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Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2015

OR

o   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: 0-50295 

 

OCATA THERAPEUTICS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

DELAWARE   87-0656515
(STATE OR OTHER JURISDICTION OF   (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)    

 

33 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 756-1212

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company o
   

(Do not check if a smaller

reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class:   Outstanding at October 30, 2015:
Common Stock, $0.001 par value per share   42,300,462 shares

 

 

 

 
 

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

INDEX

 

PART I. FINANCIAL INFORMATION      
       
ITEM 1. FINANCIAL STATEMENTS     3  
         
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     17  
         
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     23  
         
ITEM 4. CONTROLS AND PROCEDURES     23  
         
PART II. OTHER INFORMATION        
         
ITEM 1. LEGAL PROCEEDINGS     24  
         
ITEM 1A. RISK FACTORS     24  
         
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     24  
         
ITEM 6. EXHIBITS     25  
         
SIGNATURE     26  

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014 (UNAUDITED)

 

   September 30,   December 31, 
   2015   2014 
ASSETS          
           
CURRENT ASSETS:          
Cash and cash equivalents  $32,137,535   $4,424,374 
Prepaid expenses and other current assets   409,311    324,661 
Total current assets   32,546,846    4,749,035 
           
Property and equipment, net   822,682    832,963 
Deferred royalty fees   60,952    107,779 
Other assets   39,357    47,707 
TOTAL ASSETS  $33,469,837   $5,737,484 
           
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          
           
CURRENT LIABILITIES:          
Debt, current portion  $303,608   $ 
Accounts payable   1,791,049    1,271,325 
Accrued expenses   2,384,747    2,515,674 
Accrued settlement       1,731,202 
Lease liability, current portion   21,662     
Deferred revenue, current portion   157,873    157,873 
Total current liabilities   4,658,939    5,676,074 
           
Debt, less current portion and discount of $3,015   5,693,377     
Warrant liabilities   7,843,106    16,255 
Other liabilities       1,188,874 
Lease liability, less current portion   39,988     
Deferred revenue, less current portion   1,473,422    1,591,826 
Total liabilities   19,708,832    8,473,029 
           
Commitments and contingencies (Note 2)          
           
STOCKHOLDERS' EQUITY (DEFICIT):          
Common stock, $0.001 par value; 60,000,000 shares authorized, 42,300,462 and 34,620,218 shares issued and outstanding   42,300    34,620 
Additional paid-in capital   380,980,035    346,364,060 
Accumulated deficit   (367,261,330)   (349,134,225)
Total stockholders' equity (deficit)   13,761,005    (2,735,545)
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)  $33,469,837   $5,737,484 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3
 

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

  

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Revenue:                    
License & Royalty Revenue  $39,468    39,467    118,405    118,404 
Grant Revenue   44,784        44,784     
Total Revenue   84,252    39,467    163,189    118,404 
Cost of revenue   15,609    15,608    46,827    46,825 
Gross profit   68,643    23,859    116,362    71,579 
                     
Operating expenses:                    
Research and development   4,336,166    2,415,475    11,257,621    7,641,944 
General and administrative expenses   3,143,036    1,588,563    9,989,795    7,076,875 
Loss on settlement of litigation               13,468,547 
Total operating expenses   7,479,202    4,004,038    21,247,416    28,187,366 
Loss from operations   (7,410,559)   (3,980,179)   (21,131,054)   (28,115,787)
                     
Non-operating income (expense):                    
Interest income   1,804        1,804    55,840 
Interest expense   (46,791)   (69)   (47,228)   (429,573)
Other gain (loss)       221,581        (172,656)
Issuance expense   10,875        (893,314)    
Adjustment to fair value of unsettled warrant obligation               18,959 
Adjustments to fair value of derivatives   3,598,946    42,207    3,942,687    719,007 
Total non-operating income   3,564,834    263,719    3,003,949    191,577 
                     
Loss before provision for income tax   (3,845,725)   (3,716,460)   (18,127,105)   (27,924,210)
                     
Provision for income tax                
Net loss  $(3,845,725)  $(3,716,460)  $(18,127,105)  $(27,924,210)
                     
Preferred stock dividend       672,197        1,889,192 
                     
Net loss applicable to common stock  $(3,845,725)  $(4,388,657)  $(18,127,105)  $(29,813,402)
                     
Weighted average shares outstanding:                    
Basic and diluted   42,215,616    33,607,563    37,935,222    30,188,521 
                     
Net loss applicable to common share:                    
Basic and diluted  $(0.09)  $(0.13)  $(0.48)  $(0.99)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4
 

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED)

 

           Additional       Total Stockholders 
   Common Stock   Treasury Stock   Paid-in   Accumulated   Equity 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, December 31, 2014   34,620,218   $34,620       $   $346,364,060   $(349,134,225)  $(2,735,545)
Shares issued for services   33,750    34            166,166        166,200 
Stock based compensation                   4,362,036        4,362,036 
Vesting of RSUs   123,498    123    (32,500)   137,475    (137,598)        
Repurchase of common stock at cost for employee tax withholding           32,500    (137,475)           (137,475)
Issuance of common stock in financing arrangements, net of discounts and issuance costs of $2,612,466   7,522,996    7,523            30,225,371        30,232,894 
Net loss                       (18,127,105)   (18,127,105)
Balance, September 30, 2015   42,300,462   $42,300       $   $380,980,035   $(367,261,330)  $13,761,005 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5
 

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

  

   Nine Months Ended September 30, 
   2015   2014 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(18,127,105)  $(27,924,210)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   205,590    109,357 
Amortization of deferred charges   46,827    46,825 
Deferred revenue   (118,404)   (118,404)
Amortization of debt discount   30,378     
Stock based compensation   4,362,036    1,036,859 
Amortization of deferred issuance costs       65,903 
Amortization of discounts on senior secured convertible debentures       262,877 
Changes in fair value of warrant obligation       (18,959)
Changes in fair value of derivatives   (3,942,687)   (719,007)
Shares of common stock issued for services   166,200    198,309 
Non-cash financing costs   727,844    (203,358)
Loss on settlement of litigation       13,468,547 
Changes in operating assets and liabilities:          
Prepaid expenses and other assets   (76,300)   643,036 
Accounts payable and other liabilities   (2,531,279)   (3,410,934)
           
Net cash used in operating activities   (19,256,900)   (16,563,159)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchases of property and equipment   (126,799)   (135,891)
           
Net cash used in investing activities   (126,799)   (135,891)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of common stock and warrants   41,274,588    24,038,191 
Principal payments on capital lease obligations   (6,860)    
Purchase of treasury stock   (137,475)    
Proceeds from debt, net of issuance costs   5,966,607     
Repayment of senior secured convertible debentures       (1,200,000)
Redemption of Series B Preferred Stock, net       (70,129)
Net cash provided by financing activities   47,096,860    22,768,062 
           
NET INCREASE  IN CASH AND CASH EQUIVALENTS   27,713,161    6,069,012 
           
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE   4,424,374    1,743,485 
           
CASH AND CASH EQUIVALENTS, ENDING BALANCE  $32,137,535   $7,812,497 
           
CASH PAID FOR:          
Interest  $16,850   $100,793 
Income taxes  $   $ 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Capital expenditures funded by capital lease borrowings  $68,510   $ 
Accrued dividends on Series B and C Preferred Stock  $   $1,442,082 
Accretion of note receivable discount on Series B and C Preferred Stock  $   $1,348,270 
Issuance of 0 and 4,273,737 shares of common stock for accrued settlement  $   $25,977,600 
Issuance of 0 and 10,606,707 shares of common stock as commitment financing fee  $   $698,926 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6
 

 

OCATA THERAPEUTICS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. ORGANIZATIONAL MATTERS

 

Organization and Nature of Business

 

Ocata Therapeutics, Inc., and Subsidiary (the “Company”) is a clinical stage biotechnology company focused on the development and commercialization of Regenerative OphthalmologyTM therapeutics. The most advanced products are in clinical trials for the treatment of Stargardt’s macular degeneration, dry age-related macular degeneration, and myopic macular degeneration. The Company is also developing several pre-clinical terminally differentiated-cell therapies for the treatment of other ocular disorders. Additionally, the Company has a number of pre-clinical stage programs in disease areas outside the field of ophthalmology, including autoimmune, inflammatory and wound healing-related disorders. The Company’s intellectual property portfolio includes pluripotent human embryonic stem cell, or hESC; induced pluripotent stem cell, or iPSC, platforms; and other cell therapy technologies. The Company has no therapeutic products currently available for sale and does not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that the Company’s ability to continue research and development activities is dependent upon the ability of management to obtain additional financing as required.

  

The Company pursues a number of approaches to generating transplantable tissues both in-house and through collaborations with other researchers who have particular interests in, and skills related to, cellular differentiation. The Company’s research in this area includes projects focusing on the development of many different cell types that may be used to treat a range of diseases within ophthalmology and other therapeutic areas. Control of cellular differentiation and the culture and growth of stem and differentiated cells are important areas of research and development for the Company. Based on the success to date of the Phase 1 clinical trials and what the Company sees as favorable market dynamics of the ophthalmology sector, the Company’s strategic focus is primarily on the development, and ultimate commercialization of ophthalmology therapies. The largest indication involving macular degeneration is “age-related macular degeneration,” or AMD. AMD is the leading cause of blindness and visual impairment in adults over fifty years of age. The Company is also pursuing a treatment for Stargardt’s Macular Degeneration, or SMD, an inherited juvenile onset form of macular degeneration. The Company initiated the Phase 2 clinical trial for dry AMD in the third quarter of this year.

   

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation — The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, GAAP. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification™, sometimes referred to as the Codification or “ASC.” Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”).  The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10−K for the fiscal year ended December 31, 2014 filed with the SEC on March 16, 2015.  The results for the three and nine month periods ended September 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015, or any future period.

 

The accompanying consolidated financial statements have been prepared in conformity with GAAP which contemplate continuation of the Company as a going concern. Management’s plans to continue as a going concern contemplate raising additional capital including the debt financing completed in the third quarter of 2015 that resulted in approximately $6.0 million in net proceeds, the execution of an underwritten secondary offering completed in the second quarter of 2015 that resulted in approximately $28.4 million in net proceeds, and the prior execution of an agreement for a $30 million equity line in June 2014, of which approximately $5.8 million remains available as of September 30, 2015. The Company believes that its current cash balance, and the approximately $5.8 million available under the Lincoln Park financing arrangement as of September 30, 2015, will be sufficient to fund operations into the second half of 2016. The Company, as part of the debt financing completed in the third quarter of 2015, has the option, subject to the terms and conditions of the Loan and Security Agreement described in Note 7, to exercise an additional term loan totaling $4.0 million. There can be no assurances that management can raise the necessary additional capital on favorable terms or at all. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

Principles of Consolidation — The accounts of the Company and its wholly-owned subsidiary Mytogen, Inc. are included in the accompanying consolidated financial statements. All intercompany balances and transactions were eliminated in consolidation.

 

7
 

 

Segment Reporting — ASC 280, Segment Reporting requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company determined it has one operating segment.

  

Use of Estimates — These consolidated financial statements have been prepared in accordance with GAAP and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, management has estimated variables used to calculate the Black-Scholes option pricing model used to value derivative instruments, including outstanding warrants. Also, management has estimated the expected economic life and value of the Company’s licensed technology, the Company’s net operating loss for tax purposes, share-based payments for compensation to employees, directors, consultants and investment banks, and the useful lives of the Company’s fixed assets. Actual results could differ from those estimates.

  

Cash and Cash Equivalents — Cash equivalents are comprised of certain highly liquid investments with maturities of three months or less when purchased. The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses related to this concentration of risk. As of September 30, 2015 and December 31, 2014, the Company had deposits in excess of federally-insured limits totaling $31,887,435 and $4,325,886, respectively.

 

Commitments and Contingencies — The Company recognizes liabilities for contingencies and commitments when a loss is probable and can be reasonably estimated.

  

Relating to loss contingencies the Company accrues the best estimate of a loss within a range. If no estimate in a range is better than any other, the minimum amount is accrued. The Company discloses a reasonably possible loss in excess of the amount accrued, if applicable. For reasonably possible loss contingencies, the Company discloses the nature of the loss contingency and provides a range of the estimate of possible loss or state that an estimate cannot be made.

 

Included in the other liabilities balance as of December 31, 2014 is approximately $1,200,000, primarily related to the acquisition of Mytogen which the Company did not expect to settle during 2015. This balance was reclassified to the accounts payable balance as of September 30, 2015 as the Company expects to settle these payables in the near-term.

 

Grants Receivable — The Company periodically assesses its grants receivable for collectability on a specific identification basis. If collectability of an account becomes unlikely, the Company records an allowance for that doubtful account. Once the Company has exhausted efforts to collect, management writes off the grants receivable against the allowance it has already created.

 

Property and Equipment — The Company records its property and equipment at historical cost. The Company expenses maintenance and repairs as incurred. Upon disposition of property and equipment, the gross cost and accumulated depreciation are written off and the difference between the proceeds and the net book value is recorded as a gain or loss on sale of assets. In the case of certain assets acquired under capital leases, the assets are recorded net of imputed interest, based upon the net present value of future payments. Assets under capital lease are pledged as collateral for the related lease.

 

The Company provides for depreciation over the assets’ estimated useful lives as follows:

 

Machinery & equipment   4 years
Computer equipment   3 years
Office furniture   4 years
Leasehold improvements   Lesser of remaining lease life or economic life
Capital leases   Lesser of lease life or economic life

 

Patents — The Company follows ASC 350-30, General Intangibles Other than Goodwill (“ASC 350-30”), in accounting for its patents. ASC 350-30 provides that costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred. The Company has expensed as research and development expense all costs associated with developing its patents.

 

Equity Method Investment — The Company follows ASC 323, Investments-Equity Method and Joint Ventures, in accounting for its investment in the joint venture. In the event the Company’s share of the joint venture’s net losses reduces the Company’s investment to zero, the Company will discontinue applying the equity method and will not provide for additional losses unless the Company has guaranteed obligations of the joint venture or is otherwise committed to provide further financial support for the joint venture. If the joint venture subsequently reports net income, the Company will resume applying the equity method only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.

 

8
 

 

Long-Lived Assets— The Company follows ASC 360-10, Property, Plant, and Equipment, which established a “primary asset” approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. For the nine months ended September 30, 2015, the Company had not experienced impairment losses on its long-lived assets.

  

Fair Value Measurements The Company applies the provisions of ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”). ASC 820-10 defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. For certain financial instruments, including cash and cash equivalents, grants receivable, prepaid expenses, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their relatively short maturities. The carrying amount of senior secured convertible debentures approximated fair value as the interest rate charged on the debentures was based on the prevailing rate. The three levels of valuation hierarchy are defined as follows:

 

  · Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

  · Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

  · Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. In addition, the fair values of freestanding derivative instruments such as warrant derivatives are valued using the Black-Scholes model.

  

The Company uses Level 3 inputs for its valuation methodology for the fair value of certain embedded conversion options and other warrant derivative liabilities.

 

  · The expected volatility of the Company’s common stock is estimated from the historical volatility of daily returns in the Company’s common stock price. The Company monitors the volatility of its common stock on a quarterly basis to observe trends that may impact the fair value of the notes.

 

  · The discount for illiquidity is measured using an average-strike option that calculates the discount as the opportunity cost for not being able to sell a large block of the Company’s common stock immediately at prevailing observable market prices. Inputs to the average-strike option model include the expected volatility of the Company’s common stock and time to sell a large block of the Company’s stock as Level 3 inputs and other observable inputs. The time to sell the stock is estimated considering the historical daily trading volume of our common stock and market maker estimates of the amount of shares that can be offered for sale above the daily trading volume without depressing the price of the Company’s common stock.

  

At September 30, 2015, the Company identified the following assets and liabilities that are required to be presented on the balance sheet at fair value:

 

Description   Fair Value
As of
September 30, 2015
    Fair Value Measurements at
September 30, 2015
Using Fair Value Hierarchy
 
Warrant liabilities   7,843,106                   7,843,106  
Total   $ 7,843,106     $            $            $ 7,843,106  

 

9
 

 

The following tables reconcile the change in fair value for measurements categorized within Level 3 of the fair value hierarchy:

  

    Warrant Liabilities  
Balance at December 31, 2014   $ 16,255  
Addition of warrant liability     11,140,771  
Total change in fair value for the period included in earnings     (3,313,920)  
Balance at September 30, 2015   $ 7,843,106  

 

    Warrant Overallotment Liabilities  
Balance at December 31, 2014   $  
Addition of warrant overallotment liability     628,767  
Total change in fair value for the period included in earnings     (628,767)  
Balance at September 30, 2015   $  

 

Gains included in earnings for the nine months ended September 30, 2015 are reported as follows:

  

    Adjustments to fair value of derivatives  
Total gain included in earnings   $ 3,313,920  

 

The following table provides quantitative information about measurements categorized within Level 3 of the fair value hierarchy:

  

    Fair Value at            
    September 30,   Valuation        
Description   2015   Technique   Unobservable Input   Value
Warrant derivative liabilities   $7,843,106   Black Scholes Model   Expected volatility of the Company's common stock   69% - 92%

 

For the three and nine months ended September 30, 2015, the Company recognized gains of $3,598,946 and $3,942,687, respectively, for the changes in the valuation of derivative liabilities. For the three and nine months ended September 30, 2014, the Company recognized gains of $42,207 and $719,007, respectively, for the changes in the valuation of derivative liabilities.

 

The Company did not identify any non-recurring assets and liabilities that were recorded at fair value during the periods presented.

 

Revenue Recognition and Deferred Revenue The Company’s revenues are primarily generated from license and research agreements with collaborators. Licensing revenue is recognized on a straight-line basis over the shorter of the life of the license or the estimated economic life of the patents related to the license.

 

License fee revenue begins to be recognized in the first full month following the effective date of the license agreement. Deferred revenue represents the portion of the license and other payments received that has not been earned. Costs associated with license revenue are deferred and recognized over the same term as the revenue. Revenue pursuant to grants are recorded in the period during which expenses are incurred.

 

In some cases, the Company is entitled to receive royalty payments from licensees. In such cases, the Company recognizes the royalties when they are earned and collectability of those royalty payments is reasonably assured.

 

In connection with its license agreements, the Company recorded $39,468 and $118,405 in license fee revenue for the three and nine months ended September 30, 2015, respectively, in its consolidated statements of operations, and recorded $39,467 and $118,404 in license fee revenue for the three and nine months ended September 30, 2014, respectively. The remainder of the license fees are included in deferred revenue at September 30, 2015 and December 31, 2014, respectively.

   

Research and Development Costs — Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of (i) employee-related expenses, including salaries, benefits, travel and stock compensation expense; (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations, investigational sites and consultants; (iii) the cost of acquiring, developing and manufacturing clinical study materials; (iv) facilities and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and laboratory and other supplies; and (v) costs associated with pre-clinical and clinical activities and regulatory operations.

 

10
 

 

The Company enters into consulting, research and other agreements with commercial firms, researchers, universities and others for the provision of goods and services. Under such agreements, the Company may pay for services on a monthly, quarterly, project or other basis. Such arrangements are generally cancellable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided to us by the Company’s clinical sites and vendors. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Reimbursements of research expense pursuant to grants are recorded in the period during which collection of the reimbursement becomes assured, because the reimbursements are subject to approval.

 

In certain circumstances, the Company is required to make advance payments to vendors for goods or services that will be received in the future for use in research and development activities. In such circumstances, the advance payments are deferred and are expensed when the activity has been performed or when the goods have been received.

 

Stock Compensation — The Company records stock compensation in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”). ASC 718 requires companies to measure compensation cost for stock employee compensation at fair value at the measurement date (generally the grant date) and recognize the expense over the employee’s requisite service period. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.

 

Income Taxes — Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates at the date of enactment.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on the weight of available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

Applicable interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.

 

Net Loss Per Share — Basic net loss per share applicable to common stockholders is calculated by dividing net loss applicable to common stockholders by the weighted average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting weighted average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method and the if-converted method. For purposes of the diluted net loss per share calculation, convertible preferred stock, stock options, unvested restricted stock, and warrants are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share was the same for all periods presented. Additionally, dividends associated with the preferred stock, all of which has been extinguished as of September 30, 2015, has been added back in order to calculate the net loss applicable to common stockholders.

  

At September 30, 2015 and 2014, approximately 5,667,750 and 2,735,815 potentially dilutive shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.

  

Recent Accounting Pronouncements — In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, which granted a one-year deferral of the effective date of ASU No. 2014-09. The new standard will now be effective for the Company on January 1, 2018. The Company is currently evaluating the potential impact that Topic 606 may have on its financial position and results of operations and its method of adoption.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30) –Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount. The effective date of the new standard is January 1, 2016, however the Company has elected to implement the new standard beginning in the three months ended September 30, 2015.

 

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3. INVESTMENT IN JOINT VENTURE

 

On December 1, 2008, the Company and CHA Bio & Diostech Co., Ltd. (“CHA”) formed an international joint venture. The new company, Stem Cell & Regenerative Medicine International, Inc. (“SCRMI”), will work towards developing human blood cells and other clinical therapies based on the Company’s hemangio-colony forming blast cell program. As of September 30, 2015, the Company holds a 40% interest in the joint venture and CHA owns a 60% interest. Additionally, SCRMI has paid the Company a fee of $500,000 for an exclusive, worldwide license to the hemangio-colony forming blast cell program. The Company recorded $7,353 and $22,059 in license fee revenue for the three and nine months ended September 30, 2015, respectively, in its accompanying consolidated statements of operations, and recorded $7,353 and $22,059 in license fee revenue for the three and nine months ended September 30, 2014, respectively. The balance of unamortized license fee of $300,245 and $322,304 is included in deferred revenue in the accompanying consolidated balance sheets at September 30, 2015 and December 31, 2014, respectively.

 

4. PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at September 30, 2015 and December 31, 2014:

 

   September 30,   December 31, 
   2015   2014 
Machinery & equipment  $1,380,540   $1,186,232 
Computer equipment   103,488    104,857 
Office furniture   54,226    54,226 
Leasehold improvements   620,252    620,252 
    2,158,506    1,965,567 
           
Accumulated depreciation   (1,335,824)   (1,132,604)
Property and equipment, net  $822,682   $832,963 

  

Depreciation expense for the three and nine months ended September 30, 2015 amounted to $72,766 and $205,590, respectively. Depreciation expense for the three and nine months ended September 30, 2014 amounted to $45,013 and $109,357, respectively. As of September 30, 2015, $68,510 of machinery and equipment was related to a capital lease. There were no capital leases as of December 31, 2014.

 

5. ACCRUED SETTLEMENT

 

The accrued settlement is comprised of the following at September 30, 2015 and December 31, 2014:

 

   September 30,   December 31, 
   2015   2014 
SEC Civil Action  $           –   $1,356,202 
SEC Section 16 Investigation       375,000 
Total  $   $1,731,202 

 

Securities and Exchange Commission – Civil Action

 

In May 2012, the Company was named as a defendant in a civil action brought by the SEC related to transactions involving the sale and issuance of the Company’s securities. The SEC alleged that Company violated Section 5(a) and 5(c) of the Securities Act of 1933 (the “Securities Act”) because certain sales of shares to outside organizations, completed in late 2008 and early 2009 under the Company’s former management, resulted in $3.5 million in proceeds to the Company, were neither registered under the Securities Act nor subject to an exemption from registration under Section 3(a)(10) of the Securities Act, as amended. In addition, the Company is alleged to have violated Section 13(a) of the Exchange Act of 1934 because the Company did not disclose the sale and issuance of the shares to the SEC on a timely basis.

 

In December 2013, the Company settled the civil action. Under the terms of the settlement accepted by the SEC, the Company consented to entry of judgment under which it neither admits nor denies liability and agreed to the disgorgement of $3.5 million in proceeds from the transactions in question. In addition, the Company will pay approximately $587,000 in pre-judgment interest. The total amount due, approximately $4.1 million, was paid over six equal quarterly installments. In addition, the settlement permanently restrains and enjoins the Company from violations of Sections 5(a) and 5(c) of the Securities Act, Section 13(a) of the Exchange Act and Rule 13a-11 under the Exchange Act. As of September 30, 2015, the Company has paid in full its obligation to the SEC.

 

12
 

 

Securities and Exchange Commission – Section 16 Investigation

 

In April 2013, it was determined that Gary Rabin, the Company’s former Chief Executive Officer, failed to report 27 transactions in a timely manner on Form 4 under Section 16 of the Exchange Act in which Mr. Rabin sold shares of the Company’s common stock that took place between February 7, 2011 and January 10, 2013. The SEC then investigated the unreported transactions involving sales of shares of the Company’s common stock. In September 2014, the Company settled the SEC action arising from the SEC’s investigation. Under the terms of the settlement accepted by the SEC, the Company consented to the entry of order under which it neither admits nor denies liability and has agreed to pay a civil penalty of $375,000, which has been previously accrued for, by July 2015. In addition, the settlement requires the Company to engage an independent Section 16 compliance consultant, provide Section 16(a) training to each Section 16(a) reporting person, and provide a certification of compliance that each of the preceding requirements were completed. The settlement also requires the Company to cease and desist from committing or causing any violations and any future violations of Section 17(a)(2) of the Securities Act, Sections 13(a) and 14(a) of the Exchange Act, and Rules 12b-20, 13a-1, and 14a-9 thereunder. The terms of this settlement require the Company to allocate financial and management resources to complying with the settlement’s terms, which may have adverse effect on our business. Also, if the SEC deems the Company to not have complied with any portion of the settlement, it may issue additional fines or sanctions against us which may limit our ability to issue securities or otherwise conduct our business as currently conducted. As of September 30, 2015 the Company has paid in full its obligation to the SEC.

 

6. CONVERTIBLE PROMISSORY NOTES

 

CAMOFI Senior Secured Convertible Debentures

 

On January 11, 2013, the Company entered into a settlement agreement and mutual release (“the Settlement Agreement”) with CAMOFI Master LDC (“CAMOFI”) and CAMHZN Master LDC (“CAMHZN” and together with CAMOFI, the “CAMOFI Parties”), relating to the lawsuit between the CAMOFI Parties, as plaintiffs, and the Company, as defendant, in the Supreme Court of New York. Pursuant to the Settlement Agreement, the Company issued Debentures in the principal amount of $4,732,781 and $1,267,219 to CAMOFI and CAMHZN, respectively (together the “Debentures”).

 

The Debentures had contained an embedded beneficial conversion feature as the Debentures are convertible at a price per share of common stock equal to 80% of VWAP of the ten consecutive trading days prior to the conversion date. The embedded beneficial conversion feature was modeled using a binomial lattice model, and had a calculated value at September 30, 2014 of $0. The Company recorded a gain of $663,000 for the change in the fair value of the embedded conversion option liability for the nine months ended September 30, 2014 in connection with the retirement of the remaining debentures.

 

The Company recorded a debt discount of $725,000, which was being amortized over the life of the Debentures using the effective interest rate of 22.9%. The unamortized discount balance of $108,229 was written off to interest expense with the retirement of the remaining outstanding Debentures.

  

On May 2, 2014, the Company paid to the CAMOFI Parties an aggregate amount of approximately $1,616,000 calculated in accordance with the payment acceleration provisions of the Debentures and satisfying the Company’s obligations under the Debentures. The payment represented the remaining $1,200,000 in principal amount due and an additional amount of approximately $416,000, which represented penalties, interest and legal cost reimbursement to the CAMOFI Parties. With the payment, the Company satisfied in full its obligations under the Debentures and the terms of the Settlement Agreement and Mutual Release dated as of December 31, 2012 pursuant to which the Debentures were issued in January 2013. The Company received correspondence from the CAMOFI Parties stating that the CAMOFI Parties believe the aggregate amount due to be different than the amount the Company paid. The Company believes that its interpretation of the Debentures is accurate and complete and its liability under the Debentures is zero as of September 30, 2015. 

 

7. DEBT

 

On August 18, 2015, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Silicon Valley Bank ( “SVB”), pursuant to which SVB made certain term loans (the “Term Loans”) to the Company. The principal aggregate amount of up to $10.0 million, comprised of: (i) a $6.0 million term loan, which was funded at the closing (the “Term A Loan”); and (ii) subject to the terms and conditions of the Loan and Security Agreement, an additional term loan totaling $4.0 million (the “Term B Loan”) which was not funded as of September 30, 2015. The Loan and Security Agreement provides for interest-only payments through July 1, 2016 at a current per annum interest of 6.5%, subject to the adjustment described in the Loan and Security Agreement, and a final payment of 8% of amounts drawn. The final payment of 8% of amounts drawn is being accreted through interest expense to increase the carrying value of the debt throughout the life of the loan. The Company also paid to SVB approximately $19,000, to cover legal costs associated with the Loan and Security Agreement.

 

The Loan and Security Agreement provides that the Company shall repay the principal balance of the Term Loans in 36 monthly installments starting on August 1, 2016 and continuing through July 1, 2019. The interest-only period may be extended from 12 months to 18 months based on certain conditions defined in the Loan and Security Agreement. The entire term loan principal balance and all accrued but unpaid interest will be due and payable on July 1, 2019. At its option, the Company may prepay all or any part of the outstanding term loan subject to a prepayment premium (3% if the principal balance is outstanding less than one year, 2% if the principal balance is outstanding more than one year but less than two years, 1% if the principal balance is outstanding through the end of year three and none thereafter).

 

13
 

 

In connection with the Loan and Security Agreement, the Company granted SVB a security interest in all of the Company’s personal property now owned or hereafter acquired, excluding intellectual property (and a negative pledge on intellectual property). The Loan and Security Agreement also provides for standard indemnification of SVB and contains representations, warranties and certain covenants of the Company.

 

As of September 30, 2015 the carrying value of the debt outstanding, net of issuance costs and discounts, is $5,996,985 with an annual effective interest rate of approximately 9.2%.

 

8. WARRANT SUMMARY

 

Warrant Activity

 

A summary of warrant activity for the nine months ended September 30, 2015 is presented below:

 

    Number of Warrants   Number of Common Shares Underlying Warrants   Weighted Average Exercise Price $   Weighted Average Remaining Contractual Life (in years)   Aggregate Intrinsic Value (000)$  
Outstanding, December 31, 2014   45,906   45,906   40.46   1.45    
Granted   5,985,000   2,992,500   7.48          
Outstanding, September 30, 2015   6,030,906   3,038,406   7.98   5.16    
Exercisable, September 30, 2015   45,906   45,906   40.46   0.71    

  

The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the warrants and the quoted price of the Company’s common stock as of the reporting date.

 

On June 16, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) related to a registered direct offering (the “Offering”) of an aggregate of 5,500,000 shares of common stock, par value $0.001 per share (the “Shares”), together with accompanying warrants to purchase an aggregate of 2,750,000 shares of common stock (the “Warrants”).

 

The Shares and Warrants were sold in combination, with one Warrant to purchase one half of one share of common stock, for each Share sold. The combined sale price to the public for each Share and accompanying Warrant was $5.50. The per share proceeds received by the Company from the underwriters, after accounting for the standard 6% underwriting fee, for the Shares and accompanying Warrants was $5.17. The Offering closed on June 22, 2015 and the aggregate net proceeds from the sale of the Shares and accompanying Warrants, excluding the potential future proceeds, if any, from the exercise of the Warrants issued in the offering, was approximately $28.2 million after deducting the underwriting discount of $1,815,000 and estimated offering expenses payable by the Company of approximately $170,000.

 

The Warrants may be exercised at any time after December 22, 2015 until December 22, 2020. The initial exercise price for the Warrants will be $7.48 subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. The Warrants are classified as a liability on the balance sheet as of September 30, 2015 due to the fact that at inception, the Warrants embody an obligation to repurchase the Warrants in the event of a change in control whereby the surviving entity is not listed on a public exchange. Because of this potential settlement, regardless of probability, and the fact that the choice of cash settlement may ultimately lie with the warrant holders, triggers liability classification for the warrants under ASC 480. At inception, the fair value of the warrants was $10,237,968.

 

In addition, the Underwriting Agreement provided the underwriters a 30-day option to purchase up to an additional 825,000 shares and/or warrants to purchase an additional 412,500 shares of common stock from the Company (of which 485,000 Warrants representing 242,500 shares of common stock were purchased immediately in connection with the Offering’s closing on June 22, 2015).

 

9. STOCKHOLDERS’ EQUITY (DEFICIT) TRANSACTIONS

 

On September 19, 2012 the Company entered into a purchase agreement with Lincoln Park Capital, LLC (“Lincoln Park”). Pursuant to the purchase agreement, the Company had the right to sell to Lincoln Park up to $35,000,000 in shares of its common stock. On June 18, 2014, the Company completed the last sale of common stock to Lincoln Park under this agreement.

 

On June 27, 2014, the Company entered into a similar purchase agreement, the “2014 Purchase Agreement,” with Lincoln Park pursuant to which the Company has the right to sell to Lincoln Park up to $30,000,000 in shares of its common stock, subject to certain limitations set forth in the purchase agreement.

 

14
 

 

During the nine months ended September 30, 2015, Lincoln Park purchased 2,022,996 shares of common stock pursuant to the 2014 Purchase Agreement for cash proceeds of $12,797,047.

 

During the nine months ended September 30, 2015, the Company issued various board members 33,750 shares of common stock valued at $166,166 as compensation for board services.

 

At the annual meeting of the Company’s stockholders held in November 2014, the Company’s stockholders approved a Certificate of Amendment to the Company’s Certificate of Incorporation. The Certificate of Amendment provided for an increase in the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 37,500,000 to 60,000,000. The Certificate of Amendment became effective upon its filing with the Secretary of State of the State of Delaware on November 12, 2014.

 

On June 16, 2015, the Company entered into the Underwriting Agreement related to the Offering. See Note 8, “Warrant Summary,” for additional information about the Offering.

 

10. STOCK-BASED COMPENSATION

 

A summary of stock plans as of September 30, 2015 is presented below:

 

Stock Plans

 

                Options/Shares        
    Options/Shares     Options     Available     Total  
Stock Plan   Issued     Outstanding     For Grant     Authorized  
2005 Stock Incentive Plan     2,756,356       2,107,342       3,243,046       5,818,388  
2014 Stock Option and Incentive Plan     210,000       175,000       3,790,000       4,000,000  
      2,966,356       2,282,342       7,033,046       9,818,388  

 

At the annual meeting of the Company’s stockholders held in July 2015, the Company’s stockholders approved the First Amendment to the Company’s 2014 Stock Option and Incentive Plan (the “Plan Amendment”) to, among other things, increase the number of shares of common stock available for issuance thereunder by 3,750,000 shares to a total of 4,000,000 shares. The Plan Amendment previously had been approved, subject to stockholder approval, by the Company’s Board of Directors.

 

Stock Option Activity

 

A summary of option activity for the nine months ended September 30, 2015 is presented below:

 

                Weighted        
          Weighted     Average        
          Average     Remaining     Aggregate  
    Number of     Exercise     Contractual     Intrinsic  
    Options     Price     Life (in years)     Value  
Outstanding, December 31, 2014     2,245,381     $ 12.03       8.12     $ 12,110  
Granted     100,000       6.29                  
Forfeited/canceled     (63,039 )     28.59                  
Outstanding, September 30, 2015     2,282,342     $ 11.33       7.47     $ -  
                                 
Vested and expected to vest at September 30, 2015     2,187,959     $ 11.49       7.41     $ -  
                                 
Exercisable, September 30, 2015     1,556,318     $ 13.11       6.82     $ -  

 

The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the Company’s common stock as of the reporting date.

 

15
 

 

The assumptions used in calculating the fair value of options granted using the Black-Scholes option pricing model for options granted during the nine months ended, are as follows:

 

    September 30,   September 30,
    2015   2014
Risk-free interest rate   1.59 – 2.07%   .02 – 2.29%
Expected life of the options   5.00 - 6.25 years   5.00 - 6.25 years
Expected volatility   93 - 124%   112 - 148%
Expected dividend yield   0%   0%

 

The weighted average grant-date fair value for the options granted during the nine months ended September 30, 2015 and 2014 was $5.08 and $7.50, respectively.

 

The unrecognized compensation expense related to the unvested options as of September 30, 2015, was $4,980,700 which will be recognized over the weighted average vesting period of 2.09 years.

 

Restricted Stock Unit Activity

 

A summary of the restricted stock unit activity for the nine months ended September 30, 2015:

 

    Number of
Shares
Underlying Restricted
Units
    Weighted
Average
Grant-Date
Fair Value
per Share
    Weighted
Average
Remaining
Recognition
Period
(in years)
 
Outstanding, December 31, 2014     493,000     $     7.28       2.60  
Granted     10,000       6.62          
Vested     (155,998 )     7.25          
Outstanding, September 30, 2015     347,002     $ 7.16       1.93  
                         
Unearned stock-based compensation expense of outstanding restricted units   $ 2,305,357                  

 

Stock compensation expense to employees and non-employees for the three and nine months ended September 30, 2015 and 2014 are as follows:

 

Three Months Ended   September 30,     September 30,  
    2015     2014  
Research and development   $ 546,688     $ 178,004  
General and administrative     980,122       348,405  
    $ 1,526,810     $ 526,409  

 

Nine Months Ended   September 30,     September 30,  
    2015     2014  
Research and development   $ 1,639,181     $ 353,333  
General and administrative     2,889,056       881,836  
    $ 4,528,237     $ 1,235,169  

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note Regarding Forward-Looking Statements

 

Certain statements in this quarterly report on Form 10-Q that are not historical in fact constitute “forward-looking statements.” Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors based on the Company’s estimates and expectations concerning future events that may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. These risks and uncertainties, as well as the Company’s critical accounting policies, are discussed in more detail under “Management’s Discussion and Analysis—Critical Accounting Policies” and in periodic filings with the Securities and Exchange Commission. You should review carefully the factors identified in Part I, Item 1A under the heading “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and below under Part II, Item IA, “Risk Factors.” We disclaim any intent to update or announce revisions to any forward-looking statements to reflect actual events or developments, except as required by law. Except as otherwise indicated herein, all dates referred to in this report represent periods or dates fixed with reference to our fiscal year ended December 31. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

You should read the following discussion of our financial condition and results of operations together with the audited financial statements and the notes to the audited financial statements included in this annual report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those anticipated in these forward-looking statements.

 

Overview

 

We are a clinical stage biotechnology company focused on the development and commercialization of Regenerative OphthalmologyTM therapeutics. Our most advanced products are in clinical trials for the treatment of Stargardt’s macular degeneration, dry age-related macular degeneration, and myopic macular degeneration. We are also developing several pre-clinical terminally differentiated-cell therapies for the treatment of other ocular disorders. Additionally, we have a number of pre-clinical stage programs in disease areas outside the field of ophthalmology, including autoimmune, inflammatory and wound healing-related disorders. Our intellectual property portfolio includes pluripotent human embryonic stem cell, or hESC; induced pluripotent stem cell, or iPSC, platforms; and other cell therapy technologies.

  

We pursue a number of approaches to generating transplantable tissues both in-house and through collaborations with other researchers who have particular interests in, and skills related to, cellular differentiation. Our research in this area includes projects focusing on the development of many different cell types that may be used to treat a range of diseases within ophthalmology and other therapeutic areas. Control of cellular differentiation and the culture and growth of stem and differentiated cells are important areas of research and development for us. Based on the success to date of our Phase 1 clinical trials and what we see as favorable market dynamics of the ophthalmology sector, our primary strategic focus is the development, and ultimate commercialization of ophthalmology therapies. The largest indication involving macular degeneration is “age-related macular degeneration,” or AMD. AMD is the leading cause of blindness and visual impairment in adults over fifty years of age. The Company is also pursuing a treatment for Stargardt’s Macular Degeneration, or SMD, an inherited juvenile onset form of macular degeneration. The Company initiated the Phase 2 clinical trial for dry AMD in the third quarter of this year.

 

We have no therapeutic products currently available for sale and do not expect to have any therapeutic products commercially available for sale for a period of years, if at all. These factors indicate that our ability to continue research and development activities is dependent upon the ability of management to obtain additional financing as required. 

 

Comparison of Three months Ended September 30, 2015 and 2014

 

    Three Months Ended        
    September 30,        
    2015     2014     $ Change     % Change  
Revenue   $ 84,252     $ 39,467     $ 44,785       113.5%  
Cost of revenue     15,609       15,608       1       0%  
Gross profit     68,643       23,859       44,786       187.7%  
Research and development expenses:                                
-R&D expenses, excluding non-cash stock compensation     3,789,478       2,237,471       1,552,007       69.4%  
-R&D stock compensation     546,688       178,004       368,684       207.1%  
Total Research and Development Expenses     4,336,166       2,415,475       1,920,691       79.5%  
General and administrative expenses:                                
-G&A expenses, excluding non-cash stock compensation     2,162,914       1,240,158       922,756       74.4%  
-G&A stock compensation     980,122       348,405       631,717       181.3%  
Total General and Administrative Expenses     3,143,036       1,588,563       1,554,473       97.9%  
                                 
Non-operating income     3,564,834       263,719       3,301,115       1251.8%  
Net loss   $ (3,845,725 )   $ (3,716,460 )   $ (129,265     3.5%  

  

17
 

 

Revenue

 

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted. Additional revenue was recognized in the period related to the receipt of two Small Business Innovation Research, or SBIR, Grants from the National Institute of Health, or NIH. As a result, revenue for the three months ended September 30, 2015 and 2014 was $84,252 and $39,467, respectively. The deferred revenue balance of $1,631,295, as of September 30, 2015, is being amortized and recorded to revenue over the remaining license period of approximately 10 years. We currently have no therapeutic products available for sale and do not expect to have any commercially available for sale for the foreseeable future, if at all.

 

Research and Development Expenses

 

Our research and development, or R&D, expenses consist mainly of payroll and payroll related expenses for our scientific, manufacturing, clinical and regulatory staff, services attained in connection with our ongoing clinical trials and pre-clinical programs, our R&D and manufacturing facilities, and research supplies and materials. Our primary focus is on the development of novel therapies based on terminally differentiated cells. R&D expenses represent both pre-clinical and clinical development costs and costs associated with support activities such as manufacturing, quality control and regulatory processes. The cost of our research and development personnel is the most significant category of R&D expense; however, we also incur expenses with third parties, including license agreements, sponsored research programs and consulting expenses. 

 

R&D expenditures, excluding non-cash stock compensation expense, increased from $2,237,471 for the three months ended September 30, 2014 to $3,789,478 for the same period in 2015, for an increase of $1,552,007 or 69.4%. The increase in R&D expenditures was primarily related to an increase in clinical trial related costs of approximately $847,000, an increase in employee costs of approximately $207,000, and an increase in lab testing and supplies of approximately $57,000. This increased spending is in-line with our plans and our prior guidance that our spending in R&D would increase as we initiate the next phase of our clinical trials.

 

R&D expenses related to non-cash stock compensation increased from $178,004 for the three months ended September 30, 2014 to $546,688 for the same period in 2015, for an increase of $368,684, or 207.1%. This increase is due to grants of stock options and RSUs to the Chief Scientific Officer and Chief Medical Officer in the third quarter of 2014 which each accounted for approximately $125,000 of the increase. Additionally, company-wide grants were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the three months ended September 30, 2015 as compared to the same period in 2014.

 

We expect that R&D expenses will increase from period to period for the foreseeable future. This planned increase will be driven primarily by our expansion of our clinical operations and capabilities as we continue work related to our ongoing Phase 2 clinical trial for AMD and initiation of our Pivotal clinical trial for SMD. Spending will continue to increase throughout 2015 and 2016 as our trials are initiated, clinical sites are activated, and patients are enrolled in the trials. We currently work with four clinical sites in the US and two in the UK. We plan to expand the number of sites in both the US and in Europe. In addition, we are expanding the network of consultants and service providers we contract and we also plan to expand our internal workforce. These expansions and the increased spend that will result from these expanded capabilities is consistent with our previously stated plans. Our spending is impacted by the timing of enrollment and treatment of clinical trial patients along with interim results of our many pre-clinical programs. The amount and timing of these fluctuations can be difficult to predict due to the uncertainty inherent in the timing and extent of progress in our research programs, initiation of new clinical trials and rate of progression of existing clinical trials. In addition, the results from our basic research and pre-clinical trials, as well as the results of trials of similar therapeutics under development by others, will influence the number, size and duration of future trials. As our research efforts mature, we will continue to review the direction of our research based on an assessment of the value of possible commercial applications emerging from these efforts. Based on this continuing review, we expect to establish discrete research programs and evaluate the cost and potential for cash inflows from commercializing products, partnering with others in the biotechnology or pharmaceutical industry, or licensing the technologies associated with these programs to third parties.

 

We believe that it is not possible at this stage to provide a meaningful estimate of the total cost to complete our ongoing projects and bring any proposed products to market. The use of human embryonic stem cells as a therapy is an emerging area of medicine, and it is not known what clinical trials will be required by the U.S. Food and Drug Administration, or FDA, in order to gain marketing approval. Costs to complete could vary substantially depending upon the projects selected for development, the number of clinical trials required and the number of patients needed for each study. It is possible that the completion of these studies could be delayed for a variety of reasons, including difficulties in enrolling patients, delays in manufacturing, incomplete or inconsistent data from the pre-clinical or clinical trials, and difficulties evaluating the trial results. Any delay in completion of a trial would increase the cost of that trial, which would harm our results of operations. Due to these uncertainties, we cannot reasonably estimate the size, nature or timing of the costs to complete, or the amount or timing of the net cash inflows from, our current activities. Until we obtain further relevant pre-clinical and clinical data, we will not be able to estimate our future expenses related to these programs or when, if ever, and to what extent we will receive cash inflows from resulting products.

 

18
 

 

General and Administrative Expenses

 

General and administrative, or G&A, expenses consist mainly of payroll and payroll related expenses, legal costs relating to corporate matters, and fees for consultants, service providers and other administrative costs. G&A expenditures, excluding non-cash stock compensation expense, increased from $1,240,158 for the three months ended September 30, 2014 to $2,162,914 for the same period in 2015, for an increase of $922,756 or 74.4%.

 

The increase in G&A expenditures was primarily due to increases in consulting and other professional fees of approximately $151,000, payroll and other compensation costs of approximately $111,000, and in compliance costs of approximately $33,000. Also adding to the increase was the reduction of accrued expenses from prior periods that were reversed during the three months ended September 30, 2014 of approximately $566,000. Payroll costs were higher due to the hiring of a new Chief Executive Officer and a Chief Commercial Officer during the second half of 2014. The increase in consulting and other professional fees was primarily attributable to an increase in strategic business initiatives during the quarter. The rate of spend in G&A in the third quarter of 2015 was approximately the same as it was in the second quarter of 2015.

 

G&A expenses related to non-cash stock compensation increased from $348,405 for the three months ended September 30, 2014 to $980,122 for the same period in 2015, for an increase of $631,717, or 181.3%. This increase is due to grants of stock options and RSUs to the Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors in the third quarter of 2014 which accounted for approximately $579,000 of the increase. Additionally, company-wide grants were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the three months ended September 30, 2015 as compared to the same period in 2014.

 

Other Income (Expense)

 

    2015     2014     $ Change     % Change  
Interest income   $ 1,804     $     $ 1,804       100%  
Interest expense     (46,791     (69 )     (46,722     67,713%  
Other gain           221,581       (221,581     (100% )
Issuance expense     10,875             10,875       100%  
Adjustments to fair value of derivatives     3,598,946       42,207       3,556,739       8,426.9%  
Total non-operating income   $ 3,564,834     $ 263,719     $ 3,301,115       1251.8%  

 

Interest expense for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 increased from $69 to $46,791. This increase is due to interest expense incurred pursuant to the Loan and Security Agreement and related debt entered into with Silicon Valley Bank, or SVB, as described in Note 7 of the Company’s financial statements included in this quarterly report.

 

The change in other loss during the three months ended September 30, 2015, compared to that of the same period in 2014, relates primarily to an accrued loss contingency that was deemed no longer likely to be settled during 2014.

  

Adjustments to the fair value of derivatives resulted in a gain of $3,598,946 for the three months ended September 30, 2015 compared to a gain of $42,207 for the three months ended September 30, 2014. The change of $3,556,739 is primarily due to the issuance of warrants during the secondary offering completed in the second quarter of 2015 and therefore more derivative instruments are being re-valued for the three months ended September 30, 2015 as compared to the same period in 2014.

  

Comparison of Nine months Ended September 30, 2015 and 2014

 

    Nine Months Ended        
    September 30,        
    2015     2014     $ Change     % Change  
Revenue   $ 163,189     $ 118,404     $ 44,785       37.8%  
Cost of revenue     46,827       46,825       2       0%  
Gross profit     116,362       71,579       44,783       62.6%  
Research and development expenses:                                
-R&D expenses, excluding non-cash stock compensation     9,618,440       7,288,611       2,329,829       32.0%  
-R&D stock compensation     1,639,181       353,333       1,285,848       363.9%  
Total Research and Development Expenses     11,257,621       7,641,944       3,615,677       47.3%  
General and administrative expenses:                                
-G&A expenses, excluding non-cash stock compensation     7,100,739       6,195,039       905,700       14.6%  
-G&A stock compensation     2,889,056       881,836       2,007,220       227.6%  
Total General and Administrative Expenses     9,989,795       7,076,875       2,912,920       41.2%  
                                 
Loss on settlement of litigation           13,468,547       (13,468,547 )     (100% )
Non-operating income     3,003,949       191,577       2,812,372       1,468.0%  
Net loss   $ (18,127,105 )   $ (27,924,210 )   $ 9,797,105       (35.1% )

 

19
 

 

Revenue

 

Revenue relates to license fees and royalties collected that are being amortized over the period of the license granted. Additional revenue was recognized in the period related to the receipt of two SBIR Grants from the NIH. As a result, revenue for the nine months ended September 30, 2015 and 2014 was $163,189 and $118,404, respectively. The deferred revenue balance of $1,631,295, as of September 30, 2015, is being amortized and recorded to revenue over the remaining license period of approximately 10 years. We currently have no therapeutic products available for sale and do not expect to have any commercially available for sale for a period of years, if at all.

 

Research and Development Expenses

  

R&D expenditures, excluding non-cash stock compensation expense, increased from $7,288,611 for the nine months ended September 30, 2014 to $9,618,440 for the same period in 2015, for an increase of $2,329,829 or 32.0%. The increase in R&D expenditures was primarily related to an increase in clinical trial related costs of approximately $1,435,000, an increase in employee costs of approximately $286,000, and an increase in lab testing and supplies of approximately $184,000. This increased spending is in-line with our plans and our prior guidance that our spending in R&D would increase as we initiate the next phase of our clinical trials.

 

R&D expenses related to non-cash stock compensation increased from $353,333 for the nine months ended September 30, 2014 to $1,639,181 for the same period in 2015, for an increase of $1,285,848, or 363.9%. This increase is due to Q3 grants of stock options and RSUs to the Chief Scientific Officer and Chief Medical Officer in the third quarter of 2014 which each accounted for approximately $425,000 of the increase. Additionally, company-wide grants were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the nine months ended September 30, 2015 as compared to the same period in 2014.

  

General and Administrative Expenses

  

G&A expenditures, excluding non-cash stock compensation expense, increased from $6,195,039 for the nine months ended September 30, 2014 to $7,100,739 for the same period in 2015, for an increase of $905,700 or 14.6%. The increase in G&A expenditures was primarily due to increases in payroll and other compensation costs of approximately $767,000, consulting and other professional fees of approximately $408,000, and compliance costs of approximately $198,000. Also adding to the increase was the reduction of accrued expenses from prior periods that were reversed during the three months ended September 30, 2014 of approximately $566,000. Payroll costs were higher due to the hiring of a new Chief Executive Officer and a Chief Commercial Officer during the second half of 2014. The increase in consulting and other professional fees was primarily attributable to the Company becoming listed on the NASDAQ Global Market as well as an increase in IT spending period over period. These increases were partially offset by a reduction in legal costs of approximately $725,000 and a decrease in severance costs related to our prior CEO of approximately $335,000.

 

G&A expenses related to non-cash stock compensation increased from $881,836 for the nine months ended September 30, 2014 to $2,889,056 for the same period in 2015, for an increase of $2,007,220, or 227.6%. This increase is due to grants of stock options and RSUs to the Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors in the third quarter of 2014 which accounted for approximately $1,879,000 of the increase. Additionally, company-wide grants were made to non-executives during the third quarter of 2014 which resulted in higher stock compensation expense for the nine months ended September 30, 2015 as compared to the same period in 2014.

 

Loss on Settlement of Litigation

 

The loss on settlement of litigation relates to the settlement in June 2014 of the warrant holder litigation. The total value of the litigation settlement was recorded at $23,577,600 based on a 3,840,000 share settlement valued at $6.14 per share. Partially offsetting this charge was the reversal of previously recorded accruals for the unsettled warrant obligation and loss contingency totaling $12,010,591. 

Other Income (Expense)

 

    2015     2014     $ Change     % Change  
Interest income   $ 1,804     $ 55,840     $ (54,036     (96.8% )
Interest expense     (47,228     (429,573 )     382,345       (89.0% )
Other loss           (172,656     172,656       (100% )
Issuance expense     (893,314 )           (893,314 )     (100% )
Adjustments to fair value of unsettled warrant obligation           18,959       (18,959     (100% )
Adjustments to fair value of derivatives     3,942,687       719,007       3,223,680       448.4%  
Total non-operating income   $ 3,003,949     $ 191,577     $ 2,812,372       1468.0%  

 

20
 

 

 

Interest expense for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 decreased from $429,573 to $47,228. The decrease is due to the discontinuation of interest expense on our previously outstanding debt obligations to the CAMOFI Parties. This decrease is partially offset by interest expense related to the Loan and Security Agreement and related debt entered into with SVB as described in Note 7 of the Company’s financial statements included in this quarterly report

 

The change in other loss during the nine months ended September 30, 2015, compared to that of the same period in 2014, relates primarily to an accrued loss contingency that was deemed no longer likely to be settled during 2014.

 

The issuance expense, which accounted for $893,314 in expense for the nine months ended September 30, 2015, related to the issuance costs of the warrants as part of the underwritten secondary offering completed in June 2015.

 

The unsettled warrant obligation, adjustments to which generated $18,959 in income for the nine months ended September 30, 2014, was settled on June 4, 2014 and therefore there was no activity related to this item in the current fiscal year.

 

Adjustments to the fair value of derivatives resulted in a gain of $3,942,687 for the nine months ended September 30, 2015 compared to a gain of $719,007 for the nine months ended September 30, 2014. The change of $3,223,680 is primarily due to the issuance of warrants in connection with the registered direct offering completed in the second quarter of 2015 and therefore more derivative instruments are being re-valued for the nine months ended September 30, 2015 as compared to the same period in 2014. This gain is slightly offset by the retirement in 2014 of the derivatives associated with the debt issued to the CAMOFI Parties.

 

Liquidity and Capital Resources

 

Cash Flows

 

The following table sets forth a summary of our cash flows for the periods indicated below:

 

   Nine Months Ended September 30, 
   2015   2014 
Net cash used in operating activities  $(19,256,900)  $(16,563,159)
Net cash used in investing activities   (126,799)   (135,891)
Net cash provided by financing activities   47,096,860    22,768,062 
Net increase in cash and cash equivalents   27,713,161    6,069,012 
Cash and cash equivalents at the end of the period  $32,137,535   $7,812,497 

 

Operating Activities

 

Our net cash used in operating activities during the nine months ended September 30, 2015 and 2014 was $19,256,900 and $16,563,159, respectively. Net cash used in operating activities increased in the nine months ended September 30, 2015 period compared to the same period in 2014 period despite a decrease in our net loss. The net loss decrease of approximately $10 million was offset primarily by an add-back of a non-cash income statement charge in the 2014 period of approximately $13.5 million for the settlement of litigation. Other drivers include an increase in stock compensation of approximately $3.3 million and a decrease in the change in fair value of derivatives of approximately $3.2 million.

 

Cash Used in Investing Activities

 

Cash used in investing activities during the nine months ended September 30, 2015 and 2014 was $126,799 and $135,891, respectively. Our cash used in investing activities during both periods was attributed to the purchase of fixed assets.

 

Cash Flows from Financing Activities

 

Cash flows provided by financing activities during the nine months ended September 30, 2015 and 2014 was $47,096,860 and $22,768,062, respectively. During the nine months ended September 30, 2015, we received $12,797,047 from the issuance of 2,022,996 shares to Lincoln Park as part of the 2014 Purchase Agreement. During the nine months ended September 30, 2015, we received gross proceeds, before deducting the offering expenses payable by the company, of $28,477,541 related to the registered direct offering described below.

 

On June 27, 2014, we entered into the 2014 Purchase Agreement with Lincoln Park pursuant to which we have the right to sell to Lincoln Park up to $30,000,000 in shares of its common stock, subject to certain limitations set forth in the 2014 Purchase Agreement.

 

21
 

 

Upon the satisfaction of the conditions set forth in the 2014 Purchase Agreement, we obtained the right over a 36-month period to sell up to $30,000,000 worth of shares of our common stock to Lincoln Park based upon the terms set forth in the 2014 Purchase Agreement. Pursuant to the 2014 Purchase Agreement, the purchase price of such common stock is based on the prevailing market price of our common stock immediately preceding the time of sales, with our controlling the timing and amount of any future sales, if any, of common stock to Lincoln Park. There are no upper limits to the price Lincoln Park may pay to purchase our common stock. Lincoln Park shall not have the right or the obligation to purchase any shares of common stock on any business day that the closing price of our common stock is below a floor price of $1.00, as adjusted under the 2014 Purchase Agreement due to the 100-to-1 reverse split, of our common stock effected in August 2014. 

 

On June 16, 2015, the Company entered into an underwriting agreement (the “Underwriting Agreement”) related to a registered direct offering (the “Offering”) for an aggregate of 5,500,000 shares of common stock, par value $0.001 per share (the “Shares”), together with accompanying warrants to purchase an aggregate of 2,750,000 shares of common stock (the “Warrants”).

 

The Shares and Warrants were sold in combination, with one Warrant to purchase one half of one share of common stock, for each share sold. The combined sale price to the public for each share and accompanying warrant was $5.50. The per share proceeds received by the Company from the underwriters, after accounting for the standard 6% underwriting fee, for the Shares and accompanying Warrants was $5.17. The Offering closed on June 22, 2015 and the aggregate net proceeds from the sale of the Shares and accompanying Warrants, excluding the potential future proceeds, if any, from the exercise of the Warrants issued in the offering, was approximately $28.2 million after deducting the underwriting discount and estimated offering expenses payable by the Company.

 

The Warrants may be exercised at any time after December 22, 2015 until December 22, 2020. The initial exercise price for the Warrants will be $7.48 subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock.

 

In addition, the Underwriting Agreement provided the underwriters a 30-day option to purchase up to an additional 825,000 shares and/or warrants to purchase an additional 412,500 shares of common stock from the Company (of which 242,500 Warrants were purchased immediately in connection with the Offering’s closing on June 22, 2015).

 

On August 18, 2015, the Company entered into the Loan and Security Agreement with SVB, pursuant to which SVB made certain term loans (the “Term Loans”) to the Company. The principal aggregate amount of up to $10.0 million, comprised of: (i) a $6.0 million term loan, which was funded at the closing (the “Term A Loan”); and (ii) subject to the terms and conditions of the Loan and Security Agreement, an additional term loan totaling $4.0 million (the “Term B Loan”). The Loan and Security Agreement provides for interest-only payments through July 1, 2019 at a current per annum interest of 6.5%, subject to the adjustment described in the Loan and Security Agreement, and a final payment of 8% of amounts drawn. The Company also paid SVB approximately $19,000, to cover legal costs associated with the Loan and Security Agreement.

  

We plan to fund our operations from the following sources:

 

  · As of September 30, 2015, we have $32,137,535 in cash.

 

  · As of September 30, 2015, $5,822,405 is available to us through the Lincoln Park financing arrangement.

 

  · As of September 30, 2015, an additional term loan totaling $4,000,000 is available to us subject to the terms and conditions of the Loan and Security Agreement.

 

We have no expectation of generating any meaningful revenues from our product candidates for a substantial period of time and must rely on raising funds in capital transactions to finance our research and development programs. Our future cash requirements will depend on many factors, including the pace and scope of our research and development programs, the costs involved in filing, prosecuting and enforcing patents, and other costs associated with commercializing our potential products.

 

We believe that our current cash balance, and the $5,822,405 available to us under the Lincoln Park financing arrangement as of September 30, 2015, will be sufficient to fund our operations into the second half of 2016. We are continually in discussions with potential investors and collaborators to explore alternative sources of funding which may or may not result in immediate and substantial dilution to our stockholders, so that we may either extend our current cash runway beyond the second half of 2016 or accelerate the rate of investment in our many clinical and pre-clinical programs.

 

We cannot assure you that public or private financing or grants will be available on acceptable terms, if at all. Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our common stock and the broader public equity market, especially public equities issued by other pre-commercial biotechnology companies, and our ability to raise capital through non-dilutive transactions such as out-licenses. If we are unable to raise additional funds, we will be forced to either scale back our business efforts or curtail our business activities entirely. As of September 30, 2015, the Company has an accumulated deficit of $363.4 million and recurring losses from operations which raise substantial doubt about the ability of the Company to continue as a going concern.

 

22
 

 

Off-Balance Sheet Arrangements

 

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because a significant portion of our investments are in short-term debt securities issued by the U.S. government and institutional money market funds. The primary objective of our investment activities is to preserve principal. Due to the nature of our marketable securities, we believe that we are not exposed to any material market risk. We do not have any derivative financial instruments or foreign currency instruments. If interest rates had varied by 10% in the quarter ended September 30, 2015, it would not have had a material effect on our results of operations or cash flows for that period.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Our principal executive and financial officer after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Exchange Act Rule 13a- 15(e) or Rule 15d-15(e)), with the participation of our management has concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures were effective and were designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management including our principal executive and financial officer as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. It should be noted that any system of controls is designed to provide reasonable but not absolute assurances that the system will achieve its stated goals under all reasonably foreseeable circumstances. Our principal executive and financial officer has concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective at a level that provides such reasonable assurances.

 

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

23
 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the ordinary course of business, we are from time to time involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements and other matters. While the outcome of these proceedings and claims cannot be predicted with certainty, as of September 30, 2015, we were not party to any legal or arbitration proceedings that may have, or have had in the recent past, significant effects on our financial position or profitability. No governmental proceedings are pending or, to our knowledge, contemplated against us. We are not a party to any material proceedings in which any director, member of senior management or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries. 

  

ITEM 1A. RISK FACTORS

 

Investment in our securities involves a high degree of risk. Our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 16, 2015, as amended, contains in Part I, Item 1A numerous risk factors relating to, among other things, our business and operations, our intellectual property, clinical trials, regulatory matters, our dependence on third parties, our industry and our common stock.

During the nine months ended September 30, 2015, there were no material changes to the risk factors that were disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

 

On September 10, 2015, we issued Brian Levy, a new member of the board of directors, 10,000 shares of common stock valued at $43,900 as compensation for board services.

 

On September 30, 2015, we issued various board members 8,750 shares of common stock valued at $36,575 as compensation for board services.

 

We relied on the exemption from registration provided by Section 4(a)(2) of the Securities Act, with respect to each of the issuances of unregistered securities set forth above.

 

Repurchases of Equity Securities – Quarter Ended September 30, 2015
         
Period (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
         
July 1, 2015 - 32,500 $4.23 -  
July 31, 2015 -      
         
August 1, 2015 -        
August 31, 2015 - - -  
         
September 1, 2015 -        
September 30, 2015 - - -  
         
 Total 32,500 $4.23 -  

 

Under the provisions of the Company’s 2014 Stock Option Plan, 32,500 shares were tendered to the Company in satisfaction of tax liabilities associated with the vesting of restricted stock awards.

 

24
 

 

ITEM 6. EXHIBITS

 

Exhibit Description

 

10.1 First Amendment to the Ocata Therapeutics, Inc. 2014 Stock Option Plan (incorporated herein by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A (File No. 001-36855), filed on June 11, 2015).
10.2 Loan and Security Agreement dated August 18, 2015 by and between the Company and Silicon Valley Bank (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 19, 2015, File No. 001-36855).
   
31.1 Section 302 Certification of Principal Executive Officer.*
   
31.2 Section 302 Certification of Principal Financial Officer.*
   
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*
   
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*
   
101.SCH XBRL Schema Document*
   
101.CAL XBRL Calculation Linkbase Document*
   
101.DEF XBRL Definition Linkbase Document*
   
101.LAB XBRL Label Linkbase Document*
   
101.PRE XBRL Presentation Linkbase Document*

_________________

* Filed herewith

 

 

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SIGNATURE

 

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 hereunto duly authorized.

 

  OCATA THERAPEUTICS, INC.
   
  By: /s/ Paul K. Wotton
    Paul K. Wotton
    President and Chief Executive Officer
Dated: November 9, 2015   (Principal Executive Officer)

 

 

 

  OCATA THERAPEUTICS, INC.
   
  By: /s/ Edward Myles
    Edward Myles
    Chief Operating Officer and Chief Financial Officer
Dated: November 9, 2015   (Principal Financial Officer and Principal Accounting Officer)

 

 

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