failure of the Company to meet certain defined milestones, which included but were not limited to, the Company attaining specified levels of additional financing.

 

The Company accounted for the acquisition of the rights to the OncoVAX® technology platform under the License Agreement in 2007 and the Asset Transfer Agreement in 2010 as an asset acquisition in accordance with ASC Topic 805, Business Combinations. Furthermore, as described in Note 2 to these consolidated financial statements, and in accordance with ASC Topic 730, Research and Development, the Company has capitalized the cost of acquiring the rights to OncoVAX® technology platform as these rights represent intangible assets to be used in research and development activities and for which future alternative uses exist.

 

In June 2010, in connection with the Asset Transfer Agreement, the Company issued 3,452,766 shares of Series B preferred stock, with an estimated value of approximately $16.8 million. The Company estimated the fair value of the common stock issued pursuant to the License Agreement and the Series B Preferred Stock issued pursuant to the Asset Transfer Agreement by considering various commonly accepted valuation techniques, including the income and market approaches.

 

The Company ultimately relied on the income approach, specifically, the discounted cash flow method, to estimate the value of the Company’s equity. The Company further utilized commonly used option pricing techniques to estimate the fair value of the various equity classes. The use of the income approach, and specifically the discounted cash flow method, requires management to make significant assumptions about the future level and timing of revenues, direct and indirect costs associated with continued research and development, the conduct of clinical trials, and the production and commercialization of the intended cancer vaccines. The discounted cash flow method also requires the estimation of discount rates used to reflect the risk inherent in the projected cash flows, the terminal growth rate, among other factors.

 

The Company did not meet these milestones and consequently, in December 2010, was required to increase Intracel’s total ownership interest in the Company to 50% through the issuance of additional shares of Series B preferred stock.

 

In December 2010, the Company issued 10,973,612 additional shares of Series B preferred stock to Intracel when the Company failed to meet certain conditions of the Asset Transfer Agreement. The estimated value of those additional shares of approximately $63.1 million was accounted for as additional consideration and is included in the total cost of acquiring the OncoVAX® technology platform.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

All shares of Series B preferred stock were converted to common stock in 2012 as discussed in Note 10 to these unaudited condensed consolidated financial statements.

 

As of June 30, 2014 Intracel directly owns approximately 42% of the Company on a fully diluted basis, and certain officers and directors of Vaccinogen are also stockholders of Intracel and collectively own approximately 19% of the Company on a fully diluted basis. Intracel also continues to hold certain royalty rights associated with future commercial sales of vaccines developed using OncoVAX®.

 

5. Property and Equipment

 

Property and equipment consisted of the following:

 

		June 30, 2014				December 31, 2013
Machinery and equipment		$	880,001			$	903,964
Furniture and fixtures			23,485				35,690
Computers and software			28,100				1,929
			931,586				941,583
Less accumulated depreciation			(754,954	)			(742,793	)
		$	176,632			$	198,790

 

Depreciation expense was $13,436 and $22,940 for the three and six months ended June 30, 2014 respectively. Depreciation expense was $6,329 and $13,685 for the three and six months ended June 30, 2013, respectively.

 

6. Intangible Assets

 

Intangible assets consist of the capitalized costs associated with the acquisition of patents related to OncoVAX® (the “Intellectual Property”) and the costs associated with website development and domain names.

 

As discussed in Note 4 to these unaudited condensed consolidated financial statements, the total purchase price for the Intellectual Property was ultimately determined based upon the estimated fair value of the Series B preferred stock representing a 50% stock ownership in the Company, the value of cash payments made of $450,000 and, obligations of Intracel assumed of $4 million. 

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Intangible assets by major asset class were as follows at June 30, 2014:

 

		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Intellectual Property		$	84,481,856			$	25,141,701			$	59,340,155
Other Intangible Assets			121,944				88,173				33,771
		$	84,603,800			$	25,229,874			$	59,373,926

 

Intangible assets by major asset class were as follows at December 31, 2013:

 

		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
Intellectual Property		$	84,481,856			$	21,792,439			$	62,689,417
Other Intangible Assets			121,944				85,802				36,142
		$	84,603,800			$	21,878,241			$	62,725,559

 

The amortization expense for intangible assets was approximately $1.7 million and $3.4 million for both the three and six months ended June 30, 2014 and 2013. The weighted average amortization period for intangible assets was 12.6 years.

 

The estimated future amortization relating to all intangible assets that are recorded in the consolidated balance sheets as of June 30, 2014 is as follows:

 

Years ending December 31,
2014		$	3,346,897
2015			6,698,530
2016			6,698,530
2017			6,698,530
2018			6,698,530
Thereafter			29,232,909
		$	59,373,926

  

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

7. Notes Payable

 

Notes payable are as follows:

 

		June 30, 2014				December 31, 2013
Organon Obligation		$	3,500,000			$	3,500,000
Abell Loan			774,117				1,331,217
		$	4,274,117			$	4,831,217

 

Organon Obligation

 

Organon, currently owned by Merck & Co, Inc., manufactures a key component used with the OncoVAX® technology. In 2007, in conjunction with the Agreement with Intracel, the Company assumed $4.0 million of related liabilities from Intracel due to Organon (“Organon Obligation”). Of the $4.0million due to Organon, $500,000 was paid at the time of the Agreement. The remaining $3.5 million was due in installments with an additional $500,000 (plus accrued interest) payable the first year but no later than one year after the agreement date of October 31, 2007. Organon may elect to receive this first $500,000 installment in stock. Commencing one year after the earlier of the first marketing approval of OncoVAX® by the United States Food and Drug Administration or the European Medicines Agency or October 31, 2007, Vaccinogen would make an annual payment of $1.0 million to Organon until repayment of the entire liability amount. The obligation accrued interest based on a simple annual interest rate based on the US prime lending rate in effect on the anniversary date of the agreement, or October 31, 2008, which was 4.00%. Interest expense under this agreement was approximately $35,000 for both the three months ended June 30, 2014 and June 30, 2013 and $70,000 for both the six months ended June 30, 2014 and June 30, 2013. The accrued interest on this obligation is shown on the Balance Sheet as a component of Accrued Interest. This obligation was secured by the OncoVAX® Intellectual Property. While the Company has not paid the installment due one year after the Agreement, no event of default has been declared by Organon or its successors including Merck & Co, Inc. Due to the right to declare an event of default and to accelerate all amounts owed on this obligation, all amounts owed under the Agreement have been classified as current in the accompanying condensed consolidated balance sheets. If an event of default were declared, the Company would need to pay the principal payment of $500,000 plus accrued interest, which as June 30, 2014 was approximately $133,000 within 45 days in order to cure such default.

 

Abell Loan

 

On October 26, 2011, the Company obtained a $1.5 million working capital loan from The Abell Foundation Inc. (“Abell”). The Abell Loan was originally due on April 26, 2012, with 8% simple interest accruing and payable on the maturity date. On February 16, 2012, the Company received an additional $300,000, thereby increasing the amount outstanding to $1.8 million. In January 2013, the maturity of the Abell Loan was extended to March 31, 2013. In April 2013, the borrowing arrangement was further amended to extend the maturity date to May 31, 2013. On May 31, 2013, the borrowing arrangement was amended to extend the maturity date to July 31, 2013, at which time all principal plus accrued interest was due in full. During September 2013 the borrowing arrangement was amended effective July 31, 2013 to extend the maturity date to December 31, 2013.  In connection with this promissory note issued to The Abell Foundation, the Company granted The Abell Foundation a security interest in our patents related to OncoVAX®. 

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The 2012 amendment to the Abell Loan was accounted for as a modification, the January 2013 amendment was accounted for as an extinguishment, and the April 2013, May 2013 and July 2013 amendments were accounted for as modifications, as those terms are defined under ASC Topic 470-50.

 

Debt, Modifications and Extinguishments.

 

No costs or expenses were incurred by the Company in connection with the April 2013 or May 2013 extensions. The July 2013 amendment required the issuance of a fixed number of shares at various points in time known as Contingent Share Warrants. The Contingent Share Warrants are not considered a derivative instrument as they are considered indexed to the Company’s own stock as defined by ASC 815-40. As a result, the value assigned to the Contingent Share Warrants has been classified within stockholders’ equity. The outstanding debt was not repaid in full December 31, 2013 and 300,000 warrants were issued to Abell. The warrants were valued using the Black-Scholes method, and for the year ending December 31, 2013 approximately $1.7 million was included in interest expense.

 

Effective January 1, 2014 the maturity date was extended to January 31, 2014. No costs or expenses were incurred by the Company in connection with the January amendment.

 

On February 26, 2014, the Company issued a Seventh Amended and Restated Promissory Note to The Abell Foundation, Inc. dated February 1, 2014 in the aggregate principal amount of $1,038,957. The amended and restated note extends the maturity date until July 31, 2014. During August 2014 the maturity date was extended until August 22, 2014. In addition, the amended and restated note provides that the note will be paid concurrently with the closing of each issuance or sale of additional shares of capital stock, or securities directly or indirectly convertible or exchangeable for capital stock (each an “Equity Issuance”) occurring after February 1, 2014 in an amount equal to (a) twenty-five percent (25%) of the next $5,693,135 of gross proceeds of such Equity Issuance(s), and (b) one hundred percent (100%) of the net proceeds of all Equity Issuance(s) thereafter.

 

In connection with the issuance of the Seventh Amended and Restated Promissory Note, the Company entered into an Amendment No. 7 to the Note and Warrant Purchase Agreement (the “Amended Purchase Agreement”), which Amended Purchase Agreement increases the amount of shares issuable to The Abell Foundation under the Warrant to be issued to Abell by up to 360,000 Warrant Shares (the “Additional Warrant Shares”), calculated as follows: (i) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on March 1, 2014, (ii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on April 1, 2014, (iii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on May 1, 2014, (iv) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on June 1, 2014; (v) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 1, 2014 and (vi) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 31, 2014. The Note was not repaid by June 30, 2014 and 300,000 warrants were issued. The Note maturity date has been extended until August 22, 2014 without further consideration.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Payments of amounts due are required prior to the maturity date based on a percentage of proceeds received from the Company’s subsequent equity financing transactions, as outlined in the agreement. The Abell Loans are secured by all accounts, chattel paper, deposit accounts, equipment, general intangibles, instruments, inventory, investment property and letter of credit rights.

 

Under the terms of the loan, in the event of default, the interest rate increases to 10% per annum. The Company recorded interest expense related to the Abell Loan of approximately $16,500 and $38,000 for the three and six months ended June 30, 2014, respectively. The Company recorded interest expense related to the Abell Loan of approximately $36,000 and $72,039 for the three and six months ended June 30, 2013. As described in Note 3 to these unaudited condensed consolidated financial statements, in connection with the Abell Loan and the various amendments, the Company issued the Abell Warrants which are exercisable into common stock of the Company. The number of shares into which the Abell Warrants are exercisable was revised with each amendment to the Abell Loan and is ultimately equal $1.1 million divided by 85% of the purchase price per share of stock sold in the Company’s next venture capital financing resulting in proceeds of not less than $35.0 million.

  

The fair value of the Abell Warrants issued in connection with the Abell Loan in 2011 and subsequent amendment in February 2012 were recorded upon issuance as a debt discount based upon the estimated fair value and were amortized as additional interest expense through the original maturity date.

The fair value of the Abell Warrants issued in connection with the January 2013 amendment to the Abell Loan of $275,813 were included in the determination of the loss associated with the deemed extinguishment of the Abell Loan at that time. That loss was been classified within Loss on Financial instruments in the unaudited condensed consolidated statements of operations for the six months ended June 30, 2013.

 

The fair value of the warrants issued under the February 2014 Amendment No. 7 to the Note and Warrant Purchase Agreement was charged to interest expense was approximately $0.8 million and $1.6 million for the three and six months ended June 30, 2014, respectively.

 

8. Fair Value Measurements

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the most advantageous market. The Company determines fair value based on a hierarchy that priorities valuation techniques used to measure fair value based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect assumptions based on the best information available.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The three levels of the fair value hierarchy are:

 

Level 1 — Inputs are quoted prices for identical assets or liabilities in an active market

 

Level 2 — Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data correlation or other means

 

Level 3 — Inputs that are unobservable and significant to the fair value measurement

 

The Company is required to record or disclose the fair value of certain assets and liabilities. The fair value guidance described above is used in measuring and recording the fair value of the liability associated with the Abell Warrants, and the fair value of the financial derivatives including the Round C Warrants and the Bridge Financing. This fair value guidance also applies to the disclosure of the fair value of financial instruments not otherwise recorded in the Company’s condensed consolidated balance sheets at fair value.

 

The Company’s financial instruments measured on a recurring basis using fair value estimates are as follows:

 

						June 30, 2014
Description		Total				Level 1				Level 2				Level 3
Abell Warrants		$	990,399			$	-			$	-			$	990,399
Round C Warrants			1,335,363				-				-				1,335,363
Bridge Loan			720,000				-				-				720,000
Abell Investment Option			4,373,834				-				-				4,373,834
		$	7,419,596			$	-			$	-			$	7,419,596

 

						December 31, 2013
Description		Total				Level 1				Level 2				Level 3
Abell Warrants		$	1,615,835			$	-			$	-			$	1,615,835
Round C Warrants			1,796,427				-				-				1,796,427
Bridge Loan			990,000				-				-				990,000
Abell Investment  Option			7,392,528				-				-				7,392,528
		$	11,794,790			$	-			$	-			$	11,794,790

   

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following is a reconciliation of the fair value measurements from December 31, 2013 to June 30, 2014.

 

		Abell Warrants				Round C Warrants				Bridge Loan				Abell Option
Balance, December 31, 2013		$	1,615,835			$	1,796,427			$	990,000			$	7,392,528
Issuance of securities			37,529				669,445				(300,000	)			-
Fair value change included in earnings			(662,965	)			(1,130,509	)			30,000				(3,018,694	)
Balance, June 30, 2014		$	990,399			$	1,335,363			$	720,000			$	4,373,834

 

The following is a reconciliation of the fair value measurements from January 1, 2013 to December 31, 2013.

 

		Abell Warrants				Round C Warrants				Bridge Loan				Abell Option
Balance, January 1, 2013		$	831,806			$	230,349			$	1,528,500			$	-
Issuance of securities			275,813				1,112,990				(938,000	)			5,954,545
Fair value change included in earnings			508,216				453,088				399,500				1,437,983
Balance, December 31, 2013		$	1,615,835			$	1,796,427			$	990,000			$	7,392,528

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Quantitative Information

 

Quantitative information as of June 30, 2014 with respect to financial instruments measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) are as follows:

 

Level 3 - Significant Unobservable Inputs

 

						Principal Valuation		Unobservable		Range
Description		Fair Value				Techniques		Inputs		(Weighted Average)
Abell Warrants		$	990,399			Black -Scholes		Strike price		N/A
Equity volatility
Round C Warrants		$	1,335,363			Black -Scholes		Strike price		N/A
Equity volatility
Bridge Loan		$	720,000			Present Value		Timing and amount of future cash flows		N/A
Abell Investment Option		$	4,373,834			Black -Scholes		Strike price		N/A
Equity volatility

 

For the three and six months ended June 30, 2014 and 2013, there were no transfers in or out of Level 3.

 

Abell Warrants and Round C Warrants

 

The fair value of the Abell Warrants and the Round C Warrants are estimated at the end of each reporting period using an option pricing model. More specifically, the Black-Scholes option pricing model was utilized in the valuation of both the Abell Warrants and the Round C Warrants. The following assumptions were used:

 

		Abell Warrants								Round C Warrants
Six months ended June 30,		2014				2013				2014				2013
Volatility			85	%			80	%			85	%			80	%
Exercise price		$	4.55			$	4.68			$	5.88			$	6.05
Stock price at June 30		$	4.68			$	5.75			$	4.68			$	5.75
Risk free interest rate			2.53	%			2.24 – 2.45	%			0.97% - 1.62	%			1.16 – 1.41	%
Dividend yield			0	%			0	%			0	%			0	%
Expected life			10				10				3.3 -5.0				4.3 – 5.0

  

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

As described in Note 3 to the unaudited condensed consolidated financial statements, the exercise price of the Abell Warrants is ultimately dependent upon the per share price and size of future rounds of equity financing. The Black-Scholes option pricing model was used to value the Abell Warrants as management believes that it can reasonably estimate the terms and conditions of future equity offerings that would impact the valuation of the Abell Warrants. Management’s ability to estimate these terms is based in part upon the terms and conditions of binding agreements to raise future equity capital in place at the time of each valuation.

 

As described in Note 3 to the unaudited condensed consolidated financial statements, the Round C Warrants include a form of anti-dilution protection that may result in future adjustments to the terms of the warrants.

 

The fair value calculations include the use of both observable and estimated inputs. There remains an inherent subjectivity in the development of the strike price used for both the Abell and Round C warrants. Therefore, the Company considers the derived fair value to have been determined using Level 3 inputs.

 

Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of the Abell Warrants and the Round C Warrants.

 

Abell Option

 

As described in Note 3 to these unaudited condensed consolidated financial statements, the number of shares issuable under the Abell Option is dependent upon the lowest price paid for shares in a future qualified round of equity financing. Management has valued the Abell Option based upon an estimate of the fair value of the Company’s underlying stock because management believes it can reasonably estimate the occurrence and the terms of the future equity offering necessary to trigger Abell’s right to exercise the option and establish an exercise price, and because the right to exercise the option has no expiration. Given the perpetual exercise right, the Company believes it is reasonable to consider the shares issuable under the Abell Option as common stock equivalents.

 

As of January 16, 2013, the date of issuance for the Abell Option, the Company reasonably expected the undiscounted common stock price issuable to be $5.50 per share, discounted to $4.40 per share. Therefore, the $5 million investment divided by the discounted share price of $4.40 yielded an option for 1,136,364 shares. At June 30, 2014 and December 31, 2013, the estimated number of shares is 934,580 in recognition of the expected Venture Capital Financing price per share of $5.35, the effective price of the Round C issuances.

 

Since the Abell Option is perpetual, each option share has a value of the underlying common stock share or $4.68 and $7.91 per share as of June 30, 2014 and December 31, 2013 respectively. The Abell Option value will be adjusted at the end of each reporting period, based on the valuation of the underlying common stock. The change in value of the Abell Option will be recorded on the financial statements as a Loss on Financial Instruments.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The fair value calculations include the use of both observable and estimated inputs. There remains an inherent subjectivity in the development of the strike price used for the Abell Option. Therefore the Company considers the derived fair value to have been determined using Level 3 inputs.

 

Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of the Abell Option.

 

Bridge Loan

 

The estimated fair value of the Bridge Loan was determined based upon the present value of probability weighted cash flows, using assumptions about the timing and amount of future cash flows and discount rates that management considers to be appropriate in the circumstances.

 

Because of the inherent subjectivity in management’s assumptions, the Company considers the derived fair value to have been determined using Level 3 inputs.

 

Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of Bridge Loan.

 

Disclosure of the Fair Value of Financial Instruments

 

Cash and cash equivalents and accounts payable, are carried at amounts that approximate their fair values due to the short term nature of these financial instruments. The fair value of the Abell Loan approximates its carrying value due to the short term nature of the Abell Loan’s maturity. The fair value of the Organon Obligation approximates its carrying value as the note is due on demand.

 

9. Redeemable Preferred Stock and Stockholders’ Equity

 

As of January 1, 2011, the aggregate number of shares which the Company was authorized to issue was 75,000,000 shares of common stock with par value of $.0001 per share and 50,000,000 shares of preferred stock. The Company designated 15,000,000 shares of preferred stock as Series AA Convertible Redeemable Preferred Stock with a par value of $.0001 per share (“Series AA”) and 35,000,000 shares of preferred stock as Series B Convertible Redeemable Preferred Stock with a par value of $.0001 per share (“Series B”).

 

In August 2012, the Company amended and restated its Certificate of Incorporation to increase the number of shares authorized for issuance to 200,000,000 shares of common stock with a par value $.0001 and 50,000,000 shares of preferred stock with a par value of $.0001 per share.

 

Common Stock

 

On August 1, 2012, the Company issued 1,507,666 shares of common stock to the holders of the Series AA preferred stock in consideration for the conversion of all outstanding shares of Series AA preferred stock.

 

  

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

On August 1, 2012, the Company issued 16,656,082 shares of common stock to the former holders of our Series B Preferred Stock in consideration for the conversion of all outstanding shares of Series B preferred stock.

 

During 2012, the Company issued 236,364 shares of common stock to Kodiak in exchange for their commitment to enter into the equity financing agreements. The Company estimated the fair value of the common stock issued to be approximately $1.3 million and has recorded that value as a deferred cost. These costs were to be offset against the anticipated proceeds of the equity financing agreements with Kodiak. The carrying value associated with these shares of common stock had been included in long-term prepaid expenses in the accompanying consolidated balance sheet as of December 31, 2012. The amount was written off as a General & Administrative expense on the accompanying unaudited condensed consolidated financial statements for the year ended December 31, 2013 as is the agreement was expiring January 18, 2014 and it was determined that financing would not be probable prior to expiration.

 

Round C Common Stock

 

The subscription agreement for the Company’s most recent financing, beginning October 2012, through the issuance of common stock (“Round C”) provides a form of anti-dilution protection to subscribers. Pursuant to the subscription agreement, if the market price of the Company’s common stock on the effective date of the Company’s first S-1 registration statement filed with the SEC (the “Effectiveness Date Market Price”) is less than $5.50 per share, then the Company will issue to each subscriber additional shares of common stock. The number of shares issued would equal the difference between a) the number of shares that would have been issued if the price per unit was equal to the greater of the Effectiveness Date Market Price or $5.00 and b) the number of shares originally issued to the subscriber. The anti-dilution rights are determined to be clearly and closely related to the Round C common stock as that term is defined in Topic 815 and as a result these rights are not required to be accounted for as a free standing derivative financial instrument.

 

During 2012, the Company raised additional capital of $920,002 through the issuance of 167,273 shares of common stock (Round C) and common stock warrants (Round C Warrants) to purchase 50,181 shares of common stock. $725,757 was allocated to the common stock and $194,245 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. In addition, the Company satisfied a payable to a board member of the Company in the amount of $169,729 by issuing 30,860 shares of common stock and common stock warrants (Round C Warrants) exercisable into 9,258 shares of common stock. $133,624 was allocated to the common stock and $36,105 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. The terms and conditions of the Round C Warrants are described in Note 3 to the unaudited condensed consolidated financial statements.

  

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company filed a Form S-1 Registration Statement with the SEC, which became effective on October 31, 2013. The Effectiveness Date Market Price of Vaccinogen stock as of that date was $5.35. Pursuant to the protection provided to subscribers prior to October 31, 2013, 27,213 adjustment shares were issued. All subscriptions subsequent to the October 31, 2013 effective date through December 31, 2013 have been issued adjustment shares, totaling 31,811 and 14,691 adjustment shares issued for the six months ended June 30, 2014. All of the adjustment shares are included in the calculation of total shares issued or outstanding for the periods ended June 30, 2014 and December 31, 2013.

 

During 2013, the Company raised additional capital of $4,205,105 through the issuance of 764,578 shares of common stock (Round C), 21,465 adjustment shares and common stock warrants (Round C Warrants) to purchase 229,368 shares of common stock. $3,253,316 was allocated to the common stock;, $926,581 was allocated to the common stock warrants; $14,542 represents placement agent commissions paid and $10,746 was allocated to placement agent warrants. The Round C common stock warrants were determined to be a derivative financial instrument.

 

During 2013, several investors in the Bridge Loan opted to convert their loan to equity in the amount of $937,970 and the Company issued 170,540 shares of common stock (Round C), 4.787 adjustment shares and common stock warrants (Round C Warrants) exercisable into 51,159 shares of common stock. $751,561 was allocated to the common stock and $186,409 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. The terms and conditions of the Round C Warrants are described in Note 3 to the unaudited condensed consolidated financial statements.

 

The Company has increased the size of the Round C Private Placement Offering to $30,800,000 (5,600,000 Units) and extended the Final Closing Date to December 31, 2014.

 

Series AA Preferred Stock

 

In 2010, the Company created a class of preferred stock known as Series AA preferred stock and authorized 15,000,000 shares for issuance as Series AA preferred stock. All shares of Series AA were issued with an original purchase price of $9.0797 per share (“Series AA Original Issuance Price”). From January 13, 2011 to October 24, 2011, the Company issued 123,015 shares of Series AA Preferred Stock to 15 third party investors in a private offering at a price of $9.0797 per share resulting in net proceeds of approximately $1.1 million after approximately $14,000 in related stock issuance costs. As noted above, all shares of Series AA were converted into common stock of the Company in 2012.

 

Series B Preferred Stock

 

In 2010, the Company created a class of preferred stock known as Series B preferred stock and authorized 35,000,000 shares for issuance as Series B Preferred Stock. All shares of Series B were issued pursuant to a Stock Exchange Agreement entered into concurrently with the June 2010 Asset Transfer Agreement with Intracel. As noted above, all shares of Series B were converted into common stock in 2012.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

10. Stock-Based Compensation

 

Restricted Stock

  

As of June 30, 2014 and June 30, 2013, total unrecognized compensation costs related to nonvested restricted stock awards to purchase 134,278 shares of common stock was approximately $430,000 and $350,000 respectively, which will be recognized upon a successful initial public offering of the Company’s stock. The nonvested restricted stock awards have a weighted average remaining contractual term of 6.96 years as of June 30, 2014. No awards vested during the three and six months ended June 30, 2014 and 2013.

 

Stock Option Pool

 

The Company recorded stock based compensation in the amount of $11,066 and $33,669 for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2014, $4,777 and $9,554 was allocated to General & Administrative expense with $6,289 and $24,115 was allocated to Research & Development, respectively.

 

Total compensation costs for unvested stock option awards outstanding at June 30, 2014 was approximately $342,000 to be recognized over approximately 3.0 years.

 

The Company recorded stock based compensation in the amount of $6,748 and $6,748 for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2013, $1,223 and $1,223 was allocated to General & Administrative expense with $5,525 and $5,525 was allocated to Research & Development, respectively.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

Stock Purchase Warrants

 

From time to time the Company has issued stock purchase warrants to non-employees in exchange for services.  As of June 30, 2014 and 2013 there are 820,575 and 785,575, respectively, warrants issued and outstanding with exercise prices ranging from $1.00 to $7.50. To date, all warrants have been issued with the exercise price at least equal to the then estimated fair value of the underlying security, and had contractual terms ranging from 2.5 to 7.5 years.

 

The following table summarizes the stock purchase warrant activity for the six months ended June 30, 2014 and 2013.

 

		2014								2013
		Shares				Weighted Average Fair Value				Shares				Weighted Average Fair Value
Balance, January 1			785,575			$	1.48				785,575			$	1.48
Granted			35,000				4.22				-				-
Balance, June 30			820,575			$	1.72				785,575			$	1.48

 

 

The following table summarizes information on warrants outstanding as of June 30, 2014:

 

Exercise price		Shares				Weighted Average Remaining Life				Weighted Average Exercise Price
$1.00			705,575				0.55			$	1.00
$5.50			80,000				3.24			$	5.50
$7.50			35,000				4.76			$	7.50
Total			820,575

  

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

11. Commitments and Contingencies

 

Leases

 

The Company leases office space, a manufacturing facility, and equipment under operating leases expiring at various dates 2014 and 2015. In addition, the Company leases storage facilities on a month to month basis. Rent expense was approximately $42,000 and $83,000 for the three and six months ended June 30, 2014, respectively. Rent expense was approximately $39,000 and $80,500 for the three and six months ended June 30, 2013, respectively.

 

Minimum future rental payments under non-cancelable operating leases, including amendments to leases entered through the date the financial statements were available to be issued, total $61,811 for 2014 and $20,968 for 2015 for a total of $82,779.

 

Litigation

 

The Company may be subject to certain claims arising in the ordinary course of business. The Company and a vendor are in dispute over amounts owed for services performed. A demand for payment under a written agreement has been made against the Company in the amount of approximately $150,000. Management believes the vendor did not perform under the terms of the contract and contends that no amounts are due to the vendor. Management has offered to settle the matter for $75,000 to be paid upon the Company’s successful initial public offering and has accrued $75,000 in the accompanying unaudited condensed consolidated financial statements.

 

VAT Taxes

 

The foreign subsidiary of the Company, located in The Netherlands, was presented with a VAT tax bill for the years 2010 and 2011 in the amount of 65,666€. The Company is appealing the decision as it believes that it should be VAT exempt. There has not yet been a decision made by the Dutch authorities and there is no estimate of when a decision will be made. In the event an unfavorable decision is made, the Company will be required to pay the full amount plus interest. The original bill at the June 30, 2014 exchange rate would have a USD equivalent of approximately $90,000. There has been no expense accrued on the accompanying unaudited condensed consolidated financial statements.

 

 

VACCINOGEN, INC. AND SUBSIDIARY

Notes to Unaudited Condensed Consolidated Financial Statements

 

12. Related Party Transactions

 

During April 2014, an executive of the Company loaned the Company $20,000. As of June 30, 2014 $10,000 remained unpaid. The carrying value of this amount due to the Company executive is included in related party payable in the accompanying unaudited condensed consolidated financial statements as of June 30, 2014.

 

13. Supplemental Disclosure of Cash Flow Information

 

For the six months ended June 30, 2014 and June 30, 2013 the Company paid interest costs of approximately $40,767 and $233,937, respectively.

 

From January 1, 2014 through June 30, 2014, the Company raised additional capital totaling approximately $ 2.5 million (net of issuance costs) from the issuance of 463,963 shares of Round C Common Stock, 13,033 Adjustment Shares and additional Round C Warrants to purchase 139,184 shares of common stock. The Company allocated approximately $1.9 million of the total 2014 proceeds to the common stock and approximately $0.6 million of the total proceeds to the common stock warrants.

 

In January 2014, the Company issued 54,545 shares of common stock to certain holders of the 2012 Bridge Loan that had elected to convert their rights, with a value of $300,000 into common stock of the Company. The Company also issued Round C Warrants exercisable into 16,363 shares of common stock of the Company, with an exercise price of $6.05 per share.

 

From January 1, 2013 through June 30, 2013, the Company raised additional capital totaling approximately $2.6 million (net of issuance costs) from the issuance of 478,697 shares of Round C Stock and additional Round C Warrants to purchase 143,607 shares of common stock. The Company allocated $2.0 million of the total 2013 proceeds to the common stock and $0.6 million of the total proceeds to the common stock warrants.

 

In May 2013, the Company issued 152,359 shares of common stock to certainholders of the 2012 Bridge Loan that had elected to convert their rights, with a value of $838,000, into common stock of the Company. The Company also issued additional Round C Warrants exercisable into 45,705 shares of common stock of the Company, with an exercise price of $6.05 per share.

 

14. Subsequent Events

 

In accordance with ASC 855-50, “Subsequent Events,” the Company has reviewed events through the date of the filing.

 

July 1, 2014 through August 15, 2014, the Company raised additional capital totaling approximately $274,000 (net of issuance costs) through the issuance of 50,636 shares of Common Stock, warrants to purchase 15,190 shares of Common Stock and 1,424 Adjustment Shares.

 

On August 14, 2014 The Abell Foundation, under the Seventh Amended and Restated Promissory Note made February 1, 2014 by Vaccinogen, Inc. to the order of Abell, extends the maturity date until August 22, 2014, for no additional consideration.

 

 

ITEM 2 -. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements and notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from Management's expectations. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying unaudited condensed consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows.  Our MD&A is organized as follows:

 

•

Overview — Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of MD&A.

 

•

Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2014 and beyond.

 

•

Critical Accounting Policies— Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.

 

•

Results of Operations— Analysis of our financial results comparing 2014 and 2013.

 

•

Liquidity and Capital Resources— An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and future liquidity needs.

 

The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Overview” and “Trends & Outlook” section. Our actual results may differ materially.

  

Overview

 

We are a biotechnology company founded in 2007 relying on over three decades of prior research by our Chief Executive Officer and his colleagues into combating cancer by using the body’s own immune system. Vaccinogen is the developer of OncoVAX®, which we believe is the only patient specific immunotherapy for Stage II colon cancer and our technology may also have application in other tumor types, notably melanoma and renal cell carcinoma.

 

Colon cancer represents the third most common form of cancer in both the US and Europe. American Cancer Society statistics suggest there will be about 102,000 new cases of colon cancer diagnosed within the US. The European Cancer Observatory estimates that there were about 245,000 new cases of colon cancer across Europe.

 

 

We have broad patents covering the OncoVAX® technology in the U.S. and eight other countries, Australia, Canada, Switzerland, Germany, France, Great Britain, Ireland and Italy. These patents and applications provide broad coverage for the production of autologous cancer vaccines. The key protection of OncoVAX®, in addition to considerable expertise protected as trade secrets, is the broad, issued patent protection around the production of autologous, sterile, metabolically active cancer vaccines developed by us. This patent, entitled “Sterile Immunogenic Non-Tumorigenic Tumor Cell Composition and Methods” was issued in 2009 and expires no sooner than 2025. We believe that sterility will be required for any product to reach the US market and likely in any other market with an approved sterile vaccine like the one we have developed. This could result in a regulatory barrier to entry to competitors.

 

We hold 1 U.S. patent to related technologies and including the sterility patent referred to above, 2 U.S. patents total.

 

We also rely upon unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. We hold considerable proprietary expertise related to the OncoVAX® technology, including the production of autologous cancer vaccines. We have brand names for our OncoVAX® products and related technologies, and anticipate filing 5 trademark applications for these and related marks.

 

All of our research efforts to date are at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual property, our scientific team and our facilities, to advance our technologies.

 

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30, in which case we would no longer be an emerging growth company as of the following December 31.

 

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies.

 

Operating Strategy

 

We will maintain a cGMP facility and outsource clinical activities to contract research organizations (“CRO) in an effort to achieve the following:

 

1.

Complete the pivotal Phase IIIb clinical trial of this autologous vaccine, OncoVAX®, which is a new paradigm to prevent the recurrence of stage II colon cancer. The planned trial will closely replicate a successful prior Phase IIIa study (which study we believe demonstrated a 50% improvement in recurrence free survival and overall survival in the Stage II target patient population as compared to surgergy alone).

 

2.

Develop revenues by establishing licensing arrangements for distribution of OncoVAX® in certain territories as well as for additional carcinoma indications.

  

 

3.

Develop diagnostic and therapeutic drug products as well as revenues by exploiting our distinctive Human Monoclonal Antibodies (“HuMabs”) technology.

 

Trends & Outlook

 

Revenue

 

To date, the Company has not earned any revenues as the use of OncoVAX® to create cancer related vaccines is still undergoing clinical trials and has not yet received regulatory approval for commercialization and sale.

 

We are mainly focused on: preparing for the initiation of Phase IIIb clinical trials relating to OncoVAX® and our research regarding human monoclonal antibodies (HuMabs).

 

On a long-term basis, we anticipate that our revenue will be derived primarily from global sales of our OncoVAX® product and licensing fees. Commercialization of the OncoVAX® product is dependent on successful completion of a Phase IIIb clinical trial and subsequent approval by the FDA.

 

Research & Development Expenses

 

Our research and development costs consist of expenses incurred in activities connected with the development of a stage II colon cancer vaccine. These expenses consist primarily of the amortization of intangible assets, cost of conducting clinical trials, salaries and related expenses for personnel, fees paid to professional service providers and, costs of a manufacturing facility in The Netherlands. We expect that research and development expenses will increase in the near term with the onset of the Phase IIIb clinical trial.

 

Clinical Trials

 

The FDA has requested a second, confirmatory, randomized controlled Phase III trial of OncoVAX® in Stage II colon cancer. The principal objective of Vaccinogen is to organize a team to conduct a confirmatory Phase IIIb trial in Stage II colon cancer. The protocol of this trial, including endpoints and the statistical analysis plan is the subject of an Special Protocol Assessment (SPA) agreement granted by the FDA.

 

This study will be carried out under a (SPA) that was negotiated with the FDA in 2010. An SPA granted by the FDA provides a mechanism for the sponsors and the FDA to reach agreement on size, execution and analysis of a clinical trial that is intended to form the primary basis for regulatory approval. The primary endpoint of this pivotal Phase IIIb trial is recurrence-free survival (RFS) with an interim analysis after 70 “events,” and a final primary analysis three years following completed enrollment. “Events” are incidents of either recurrent disease or death. The study is powered at 90% to detect a 50% improvement in RFS versus resection only for final analysis with an adjustment for interim analysis. The power calculations in the study assume an event rate and distribution that match those observed in the 8701 Phase IIIa study. If a robust p value is achieved at the interim analysis, the Biologics License Application (BLA) can be filed with the FDA’s center for Biologics Evaluation and Research (CBER) at that point. Past clinical trials using the optimal regimen with four immunizations will be accepted as supportive studies during the FDA review of the BLA.

 

 

The Phase IIIb study will enroll 550 patients, randomized 1:1 to receive surgery alone, or surgery plus OncoVAX®. Patients will be followed on a regular schedule to see whether and when their cancer might reappear. The experience with OncoVAX® in the 8701 study showed that in the relevant Stage II group, disease recurrence happened more quickly and more frequently in those patients who received surgery alone. If the Phase IIIb trial replicates the experience of the 8701 patients, the interim analysis after 2/3 of the expected events should give a clear and statistically significant separation between the Kaplan-Meier curves at that point, and would form the basis for a BLA seeking marketing approval from the FDA. The planned Phase IIIb clinical trial will commence within 60 days of obtaining adequate funding. Management currently estimates that approximately $30 million in committed funding will be required to commence the Phase IIIb clinical trial.

 

It is important to emphasize that the FDA has agreed that RFS is the most appropriate endpoint to evaluate a trial in Stage II colon cancer. The alternative in cancer studies is often overall survival (OS). An OS endpoint has several drawbacks in this case. The average age of patients presenting with colon cancer is 65 years, so deaths from causes other than the tumor will dilute the outcome in both arms. Patients in either arm whose disease recurs will receive chemotherapy and other treatments for their metastatic disease, and the success of these treatments will dilute the impact of earlier therapies such as OncoVAX® on OS. From a patient perspective, being disease free is clearly a meaningful endpoint.

 

General and Administrative Expenses

 

Our general and administrative (“G&A”) expenses consist of the general costs, expenses and salaries for the operation and maintenance of our business. We anticipate that general and administrative expenses will increase as we progress through the clinical phase of development into commercialization.

 

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 3 of the Notes to consolidated financial statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

 

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

 

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

 

 

Use of Estimate - Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. On an ongoing basis, the Company evaluates the estimates used in recording common stock warrant related liabilities, derivative financial instruments, stock based compensation, and where applicable, the fair value of assets. The Company may base such estimates on various assumptions including information received from valuation consultants which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.

 

Intangible Assets- Intangible assets consist primarily of the cost of the acquired patents associated with OncoVAX® to be used in research and development and the commercialization cancer related vaccines. The Company has capitalized the cost of OncoVAX® because the Company has identified alternative future research and development efforts for numerous forms of cancer which it intends to pursue and for which management believes will result in commercialization of related vaccines. Acquired patents are carried at cost less accumulated amortization. Amortization is calculated on a straight-line basis, over the estimated useful economic life of the patent, which is 12.6 years for OncoVAX®.

 

Long-lived assets, including identifiable intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When events or circumstances indicate that assets may not be recoverable, the Company prepares cash flows, undiscounted, for each asset or asset group. The Company groups assets for this purpose at the lowest level for which identifiable cash flows exist or are projected to exist. If the sum of the undiscounted cash flows exceeds the carrying value of the asset or asset group, no impairment is deemed present. If the sum of undiscounted cash flows is less than the carrying amount of the asset or asset group, the Company records an impairment charge, if any, for the amount by which the carrying value exceeds the estimated sum of undiscounted cash flows of the asset or asset group.

 

The Company considers various factors when evaluating whether there are indications that the carrying value of its intangible assets may not be recoverable. Among others, those factors include, adverse changes in marketplace conditions or in the regulatory or legal environment impacting the anticipated use of OncoVAX® and related patents for their intended purpose in research and development and eventual commercialization, significant increases as compared to budget in the level of investment necessary to conduct research and development, clinical trials, and eventual commercialization of OncoVAX®, significant negative variances to budget for operating losses and operating cash flow deficits, and indications of adverse changes in the value of the Company’s equity.

 

The Company considers these factors no less frequently than the end of each reporting period, including as of June 30, 2014. The Company has noted no adverse change in the demand for the development and commercialization of cancer related vaccines indicated in part by the continuing interest of new and existing investors to fund the Company’s ongoing research and development. The Company has considered the progress of its research and development activities against its operating plan noting the timing for the conduct of its clinical trials and recertification of its production facilities remains consistent with its operating plan. The Company has also evaluated its financial performance and cash flow results noting that the level of investment necessary to conduct its research and development, complete necessary testing for regulatory approval, and begin eventual commercialization of cancer related vaccines remains consistent with its operating plan and financial budgets. The Company also has noted no adverse change in the estimated fair value of the Company based upon values indicated in its ongoing capital raising activities.

 

 

Through June 30, 2014, the Company has determined that there have been no events or circumstances that would indicate that the carrying value of its intangible assets is not recoverable.

 

Fair Value of Financial Instruments - Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.

 

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, as defined by the new guidance related to fair value measurements and disclosures, and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

Level 1-		Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
		We carry no investments classified as Level 1.
Level 2-		Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument's anticipated life.
		We carry no investments classified as Level 2.
Level 3-		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management's best estimate of what market participants would use in pricing the asset or liability at the reporting date.  Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.   Our Abell Warrants, Round C Warrants, Bridge Loan and Abell Investment Option obligations are considered Level 3.

 

For a further discussion regarding fair value measurements, see Note 8 on Fair Value in the Notes to consolidated financial statements.

 

Accounting for Warrants – We have adopted FASB guidance related to determining whether an instrument or embedded feature is indexed to an entity’s own stock.  This guidance applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined in ASC Topic 815, Derivatives and Hedging, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result, certain of our warrants were considered to be derivatives and were valued using various assumptions as they are recorded as liabilities.

 

 

Research and Development Costs – Research and development costs that do not have alternative future use are expensed as incurred. Research and development expenses primarily include the amortization of intangible assets, cost of conducting clinical trials, compensation and related overhead for employees, consultants, facilities costs and the cost of materials purchased for research and development.

 

Stock Based Compensation – The Company measures the cost of employee services received in exchange for stock options or restricted stock awards based upon the fair value of the award on the date of the grant. The Company recognizes the estimated grant date fair value of the award as stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period.

 

The Company initially measures the cost of awards granted to non-employees based on the fair value of the award on the date of grant however such cost is re-measured at the end of each reporting period until performance is fully satisfied or services are rendered by the non-employee.

 

The fair value of stock options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The fair value of non-vested stock awards is determined based upon the market value of the Company's common stock.

 

Results of Operations

 

Consolidated Statement of Operations Data

 

		Three Months Ended June 30,								Six Months Ended March 31,
		2014				2013				2014				2013
Revenues		$	-			$	-			$	-			$	-
Operating Expenses:
Research and development			2,102,699				2,116,484				4,122,828				4,189,668
General and administrative expenses			986,842				1,042,931				1,694,768				7,972,691
Total Operating Expenses			3,089,541				3,159,415				5,817,596				12,162,359
Loss from Operations			(3,089,541	)			(3,159,415	)			(5,817,596	)			(12,162,359	)
Gain (Loss) on Financial Instruments			2,841,816				(809,301	)			4,744,639				(1,223,196	)
Interest and Other Expenses			(875,395	)			(71,791	)			(1,728,280	)			(137,021	)
Net Loss		$	(1,123,120	)		$	(4,040,507	)		$	(2,801,237	)		$	(13,522,576	)

  

 

Revenue

 

Since inception, we have not earned any revenues as the use of OncoVax® to create cancer related vaccines is still undergoing clinical trials and has not yet received regulatory approval for commercialization and sale.

 

Operating Expenses – Three Months Ended June 30, 2014 and 2013

 

Our operating expenses totaled $3,089,541 and $3,159,415 in the three months ended June 30, 2014 and June 30, 2013 respectively. The operating expenses are discussed in further detail below.

 

Research and Development Expenses

 

		Three Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Research & Development		$	2,102,699			$	2,116,484			$	(13,785	)			-0.65	%

 

Research and development (R&D) expenses were essentially unchanged for the three months ended June 30, 2014 and 2013. R&D expenses include the operation and maintenance of the Netherlands facility and preparation for the Phase IIIb clinical trial and approximately $1.7 million for amortization of intangibles, related to OncoVax® intellectual property, for the three months ended June 30, 2014 and 2013.

 

General and Administrative Expenses

		Three Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
General & Administrative		$	986,842			$	1,042,931			$	(56,089	)			-5.38	%

 

General and administrative expenses decreased by $56,089 in the three months ended June 30, 2014 over the three months ended June 30, 2013. The decrease was attritutabe todecreases of accounting fees ($280,000); consulting fees ($236,000) and partially offset by increases in legal fees ($342,000), public relations/investor relations ($107,000) and personnel costs ($16,000).

 

Nonoperating Expense – Three Months Ended June 30, 2014 and 2013

 

Nonoperating income and (expenses) were $1,966,421and ($881,092) in the three months ended June 30, 2014 and 2013 respectively. The nonoperating expenses are discussed below.

  

 

Gain (Loss) on Financial Instruments

 

		Three Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Gain (Loss) on Financial Instruments		$	2,841,816			$	(809,301	)		$	3,651,117				*

      * Not meaningful

 

Recorded gains or losses on Financial Instruments may fluctuate from period to period as determination of fair value is based on Vaccinogen stock values and management’s assessment of the probability of qualifying events which may affect the fair value of the Financial Instrument. The closing stock price at June 30, 2014 was $4.68 and at March 31, 2014 was $6.50. This decline in stock price had a significant impact on the fair value of the Financial Instruments creating a gain for the three months ended June 30, 2014.

 

In the three months ended June 30, 2014 Gains on Financial Instruments were generated due to changes in the estimated fair value of the Abell Warrants ($385,667), Round C Warrants ($755,213) and the Abell Option ($1,700,936).

 

In the three months ended June 30, 2013 Losses on Financial Instruments were generated due to changes in the estimated fair value of the Abell Warrants ($107,404), Round C Warrants ($38,549), the Abell Option ($579,548) and the Bridge Loan 2:1 ($83,800).

 

Interest and Other Expenses

 

		Three Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Interest & Other Expenses		$	(875,395	)		$	(71,791	)		$	(803,604	)			*

        * Not meaningful

 

Interest & Other Expenses increased to $875,395 for the three months ended June 30, 2014 from $71,791 for the comparable period in 2013. The increase is primarily due to non-cash interest expense relating to the issuance of contingent warrants under the Amendment No. 7 to the Note and Warrant Purchase Agreement with The Abell Foundation in the amount of approximately $847,000.

 

Operating Expenses – Six Months Ended June 30, 2014 and 2013

 

Our operating expenses totaled $5,817,596 and $12,162,359 in the six months ended June 30, 2014 and June 30, 2013 respectively. The operating expenses are discussed in further detail below.

 

 

Research and Development Expenses

 

		Six Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Research & Development		$	4,122,828			$	4,189,668			$	(66,840	)			-1.60	%

 

Research and development (R&D) expenses were essentially unchanged for the six months ended June 30, 2014 and 2013. R&D expenses include the operation and maintenance of the Netherlands facility and preparation for the Phase IIIb clinical trial and approximately $3.4 million for amortization of intangibles, related to OncoVax® intellectual property, for the six months ended June 30, 2014 and 2013.

 

General and Administrative Expenses

 

		Six Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
General & Administrative		$	1,694,768			$	7,972,691			$	(6,277,923	)			-78.74	%

 

Genaral and Administrative expenses decreased for the six months ended June 30, 2014 as compared to the same period in 2013 primairly due to the estimated value ($5,954,545) of the Abell Option issued with respect to the Abell Investment Agreement in January 2013 as discussed in Note 3 of the unaudited condensed consolidated financial statements.

 

Nonoperating Expense – Six Months Ended June 30, 2014 and 2013

 

Nonoperating income and (expenses) were $4,744,639 and ($1,223,196) in the six months ended June 30, 2014 and 2013 respectively. The nonoperating expenses are discussed below.

 

		Six Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Gain (Loss) on Financial Instruments		$	4,744,639			$	(1,223,196	)		$	5,967,835				*

 * Not meaningful

 

Recorded gains or losses on Financial Instruments may fluctuate from period to period as determination of fair value is based on Vaccinogen stock values and management’s assessment of the probability of qualifying events which may affect the fair value of the Financial Instrument. The closing stock prices at June 30, 2014 was $4.68 and at June 30, 2013 was $7.00. This decline in stock price had a significant impact on the fair value of the Financial Instruments creating a gain for the six months ended June 30, 2014.

 

In the six months ended June 30, 2014 Gains on Financial Instruments were generated due to changes in the estimated fair value of the Abell Warrants ($625,436), Round C Warrants ($1,130,509) and the Abell Option ($3,018,694) offset by a loss on the Bridge Loan 2:1 of ($30,000).

 

 

In the six months ended June 30, 2013 Gains on Financial Instruments were attributable to the change in the estimated fair value of the Round C Warrants ($6,068) offset by Losses for Abell Warrants of approximately ($260,216),Abell Option ($579,548) and the Bridge Loan 2:1 ($389,500)

 

		Six Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Interest & Other Expenses		$	(1,728,280	)		$	(137,021	)		$	(1,591,259	)			*
		*    Not meaningful

 

Interest expense increased for the six months ended June 30, 2014 over the same prior year period due to the Contingent Interest Warrants issued to The Abell Foundation, which were expensed as interest expense, for approximately $1.6 million.

  

Liquidity and Capital Resources

 

Since our inception, we have financed our operations through the private placement of our securities. During the six months ended June 30, 2014 and 2013 we raised gross proceeds of approximately $2.6 million and $2.6 million respectively.

 

		Six Months Ended June 30,								Change in 2014 v. 2013
		2014				2013				$				%
Net cash used in operating activities		$	(1,851,494	)		$	(2,415,681	)		$	564,187				-23.36	%
Net cash used in investing activities			(1,500	)			(722	)			(778	)			107.76	%
Net cash provided by  financing activities			1,803,800				2,410,388				(606,588	)			-25.17	%
Effect of foreign exchange rate changes on cash and equivalents			12,371				41,356				(28,985	)			-70.09	%
Net (decrease) increase in cash and  cash equivalents		$	(36,823	)		$	35,341			$	(72,164	)			-204.19	%

 

Cash & Cash Equivalents

 

Total cash and cash equivalents were $36,273 at June 30, 2014, compared with $149,181 at June 30, 2013, for a decrease of $112,908. Cash balances will fluctuate from one reporting period to another based on the amount and timing of the issuance of our common stock and warrants for cash.

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities was approximately $1,851,000 and $2,416,000 for the six months ended June 30, 2014 and 2013 respectively, inclusive of both cash and non cash adjustments to net losses of $2,801,237 and $13,522,576 for the six months ended June 30, 2014 and 2013 respectively.

 

Non cash adjustments were the driving force in the adjustments with respect to changes in the Gain and Loss of Financial Instruments of approximately $6,000,000, and other stock based expense of approximately $5,900,000 related to the Abell Option as described in Note 3 to the attached unaudited condensed consolidated financial statements. These adjustments were offset by increases of stock based compensation of approximately $27,000 and non cash interest expense of approximately $1,641,000 related to the Abell Note and Warrant Purchase Agreement as described in Note 7 to the attached unaudited condensed consolidated financial statements.

 

 

Net Cash Used in Investing Activities

 

We invested $1,500 and $722 in the six months ended June 30, 2014 and 2013 respectively in purchases of property and equipment. 

 

Net Cash Provided by Financing Activities.

 

Listed below are key financing transactions entered into by us during 2014:

 

·

During the six months ended June 30, 2014 we raised additional capital of approximately $2.6 million through the issuance of 463,963 Units Round C common stock (each Unit consisting of 1 share of common stock and a common stock purchase warrant to purchase 0.3 shares of common stock).

 

·

A principal reduction in the Abell Loan was made in the amount of approximately $557,000 and the maturity date has been extended to August 22, 2014.

 

·

We also used approximately $22,000 in proceeds for payment of placement agent and finders fees.

 

Listed below are key financing transactions entered into by us during 2013:

 

·

During the six months ended June 30, 2013 we raised additional capital of approximately $2,632,836 through the issuance of 478,697 Units Round C common stock (each Unit consisting of 1 share of common stock and a common stock purchase warrant to purchase 0.3 shares of common stock).

 

Future Liquidity & Needs

 

We have incurred significant operating losses and negative cash flows since inception. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for our Phase IIIb clinical trial, pursuit of regulatory approvals, acquisition of capital equipment, costs to maintain office and manufacturing facilities, for general and administrative expenses and other working capital requirements. The planned Phase IIIb clinical trial will commence within 60 days of obtaining adequate funding. Management currently estimates that approximately $30 million in commmited funding will be required to commence the Phase IIIb clinical trial. We rely on cash balances and the proceeds from the offering of our securities to fund our operations. As of June 30, 2014 we had $36,273 in cash which is less than one month’s cash required to fund operations. Our current monthly cash requirement committed approximately $500,000.

 

We have recurring losses and negative cash flows from operating activities and have significant future commitments, and as a result substantial doubt exists regarding our ability to remain in operation at our current level. The report of BDO USA, LLP, our independent registered accounting firm, with respect to our audited consolidated financial statements at December 31, 2013 contains an explanatory paragraph as to our potential inability to continue as a going concern. Additionally, this may adversely affect our ability to obtain new financing on reasonable terms or at all.

 

 

We are continuing our Unit (Round C) offering of common stock and warrants. The total offering is for $30,800,000 (or 5,600,000 Units) of which 5,229,454 million units are being offered for cash and 370,546 Units are being offered for cancellation of certain outstanding indebtedness. The Units have a purchase price of $5.50 per Unit and are comprised of one share of Common Stock and one Warrant, exercisable for five years, to purchase three-tenths (0.3) of a share of Common Stock at an exercise price of $6.05 per whole share. These securities were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

  

On April 24, 2014 we entered into a binding agreement (the “Agreement”) with the Investment Syndicate, a group of investors (“TIS”), pursuant to which TIS has agreed to purchase (a) up to 3,636,364 units (“Units”), each Unit consisting of one share of our common stock and one warrant, exercisable for five years, to purchase three tenths (0.3) of a share of common stock at an exercise price of $6.05 per whole share, at $5.50 per Unit, for a total of $20,000,000, in our current Unit (Round C) offering, and (b) up to 10,909,091 shares of our common stock at $5.50 per share, for a total of up to an additional $60,000,000, all in up to five closings, with certain terms and conditions. TIS’ obligation to purchase any Units (or shares of common stock) under the Agreement is subject to the satisfaction of these closing conditions. There can be no assurance that any of these conditions will be met or that TIS will purchase any Units or common stock. A full description of this transaction is set forth in our Current Report on Form 8-K dated April 24, 2014 and filed with the SEC on April 28, 2014.

 

We do not have sufficient capital to fund our plan of operations over the next twelve months. In order to address our capital needs, including our planned Phase IIIb clinical trial, we are continuing our private offering of Units, and we are actively pursuing additional equity or debt financing, in the form of either a private placement or a public offering. We have been in ongoing discussions with strategic institutional investors and investment banks with respect to such possible offerings. Such additional financing opportunities might not be available to us, when and if needed, on acceptable terms or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected.

 

Off-Balance Sheet Arrangements

 

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.

 

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 

ITEM 4 - CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.

 

Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II: OTHER INFORMATION

 

ITEM 1 - LEGAL PROCEEDINGS

 

We are currently in a dispute with a vendor regarding amounts owed for services performed. A demand for payment under a written agreement has been made in the amount of approximately $150,000. Management believes the vendor did not perform under the terms of the contract and contends that no amounts are due. Settlement discussions between the parties are continuing. We have reserved $75,000 under our financial statements for resolution of this matter.

 

We are party to claims and litigation that arise in the normal course of business. Management believes that the ultimate outcome of these claims and litigation will not have a material impact on our financial position or results of operations.

 

 

ITEM 1A - RISK FACTORS

 

As a “smaller reporting company” as defined by Item 10 of regulation S-K, we are not required to provide information required by this item.

 

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

1.

From May 14, 2014 through August 15, 2014, we issued 111,545 units (“Units”) for cash. Each Unit consists of 1 share of common stock and a warrant to purchase 0.3 shares of common stock resulting in the issuance of 111,545 shares of common stock and warrants to purchase 33,463 shares of our common stock. The purchase price for each unit was $5.50 per unit and the exercise price for each warrant was $6.05 per shares. We received gross proceeds $613,500 from the sales of these Units used approximately $139,000 for partial repayment of outstanding indebtedness to The Abell Foundation and $10,000 as repayment of related party loans. The remaining proceeds were used for working capital and general corporate purposes. These issuances were exempt under Rule 506 of the Securities Act of 1933, as amended. All investors in Unit offering were accredited investors and were solicited by officers (Michael Hanna and Andrew Tussing) of Vaccinogen and all investors had a substantial pre-existing relationship with such officers of Vaccinogen. The shares of common stock and warrants received were issued as restricted securities and all certificates issued contained a legend stating the shares have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and the sale of the shares under the Securities Act.

 

2.

The Units referred to in paragraph 1. above contained anti-dilution rights such that if the market price of our Common Stock on the effective date of our first S-1 registration statement filed with the SEC (the “Effectiveness Date Market Price”) was less than $5.50 per share, then we agreed to each subscriber of the Units, for no additional consideration, such number of shares (“Adjustment Shares”)  of Common Stock equal to the difference between (x) the number of shares of our Common Stock that would have been issued to purchaser if the per-Unit purchase price for such shares had been equal to either (1) the Effectiveness Date Market Price or (2) $5.00, whichever is greater and (y) the number of shares of the Common Stock originally issued to purchaser upon the closing of the sale of Units.   The Effectiveness Date Market Price was $5.35 on October 31, 2013.  Accordingly, we issued 773 Adjustment Shares to the Unit subscribers under paragraph 1 above.  The Adjustment Shares were issued to all accredited investors and were issued as restricted securities and all certificates for such shares contained stating that the shares have not been registered under the Securities Act of 1933, as amended, and setting forth or referring to the restrictions on transferability and the sale of the shares under the Securities Act of 1933, as amended.  We relied on the exemption provided by  Rule 506 of the Securities Act of 1933, as amended for issuance of the Adjustment Shares.  We did not receive any proceeds for issuance of the Adjustment Shares.

 

3.

See our Current Report on Form 8-K dated April 24, 2014 and filed with the SEC on April 28, 2014.

 

 

4.

See our Item 2 under our Quarterly on Form 10-Q for the period ended March 31, 2014.

 

ITEM 3 - DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 - OTHER INFORMATION

 

None.

 

 

ITEM 6 – EXHIBITS

 

Exhibit Number
31.1		Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Schema Linkbase Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Definition Linkbase Document
101.LAB		XBRL Taxonomy Labels Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

 

SIGNATURES

 

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.

 

		VACCINOGEN, INC.
Dated:	August 19, 2014	By:	/s/ Michael G. Hanna, Jr., Ph.D.
			Michael G. Hanna, Jr., Ph.D.
			Chairman and Chief Executive Officer (Principal Executive Officer)
Dated:	August 19, 2014	By:	/s/ Andrew Tussing
			Andrew Tussing
			President, Chief Operating Officer and acting Chief Financial Officer (Principal Financial Officer)