U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission File Number
VACCINOGEN, INC.
(Name of small business issuer as specified in its charter)
| Maryland | 14-1997223 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 5300 Westview Drive, Suite 406 Frederick, Maryland 21703 (Address of principal executive offices, including zip code) | |
Registrant’s telephone number, including area code:(301) 668-8400
Indicate by check mark whether the registrant(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day.x Yes¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).x Yes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 if the Exchange Act.
| Large accelerated filter¨ | Accelerated filter¨ |
| Non-accelerated filter ¨ (Do not check if a smaller reporting company) | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes¨ Nox
As of May 13 2014, 32,043,753 shares of our common stock were issued and outstanding.
VACCINOGEN, INC.
FORM 10-Q
March 31, 2014
TABLE OF CONTENTS
| 2 |
VACCINOGEN INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
| March 31, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 62,567 | $ | 73,096 | ||||
| Restricted cash | 44,473 | 44,394 | ||||||
| Inventory | 99,250 | 100,150 | ||||||
| Prepaid expenses and other current assets | 235,338 | 115,522 | ||||||
| Total Current Assets | 441,628 | 333,162 | ||||||
| Prepaid expenses and other assets | - | - | ||||||
| Property and equipment, net | 189,953 | 198,790 | ||||||
| Intangible assets, net | 61,049,742 | 62,725,559 | ||||||
| Total Assets | $ | 61,681,323 | $ | 63,257,511 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities | ||||||||
| Financial instruments | $ | 10,169,317 | $ | 11,794,790 | ||||
| Notes payable | 4,403,803 | 4,831,217 | ||||||
| Accounts payable | 2,759,213 | 3,357,287 | ||||||
| Accrued compensation | 1,191,578 | 1,108,541 | ||||||
| Accrued interest | 901,347 | 863,637 | ||||||
| Accrued expenses and other liabilities | 761,926 | 639,448 | ||||||
| Related party payable | - | 54,099 | ||||||
| Total Current Liabilities | 20,187,184 | 22,649,019 | ||||||
| Total Liabilities | 20,187,184 | 22,649,019 | ||||||
| Commitments and Contigencies | ||||||||
| Stockholders' Equity | ||||||||
| Preferred stock, $0.0001 par value: 50,000,000 shares authorized; 0 shares issued and outstanding | - | - | ||||||
| Common stock, $0.0001 par value; 200,000,000 shares authorized; 32,015,480 and 31,568,629 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively. | 3,202 | 3,157 | ||||||
| Additional paid-in capital | 146,484,487 | 143,920,855 | ||||||
| Accumulated other comprehensive loss | (36,112 | ) | (36,199 | ) | ||||
| Accumulated deficit | (104,957,438 | ) | (103,279,321 | ) | ||||
| Total Stockholders' Equity | 41,494,139 | 40,608,492 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 61,681,323 | $ | 63,257,511 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 3 |
VACCINOGEN INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Operations
| Three Months ended March 31, | 2014 | 2013 | ||||||
| Revenues | $ | - | $ | - | ||||
| Operating Expenses: | ||||||||
| Research and Development | 2,020,128 | 2,073,184 | ||||||
| General and administrative expenses | 707,927 | 6,929,760 | ||||||
| Total Operating Expenses | 2,728,055 | 9,002,944 | ||||||
| Loss From Operations | (2,728,055 | ) | (9,002,944 | ) | ||||
| Gain (Loss) on Financial Instruments | 1,902,823 | (413,895 | ) | |||||
| Interest Expense and Other Expenses | (852,885 | ) | (65,230 | ) | ||||
| Net Loss | $ | (1,678,117 | ) | $ | (9,482,069 | ) | ||
| Net loss available to common stockholders | $ | (1,678,117 | ) | $ | (9,482,069 | ) | ||
| Basic and diluted weighted average shares outstanding | 31,657,798 | 19,794,127 | ||||||
| Basic and diluted loss per common share | $ | (0.05 | ) | $ | (0.48 | ) | ||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
VACCINOGEN INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Comprehensive Loss
| Three Months ended March 31, | 2014 | 2013 | ||||||
| Comprehensive Loss | ||||||||
| Net loss | $ | (1,678,117 | ) | $ | (9,482,069 | ) | ||
| Foreign currency translation adjustments | 87 | 35,463 | ||||||
| Total Comprehensive Loss | $ | (1,678,030 | ) | $ | (9,446,606 | ) | ||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
VACCINOGEN INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2014
| Stockholders' Equity | ||||||||||||||||||||||||
| Common Stock | Additional | Accumulated | Accumulated Other Comprehensive | Total Stockholders' | ||||||||||||||||||||
| Shares | Amount | Paid-In Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance, January 1, 2014 | 31,568,629 | $ | 3,157 | $ | 143,920,855 | $ | (103,279,321 | ) | $ | (36,199 | ) | $ | 40,608,492 | |||||||||||
| Issuance of common stock for cash | 386,103 | 39 | 1,500,566 | - | - | 1,500,605 | ||||||||||||||||||
| Conversion of 2012 Bridge Loan for common stock | 56,075 | 6 | 227,933 | - | - | 227,939 | ||||||||||||||||||
| Conversion of payable to common stock | 4,673 | - | 18,967 | - | - | 18,967 | ||||||||||||||||||
| Contingent Warrants | - | - | 793,563 | - | - | 793,563 | ||||||||||||||||||
| Stock-based compensation | - | - | 22,603 | - | - | 22,603 | ||||||||||||||||||
| Other comprehensive loss | - | - | - | - | 87 | 87 | ||||||||||||||||||
| Net Loss | - | - | - | (1,678,117 | ) | - | (1,678,117 | ) | ||||||||||||||||
| Balance, March 31, 2014 | 32,015,480 | $ | 3,202 | $ | 146,484,487 | $ | (104,957,438 | ) | $ | (36,112 | ) | $ | 41,494,139 | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 6 |
VACCINOGEN INC. AND SUBSIDIARY
Unaudited Condensed Consolidated Statements of Cash Flows
| Three Months ended March 31, | 2014 | 2013 | ||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | (1,678,117 | ) | $ | (9,482,069 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 9,504 | 7,356 | ||||||
| Amortization of intangible assets | 1,675,816 | 1,675,817 | ||||||
| (Gain) Loss on financial instruments | (1,902,823 | ) | 413,895 | |||||
| Other Stock based expense | - | 5,954,545 | ||||||
| Stock based compensation - employees | 22,603 | - | ||||||
| Non-cash interest expense | 793,563 | - | ||||||
| Changes in operating assets and liabilities, net: | - | - | ||||||
| Accrued interest | 37,711 | 25,888 | ||||||
| Changes in restricted cash | (79 | ) | (165 | ) | ||||
| Prepaid expenses and other assets | 106,459 | (28,294 | ) | |||||
| Accounts payable and accrued expenses and other liabilities | (606,038 | ) | 431,490 | |||||
| Net Cash Used In Operating Activities | (1,541,401 | ) | (1,001,537 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property and equipment | - | (722 | ) | |||||
| Net Cash Used In Investing Activities | - | (722 | ) | |||||
| Cash Flows From Financing Activities | ||||||||
| Repayments of Abell Loan | (427,415 | ) | - | |||||
| Repayments of related party notes payable | (54,099 | ) | - | |||||
| Proceeds from issuance of common stock and warrants | 1,999,866 | 971,836 | ||||||
| Net Cash Provided by Financing Activities | 1,518,352 | 971,836 | ||||||
| Impact of foreign currency translation on cash and cash equivalents | 12,520 | 40,752 | ||||||
| Net (Decrease) Increase in Cash and Cash Equivalents | (10,529 | ) | 10,329 | |||||
| Cash and Cash Equivalents, beginning of period | 73,096 | 113,840 | ||||||
| Cash and Cash Equivalents, end of period | $ | 62,567 | $ | 124,169 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
| 1. | Organization |
The Business
Vaccinogen, Inc. (the “Company” or “Vaccinogen”), a biotechnology Company headquartered in Frederick, Maryland, was incorporated in the State of Delaware during 2007 for the purpose of developing therapies and vaccines to combat cancer by using the body’s own immune system. On November 23, 2010, the Company changed its domicile from Delaware to Maryland by means of a merger of the Company with and into its wholly owned subsidiary Vaccinogen I, Inc., a Maryland corporation.
On October 10, 2007, the Company entered into a license agreement with Intracel Holdings Corporation (“Intracel”), a related party, for the exclusive and indefinite rights to use the OncoVAX® technology platform. OncoVAX® is an active specific immunotherapy (“ASI”) that uses the patient’s own cancer cells to create a vaccine that in turn is used to block the return of cancer following surgery. In June 2010, the Company entered into an agreement with Intracel (the “Asset Transfer Agreement”) whereby the Company acquired title to the patents associated with the OncoVAX® (See Note 4). On October 23, 2007, Vaccinogen acquired out of bankruptcy, certain tangible assets that had been previously owned and used by Intracel’s wholly owned subsidiary in the Netherlands. These assets will be used to conduct research and development and in the commercialization of OncoVAX® to produce vaccines. In connection with the acquisition of these assets, the Company formed a wholly owned subsidiary, Vaccinogen BV, for the purposes of continuing development of OncoVAX®.
| 2. | Going Concern |
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has recurring losses and as of March 31, 2014, the Company had an accumulated deficit of approximately $104.9 million and negative working capital of approximately $19.7 million. Since inception, the Company has financed its activities principally from the proceeds from the issuance of equity and debt securities and loans from officers.
The Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise additional debt and equity capital. There can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the Company. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should the Company be unable to continue as a going concern.
We do not have sufficient capital to fund our plan of operations over the next twelve months.In order to address our capital needs, including our planned Phase IIIb clinical trial, we are continuing our private offering of Units, and we are actively pursuing additional equity or debt financing, in the form of either a private placement or a public offering. We have been in ongoing discussions with strategic institutional investors and investment banks with respect to such possible offerings. We have identified a potential investor as outlined in Note 15 to these unaudited condensed consolidated financial statements. Such additional financing opportunities might not be available to us, when and if needed, on acceptable terms or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected.
| 8 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
3. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of March 31, 2014 and for the three months ended March 31, 2014 and 2013, respectively include the accounts of Vaccinogen, Inc. and its wholly owned subsidiary and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and, therefore, omit or condense certain disclosures and other information required under generally accepted accounting principles in the United States of America (“US GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements and the accompanying notes for the year ended December 31, 2013.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all the adjustments and reclassifications necessary for a fair presentation for the periods presented in accordance with US GAAP. The results for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
The unaudited condensed consolidated financial statements include accounts of Vaccinogen and its wholly owned subsidiary, Vaccinogen BV (a company incorporated in the Netherlands). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in its financial statements. On an ongoing basis, the Company evaluates the estimates used in recording common stock warrant related liabilities, derivative financial instruments, stock based compensation, and where applicable, the fair value of assets. The Company may base such estimates on various assumptions which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid securities with a maturity of three months or less at acquisition to be cash equivalents. Cash and cash equivalents include demand deposits with financial institutions and at times the amounts may exceed federally insured deposit limits. The Company has not experienced any losses and does not believe it is exposed to any significant credit risk related to demand deposits.
| 9 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Restricted Cash
Restricted cash represents monies pledged by the Company’s foreign subsidiary for a lease obligation related to the manufacturing facility and to the Dutch government as required for companies with irradiator equipment.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents with high-credit-quality financial institutions in the United States and the Netherlands.
Cash and cash equivalents in the United States are maintained at financial institutions and, at times, balances may exceed federally insured limits. All non-interest bearing cash balances were fully insured to $250,000 per depositor at each financial institution, and noninterest bearing cash balances may again exceed federally insured limits.
Cash and cash equivalents in The Netherlands are maintained at a financial institution and, at times, balances may exceed insured limits. Insurance coverage is limited to 100.000€ for all company accounts at each financial institution.
Inventory
Inventory is reported at the lower of cost or market value. The Company analyzes its inventory and writes down inventory that has become obsolete, or has a cost basis in excess of its expected net realizable value and inventory quantities in excess of expected requirements. Inventory primarily consists of a product used in creating vaccines using the OncoVAX® technology platform to be utilized in the planned Phase IIIb clinical trial and for research and development activities.
Property and Equipment
Property and equipment are recorded at cost and are depreciated or amortized over their estimated useful lives using the straight-line method. Estimated useful lives are as follows:
| Machinery and equipment | 3 – 5 years | |
| Automobile | 3 – 5 years | |
| Furniture and fixtures | 5 years | |
| Computers and software | 3 years |
| 10 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Maintenance and repairs are charged to expense as incurred. Major betterments and improvements, which extend the useful life of the underlying assets, are capitalized and depreciated.
Intangible Assets
Intangible assets consist primarily of the cost of acquired patents associated with OncoVAX® to be used in research and development and the commercialization of cancer related vaccines. The Company has capitalized the cost of the acquired patents because the Company has identified alternative future research and development efforts for numerous forms of cancer which it intends to pursue and for which management believes will result in commercialization of related vaccines. Acquired patents are carried at cost less accumulated amortization. Amortization is calculated on a straight-line basis, over the estimated useful economic life of the patent, which is 12.3 years for OncoVAX®.
Impairment of Long-Lived Assets
Long-lived assets, including identifiable intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company has determined that no impairment has occurred as of March 31, 2014.
Foreign Currency Translation
The financial statements of foreign subsidiaries are maintained in their functional currency, which generally is the local currency. The assets and liabilities are translated to U.S. dollars using the exchange rate in effect at the balance sheet date. Revenues, expenses and cash flows of these operations are translated using average exchange rates during the reporting period which they occur. The resulting translation adjustments are reflected in other comprehensive loss. As of March 31, 2014 and 2013 the assets of Vaccinogen BV, excluding intercompany balances, were approximately $252,000 and $263,000 respectively. For the three months ended March 31, 2014 and 2013 net deficit of Vaccinogen BV, excluding intercompany balances, was approximately $253,000 and $314,000, respectively. The net loss of Vaccinogen BV was approximately $349,000 and $387,000 for the three months ended March 31, 2014 and 2013 respectively.
Revenue Recognition
To date, the Company has not earned any revenues as the use of OncoVAX® to create cancer related vaccines still requires additional clinical trials and has not received regulatory approval for commercialization and sale.
Research and Development Expense
Research and development costs are expensed as incurred. Research and development expenses primarily include the amortization of intangible assets, cost of conducting clinical trials, compensation and related overhead for employees, consultants, facilities costs and the cost of materials purchased for research and development.
| 11 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Stock-Based Compensation
The Company measures the cost of employee services received in exchange for stock options or restricted stock awards based upon the fair value of the award on the date of the grant. The Company recognizes the estimated grant date fair value of the award as stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The Company initially measures the cost of awards granted to non-employees based on the fair value of the award on the date of grant however such cost is re-measured at the end of each reporting period until performance is fully satisfied or services are rendered by the non-employee.
The fair value of stock options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The fair value of non-vested stock awards is determined based upon the estimated fair value of the Company's common stock.
Income Taxes
Deferred income tax assets and liabilities are determined based on differences between the financial statements and tax basis of assets and liabilities, as measured using the enacted tax rates, which are expected to be in effect when the differences reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. A full valuation allowance was recorded against its deferred tax assets of approximately $19 million and $18 million for the periods ended March 31, 2014 and December 31, 2013 respectively.
As required under ASC 740-270 Interim Financial Reporting, the Company has estimated its annual effective tax rate for the full fiscal year and applied that rate to its income tax before income taxes in determining its provision for income taxes for the three month period ended March 31, 2014. The Company had no provision for income taxes for the three months ended March 31, 2014.
The tax effects of uncertain tax positions are recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that had greater than 50% likelihood of being realized. Management has not identified any uncertain tax positions with the exception of income tax return filing penalties and accordingly has established a liability of $130,000 under ASC 740-10 (“FIN 48”) as of March 31, 2014 and December 31, 2013. It is the Company’s accounting policy to account for ASC 740-10 related penalties and interest in other liabilities/expenses and not include it in the income tax provision of consolidated statements of operations. The Company has identified its U.S. Federal income tax return, its state return in Maryland and Netherlands corporate income tax returns as its major tax jurisdictions. Tax returns for fiscal years 2007 and forward are still open for examination.
Financial Instruments
Warrants Accounted for as Liabilities
Abell Warrants
In October 2011, the Company entered into a borrowing arrangement with The Abell Foundation (“Abell”). In connection with that arrangement, the Company also issued warrants (the “Abell Warrants”) exercisable into common stock of the Company. In February 2012, the Company and Abell amended the agreement to provide for additional borrowings (the “Abell Loan”). In January 2013, the maturity of the Abell Loan was extended to March 31, 2013. In April 2013, the borrowing arrangement was further amended to extend the maturity date to May 31, 2013. On May 31, 2013, the borrowing arrangement was amended to extend the maturity date to July 31, 2013. During September 2013 the borrowing arrangement was amended effective July 31, 2013 to extend the maturity date to December 31, 2013. During January 2014 the borrowing arrangement was amended effective January 1, 2014 to extend the maturity date to January 31, 2104. During March 2014 the borrowing arrangement was amended effective February 1, 2014 to extend the maturity date to July 31, 2014. The accounting treatment of these extensions are described within Note 8 to these unaudited condensed consolidated financial statements. In connection to our promissory note issued to The Abell Foundation, we granted The Abell Foundation a security interest in our patents related to OncoVAX®.
| 12 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The number of shares issuable pursuant to the Abell Warrants was originally determined based upon a fixed amount of $500,000 divided by 85% of the per share price of stock sold in the next qualifying round of venture capital financing (defined as a round that raised at least $20 million). In connection with February 2012 amendment to the borrowing arrangement, the fixed amount used to determine the ultimate number of shares into which the Abell Warrants are exercisable was increased to $800,000. In connection with the January 2013 amendment to the borrowing arrangement, the fixed amount used to determine the ultimate number of shares into which the Abell Warrants are exercisable was increased to $1.1 million and the total proceeds of the next qualifying round of venture capital financing was increased to $35 million. There were no amendments to the Abell Warrants in connection with the April 2013 and May 2013 modifications to the Abell Loan. The Abell Warrants have a contractual term of 10 years and were fully vested upon issuance.
The Abell Warrants represent a fixed obligation that is to be settled through the issuance of a variable number of shares of the Company’s common stock. Consistent with the provisions of ASC Topic 480,Distinguishing Liabilities from Equity, the Company has concluded that the Abell Warrants should be accounted for as a liability. The Company is required to record the Abell Warrants at their estimated fair value at the end of each reporting period, with changes in the estimated fair value recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.
As of March 31, 2014 and December 31, 2013, the estimated fair value of the Abell Warrants was $1,376,066 and $1,615,835, respectively. The Company recorded a gain of $239,769 and $123,001 representing the change in the fair value of the Abell Warrants for the three months ended March 31, 2014 and 2013, respectively.
Included in the change in the carrying value of the liability at March 31, 2013 is $275,813 representing the grant date fair value of the amended number of shares issuable in connection with the Abell Warrants pursuant to the January 2013 amendments to the Abell Loan. This amount has been included in the determination of the loss resulting from the deemed extinguishment of the Abell Loan triggered by the January 2013 amendments. The loss from the deemed extinguishment of the Abell Loan has been included as a component of Gain (Loss) on Financial Instruments in the accompanying unaudited condensed consolidated statements of operations.
| 13 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Effective July 31, 2013, the Company and the Abell agreed to amend the Abell Note (the “July Amendment”). In connection with the July Amendment, the Company and Abell also amended the terms and conditions of the Warrant. In addition to the continuation of the “fixed for variable” feature, if the Company has not repaid the outstanding debt in full by specified dates between July 31, 2013 and December 31, 2013, the Company will be required to issue additional warrants for incremental shares (“Contingent Warrants”). More specifically, since the debt remained outstanding as of August 31, September 30, October 31, November 30 and December 31, the Warrant will be exercisable into the number of shares as described above plus an additional 20,000, 40,000, 60,000, 80,000 and 100,000 respectively. It is understood that the exercise price related to the Contingent Warrants will be the same as that for those warrants subject to the Fixed for Variable provisions – that is it will depend upon a value equal to 85% of the lowest price paid a qualified future raise of equity capital. The outstanding debt was not repaid in full by December 31, 2013 and all 300,000 warrants were issued to Abell.
Effective February 1, 2014 the Company and Abell agreed to amend the Abell Note. In connection with the issuance of the Seventh Amended and Restated Promissory Note, we entered into an Amendment No. 7 to the Note and Warrant Purchase Agreement, which Agreement increases the amount of shares issuable to The Abell Foundation under the Warrant to be issued by up to 360,000 Warrant Shares (“Contingent Warrants”), calculated as follows: (i) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on March 1, 2014, (ii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on April 1, 2014, (iii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on May 1, 2014, (iv) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on June 1, 2014; (v) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 1, 2014 and (vi) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 31, 2014.
The outstanding debt was not repaid in full by March 31, 2014 and 120,000 warrants were issued to Abell. The warrants were valued using the Black-Scholes method, and for the three months ended March 31, 2014 approximately $794,000 was included in Interest expense.
The Contingent Warrants provide for the issuance of a fixed number of shares that are known at inception. The Contingent Share warrants are not considered a derivative as they are considered indexed to the Company’s own stock as defined by ASC 815-40.
Abell Investment Option
On January 16, 2013, the Company entered into an investment agreement with Abell under which Abell was granted an option to acquire up to $5.0 million of common stock of the Company (the “Abell Option”). The number of shares to be issued will be based on the lowest price paid by any purchaser of shares in a subsequent round of equity financing meeting certain conditions defined in the agreement. The term of the agreement and Abell’s right to exercise is perpetual.
The Abell Option represents a fixed obligation that is to be settled through the issuance of a variable number of shares of the Company’s common stock. Consistent with the provisions of ASC Topic 480, the Company has concluded that the Abell Option should be accounted for as a liability and should be recorded as the conditions necessary to trigger the holders rights to exercise are considered by management to be probable of occurring as of March 31, 2014. The Company is required to record the Abell Option at its estimated fair value at the end of each reporting period. The Company recorded the grant date fair value as a component of general and administrative expenses. Changes in the estimated fair value of the Abell Option will be recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.
| 14 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
As of March 31, 2014, the estimated value of the Abell Option is $6,074,770 which the Company has recorded as a liability. The Company has classified the carrying value of the Abell Option in Financial instruments in the accompanying unaudited condensed consolidated balance sheet. The Company has recorded a gain of $1,317,758 and $0 for the three months ended March 31, 2014 and 2013 respectively, representing the change in the fair value of the Abell Option. The initial value assigned to the Abell Option of $5,954,545 was recorded as a component of General & Administrative expense in the accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2013.
Derivative Financial Instruments
The Company may enter into transactions that represent free-standing or embedded derivative financial instruments as those terms are defined in ASC Topic 815Derivatives and Hedging (“Topic 815”). The Company records the estimated fair value of derivative financial instruments in its consolidated balance sheets and records changes in the estimated fair value of derivative financial instruments as income or expense in its unaudited condensed consolidated statements of operations.
Round C Warrants
From October 2012 through December 2013 and then again from January 2014 through March 31, 2014, the Company issued warrants to certain investors in the common stock of the Company (the “Round C Warrants”). Round C Warrants to acquire 339,966 shares of common stock were issued through December 2013 and Round C Warrants to acquire 130,389 shares of common stock were issued during the three months ended March 31, 2014. The Round C Warrants have an exercise price of $6.05, a contractual term of 5 years and were fully vested upon issuance.
The terms of the Round C Warrants provide for "down-round" anti-dilution adjustments in certain situations whereby the Company sells or issues (a) stock at a price per share less than the exercise price of the Round C Warrants or (b) equity linked financial instruments with an exercise price less than the exercise price of the Round C Warrants. Consistent with the provisions of ASC Topic 815-40, the Round C Warrants are classified as derivative financial instruments. The Company is required to record the estimated fair value of derivative financial instruments at the end of each reporting period, with changes in the estimated fair value of such derivatives recorded in the unaudited condensed consolidated statements of operations as a component of Gain (Loss) on Financial Instruments.
As of March 31, 2014 and December 31, 2013, the estimated fair value of the liability associated with the Round C Warrants was $1,998,481 and $1,796,427, respectively, and is included in Financial Instruments in the accompanying condensed consolidated balance sheets. The Company has recorded a gain of $375,296 and $44,617 representing the change in the fair value of the Round C Warrants for the three months ended March 31, 2014 and 2013 respectively.
| 15 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
2012 Bridge Loan
Between April 2012 and October 2012, the Company entered into transactions with various investors which resulted in the Company raising $1,019,000 from the issuance of unsecured notes payable (collectively the “Bridge Loan”). The Bridge Loan has no contractual maturity date, and is repayable only in the event that the Company closes on a future round of equity financing which results in gross proceeds of at least $20 million. If the Company fails to raise sufficient additional capital, there is no obligation to pay interest or repay any amount borrowed under the Bridge Loan. Should the Company be successful in raising sufficient equity capital, the Company must repay an amount to the investors equal to 2 times the amount originally raised.
The Company has classified the Bridge Loan as a derivative financial instrument, as it meets three qualifying criteria of ASC Topic 815Derivatives and Hedging (“Topic 815”) including the contractual terms whereby the Company can be required to settle its obligation under the Bridge Loan by transferring cash to investors if and only when sufficient additional capital is raised. As of March 31, 2014, and December 31, 2013, the estimated fair value of the liability associated with the Bridge Loan was $720,000 and $990,000 respectively, which has been recorded and included in financial instruments in the accompanying condensed consolidated balance sheets.
The change in the carrying value of the Bridge Loan includes a reduction of $270,000 representing the carrying value of the liability, as referenced in Note 9, related to those investors on the date of conversion. In April 2013, the board of directors authorized the Company to offer the investors in the 2012 Bridge Loan, the option to convert the amount otherwise due and payable to them in the event of a successful qualified offering, or $2,038,000, into common stock of the Company, at a per share price equal to that provided in the Round C common stock offering, or $5.50 per share plus 30% warrant coverage. In order to accommodate all Bridge Loan holders, the total dollar value of common stock issuable in the Round C offering was increased from $11 million to $13 million.
During 2013, certain investors in the Bridge Loan elected to convert their rights to receive cash under the Bridge Loan into shares of common stock and common stock warrants. The accounts for these investors were increased to 2 times the amount originally invested creating a loss on financial instruments as of December 31, 2013 of $93,800. As a result, the Company issued 170,540 shares of common stock to certain holders of the Bridge Loan that had elected to convert their rights into common stock of the Company and an additional 4,787 Adjustment Shares as discussed in Note 10 of these unaudited condensed consolidated financial statements. The Company also issued additional Round C Warrants exercisable into 51,159 shares of common stock of the Company, with an exercise price of $6.05 per share.
During the three months ended March 31, 2014, certain investors in the Bridge Loan elected to convert their rights to receive cash under the Bridge Loan into shares of common stock and common stock warrants. The accounts for these investors were increased to 2 times the amount originally invested creating a loss on financial instruments as of March 31, 2014 of $30,000. As a result, the Company issued 54,545 shares of common stock to certain holders of the Bridge Loan that had elected to convert their rights into common stock of the Company and an additional 1,530 Adjustment Shares as discussed in Note 10 of these unaudited condensed consolidated financial statements. The Company also issued additional Round C Warrants exercisable into 16,363 shares of common stock of the Company, with an exercise price of $6.05 per share.
| 16 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The Company has recorded a loss of $30,000 and $305,700 representing the change in the fair market carrying value of the Bridge Loan for the three months ended March 31, 2014 and 2013 respectively. This loss has been classified in Gain (Loss) on Financial Instruments in the accompanying unaudited condensed consolidated statements of operations.
Net Loss Per Share
Basic loss per share is determined by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period. The treasury stock method is used to determine the dilutive effect of the Company's outstanding stock warrants, unvested restricted stock and the if-converted method is used to determine the dilutive effect of convertible preferred stock and convertible debt. The following common stock equivalents were excluded in the calculation of diluted loss per share because their effect would be anti-dilutive:
| Three months ended March 31, | 2014 | 2013 | ||||||
| Stock Option Pool | 77,000 | - | ||||||
| Abell Investment Option | 934,579 | 1,136,364 | ||||||
| Convertible debt | 76,923 | 91,324 | ||||||
| Restricted stock awards | 134,278 | 119,734 | ||||||
| Warrants | 3,575,948 | 2,780,906 | ||||||
4. Agreements with Intracel
License Agreement
On October 10, 2007, the Company entered into an agreement (the “License Agreement”) with Intracel Holdings Corporation (“Intracel”), for the exclusive and indefinite rights to license and use the OncoVAX® technology platform. OncoVAX® is an active specific immunotherapy (“ASI”) that uses the patient’s own cancer cells to block the return of cancer following surgery. In exchange for the rights to OncoVAX®, the Company (i) agreed to issue equity securities equal to 10% of the fully diluted capitalization of the Company, (ii) assumed liabilities of Intracel to Organon Teknika Corporation (“Organon”) totaling $4.0 million under an October 31, 2007 Letter Agreement between Intracel and Organon, (iii) agreed to pay $450,000 in cash for settling trade payable related to the OncoVAX intellectual property, and (iv) agreed to make royalty payments to Intracel based on future sales of OncoVAX®. The terms of the securities issued to Intracel provided Intracel with anti-dilution rights with respect to its 10% ownership interest (See Note 10). The License Agreement also contained a provision such that if the Company obtained specified levels of financing in a specified time period, that title to OncoVAX® would transfer to the Company without further consideration. If the Company did not reach the specified levels of financing in the specified period of time, Intracel could cancel the License Agreement and could re-purchase the rights to OncoVAX®. The Company did not obtain the necessary financing in the period specified.
| 17 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
In connection with the License Agreement, the Company issued 1,506,750 shares of common stock valued at approximately $984,000 and assumed liabilities with an estimated value of $4,450,000. The Company estimated the fair value of the liabilities assumed based upon their face amount as these liabilities were due currently and on demand.
Asset Transfer Agreement and Stock Exchange Agreement
As a result of the Company’s inability to raise the necessary capital under the License Agreement, the Company and Intracel negotiated amended terms to the License Agreement. On June 24, 2010, the Company and Intracel entered into the Asset Transfer Agreement pursuant to which the title to all of the intellectual property associated with OncoVAX® was transferred to the Company. Under the Asset Transfer Agreement, the Company also agreed to exchange the previously issued common stock and Series AA preferred stock representing a 10% interest in the Company for shares of its Series B preferred stock equal to a 20% interest in the Company on a fully diluted basis.
The terms and conditions of the Series B preferred stock provided Intracel with anti-dilution rights with respect to its 20% ownership interest (See Note 10). In addition, the Company agreed that Intracel’s ownership position (and corresponding anti-dilution rights) would increase to 50% upon failure of the Company to meet certain defined milestones, which included but were not limited to, the Company attaining specified levels of additional financing.
The Company accounted for the acquisition of the rights to the OncoVAX® technology platform under the License Agreement in 2007 and the Asset Transfer Agreement in 2010 as an asset acquisition in accordance with ASC Topic 805,Business Combinations. Furthermore, as described in Note 2 to these consolidated financial statements, and in accordance with ASC Topic 730,Research and Development, the Company has capitalized the cost of acquiring the rights to OncoVAX® technology platform as these rights represent intangible assets to be used in research and development activities and for which future alternative uses exist.
In June 2010, in connection with the Asset Transfer Agreement, the Company issued 3,452,766 shares of Series B preferred stock, with an estimated value of approximately $16.8 million. The Company estimated the fair value of the common stock issued pursuant to the License Agreement and the Series B Preferred Stock issued pursuant to the Asset Transfer Agreement by considering various commonly accepted valuation techniques, including the income and market approaches.
The Company ultimately relied on the income approach, specifically, the discounted cash flow method, to estimate the value of the Company’s equity. The Company further utilized commonly used option pricing techniques to estimate the fair value of the various equity classes. The use of the income approach, and specifically the discounted cash flow method, requires management to make significant assumptions about the future level and timing of revenues, direct and indirect costs associated with continued research and development, the conduct of clinical trials, and the production and commercialization of the intended cancer vaccines. The discounted cash flow method also requires the estimation of discount rates used to reflect the risk inherent in the projected cash flows, the terminal growth rate, among other factors.
| 18 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The Company did not meet these milestones and consequently, in December 2010, was required to increase Intracel’s total ownership interest in the Company to 50% through the issuance of additional shares of Series B preferred stock.
In December 2010, the Company issued 10,973,612 additional shares of Series B preferred stock to Intracel when the Company failed to meet certain conditions of the Asset Transfer Agreement. The estimated value of those additional shares of approximately $63.1 million was accounted for as additional consideration and is included in the total cost of acquiring the OncoVAX® technology platform.
All shares of Series B preferred stock were converted to common stock in 2012 as discussed in Note 10 to these unaudited condensed consolidated financial statements.
As of March 31, 2014 Intracel directly owns approximately 42% of the Company on a fully diluted basis, and certain officers and directors of Vaccinogen are also stockholders of Intracel and collectively own approximately 31% of the Company on a fully diluted basis. Intracel also continues to hold certain royalty rights associated with future commercial sales of vaccines developed using OncoVAX®.
5. Contingent Equity Lines of Credit
Initial Equity Line of Credit
On July 18, 2012, the Company entered into an Investment Agreement (“Initial Investment Agreement”) with Kodiak Capital Group, LLC (“Kodiak”). The Investment Agreement provides the Company an equity line whereby the Company can issue and sell to Kodiak, from time to time, shares of the Company’s common stock up to an aggregate purchase price of $1.0 million (the “Initial Kodiak Shares”) during the Initial Open Period.
On May 13, 2013 Vaccinogen and Kodiak Capital Group, LLC terminated the Initial Equity Line of Credit. The additional agreement with Kodiak discussed below was unaffected by this termination.
Subsequent Equity Line of Credit
On July 18, 2012, the Company entered into an Investment Agreement, as amended by that Amendment to Investment Agreement dated July 8, 2013 (“Subsequent Investment Agreement”) with Kodiak. The Subsequent Investment Agreement provides the Company an equity line (the “Subsequent Financing”) whereby the Company can issue and sell to Kodiak, from time to time, shares of the Company’s common stock up to an aggregate purchase price of $25 million (the “Subsequent Kodiak Shares”) during the Subsequent Open Period.
| 19 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The Subsequent Investment Agreement will terminate when any of the following events occur: (i) Kodiak has purchased an aggregate of $26 million of the Company’s common stock, (ii) on the date which is eighteen months (18) months following the original execution date of the Investment Agreement, or (iii) upon written notice from the Company to Kodiak. Similarly, this Subsequent Investment Agreement, may, at the option of the non-breaching party, terminate if Kodiak or the Company commits a material breach, or becomes insolvent or enters bankruptcy proceedings.
As part of the consideration for the Financing, we paid Kodiak a document preparation fee of $25,000 and we issued Kodiak 236,364 shares of common stock valued at approximately $1.3 million. The Company concluded that it was more likely than not the Kodiak Equity Line would not be used at December 31, 2013 and subsequently the Investment Agreement terminated on January 18, 2014 without us issuing or selling any shares to Kodiak. Therefore, the consolidated financial statements for the year ended December 31, 2013 reflect the approximately $1.3 million as an expense, classified within General and Administrative expenses.
6. Property and Equipment
Property and equipment consisted of the following:
| Period ended | March 31, 2014 | December 31, 2013 | ||||||
| Machinery and equipment | $ | 904,631 | $ | 903,964 | ||||
| Furniture and fixtures | 35,690 | 35,690 | ||||||
| Computers and software | 1,929 | 1,929 | ||||||
| 942,250 | 941,583 | |||||||
| Less accumulated depreciation | (752,297 | ) | (742,793 | ) | ||||
| $ | 189,953 | $ | 198,790 | |||||
Depreciation expense was $9,504 and $7,356 for the three months ended March 31, 2014 and 2013, respectively.
7. Intangible Assets
Intangible assets consist of the capitalized costs associated with the acquisition of patents related to OncoVAX® (the “Intellectual Property”) and the costs associated with website development and domain names.
As discussed in Note 4 to these unaudited condensed consolidated financial statements, the total purchase price for the Intellectual Property was ultimately determined based upon the estimated fair value of the Series B preferred stock representing a 50% stock ownership in the Company, the value of cash payments made of $450,000 and, obligations of Intracel assumed of $4 million.
| 20 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Intangible assets by major asset class were as follows at March 31, 2014:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Intellectual Property | $ | 84,481,856 | $ | 23,467,070 | $ | 61,014,786 | ||||||
| Other Intangible Assets | 121,944 | 86,988 | 34,956 | |||||||||
| $ | 84,603,800 | $ | 23,554,058 | $ | 61,049,742 | |||||||
Intangible assets by major asset class were as follows at December 31, 2013:
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||
| Intellectual Property | $ | 84,481,856 | $ | 21,792,439 | $ | 62,689,417 | ||||||
| Other Intangible Assets | 121,944 | 85,802 | 36,142 | |||||||||
| $ | 84,603,800 | $ | 21,878,241 | $ | 62,725,559 | |||||||
The amortization expense for intangible assets was approximately $1.7 million and $1.7 million for the three months ended March 31, 2014 and 2013, respectively. The weighted average amortization period for intangible assets was 12.6 years.
The estimated future amortization relating to all intangible assets that are recorded in the consolidated balance sheets as of March 31, 2014 is as follows:
| Years ending December 31, | ||||
| 2014 | $ | 5,022,713 | ||
| 2015 | 6,698,530 | |||
| 2016 | 6,698,530 | |||
| 2017 | 6,698,530 | |||
| 2018 | 6,698,530 | |||
| Thereafter | 29,232,909 | |||
| $ | 61,049,742 | |||
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
8. Notes Payable
Notes payable are as follows:
| March 31, 2014 | December 31, 2013 | |||||||
| Organon Obligation | $ | 3,500,000 | $ | 3,500,000 | ||||
| Abell Loan | 903,803 | 1,331,217 | ||||||
| $ | 4,403,803 | $ | 4,831,217 | |||||
Organon Obligation
Organon, currently owned by Merck & Co, Inc., manufactures a key component used with the OncoVAX® technology. In 2007, in conjunction with the Agreement with Intracel, the Company assumed $4.0 million of related liabilities from Intracel due to Organon (“Organon Obligation”). Of the $4.0million due to Organon, $500,000 was paid at the time of the Agreement. The remaining $3.5 million was due in installments with an additional $500,000 (plus accrued interest) payable the first year but no later than one year after the agreement date of October 31, 2007. Organon may elect to receive this first $500,000 installment in stock. Commencing one year after the earlier of the first marketing approval of OncoVAX® by the United States Food and Drug Administration or the European Medicines Agency or October 31, 2007, Vaccinogen would make an annual payment of $1.0 million to Organon until repayment of the entire liability amount. The obligation accrued interest based on a simple annual interest rate based on the US prime lending rate in effect on the anniversary date of the agreement, or October 31, 2008, which was 4.00%. Interest expense under this agreement was approximately $35,000 for both the three months ended March 31, 2014 and March 31, 2013. The accrued interest on this obligation is shown on the Balance Sheet as a component of Accrued Interest. This obligation was secured by the OncoVAX® Intellectual Property. While the Company has not paid the installment due one year after the Agreement, no event of default has been declared by Organon or its successors including Merck & Co, Inc. Due to the right to declare an event of default and to accelerate all amounts owed on this obligation, all amounts owed under the Agreement have been classified as current in the accompanying condensed consolidated balance sheets. If an event of default were declared, the Company would need to pay the principal payment of $500,000 plus accrued interest, which as March 31, 2014 was approximately $128,000 within 45 days in order to cure such default.
Abell Loan
On October 26, 2011, the Company obtained a $1.5 million working capital loan from The Abell Foundation Inc. (“Abell”). The Abell Loan was originally due on April 26, 2012, with 8% simple interest accruing and payable on the maturity date. On February 16, 2012, Vaccinogen received an additional $300,000, thereby increasing the amount outstanding to $1.8 million. In January 2013, the maturity of the Abell Loan was extended to March 31, 2013. In April 2013, the borrowing arrangement was further amended to extend the maturity date to May 31, 2013. On May 31, 2013, the borrowing arrangement was amended to extend the maturity date to July 31, 2013, at which time all principal plus accrued interest is due in full. During September 2013 the borrowing arrangement was amended effective July 31, 2013 to extend the maturity date to December 31, 2013. In connection to our promissory note issued to The Abell Foundation, we granted The Abell Foundation a security interest in our patents related to OncoVAX®.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The 2012 amendment to the Abell Loan was accounted for as a modification, the January 2013 amendment was accounted for as an extinguishment, and the April 2013, May 2013 and July 2013 amendments were accounted for as modifications, as those terms are defined under ASC Topic 470-50,
Debt, Modifications and Extinguishments.
No costs or expenses were incurred by the Company in connection with the April 2013 or May 2013 extensions. The July amendment requires for the issuance of a fixed number of shares at various points in time known as Contingent Share Warrants. The Contingent Share Warrants are not considered a derivative as they are considered indexed to the Company’s own stock as defined by ASC 815-40. As a result, the value assigned to the Contingent Share Warrants has been classified within stockholders’ equity. The outstanding debt was not repaid in full December 31, 2013 and 300,000 warrants were issued to Abell. The warrants were valued using the Black-Scholes method, and for the year ending December 31, 2013 approximately $1.7 million was included in interest expense.
Effective January 1, 2014 the maturity date was extended to January 31, 2014. No costs or expenses were incurred by the Company in connection with the January amendment.
On February 26, 2014, we issued a Seventh Amended and Restated Promissory Note to The Abell Foundation, Inc. dated February 1, 2014 in the aggregate principal amount of $1,038,957. The amended and restated note extends the maturity date until July 31, 2014. In addition, the amended and restated note provides that the note will be paid concurrently with the closing of each issuance or sale of additional shares of capital stock, or securities directly or indirectly convertible or exchangeable for capital stock (each an “Equity Issuance”) occurring after February 1, 2014 in an amount equal to (a) twenty-five percent (25%) of the next $5,693,135 of gross proceeds of such Equity Issuance(s), and (b) one hundred percent (100%) of the net proceeds of all Equity Issuance(s) thereafter.
In connection with the issuance of the Seventh Amended and Restated Promissory Note, we entered into an Amendment No. 7 to the Note and Warrant Purchase Agreement (the “Amended PurchaseAgreement”), which Amended Purchase Agreement increases the amount of shares issuable to The Abell Foundation under the Warrant to be issued to Abell by up to 360,000 Warrant Shares (the “Additional Warrant Shares”), calculated as follows: (i) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on March 1, 2014, (ii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on April 1, 2014, (iii) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on May 1, 2014, (iv) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on June 1, 2014; (v) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 1, 2014 and (vi) an additional 60,000 Warrant Shares if the Note remains outstanding in whole or in part on July 31, 2014.
| 23 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The Additional Warrant Shares are not considered a derivative as they are considered indexed to the Company’s own stock as defined by ASC 815-40. As a result, the value assigned to the Additional Warrant Shares has been classified within stockholders’ equity.
Payments of amounts due are required prior to the maturity date based on a percentage of proceeds received from the Company’s subsequent equity financing transactions, as outlined in the agreement. The Abell Loans are secured by all accounts, chattel paper, deposit accounts, equipment, general intangibles, instruments, inventory, investment property and letter of credit rights.
Under the terms of the loan, in the event of default, the interest rate increases to 10% per annum. The Company recorded interest expense related to the Abell Loan of approximately $22,000 and $36,000 for the three months ended March 31, 2014 and 2013, respectively.
As described in Note 3 to these unaudited condensed consolidated financial statements, in connection with the Abell Loan and the various amendments, the Company issued the Abell Warrants which are exercisable into common stock of the Company. The number of shares into which the Abell Warrants are exercisable was revised with each amendment to the Abell Loan and is ultimately equal $1.1 million divided by 85% of the purchase price per share of stock sold in the Company’s next venture capital financing resulting in proceeds of not less than $35.0 million.
The fair value of the Abell Warrants issued in connection with the Abell Loan in 2011 and subsequent amendment in February 2012 were recorded upon issuance as a debt discount based upon the estimated fair value and were amortized as additional interest expense through the original maturity date.
The fair value of the Abell Warrants issued in connection with the January 2013 amendment to the Abell Loan of $275,813 were included in the determination of the loss associated with the deemed extinguishment of the Abell Loan at that time. That loss was been classified within Loss on Financial instruments in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2013.
The fair value of the warrants issued under the February 2014 Amendment No. 7 to the Note and Warrant Purchase Agreement was charged to interest expense was approximately $794,000 for the three months ended March 31, 2014.
9. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction occurring in the most advantageous market. The Company determines fair value based on a hierarchy that priorities valuation techniques used to measure fair value based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect assumptions based on the best information available.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The three levels of the fair value hierarchy are:
| Level 1 — | Inputs are quoted prices for identical assets or liabilities in an active market |
| Level 2 — | Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (interest rates and yield curves), and inputs that are derived principally from or corroborated by observable market data correlation or other means |
| Level 3 — | Inputs that are unobservable and significant to the fair value measurement |
The Company is required to record or disclose the fair value of certain assets and liabilities. The fair value guidance described above is used in measuring and recording the fair value of the liability associated with the Abell Warrants, and the fair value of the financial derivatives including the Round C Warrants and the Bridge Financing. This fair value guidance also applies to the disclosure of the fair value of financial instruments not otherwise recorded in the Company’s condensed consolidated balance sheets at fair value.
The Company’s financial instruments measured on a recurring basis using fair value estimates are as follows:
| March 31, 2014 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Abell Warrants | $ | 1,376,066 | $ | - | $ | - | $ | 1,376,066 | ||||||||
| Round C Warrants | 1,998,481 | - | - | 1,998,481 | ||||||||||||
| Bridge Loan | 720,000 | - | - | 720,000 | ||||||||||||
| Abell Investment Option | 6,074,770 | - | - | 6,074,770 | ||||||||||||
| $ | 10,169,317 | $ | - | $ | - | $ | 10,169,317 | |||||||||
| December 31, 2013 | ||||||||||||||||
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Abell Warrants | $ | 1,615,835 | $ | - | $ | - | $ | 1,615,835 | ||||||||
| Round C Warrants | 1,796,427 | - | - | 1,796,427 | ||||||||||||
| Bridge Loan | 990,000 | - | - | 990,000 | ||||||||||||
| Abell Investment Option | 7,392,528 | - | - | 7,392,528 | ||||||||||||
| $ | 11,794,790 | $ | - | $ | - | $ | 11,794,790 | |||||||||
| 25 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
The following is a reconciliation of the fair value measurements from December 31, 2013 to March 31, 2014.
| Abell Warrants | Round C Warrants | Bridge Loan | Abell Option | |||||||||||||
| Balance, December 31, 2013 | $ | 1,615,835 | $ | 1,796,427 | $ | 990,000 | $ | 7,392,528 | ||||||||
| Issuance of securities | 37,529 | 577,350 | (300,000 | ) | - | |||||||||||
| Fair value change included in earnings | (277,298 | ) | (375,296 | ) | 30,000 | (1,317,758 | ) | |||||||||
| Balance, March 31, 2014 | $ | 1,376,066 | $ | 1,998,481 | $ | 720,000 | $ | 6,074,770 | ||||||||
The following is a reconciliation of the fair value measurements from December 31, 2012 to March 31, 2013.
| Abell Warrants | Round C Warrants | Bridge Loan | Abell Option | |||||||||||||
| Balance, December 31, 2012 | $ | 831,806 | $ | 230,349 | $ | 1,528,500 | $ | - | ||||||||
| Issuance of securities | 275,813 | 169,024 | - | 5,954,545 | ||||||||||||
| Fair value change included in earnings | (123,001 | ) | (44,617 | ) | 305,700 | |||||||||||
| Balance, March 31, 2013 | $ | 984,618 | $ | 354,756 | $ | 1,834,200 | $ | 5,954,545 | ||||||||
| 26 |
VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Quantitative Information
Quantitative information as of March 31, 2014 with respect to financial instruments measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) are as follows:
Level 3 - Significant Unobservable Inputs
| Principal Valuation | Unobservable | Range | ||||||||
| Description | Fair Value | Techniques | Inputs | (Weighted Average) | ||||||
| Abell Warrants | $ | 1,376,066 | Black -Scholes | Strike price Equity volatility | N/A | |||||
| Round C Warrants | $ | 1,998,481 | Black -Scholes | Strike price Equity volatility | N/A | |||||
| Bridge Loan | $ | 720,000 | Present Value | Timing and amount of future cash flows | N/A | |||||
| Abell Investment Option | $ | 6,074,770 | Black -Scholes | Strike price Equity volatility | N/A | |||||
Abell Warrants and Round C Warrants
The fair value of the Abell Warrants and the Round C Warrants are estimated at the end of each reporting period using an option pricing model. More specifically, the Black-Scholes option pricing model was utilized in the valuation of both the Abell Warrants and the Round C Warrants. The following assumptions were used:
| Abell Warrants | Round C Warrants | |||||||
| Three months ended March 31, | 2014 | 2013 | 2014 | 2013 | ||||
| Volatility | 85% | 80% | 85% | 90% | ||||
| Exercise price | $4.55 | $4.68 | $5.88 | $6.05 | ||||
| Stock price at March 31 | $6.50 | $5.42 | $6.50 | $5.42 | ||||
| Risk free interest rate | 2.66% - 2.77% | 1.58% - 1.83% | 1.12% - 1.73% | 0.66- 0.73% | ||||
| Dividend yield | 0% | 0% | 0% | 0% | ||||
| Expected life | 10 | 10 | 3.7 -5.0 | 4.6 – 5.0 | ||||
As described in Note 3 to the unaudited condensed consolidated financial statements, the exercise price of the Abell Warrants is ultimately dependent upon the per share price and size of future rounds of equity financing. The Black-Scholes option pricing model was used to value the Abell Warrants as management believes that it can reasonably estimate the terms and conditions of future equity offerings that would impact the valuation of the Abell Warrants. Management’s ability to estimate these terms is based in part upon the terms and conditions of binding agreements to raise future equity capital in place at the time of each valuation.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
As described in Note 3 to the unaudited condensed consolidated financial statements, the Round C Warrants include a form of anti-dilution protection that may result in future adjustments to the terms of the warrants.
The fair value calculations include the use of both observable and estimated inputs. There remains an inherent subjectivity in the development of the strike price used for both the Abell and Round C warrants. Therefore, the Company considers the derived fair value to have been determined using Level 3 inputs.
Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of the Abell Warrants and the Round C Warrants.
Abell Option
As described in Note 3 to these unaudited condensed consolidated financial statements, the number of shares issuable under the Abell Option is dependent upon the lowest price paid for shares in a future qualified round of equity financing. Management has valued the Abell Option based upon an estimate of the fair value of the Company’s underlying stock because management believes it can reasonably estimate the occurrence and the terms of the future equity offering necessary to trigger Abell’s right to exercise the option and establish an exercise price, and because the right to exercise the option has no expiration. Given the perpetual exercise right, the Company believes it is reasonable to consider the shares issuable under the Abell Option as common stock equivalents.
As of January 16, 2013, the date of issuance for the Abell Option, the Company reasonably expected the undiscounted common stock price issuable under the Subsequent Financing Agreement (see Note 5) to be $5.50 per share, discounted to $4.40 per share. Therefore, the $5 million investment divided by the discounted share price of $4.40 yielded an option for 1,136,364 shares. At March 31, 2014 and December 31, 2013, the estimated number of shares is 934,580 in recognition of the expected Venture Capital Financing price per share of $5.35, the effective price of the Round C issuances.
Since the Abell Option is perpetual, each option share has a value of the underlying common stock share or $6.50 and $7.91 per share as of March 31, 2014 and December 31, 2013 respectively. The Abell Option value will be adjusted at the end of each reporting period, based on the valuation of the underlying common stock. The change in value of the Abell Option will be recorded on the financial statements as a Loss on Financial Instruments.
The fair value calculations include the use of both observable and estimated inputs. There remains an inherent subjectivity in the development of the strike price used for the Abell Option. Therefore the Company considers the derived fair value to have been determined using Level 3 inputs.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of the Abell Option.
Bridge Loan
The estimated fair value of the Bridge Loan was determined based upon the present value of probability weighted cash flows, using assumptions about the timing and amount of future cash flows and discount rates that management considers to be appropriate in the circumstances.
Because of the inherent subjectivity in management’s assumptions, the Company considers the derived fair value to have been determined using Level 3 inputs.
Significant changes to the assumptions used in the Company’s model would result in changes in the fair value of Bridge Loan.
Disclosure of the Fair Value of Financial Instruments
Cash and cash equivalents and accounts payable, are carried at amounts that approximate their fair values due to the short term nature of these financial instruments. The fair value of the Abell Loan approximates its carrying value due to the short term nature of the Abell Loan’s maturity. The fair value of the Organon Obligation approximates its carrying value as the note is due on demand.
10. Redeemable Preferred Stock and Stockholders’ Equity
As of January 1, 2011, the aggregate number of shares which the Company was authorized to issue was 75,000,000 shares of common stock with par value of $.0001 per share and 50,000,000 shares of preferred stock. The Company designated 15,000,000 shares of preferred stock as Series AA Convertible Redeemable Preferred Stock with a par value of $.0001 per share (“Series AA”) and 35,000,000 shares of preferred stock as Series B Convertible Redeemable Preferred Stock with a par value of $.0001 per share (“Series B”).
In August 2012, the Company amended and restated its Certificate of Incorporation to increase the number of shares authorized for issuance to 200,000,000 shares of common stock with a par value $.0001 and 50,000,000 shares of preferred stock with a par value of $.0001 per share.
Common Stock
On August 1, 2012, the Company issued 1,507,666 shares of common stock to the holders of the Series AA preferred stock in consideration for the conversion of all outstanding shares of Series AA preferred stock.
On August 1, 2012, the Company issued 16,656,082 shares of common stock to the former holders of our Series B Preferred Stock in consideration for the conversion of all outstanding shares of Series B preferred stock.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
During 2012, the Company issued 236,364 shares of common stock to Kodiak in exchange for their commitment to enter into the equity financing agreements described in Note 5 to these consolidated financial statements. The Company estimated the fair value of the common stock issued to be approximately $1.3 million and has recorded that value as a deferred cost. These costs were to be offset against the anticipated proceeds of the equity financing agreements with Kodiak. The carrying value associated with these shares of common stock had been included in long-term prepaid expenses in the accompanying consolidated balance sheet as of December 31, 2012. The amount was written off as a General & Administrative expense on the accompanying financial statements for the year ended December 31, 2013 as is the agreement was expiring January 18, 2014 and it was determined that financing would not be probable prior to expiration.
Round C Common Stock
The subscription agreement for the Company’s most recent financing, beginning October 2012, through the issuance of common stock (“Round C”) provides a form of anti-dilution protection to subscribers. Pursuant to the subscription agreement, if the market price of the Company’s common stock on the effective date of the Company’s first S-1 registration statement filed with the SEC (the “Effectiveness Date Market Price”) is less than $5.50 per share, then the Company will issue to each subscriber additional shares of common stock. The number of shares issued would equal the difference between a) the number of shares that would have been issued if the price per unit was equal to the greater of the Effectiveness Date Market Price or $5.00 and b) the number of shares originally issued to the subscriber. The anti-dilution rights are determined to be clearly and closely related to the Round C common stock as that term is defined in Topic 815 and as a result these rights are not required to be accounted for as a free standing derivative financial instrument.
During 2012, the Company raised additional capital of $920,002 through the issuance of 167,273 shares of common stock (Round C) and common stock warrants (Round C Warrants) to purchase 50,181 shares of common stock. $725,757 was allocated to the common stock and $194,245 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. In addition, the Company satisfied a payable to a board member of the Company in the amount of $169,729 by issuing 30,860 shares of common stock and common stock warrants (Round C Warrants) exercisable into 9,258 shares of common stock. $133,624 was allocated to the common stock and $36,105 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. The terms and conditions of the Round C Warrants are described in Note 3 to the unaudited condensed consolidated financial statements.
The Company filed a Form S-1 Registration Statement with the SEC, which became effective on October 31, 2013. The Effectiveness Date Market Price of Vaccinogen stock as of that date was $5.35. Pursuant to the protection provided to subscribers prior to October 31, 2013, 27,213 Adjustment Shares were issued. All subscriptions subsequent to the October 31, 2013 effective date through December 31, 2013 have been issued Adjustment Shares, totaling 31,811 and 12,207 Adjustment Shares issued for the three months ended March 31, 2014. All of the Adjustment Shares are included in the calculation of total shares issued or outstanding for the periods ended March 31, 2014 and December 31, 2013.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
During 2013, the Company raised additional capital of $4,205,105 through the issuance of 764,578 shares of common stock (Round C), 21,465 Adjustment Shares and common stock warrants (Round C Warrants) to purchase 229,368 shares of common stock. $3,253,316 was allocated to the common stock;, $926,581 was allocated to the common stock warrants; $14,542 represents placement agent commissions paid and $10,746 was allocated to placement agent warrants. The Round C common stock warrants were determined to be a derivative financial instrument.
During 2013, several investors in the Bridge Loan opted to convert their loan to equity in the amount of $937,970 and the Company issued 170,540 shares of common stock (Round C), 4.787 Adjustment Shares and common stock warrants (Round C Warrants) exercisable into 51,159 shares of common stock. $751,561 was allocated to the common stock and $186,409 was allocated to the common stock warrants. The common stock warrants were determined to be a derivative financial instrument. The terms and conditions of the Round C Warrants are described in Note 3 to the unaudited condensed consolidated financial statements.
The Company has increased the size ofthe Round C Private Placement Offering to $23,038,000 (4,188,727 Units) (which may be increased to $28,030,000 (5,097,817 Units) at the discretion of the Company) and extended the Final Closing Date to July 31, 2014.
Series AA Preferred Stock
In 2010, the Company created a class of preferred stock known as Series AA preferred stock and authorized 15,000,000 shares for issuance as Series AA preferred stock. All shares of Series AA were issued with an original purchase price of $9.0797 per share (“Series AA Original Issuance Price”). From January 13, 2011 to October 24, 2011, the Company issued 123,015 shares of Series AA Preferred Stock to 15 third party investors in a private offering at a price of $9.0797 per share resulting in net proceeds of approximately $1.1 million after approximately $14,000 in related stock issuance costs. As noted above, all shares of Series AA were converted into common stock of the Company in 2012.
Series B Preferred Stock
In 2010, the Company created a class of preferred stock known as Series B preferred stock and authorized 35,000,000 shares for issuance as Series B Preferred Stock. All shares of Series B were issued pursuant to a Stock Exchange Agreement entered into concurrently with the June 2010 Asset Transfer Agreement with Intracel. As noted above, all shares of Series B were converted into common stock in 2012.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
11. Stock-Based Compensation
Restricted Stock
The Company from time to time has issued shares of restricted common shares to directors. From August 2010 through March 31, 2014, the Company issued 134,278 shares of restricted common stock to employees whose vesting is contingent upon a successful initial public stock offering with a 10 year contractual life. In 2007 and 2010 the Company issued 180,000 and 1.1 million shares, respectively of restricted common stock to employees whose vesting is dependent upon future employment. Those shares generally vest over periods of 4 to 5 years.
The Company records compensation expense for the award of restricted stock based upon the awards fair value determined as the difference in the estimated fair value of the Company’s common stock and the price paid by the employee, if any, generally on the date of grant. The fair value of restricted stock awards is recognized as compensation expense over the service period which is generally the same as the vesting period. No compensation cost has been or will be recognized for the restricted stock awards whose vesting is contingent upon a successful initial public offering until such event is probable of occurring. As of March 31, 2014, management has determined that such an event is not yet probable of occurring. No compensation expense related to awards with service based vesting was recorded for the three months ended March 31, 2014 and 2013
The following table summarizes activity related to restricted-stock awards for the three months ended March 31, 2014 and 2013. The weighted average fair values for the awards below are based on the fair value at the grant date of the respective awards, which is equal to the value of the Company’s common stock on such date.
| 2014 | 2013 | |||||||||||||||
| Three months ended March 31, | Shares | Weighted Average Fair Value | Shares | Weighted Average Fair Value | ||||||||||||
| Balance, January 1 | 134,278 | $ | 3.91 | 119,734 | $ | 3.42 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Vested | - | - | - | - | ||||||||||||
| Forfeitures | - | - | - | - | ||||||||||||
| Balance, March 31 | 134,278 | $ | 3.91 | 119,734 | $ | 3.42 | ||||||||||
As of March 31, 2014 and December 31, 2013, total unrecognized compensation costs related to nonvested restricted stock awards to purchase 134,278 shares of common stock was approximately $524,000 and $489,000 respectively, which will be recognized upon a successful initial public offering of the Company’s stock. The nonvested restricted stock awards have a weighted average remaining contractual term of 7.12 years as of March 31, 2014. No awards vested during the three months ended March 31, 2014 and 2013.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
In December 2010, the Company has committed to issue $462,500 of restricted stock, subject to restrictions yet to be defined, to an officer of the Company if and only if the Company completes a financing round that provides bona fide equity capital to the Company of at least $35.0 million.
Stock Option Pool
On July 17, 2012, the Company’s board of directors approved the grant of 200,000 options to acquire Vaccinogen common stock. No options were issued through December 31, 2012. On October 23, 2012, the Company committed to grant an option to purchase 20,000 shares of common stock to an employee if the Company’s stock begins trading on the “Over the Counter Bulletin Board”. The exercise price of the award will be equal to the Company’s stock closing price on the first day of trading on the “Over the Counter Bulletin Board” and the awards will vest over four years from that date.
During the first quarter of 2013 option grant letters were sent to existing employees and consultants granting an option to purchase an additional 87,000 shares of common stock with the grant date being set as the first day of trading on the “Over the Counter Bulletin Board”. The exercise price of the award was equal to the Company’s closing price on the first day of trading and will vest over four years from that date.
The Company uses the Black-Scholes option pricing model to calculate the fair value of options. The significant assumptions used in this model include:
| Annual Dividend | - |
| Expected life (in years) | 6.25 – 10.00 |
| Risk free interest rate | 1.35% - 2.17% |
| Expected volatility | 80% |
The following table summarizes the Stock Option pool activity for the three months ended March 31, 2014. No Stock Options were granted as of March 31, 2013.
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||
| Balance, January 1, 2014 | 77,000 | $ | 7.00 | 3.45 | ||||||||
| Granted | - | - | - | |||||||||
| Forfeited | - | - | - | |||||||||
| Balance, March 31. 2014 | 77,000 | $ | 7.00 | 3.20 | ||||||||
During the three months ended March 31, 2014 and 2013 the Company recorded stock based compensation expense of $22,603 and $0 respectively. For the three months ended March 31, 2014, $4,777 was allocated to General & Administrative expense and $17,826 to Research & Development.
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VACCINOGEN INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Total compensation costs for unvested stock option awards outstanding at March 31, 2014 was approximately $353,000 to be recognized over approximately 3.2 years.
Stock Purchase Warrants
From time to time the Company has issued stock purchase warrants to non-employees in exchange for services rendered. As of March 31, 2014 and March 31, 2013, approximately 785,575 warrants were issued and outstanding with exercise prices ranging from $1.00 to $5.50. To date, all warrants have been issued for past services, with the exercise prices at least equal to the then estimated fair value of the underlying security, were fully vested upon issuance, and had contractual terms ranging from 2.5 to 7.5 years.
The following table summarizes the stock purchase warrant activity for the three months ended March 31, 2014 and 2013.
| 2014 | 2013 | |||||||||||||||
| Shares | Weighted Average Fair Value | Shares | Weighted Average Fair Value | |||||||||||||
| Balance, January 1 | 785,575 | $ | 1.48 | 785,575 | $ | 1.48 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Balance, March 31 | 785,575 | $ | 1.48 | 785,575 | $ | 1.48 | ||||||||||
The following table summarizes information on warrants outstanding as of March 31, 2014:
| Exercise price | Shares | Weighted Average Remaining Life | Weighted Average Exercise Price | |||||||||
| $1.00 | 705,575 | 0.80 | $ | 1.00 | ||||||||
| $5.50 | 80,000 | 3.49 | $ | 5.50 | ||||||||
| Total | 785,575 | |||||||||||
Common Stock Warrants
The following table summarizes the warrant activity for the three months ended March 31, 2014 and is inclusive of the Abell Warrants, the Round C Warrants, the Stock Purchase Warrants and represents the total outstanding warrants.
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| VACCINOGEN INC. AND SUBSIDIARY |
| Notes to Unaudited Condensed Consolidated Financial Statements |
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Life | ||||||||||
| Outstanding at January 1, 2014 | 3,310,378 | $ | 2.20 | 2.95 | ||||||||
| Granted | 265,570 | $ | 5.35 | 7.41 | ||||||||
| Exercised | - | - | - | |||||||||
| Expired | - | - | - | |||||||||
| Outstanding at March 31, 2014 | 3,575,948 | $ | 2.44 | 3.12 | ||||||||
The warrants granted in the three months ended March 31, 2014 and 2013 had a weighted average fair value at grant date of $5.45 and $3.79 respectively.
The following table summarizes the outstanding warrants by year of expiration:
| Shares | ||||
| 2014 | 1,151,690 | |||
| 2015 | 1,201,475 | |||
| 2016 | - | |||
| 2017 | 139,439 | |||
| 2018 | 280,527 | |||
| Thereafter | 802,817 | |||
| Total | 3,575,948 | |||
12. Commitments and Contingencies
Leases
The Company leases office space, a manufacturing facility, and equipment under operating leases expiring in 2014. In addition, the Company leases storage facilities on a month to month basis. Rent expense was approximately $40,591 and $41,333 for the three months ended March 31, 2014 and March 31, 2013, respectively.
Minimum future rental payments under non-cancelable operating leases, including amendments to leases entered through the date the financial statements were available to be issued, total $94,055 for 2014 and $20,968 for 2015 for a total of $115,023.
Royalty Agreement with Intracel
Pursuant to the Agreement, the Company agreed to pay Intracel the following royalties on the Net Sales of Royalty Bearing Products (as defined): (i) 3% of net sales on the first $350.0 million of Net Sales of Colon Cancer Products occurring in the calendar year; (ii) 4% of net sales of Net Sales of Royalty Bearing Products occurring in the calendar year in excess of $350.0 million and up to and including $750.0 million and (iii) 5% of net sales of Net Sales of Royalty Bearing Products occurring in the calendar year in excess of $750.0 million.
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| VACCINOGEN INC. AND SUBSIDIARY |
| Notes to Unaudited Condensed Consolidated Financial Statements |
Royalty Agreement with Organon
The Company has agreed to pay Organon a royalty of 10% of the Net Sales of OncoVAX® (and all other TICE BCG related products, if any) until the Organon Obligation is paid in full, including interest, and 3% for 5 years thereafter.
Litigation
The Company may be subject to certain claims arising in the ordinary course of business. The Company and a vendor are in dispute over amounts owed for services performed. A demand for payment under a written agreement has been made against the Company in the amount of approximately $150,000. Management believes the vendor did not perform under the terms of the contract and contends that no amounts are due to the vendor. Management has offered to settle the matter for $75,000 to be paid upon the Company’s successful initial public offering and has accrued $75,000 in the accompanying unaudited condensed consolidated financial statements.
VAT Taxes
The foreign subsidiary of the Company, located in The Netherlands, was presented with a VAT tax bill for the years 2010 and 2011 in the amount of 65,666€. The Company is appealing the decision as we believe that we should be VAT exempt. There has not yet been a decision made by the Dutch authorities and there is no estimate of when a decision will be made. In the event an unfavorable decision is made, the Company will be required to pay the full amount plus interest. The original bill at the March 31, 2014 exchange rate would have a USD equivalent of approximately $90,000. There has been no expense accrued on the accompanying unaudited condensed consolidated financial statements.
13. Related Party Transactions
On April 15, 2012, Intracel provided an unsecured note payable in the amount of $30,000. The note is unsecured, non-interest bearing, and becomes due on the date on which a minimum equity raise of $1.0 million occurs. The carrying value of the note payable to Intracel is included in related party payable in the accompanying unaudited condensed consolidated financial statements as of December 31, 2013. The note was paid in full during January 2014.
In 2012, an executive of the Company loaned the Company $10,000. As of December 31, 2013, the balance due of $4,099 is past due and in default. The carrying value of this amount due to the Company executive is included in related party payable in the accompanying unaudited condensed consolidated financial statements as of December 31, 2013. The loan was paid in full during January 2014.
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| VACCINOGEN INC. AND SUBSIDIARY |
| Notes to Unaudited Condensed Consolidated Financial Statements |
As discussed in Note 10, on February 14, 2012, a member of the board of directors of the Company, agreed to loan the Company money to pay one of the Company’s vendors an outstanding amount of $169,729. The Company subsequently issued to this board member 30,860 shares of common stock and a warrant exercisable into 9,258 warrants (Round C Warrant).
During 2013, an executive of the Company loaned the Company $70,000. As of December 31, 2013 $20,000 remained unpaid. The carrying value of this amount due to the Company executive is included in related party payable in the accompanying consolidated financial statements as of December 31, 2013.
The loan was paid in full during January 2014.
14. Supplemental Disclosure of Cash Flow Information
For the three months ended March 31, 2014 and March 31, 2013 the Company paid interest costs of approximately $23,500 and $38,550, respectively.
From January 1, 2014 through March 31, 2014 the Company raised additional capital totaling approximately $2.0 million (net of issuance costs) from the issuance of 375,399 shares of Round C Common Stock, 10,704 adjustment shares and additional Round C Warrants to purchase 112,663 shares of common stock. The Company allocated approximately $1.5 million of the total 2014 proceeds to the common stock and approximately $0.5 million of the total proceeds to the common stock warrants.
From January 1, 2013 through March 31, 2013 the Company raised additional capital totaling approximately, $972,000 (net of issuance costs) from the issuance of 176,697 shares of Round C Common stock and additional Round C Warrants to purchase 53,008 shares of common stock. The Company allocated approximately $803,000 of the total 2013 proceeds to the common stock and approximately $169,000 of the total proceeds to the common stock warrants.
15. Subsequent Events
In accordance with ASC 855-50, “Subsequent Events,” the Company has reviewed events through the date of the filing.
April 1, 2014 through May 13, 2014, the Company raised additional capital totaling approximately $151,000 (net of issuance costs) through the issuance of 27,500 shares of Common Stock, warrants to purchase 8,250 shares of Common Stock and 773 Adjustment Shares.
The Chief Executive Officer has loaned the Company $28,500 during April 2014. This is a non interest bearing loan.
On April 24, 2014, the Company entered into a binding agreement (the “Agreement”) with The Investment Syndicate, a group of investors (“TIS”), pursuant to which TIS has agreed to purchase (a) up to 3,636,364 units (“Units”), each Unit consisting of one share of our common stock and one warrant, exercisable for five years, to purchase three tenths (0.3) of a share of common stock at an exercise price of $6.05 per whole share, at $5.50 per Unit, for a total of $20,000,000, in our current Unit (Round C) offering, and (b) up to 10,909,091 shares of our common stock at $5.50 per share, for a total of up to an additional $60,000,000, all in up to five closings, with certain terms and conditions. TIS’ obligation to purchase any Units (or shares of common stock) under the Agreement is subject to the satisfaction of these closing conditions. There can be no assurance that any of these conditions will be met or that TIS will purchase any Units or common stock. A full description of this transaction is set forth in our Current Report on Form 8-K dated April 24, 2014 and filed with the SEC on April 28, 2014.
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ITEM 2 -. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from Management's expectations. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. Our MD&A is organized as follows:
| • | Overview — Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of MD&A. |
| • | Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2013 and beyond. |
| • | Critical Accounting Policies— Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts. |
| • | Results of Operations— Analysis of our financial results comparing 2013 and 2012. |
| • | Liquidity and Capital Resources— An analysis of changes in our balance sheet and cash flows and discussion of our financial condition and future liquidity needs. |
The various sections of this MD&A contain a number of forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Overview” and “Trends & Outlook” section. Our actual results may differ materially.
Overview
We are a biotechnology company founded in 2007 relying on over three decades of prior research by our Chief Executive Officer and his colleagues into combating cancer by using the body’s own immune system. Vaccinogen is the developer of OncoVAX®, which we believe is the only patient specific immunotherapy for Stage II colon cancer and our technology may also have application in other tumor types, notably melanoma and renal cell carcinoma.
Colon cancer represents the third most common form of cancer in both the US and Europe. American Cancer Society statistics suggest there will be about 102,000 new cases of colon cancer diagnosed within the US. The European Cancer Observatory estimates that there were about 245,000 new cases of colon cancer across Europe.
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We have broad patents covering the OncoVAX® technology in the U.S. and eight other countries, Australia, Canada, Switzerland, Germany, France, Great Britain, Ireland and Italy. These patents and applications provide broad coverage for the production of autologous cancer vaccines. The key protection of OncoVAX®, in addition to considerable expertise protected as trade secrets, is the broad, issued patent protection around the production of autologous, sterile, metabolically active cancer vaccines developed by us. This patent, entitled “Sterile Immunogenic Non-Tumorigenic Tumor Cell Composition and Methods” was issued in 2009 and expires no sooner than 2025. We believe that sterility will be required for any product to reach the US market and likely in any other market with an approved sterile vaccine like the one we have developed. This could result in a regulatory barrier to entry to competitors.
We hold 1 U.S. patent to related technologies and including the sterility patent referred to above, 2 U.S. patents total.
We also rely upon unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. We hold considerable proprietary expertise related to the OncoVAX® technology, including the production of autologous cancer vaccines. We have brand names for our OncoVAX® products and related technologies, and anticipate filing 5 trademark applications for these and related marks.
All of our research efforts to date are at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual property, our scientific team and our facilities, to advance our technologies.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30, in which case we would no longer be an emerging growth company as of the following December 31.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies.
Operating Strategy
We will maintain a cGMP facility and outsource clinical activities to contract research organizations (“CRO) in an effort to achieve the following:
| 1. | Complete the pivotal Phase IIIb clinical trial of this autologous vaccine, OncoVAX®, which is a new paradigm to prevent the recurrence of stage II colon cancer. The planned trial will closely replicate a successful prior Phase IIIa study (which study we believe demonstrated a 50% improvement in recurrence free survival and overall survival in the Stage II target patient population as compared to surgergy alone). |
| 2. | Develop revenues by establishing licensing arrangements for distribution of OncoVAX® in certain territories as well as for additional carcinoma indications. |
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| 3. | Develop diagnostic and therapeutic drug products as well as revenues by exploiting our distinctive Human Monoclonal Antibodies (“HuMabs”) technology. |
Trends & Outlook
Revenue
To date, the Company has not earned any revenues as the use of OncoVAX® to create cancer related vaccines is still undergoing clinical trials and has not yet received regulatory approval for commercialization and sale.
We are mainly focused on: preparing for the initiation of Phase IIIb clinical trials relating to OncoVAX® and our research regardinghuman monoclonal antibodies (HuMabs).
On a long-term basis, we anticipate that our revenue will be derived primarily from global sales of our OncoVAX® product and licensing fees. Commercialization of the OncoVAX® product is dependent on successful completion of a Phase IIIb clinical trial and subsequent approval by the FDA.
Research & Development Expenses
Our research and development costs consist of expenses incurred in activities connected with the development of a stage II colon cancer vaccine. These expenses consist primarily of the amortization of intangible assets, cost of conducting clinical trials, salaries and related expenses for personnel, fees paid to professional service providers and, costs of a manufacturing facility in The Netherlands. We expect that research and development expenses will increase in the near term with the onset of the Phase IIIb clinical trial.
Clinical Trials
The FDA has requested a second, confirmatory, randomized controlled Phase III trial of OncoVAX® in Stage II colon cancer. The principal objective of Vaccinogen is to organize a team to conduct a confirmatory Phase IIIb trial in Stage II colon cancer. The protocol of this trial, including endpoints and the statistical analysis plan is the subject of an SPA agreement granted by the FDA.
This study will be carried out under a Special Protocol Assessment (SPA) that was negotiated with the FDA in 2010. An SPA granted by the FDA provides a mechanism for the sponsors and the FDA to reach agreement on size, execution and analysis of a clinical trial that is intended to form the primary basis for regulatory approval. The primary endpoint of this pivotal Phase IIIb trial is recurrence-free survival (RFS) with an interim analysis after 70 “events,” and a final primary analysis three years following completed enrollment. “Events” are incidents of either recurrent disease or death. The study is powered at 90% to detect a 50% improvement in RFS versus resection only for final analysis with an adjustment for interim analysis. The power calculations in the study assume an event rate and distribution that match those observed in the 8701 Phase IIIa study. If a robust p value is achieved at the interim analysis, the Biologics License Application (BLA) can be filed with the FDA’s center for Biologics Evaluation and Research (CBER) at that point. Past clinical trials using the optimal regimen with four immunizations will be accepted as supportive studies during the FDA review of the BLA.
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The Phase IIIb study will enroll 550 patients, randomized 1:1 to receive surgery alone, or surgery plus OncoVAX®. Patients will be followed on a regular schedule to see whether and when their cancer might reappear. The experience with OncoVAX® in the 8701 study showed that in the relevant Stage II group, disease recurrence happened more quickly and more frequently in those patients who received surgery alone. If the Phase IIIb trial replicates the experience of the 8701 patients, the interim analysis after 2/3 of the expected events should give a clear and statistically significant separation between the Kaplan-Meier curves at that point, and would form the basis for a BLA seeking marketing approval from the FDA. The planned Phase IIIb clinical trial will commence within 60 days of obtaining adequate funding. Management currently estimates that approximately $30 million in funding will be required to commence the Phase IIIb clinical trial.
It is important to emphasize that the FDA has agreed that RFS is the most appropriate endpoint to evaluate a trial in Stage II colon cancer. The alternative in cancer studies is often overall survival (OS). An OS endpoint has several drawbacks in this case. The average age of patients presenting with colon cancer is 65 years, so deaths from causes other than the tumor will dilute the outcome in both arms. Patients in either arm whose disease recurs will receive chemotherapy and other treatments for their metastatic disease, and the success of these treatments will dilute the impact of earlier therapies such as OncoVAX® on OS. From a patient perspective, being disease free is clearly a meaningful endpoint.
General and Administrative Expenses
Our general and administrative (“G&A”) expenses consist of the general costs, expenses and salaries for the operation and maintenance of our business. We anticipate that general and administrative expenses will increase as we progress through the clinical phase of development into commercialization.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 3 of the Notes to consolidated financial statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:
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Use of Estimate -Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements. On an ongoing basis, the Company evaluates the estimates used in recording common stock warrant related liabilities, derivative financial instruments, stock based compensation, and where applicable, the fair value of assets. The Company may base such estimates on various assumptions including information received from valuation consultants which it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Intangible Assets- Intangible assets consist primarily of the cost of the acquired patents associated with OncoVAX® to be used in research and development and the commercialization cancer related vaccines. The Company has capitalized the cost of OncoVAX® because the Company has identified alternative future research and development efforts for numerous forms of cancer which it intends to pursue and for which management believes will result in commercialization of related vaccines. Acquired patents are carried at cost less accumulated amortization. Amortization is calculated on a straight-line basis, over the estimated useful economic life of the patent, which is 12.3 years for OncoVAX®.
The carrying value of the Company’s intangible assets is $61,049,742 and $62,725,559 as of March 31, 2014 and December 31, 2013. Long-lived assets, including identifiable intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When events or circumstances indicate that assets may not be recoverable, the Company prepares cash flows, undiscounted, for each asset or asset group. The Company groups assets for this purpose at the lowest level for which identifiable cash flows exist or are projected to exist. If the sum of the undiscounted cash flows exceeds the carrying value of the asset or asset group, no impairment is deemed present. If the sum of undiscounted cash flows is less than the carrying amount of the asset or asset group, the Company records an impairment charge, if any, for the amount by which the carrying value exceeds the estimated sum of undiscounted cash flows of the asset or asset group.
The Company considers various factors when evaluating whether there are indications that the carrying value of its intangible assets may not be recoverable. Among others, those factors include, adverse changes in marketplace conditions or in the regulatory or legal environment impacting the anticipated use of OncoVAX® and related patents for their intended purpose in research and development and eventual commercialization, significant increases as compared to budget in the level of investment necessary to conduct research and development, clinical trials, and eventual commercialization of OncoVAX®, significant negative variances to budget for operating losses and operating cash flow deficits, and indications of adverse changes in the value of the Company’s equity.
The Company considers these factors no less frequently than the end of each reporting period, including as of March 31, 2014. The Company has noted no adverse change in the demand for the development and commercialization of cancer related vaccines indicated in part by the continuing interest of new and existing investors to fund the Company’s ongoing research and development. The Company has considered the progress of its research and development activities against its operating plan noting the timing for the conduct of its clinical trials and recertification of its production facilities remains consistent with its operating plan. The Company has also evaluated its financial performance and cash flow results noting that the level of investment necessary to conduct its research and development, complete necessary testing for regulatory approval, and begin eventual commercialization of cancer related vaccines remains consistent with its operating plan and financial budgets. The Company also has noted no adverse change in the estimated fair value of the Company based upon values indicated in its ongoing capital raising activities.
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Through March 31, 2014, the Company has determined that there have been no events or circumstances that would indicate that the carrying value of its intangible assets is not recoverable.
Fair Value of Financial Instruments -Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.
Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, as defined by the new guidance related to fair value measurements and disclosures, and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
| Level 1- | Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
| We carry no investments classified as Level 1. | |
| Level 2- | Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument's anticipated life. |
| We carry no investments classified as Level 2. | |
| Level 3- | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management's best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Our Abell Warrants, Round C Warrants, Bridge Loan and Abell Investment Option obligations are considered Level 3. |
For a further discussion regarding fair value measurements, see Note 9 on Fair Value in the Notes to consolidated financial statements.
Accounting for Warrants –We have adopted FASB guidance related to determining whether an instrument or embedded feature is indexed to an entity’s own stock. This guidance applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined in ASC Topic 815, Derivatives and hedging, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result, certain of our warrants were considered to be derivatives and were valued using various assumptions as they are recorded as liabilities.
Research and Development Costs –Research and development costs that do not have alternative future use are expensed as incurred. Research and development expenses primarily include the amortization of intangible assets, cost of conducting clinical trials, compensation and related overhead for employees, consultants, facilities costs and the cost of materials purchased for research and development.
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Stock Based Compensation –The Company measures the cost of employee services received in exchange for stock options or restricted stock awards based upon the fair value of the award on the date of the grant. The Company recognizes the estimated grant date fair value of the award as stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The Company initially measures the cost of awards granted to non-employees based on the fair value of the award on the date of grant however such cost is re-measured at the end of each reporting period until performance is fully satisfied or services are rendered by the non-employee.
The fair value of stock options granted is calculated using the Black-Scholes option-pricing model, which requires the use of subjective assumptions including volatility, expected term, risk-free rate, and the fair value of the underlying common stock. The fair value of non-vested stock awards is determined based upon the estimated fair value of the Company's common stock.
Results of Operations
Consolidated Statement of Operations Data
| Three Months Ended March 31, | ||||||||
| 2014 | 2013 | |||||||
| Revenues | $ | - | $ | - | ||||
| Operating Expenses: | ||||||||
| Research and development | 2,020,128 | 2,073,184 | ||||||
| General and administrative expenses | 707,927 | 6,929,760 | ||||||
| Total Operating Expenses | 2,728,055 | 9,002,944 | ||||||
| Loss from Operations | (2,728,055 | ) | (9,002,944 | ) | ||||
| Gain (Loss) on Financial Instruments | 1,902,823 | (413,895 | ) | |||||
| Interest and Other Expenses | (852,885 | ) | (65,230 | ) | ||||
| Net Loss | $ | (1,678,117 | ) | $ | (9,482,069 | ) | ||
Revenue
Since inception, we have not earned any revenues as the use of OncoVax® to create cancer related vaccines is still undergoing clinical trials and has not yet received regulatory approval for commercialization and sale.
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Operating Expenses – Three Months Ended March 31, 2014 and 2013
Our operating expenses totaled $2,728,055 and $9,002,944 in the three months ended March 31, 2014 and March 31, 2013 respectively. The operating expenses are discussed in further detail below.
Research and Development Expenses
| Three Months Ended March 31, | Change in 2014 v. 2013 | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Research & Development | $ | 2,020,128 | $ | 2,073,184 | $ | (53,056 | ) | -2.56 | % | |||||||
Research and development expenses decreased to $2,020,128 in the three months ended March 31, 2014, or approximately 2.56%, from $2,073,184 in the three months ended March 31, 2013. These expenses include approximately $1.7 million for amortization of intangibles, related to OncoVax® intellectual property, for the three months ended March 31, 2014 and 2013. The activities for both the three months ended March 31, 2104 and 2013 were related to preparation for the planned Phase IIIb clinical trial.
General and Administrative Expenses
| Three Months Ended March 31, | Change in 2014 v. 2013 | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| General & Administrative | $ | 707,927 | $ | 6,929,760 | $ | (6,221,833 | ) | -89.78 | % | |||||||
General and administrative expenses decreased to $707,927 in the three months ended March 31, 2014 from $6,929,760 in the three months ended March 31, 2013. The decrease of $6,221,833, from 2014 to 2013 was attributable to both cash and non-cash items.
The non-cash items are comprised of the estimated value ($5,954,545) of the Abell Option issued with respect to the Abell Investment Agreement in January 2013 as discussed in Note 3 of the unaudited condensed consolidated financial statements.
The cash items are decreases of in accounting fees ($354,000); consulting fees ($29,000) and partially offset by increases in legal fees ($49,000) and liability insurance ($40,000).
Nonoperating Expense – Three Months Ended March 31, 2014 and 2013
Nonoperating (gains) and expenses were ($1,049,938)and $479,125 in the three months ended March 31, 2014 and 2013 respectively. The nonoperating expenses are discussed below.
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Loss on Financial Instruments
| Three Months Ended March 31, | Change in 2014 v. 2013 | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Nonoperating Expenses | ||||||||||||||||
| (Gain) Loss on Financial Instruments | $ | (1,902,823 | ) | $ | 413,895 | $ | (2,316,718 | ) | * | |||||||
* Not meaningful
Recorded gains or losses on Financial Instruments may fluctuate from period to period as determination of fair value is based on Vaccinogen stock values and management’s assessment of the probability of qualifying events which may affect the fair value of the Financial Instrument.
In the three months ended March 31, 2014 Gains on Financial Instruments were generated due to changes in the estimated fair value of the Abell Warrants ($239,769), Round C Warrants ($375,296) and the Abell Option ($1,317,758). Losses were recorded for The Bridge Loan ($30,000).
The Company issued additional warrants associated with the Abell Warrant Agreement to recognize the change in the estimated lowest per share price of stock sold in the next qualifying round of venture capital financing, to $5.35. The fair value of the warrants ($37,529) is included in the Gain (Loss) on Financial Instruments. Further discussion of this transaction can be found in Note 3 to the accompanying unaudited condensed consolidated financial statements.
In the three months ended March 31, 2013 Gains on Financial Instruments were attributable to the change in the estimated fair value of the Abell Warrants of approximately ($123,001) and Round C Warrants ($44,617). These gains were offset by a Loss on Financial Instruments recorded for the Bridge Loan of approximately ($306,000).
The Company issued additional warrants associated with the January 2013 amendment as a result of the deemed extinguishment of the Abell Loan. The fair value of the warrants ($275,813) is included in the Loss on Financial Instruments. Further discussion of this transaction can be found in Note 3 and Note 9 to the accompanying unaudited condensed consolidated financial statements.
Interest and Other Expenses
| Three Months Ended March 31, | Change in 2014 v. 2013 | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Interest & Other Expenses | $ | 852,885 | $ | 65,230 | $ | 787,655 | * | |||||||||
* Not meaningful
Interest & Other Expenses increased to $852,885 for the three months ended March 31, 2014 from $65,230 for the comparable period in 2013. The increase of $787,655 is primarily due to non-cash interest expense relating to the issuance of contingent warrants under the Amendment No, 7 to the Note and Warrant Purchase Agreement with The Abell Foundation in the amount of approximately $794,000.
Liquidity and Capital Resources
Since our inception, we have financed our operations through the private placement of our securities. During the three months ended March 31, 2014 and 2013 we raised gross proceeds of approximately $2.0 million and $0.9 million respectively.
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| Three Months Ended March 31, | Change in 2014 v. 2013 | |||||||||||||||
| 2014 | 2013 | $ | % | |||||||||||||
| Net cash used in operating activities | $ | (1,541,401 | ) | $ | (1,001,537 | ) | $ | (539,864 | ) | 53.90 | % | |||||
| Net cash used in investing activities | - | (722 | ) | 722 | -100.00 | % | ||||||||||
| Net cash provided by financing activities | 1,518,352 | 971,836 | 546,516 | 56.24 | % | |||||||||||
| Effect of foreign exchange rate changes on cash and equivalents | 12,520 | 40,752 | (28,232 | ) | -69.28 | % | ||||||||||
| Net decrease in cash and cash equivalents | $ | (10,529 | ) | $ | 10,329 | $ | (20,858 | ) | -201.94 | % | ||||||
Cash & Cash Equivalents
Total cash and cash equivalents were $62,567 at March 31, 2014, compared with $124,169 at March 31, 2013, for a decrease of $61,602. Cash balances will fluctuate from one reporting period to another based on the amount and timing of the issuance of our common stock and warrants for cash.
Net Cash Used in Operating Activities
The net cash used in operating activities for the three months ended March 31, 2014 consisted of our net loss of $1,678,117 which was offset by both cash and non-cash adjustments of $136,716. The net cash used in operating activities for the year ended March 31, 2013 consisted of our net loss of $9,482,069 which was offset by both cash and non-cash adjustments of $8,480,532.
The decrease of $8,343,816 in both cash and non-cash adjustments for the three months ended March 31, 2014 is primarily attributable to the stock based expense of $5,954,545 related to the Abell option and a gain on financial instruments of $1,902,823 in 2014.
Net Cash Used in Investing Activities
We invested $0 and $722 in the three months ended March 31, 2014 and 2013 respectively in purchases of property and equipment.
Net Cash Provided by Financing Activities.
Listed below are key financing transactions entered into by us during 2014:
| · | During the three months ended March 31, 2014 we raised additional capital of approximately $2.1 million through the issuance of 386,103 Units Round C common stock (each Unit consisting of 1 share of common stock and a common stock purchase warrant to purchase 0.3 shares of common stock). | |
| · | A principal reduction in the Abell Loan was made in the amount of approximately $427,000. | |
| · | We also used approximately $22,000 in proceeds for payment of placement agent and finders fees. |
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Listed below are key financing transactions entered into by us during 2013:
| · | During the three months ended March 31, 2013 we raised additional capital of approximately $972,000 through the issuance of 176,697 Units Round C common stock (each Unit consisting of 1 share of common stock and a common stock purchase warrant to purchase 0.3 shares of common stock). |
Future Liquidity & Needs
We have incurred significant operating losses and negative cash flows since inception. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for our Phase IIIb clinical trial, pursuit of regulatory approvals, acquisition of capital equipment, costs to maintain office and manufacturing facilities, for general and administrative expenses and other working capital requirements. The planned Phase IIIb clinical trial will commence within 60 days of obtaining adequate funding. Management currently estimates that approximately $30 million in funding will be required to commence the Phase IIIb clinical trial. We rely on cash balances and the proceeds from the offering of our securities to fund our operations. As of March 31, 2014 we had $62,567 in cash which is less than one month’s cash required to fund operations. Our current monthly cash requirement is approximately $500,000.
We have recurring losses and negative cash flows from operating activities and have significant future commitments, and as a result substantial doubt exists regarding our ability to remain in operation at our current level. The report of BDO USA, LLP, our independent registered accounting firm, with respect to our audited condensed consolidated financial statements at December 31, 2013 contains an explanatory paragraph as to our potential inability to continue as a going concern. Additionally, this may adversely affect our ability to obtain new financing on reasonable terms or at all.
We are continuing our Unit (Round C) offering of common stock and warrants. The total offering is for $23,038,000 (or 4,188,727 Units) of which 3,818,181 million units are being offered for cash and 370,546 Units are being offered for cancellation of certain outstanding indebtedness. At the Company’s discretion it may increase the Unit (Round C) offering by an additional $5 million for a total of $28,038,000. The Units have a purchase price of $5.50 per Unit and are comprised of one share of Common Stock and one Warrant, exercisable for five years, to purchase three-tenths (0.3) of a share of Common Stock at an exercise price of $6.05 per whole share. These securities were issued pursuant to an exemption from registration under the Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Through March 31, 2014, we have sold 1,342,810 Units for gross proceeds of $7,385,455 and 225,085 Units for cancellation of existing indebtedness. Accordingly, at March 31, 2014, there were 2,475,371 Units remaining available for purchase and 145,461 Units remaining for cancellation of existing indebtedness in the Offering. Any funds received upon subscription for Units are immediately available to us, subject only to our arrangements with The Abell Foundation regarding repayment of our outstanding Note due them.
Since April 1, 2014 we have sold an additional 27,500 Units for gross proceeds of approximately $151,000. We used approximately $53,000 in proceeds for partial repayment of outstanding indebtedness to the Abell Foundation and the remaining proceeds were used for working capital and general corporate expenses.
On April 24, 2014 we entered into a binding agreement (the “Agreement”) with The Investment Syndicate, a group of investors (“TIS”), pursuant to which TIS has agreed to purchase (a) up to 3,636,364 units (“Units”), each Unit consisting of one share of our common stock and one warrant, exercisable for five years, to purchase three tenths (0.3) of a share of common stock at an exercise price of $6.05 per whole share, at $5.50 per Unit, for a total of $20,000,000, in our current Unit (Round C) offering, and (b) up to 10,909,091 shares of our common stock at $5.50 per share, for a total of up to an additional $60,000,000, all in up to five closings, with certain terms and conditions. TIS’ obligation to purchase any Units (or shares of common stock) under the Agreement is subject to the satisfaction of these closing conditions. There can be no assurance that any of these conditions will be met or that TIS will purchase any Units or common stock. A full description of this transaction is set forth in our Current Report on Form 8-K dated April 24, 2014 and filed with the SEC on April 28, 2014.
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We do not have sufficient capital to fund our plan of operations over the next twelve months.In order to address our capital needs, including our planned Phase IIIb clinical trial, we are continuing our private offering of Units, and we are actively pursuing additional equity or debt financing, in the form of either a private placement or a public offering. We have been in ongoing discussions with strategic institutional investors and investment banks with respect to such possible offerings. Such additional financing opportunities might not be available to us, when and if needed, on acceptable terms or at all. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms under such circumstances, our operating results and prospects will be adversely affected.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4 - CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of March 31, 2014, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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We are currently in a dispute with a vendor regarding amounts owed for services performed. A demand for payment under a written agreement has been made in the amount of approximately $150,000. Management believes the vendor did not perform under the terms of the contract and contends that no amounts are due. Settlement discussions between the parties are continuing. We have reserved $75,000 under our financial statements for resolution of this matter.
We are party to claims and litigation that arise in the normal course of business. Management believes that the ultimate outcome of these claims and litigation will not have a material impact on our financial position or results of operations.
As a “smaller reporting company” as defined by Item 10 of regulation S-K, we are not required to provide information required by this item.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
| 1. | From March 27, 2014 through May 13, 2014, we issued 27,500 units (“Units”) of which 27,500 units were purchased for cash and zero units were purchased in consideration of cancellation of outstanding indebtedness. Each Unit consists of 1 share of common stock and a warrant to purchase 0.3 shares of common stock resulting in the issuance of 27,500 shares of common stock and warrants to purchase 8,250 shares of our common stock. The purchase price for each unit was $5.50 per unit and the exercise price for each warrant was $6.05 per shares. We received gross proceeds of $151,250 from the sale of these Units for cash. We used $53,000 of these proceeds for partial repayment of outstanding indebtedness to The Abell Foundation and $8,500 in proceeds were used as repayment related party loans. The remaining proceeds were used for working capital and general corporate purposes. These issuances were exempt under Rule 506 of the Securities Act of 1933, as amended. All investors in Unit offering were accredited investors and were solicited by officers (Michael Hanna and Andrew Tussing) of Vaccinogen and all investors had a substantial pre-existing relationship with such officers of Vaccinogen. The shares of common stock and warrants received were issued as restricted securities and all certificates issued contained a legend stating the shares have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and the sale of the shares under the Securities Act. |
| 2. | The Units referred to in paragraph 1. above contained anti-dilution rights such that if the market price of our Common Stock on the effective date of our first S-1 registration statement filed with the SEC (the “Effectiveness Date Market Price”) was less than $5.50 per share, then we agreed to each subscriber of the Units, for no additional consideration, such number of shares (“Adjustment Shares”) of Common Stock equal to the difference between (x) the number of shares of our Common Stock that would have been issued to purchaser if the per-Unit purchase price for such shares had been equal to either (1) the Effectiveness Date Market Price or (2) $5.00, whichever is greater and (y) the number of shares of the Common Stock originally issued to purchaser upon the closing of the sale of Units. The Effectiveness Date Market Price was $5.35 on October 31, 2013. Accordingly, we issued 15,397 Adjustment Shares to the Unit subscribers under paragraph 1 above. The Adjustment Shares were issued to all accredited investors and were issued as restricted securities and all certificates for such shares contained stating that the shares have not been registered under the Securities Act of 1933, as amended, and setting forth or referring to the restrictions on transferability and the sale of the shares under the Securities Act of 1933, as amended. We relied on the exemption provided by Rule 506 of the Securities Act of 1933, as amended for issuance of the Adjustment Shares. We did not receive any proceeds for issuance of the Adjustment Shares. |
| 3. | See our Current Report on Form 8-K dated April 24, 2014 and filed with the SEC on April 28, 2014. |
| 4. | See our Item 5 under our Annual Report on Form 10-K for the year ended December 31, 2013. We used approximately $559,000 of the proceeds received from these issuances as partial repayment of outstanding indebtedness to The Abell Foundation, approximately $22,000 in proceeds were used for payment of placement agent and finder fees and approximately $84,000 for repayment of related party loans. The remainder was used for working capital and general corporate purposes. |
| 5. | In May 2014, we issued warrants to purchase 10,293 shares of our common stock at an exercise price of $5.50 to $6.05 per share. These warrants were issued to certain placement agents and finders in connection with agreements with them in respect of our offering described in paragraph 1 above. We did not receive any proceeds for the issuance of these warrants. The issuance was exempt under Section 4(2) and/or Rule 506 of the Securities Act of 1933, as amended. |
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ITEM 3 - DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4 - MINE SAFETY DISCLOSURES
Not applicable.
None.
Exhibit Number | ||
| 31.1 | Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Schema Linkbase Document | |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Labels Linkbase Document | |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| 51 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| VACCINOGEN, INC. | |||
| Dated: | May 14, 2014 | By: | /s/ Michael G. Hanna, Jr., Ph.D. |
| Michael G. Hanna, Jr., Ph.D. | |||
Chairman and Chief Executive Officer (Principal Executive Officer) | |||
| Dated: | May 14, 2014 | By: | /s/ Andrew Tussing |
| Andrew Tussing | |||
President, Chief Operating Officer and acting Chief Financial Officer (Principal Financial Officer) | |||
| 52 |