Company Quick10K Filing
Icagen
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 6 $-0
10-Q 2020-02-19 Quarter: 2019-09-30
10-Q 2019-08-19 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-12 Annual: 2018-12-31
10-Q 2018-11-19 Quarter: 2018-09-30
10-Q 2018-08-20 Quarter: 2018-06-30
10-Q 2018-05-21 Quarter: 2018-03-31
10-K 2018-04-17 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-16 Quarter: 2017-06-30
10-Q 2017-05-22 Quarter: 2017-03-31
10-K 2017-04-17 Annual: 2016-12-31
10-Q 2016-11-18 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-19 Quarter: 2016-03-31
10-K 2016-04-14 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-23 Annual: 2014-12-31
10-Q 2014-11-13 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-07-17 Quarter: 2014-03-31
10-K 2014-06-02 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-16 Quarter: 2013-06-30
10-Q 2013-05-14 Quarter: 2013-03-31
10-K 2013-04-01 Annual: 2012-12-31
10-Q 2012-11-09 Quarter: 2012-09-30
10-Q 2012-08-10 Quarter: 2012-06-30
8-K 2019-08-26 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-04-29 Enter Agreement, Off-BS Arrangement, Officers, Exhibits
8-K 2018-11-14 Enter Agreement, Officers, Exhibits
8-K 2018-08-31 Enter Agreement, Leave Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-08-27 Enter Agreement, Off-BS Arrangement, Exit Costs, Sale of Shares, Exhibits
8-K 2018-08-13 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-07-13 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-05-30 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-05-01 Other Events, Exhibits
8-K 2018-04-03 Enter Agreement, Off-BS Arrangement, Sale of Shares, Shareholder Rights, Amend Bylaw, Exhibits
ICFN 2019-09-30
Part I: Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-4.1 f10q0919ex4-1_icageninc.htm
EX-4.2 f10q0919ex4-2_icageninc.htm
EX-4.3 f10q0919ex4-3_icageninc.htm
EX-4.4 f10q0919ex4-4_icageninc.htm
EX-4.5 f10q0919ex4-5_icageninc.htm
EX-4.6 f10q0919ex4-6_icageninc.htm
EX-4.7 f10q0919ex4-7_icageninc.htm
EX-10.1 f10q0919ex10-1_icageninc.htm
EX-10.2 f10q0919ex10-2_icageninc.htm
EX-31.1 f10q0919ex31-1_icageninc.htm
EX-31.2 f10q0919ex31-2_icageninc.htm
EX-32.1 f10q0919ex32-1_icageninc.htm
EX-32.2 f10q0919ex32-2_icageninc.htm

Icagen Earnings 2019-09-30

ICFN 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
ROPL 7,009 819 816 0 199 435 548 0% 1.3 3%
C964 58 7 103 -1 -4 1 -5 -1% -4.2 -7%
HWH 0 0 0 -0 -0 -0 -0 -109% 0.1 -163%
FNM 3,443,287 3,436,922 0 0 13,073 119,452 3,332,708 27.9 0%
ABLP 8,794 4,704 3,369 0 726 831 -721 0% -0.9 8%
NYCR 867 435 66 0 -21 23 -100 0% -4.4 -2%
QVC 14,399 7,656 10,628 0 868 1,708 4,614 0% 2.7 6%
DWSS 8 0 0 0 0 0 -0 -0.0 5%
WLUC 0 0 0 0 -1 -1 -0 0.0
ANVI 0 1 0 0 -0 -0 -0 0.3 -162%

10-Q 1 f10q0919_icageninc.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2019

 

or

 

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 000-54748

 

ICAGEN, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   20-0982060
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     

4222 Emperor Blvd., Suite 350

Research Triangle Park. Durham, NC

 

27703

Address of Principal Executive Offices   Zip Code

 

(919) 433-3205

Registrant’s Telephone Number, Including Area Code

 

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class   Trading Symbol(s)   Name of each exchange on
which registered
         
         
         

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒  Smaller reporting company ☒
  Emerging growth company ☐  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

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

 

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

 

Number of shares of common stock outstanding as of February 14, 2020 was 6,393,107.

 

 

 

 

 

 

ICAGEN, INC.

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In particular, statements contained in this Quarterly Report on Form 10-Q, including but not limited to, statements regarding the sufficiency of our cash, our ability to finance our operations and business initiatives and obtain funding for such activities; our future results of operations and financial position, business strategy and plan prospects, or costs and objectives of management for future acquisitions, are forward looking statements. These forward-looking statements relate to our future plans, objectives, expectations and intentions and may be identified by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,” “estimates,” “predicts,” “potential” and “continue” or similar words. Readers are cautioned that these forward-looking statements are based on our current beliefs, expectations and assumptions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on April 12, 2019. Therefore, actual results may differ materially and adversely from those expressed, projected or implied in any forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.

 

NOTE REGARDING COMPANY REFERENCES

 

Throughout this Quarterly Report on Form 10-Q, “Icagen,” the “Company,” “we,” “us” and “our” refer to Icagen, Inc.

 

i

 

 

 

ICAGEN, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

    Page
  PART I - FINANCIAL INFORMATION  
Item l. Financial Statements 1
  Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 1
  Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 2
  Unaudited Condensed Consolidated Statements of Stockholders’ Deficit for the three and nine months ended September 30, 2019 and 2018. 3
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 5
  Notes to the Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk 56
Item 4. Controls and Procedures 57
     
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 58
Item 1A. Risk Factors 58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 60
Item 3. Defaults Upon Senior Securities 60
Item 4. Mine Safety Disclosures 61
Item 5. Other Information 61
Item 6. Exhibits 61
SIGNATURES 62

 

ii

 

 

  

PART I: FINANCIAL INFORMATION 

 

Item 1. Financial Statements

 

ICAGEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,  December 31,
   2019  2018
   (unaudited)   
Assets      
Current Assets      
Cash  $2,150,043   $4,119,058 
Accounts receivable, net   923,676    2,051,329 
Inventory   172,796    62,792 
Prepaid expenses and other current assets   146,270    110,653 
Total Current Assets   3,392,785    6,343,832 
           
Non-Current Assets          
Intangibles, net   6,880,185    7,048,923 
Plant and equipment, net   1,955,147    1,982,845 
Right of use assets, net   557,838    - 
Deposits   259,599    239,987 
Total Non-Current Assets   9,652,769    9,271,755 
Total Assets  $13,045,554   $15,615,587 
           
Liabilities and Stockholders’ Deficit          
           
Current Liabilities          
Accounts payable  $2,395,717   $1,721,812 
Other payables and accrued expenses   1,417,871    922,457 
Deferred revenue   2,006,876    1,756,878 
Deferred purchase consideration   3,100,000    2,450,000 
Bridge notes payable, related party   300,000    254,641 
Short-term portion of term loan payable, net   

6,834,194

    - 
Short term loan payable   259,958    - 
Finance lease liability   564,257    49,952 
Operating lease liability   192,875    - 
Accrued interest   363,624    224,475 
Dividends payable   505,392    224,855 
Total Current Liabilities   

17,940,764

    7,605,070 
           
Non-Current Liabilities          
Deferred purchase consideration, net   5,578,470    6,131,739 
Finance lease liability   117,617    18,861 
Operating lease liability   367,936    - 
Subordinated promissory note payable, net   13,651    - 
Term loan payable, net   

7,303,738

    12,705,696 
Deferred revenue   2,083,331    3,333,332 
Derivative liability   6,004,480    5,178,598 
Total Non-Current Liabilities   

21,469,223

    27,368,226 
           
Total Liabilities   39,409,987    34,973,296 
           
Commitment and contingencies          
           
Stockholders’ Deficit          
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 400,000 shares designated as Series A Preferred Stock and unissued, 3,000,000 shares designated as Series B Preferred stock and unissued, 4,742,857 shares designated as Series C Preferred Stock and 1,857,143 undesignated and unissued   -    - 
Series C Preferred Stock, $0.001 par value, 4,742,857 shares designated, 1,542,835 and 799,989 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively. (Liquidation preference $8,099,884)   1,543    800 
Common stock, $0.001 par value; 50,000,000 shares authorized, 6,720,107 shares issued and 6,393,107 outstanding as of September 30, 2019 and December 31, 2018.   6,392    6,392 
Additional paid-in-capital   31,787,852    27,657,098 
Treasury stock, at cost: 327,000 shares of common stock as of September 30, 2019 and December 31, 2018.   (237)   (237)
Accumulated deficit   (58,159,983)   (47,021,762)
Total Stockholder’s Deficit   (26,364,433)   (19,357,709)
Total Liabilities and Stockholders’ Deficit  $13,045,554   $15,615,587 

 

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

 

1

 

 

ICAGEN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three months ended   Three months ended   Nine months ended   Nine months ended 
   September 30,   September 30,   September 30,   September 30, 
   2019   2018   2019   2018 
                 
Revenue  $3,599,372   $3,007,928   $10,965,410   $10,465,046 
                     
Cost of sales   3,109,302    1,377,571    8,078,648    6,898,815 
                     
Gross profit   490,070    1,630,357    2,886,762    3,566,231 
                     
Operating expenses:                    
Selling, general and administrative expenses   2,123,830    2,382,648    7,878,300    8,023,292 
Depreciation   323,887    364,712    1,151,428    1,190,442 
Amortization   56,246    56,246    168,738    168,738 
Total Operating expenses   2,503,963    2,803,606    9,198,466    9,382,472 
                     
Operating loss   (2,013,893)   (1,173,249)   (6,311,704)   (5,816,241)
                     
Other (expense) income                    
Other income   878    118,834    2,477    125,218 
Gain on debt extinguishment   -    495,783    -    495,783 
Other expense   (40,000)   (572,524)   (40,000)   (572,524)
Interest expense   (3,783,604)   (815,238)   (5,349,510)   (2,366,170)
Derivative liability movement   129,033    (300,665)   841,053    (1,346,202)
Total other expense   (3,693,693)   (1,073,810)   (4,545,980)   (3,663,895)
                     
Net loss before income tax   (5,707,586)   (2,247,059)   (10,857,684)   (9,480,136)
                     
Income tax   -    -    -    - 
                     
Net loss   (5,707,586)   (2,247,059)   (10,857,684)   (9,480,136)
                     
Preferred stock dividend   (113,918)   (80,548)   (280,537)   (140,088)
                     
Net loss available to common stockholders  $(5,821,504)  $(2,327,607)  $(11,138,221)  $(9,620,224)
                     
Net Loss Per Share - Basic and Diluted  $(0.91)  $(0.36)  $(1.74)  $(1.50)
                     
Weighted Average Number of Shares Outstanding - Basic and Diluted   6,393,107    6,393,107    6,393,107    6,393,107 

  

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

  

2

 

 

ICAGEN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018

 

                   Treasury   Additional       Total 
   Preferred Stock   Common Stock   Stock   Paid-in   Accumulated   Stockholders’ 
   Shares   Amount   Shares   Amount   Amount   Capital   Deficit   Deficit 
                                 
Balance as of December 31, 2018   799,989   $800    6,393,107   $6,392   $(237)  $27,657,098   $(47,021,762)  $(19,357,709)
                                         
Stock option based compensation   -    -    -    -    -    263,938    -    263,938 
Net loss   -    -    -    -    -    -    (2,753,653)   (2,753,653)
Series C Preferred Stock dividends   -    -    -    -    -    -    (82,849)   (82,849)
                                         
Balance as of March 31, 2019   799,989    800    6,393,107    6,392    (237)   27,921,036    (49,858,264)   (21,930,273)
                                         
Stock option based compensation   -    -    -    -    -    938,166    -    938,166 
Net loss   -    -    -    -    -    -    (2,396,445)   (2,396,445)
Series C Preferred Stock dividends   -    -    -    -    -    -    (83,770)   (83,770)
                                         
Balance as of June 30, 2019   799,989    800    6,393,107   6,392    (237)   28,859,202    (52,338,479)   (23,472,322)
                                         
Series C preferred stock issued   742,846    743    -    -    -    2,599,226         2,599,969 
Stock option based compensation   -    -    -    -    -    329,424    -    329,424 
Net loss   -    -    -    -    -    -    (5,707,586)   (5,707,586)
Series C Preferred Stock dividends   -    -    -    -    -    -    (113,918)   (113,918)
                                         
Balance as of September 30, 2019   1,542,835   $1,543    6,393,107   $6,392   $(237)  $31,787,852   $(58,159,983)  $(26,364,433)

 

3

 

 

ICAGEN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (Continued)

 

   Preferred Stock
Subscription
   Preferred Stock   Common Stock   Treasury
Stock
   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Receipts   Shares   Amount   Shares   Amount   Amount   Capital   Deficit   Deficit 
                                     
Balance at December 31, 2017  $-    -   $-    6,393,107   $6,392   $(237)  $25,084,252   $(33,757,671)  $(8,667,264)
                                              
Stock option based compensation   -    -    -    -    -    -    153,908    -    153,908 
Subscription receipts for Series C Preferred stock   500,000    -    -    -    -    -    -    -    500,000 
Net loss   -    -    -    -    -    -    -    (3,732,441)   (3,732,441)
                                              
Balance at March 31, 2018   500,000    -    -    6,393,107    6,392    (237)   25,238,160    (37,490,112)   (11,745,797)
                                              
Stock option based compensation   -    -    -    -    -    -    151,712    -    151,712 
Series C Preferred stock issued   (500,000)   599,991    600    -    -    -    2,099,400    -    1,600,000 
Fair value of Series C Preferred warrants issued   -    -    -    -    -         (1,386,699)   -    (1,386,699)
Net loss   -    -    -    -    -    -    -    (3,500,636)   (3,500,636)
Series C Preferred Stock dividends   -    -    -    -    -    -    -    (59,540)   (59,540)
                                              
Balance as of June 30, 2018   -    599,991    600    6,393,107    6,392   $(237)   26,102,573    (41,050,288)   (14,940,960)
                                              
Stock option based compensation   -    -    -    -    -    -    151,713    -    151,713 
Series C Preferred stock issued   -    199,997    200    -    -    -    699,800    -    700,000 
Fair value of Series C Preferred warrants issued   -    -    -    -    -         (471,966)   -    (471,966)
Fair value of bridge note warrants issued   -    -    -    -    -         116,485    -    116,485 
Net loss   -    -    -    -    -    -    -    (2,247,059)   (2,247,059)
Series C Preferred Stock dividends   -    -    -    -    -    -    -    (80,548)   (80,548)
                                              
Balance as of September 30, 2018  $-    799,988   $800    6,393,107   $6,392   $(237)  $26,598,605   $(43,377,895)  $(16,772,335)

 

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

 

4

 

 

ICAGEN, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine months ended   Nine months ended 
   September 30,   September 30, 
   2019   2018 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(10,857,684)  $(9,480,136)
Adjustment to reconcile net loss to net cash used in operating activities:          
Depreciation expense   1,151,428    1,190,442 
Amortization expense   168,738    168,738 
Stock based compensation charge   1,531,528    457,333 
Amortization of debt discount   1,706,706    1,017,408 
Gain on extinguishment of debt   -    (495,783)
Derivative liability movements   (841,053)   1,346,202 
Value of series C preferred stock expensed as interest expense   99,969    - 
Value of derivative liability expensed as interest expense   1,666,935    - 
Imputed interest   207,535    224,307 
Changes in operating assets and liabilities          
Accounts receivable   1,127,653    (158,218)
Inventory   (110,004)   26,669 
Prepaid expenses and other current assets   (35,617)   (2,717)
Right of use asset   (557,838)   - 
Accounts payable   673,901    604,446 
Deferred revenues   (1,000,003)   (89,584)
Right of use liability   560,811    - 
Other payables and accrued expenses   665,392    (1,006,331)
CASH USED IN OPERATING ACTIVITIES   (3,841,603)   (6,197,224)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Payment of deferred purchase consideration   (100,000)   (150,000)
Purchase of plant and equipment   (1,123,729)   (715,466)
Deposits paid   (19,612)   - 
NET CASH USED IN INVESTING ACTIVITIES   (1,243,341)   (865,466)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from term loan   2,000,000    15,250,000 
Repayment of convertible loan   -    (10,000,000)
Proceeds from promissory notes   500,000    - 
Proceeds from bridge note   -    500,000 
Capital raising fee   5,319    (962,162)
Fees paid on extinguishment of debt   -    (207,000)
Proceeds from the sale of Series C Convertible Preferred Stock   -    2,800,000 
Asset funding advanced   655,133    - 
Repayment of Asset financing   (44,523)   (127,514)
NET CASH PROVIDED BY FINANCING ACTIVITIES   3,115,929    7,253,324 
           
NET (DECREASE) INCREASE IN CASH   (1,969,015)   190,634 
           
CASH AT BEGINNING OF PERIOD   4,119,058    2,763,596 
           
CASH AT END OF PERIOD  $2,150,043   $2,954,230 
           
CASH PAID FOR INTEREST AND TAXES:          
Cash paid for income taxes  $-   $- 
Cash paid for interest  $1,500,718   $1,055,426 
           
NON-CASH INVESTING AND FINANCING ACTIVITIES          
Value of series C preferred stock issued concurrent with term loans  $2,000,000   $- 
Value of series C preferred stock issued concurrent with promissory notes  $500,000   $- 
Value of warrants issued concurrent with Series C Preferred shares  $-   $1,858,663 
Value of warrants issued concurrent with bridge notes  $-   $116,485 
Value of warrants issued on term debt  $-   $1,746,065 
Extinguishment of derivative liability and unamortized debt discount on convertible debt  $-   $3,890,826 

 

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

5

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. GENERAL INFORMATION

 

Icagen, Inc. (“the Company”, “we”, “us”, “our”) is a Delaware corporation. The principal office is located in Durham, North Carolina. The Company was incorporated in November 2003.

 

Icagen is a drug discovery company with a focus in Neuroscience and Rare Disease. The Icagen platform is unique as it integrates the Company’s current state of the art drug discovery engine along with an artificial intelligence (AI) computational platform that enables an accelerated path to drug discovery.

 

The Company’s team is comprised of pharmaceutical and biotechnology leadership with extensive industry knowledge and experience with a successful track record of moving molecules through pre-clinical and clinical development. The Company’s scientific team is derived from two key acquisitions of drug discovery experts in Neuroscience (the “Pfizer Acquisition”) and Rare Disease (the “Sanofi Acquisition”).

 

The Company’s business model is focused on research collaborations and partnerships with large pharmaceutical and biotechnology companies and foundations who it partners with to support the discovery and development of innovative pharmaceuticals. These revenue-generating partnerships provide current funding for drug discovery services provided while the Company’s co-owned pipeline of drug candidates provides the potential of additional significant long-term upside through milestone and royalty payments in new partnerships. The development and commercialization expense of these assets is being partially funded by the Company’s partners. In addition, the Company also retains a CRO-based fee-for-service revenue stream as a component of the business model.

 

In May 2018, the Company announced its first such collaboration with the Cystic Fibrosis Foundation to discover therapies to treat cystic fibrosis and in December 2018, it announced its second such collaboration with F. Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, “Roche”) to discover therapies for certain neurological diseases.

 

The Company currently operates out of two sites, one in Durham, North Carolina (“Icagen NC”) and the other in Tucson, Arizona (the “Tucson Facility”). The teams in North Carolina and Arizona have extensive experience over the last 20 plus years performing drug discovery within Pfizer, Inc. (“Pfizer”) and Sanofi US Inc. (“Sanofi”), respectively, advancing molecules through pre-clinical development with numerous molecules entering clinical development. At Icagen NC, which the Company began to operate in July 2015, it has a leading biology expertise focused on ion channels which are important targets in neuroscience. Icagen NC also houses the XRpro® technology. The XRPro technology is an x-ray fluorescence technology that delivers transporter screening to detect and quantitatively analyze the x-ray signature of elements with an atomic number greater than 12. More specifically, the Company’s capabilities in Icagen NC include a focus on ion channels and transporters, HTS and lead optimization, ion channels, assay development and x-ray fluorescence-based assays.

 

At the Tucson Facility, which the Company acquired in July 2016, it has leading biology expertise and platform capabilities in Rare Diseases, in silico and computational applications and integrated drug discovery. The Tucson Facility provides capacity in cell models, human biomarkers, and primary human cell and stem cell-based assays. In addition, the Tucson Facility provides compound management services, HTS and Hit identification, in vitro pharmacology, medicinal chemistry, computational chemistry and ADME. The Tucson Facility also features high volume biology with a flexible robotic infrastructure capable of performing high throughput screening in ultra-high 1536 format, enhancing the Company’s depth of expertise running programs in a highly specialized, efficient and cost-effective manner. This enables the Company to offer a broad range of integrated drug discovery services in a growing market. The extensive integrated drug discovery platform and technologies at the Tucson Facility enable the Company to utilize its biology expertise at both Icagen NC and the Tucson Facility to accelerate drug discovery for challenging, but innovative programs and identify quality leads faster.

 

6

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES

 

Basis of presentation

 

The (a) unaudited condensed consolidated balance sheets as of September 30, 2019, which have been derived from the unaudited condensed consolidated financial statements, and as of December 31, 2018, which have been derived from audited consolidated financial statements, and (b) the unaudited condensed consolidated statements of operations, statements of stockholders’ deficit and cash flows of the Company, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on April 12, 2019.

 

All amounts referred to in the notes to the unaudited condensed consolidated financial statements are in United States Dollars ($) unless stated otherwise.

 

Consolidation

 

The unaudited condensed consolidated financial statements include the financial statements of the Company and its subsidiaries in which it has at least a majority voting interest. All significant inter-company accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements. The entities included in these unaudited condensed consolidated financial statements are as follows:

 

Icagen, Inc. - Parent Company

Icagen Corp - Wholly owned subsidiary

Icagen-T, Inc. - wholly owned subsidiary

Caldera Discovery, Inc. - Wholly owned subsidiary

XRpro Sciences, Inc. - Wholly owned subsidiary

 

Estimates

 

The preparation of these unaudited condensed consolidated financial statements in accordance with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company continually evaluates its estimates, including those related to bad debts and recovery of long-lived assets. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to the Company’s reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the unaudited condensed consolidated financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, the valuation of certain assets and intangibles acquired from Pfizer, Inc., the assumptions used to calculate fair value of warrants and options granted, in addition to assumptions used to calculate the value of the derivative liability and assumptions used in assessing impairment of long-term assets.

 

7

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Fair value of financial instruments

 

The Company adopted the guidance of ASC 820 for fair value measurements which clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

  Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

  Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

  Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

 

The carrying amounts reported in the balance sheets for cash, accounts receivable, loans payable, accounts payable and accrued expenses approximate their fair market value based on the short-term maturity of these instruments. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The Company had recorded a derivative liability for its warrants which contain a cash settlement option upon the occurrence of a fundamental event. The derivative liability measured at fair value using unobservable inputs (Level 3) amounted to $6,004,480 as of September 30, 2019.

 

ASC 825-10 “Financial Instruments” allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable, unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments.

 

Concentrations of credit risk

 

The Company’s operations are carried out in the USA. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the USA and by the general state of the economy. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, and rates and methods of taxation, among other things.

 

The Company maintains cash with major financial institutions. The Federal Deposit Insurance Corporation (“FDIC”) provides insurance coverage for deposits of corporations, the current limit of coverage is $250,000. As a result of this coverage the Company cash balances of $1,487,230 are not covered by the FDIC as of September 30, 2019.

 

Concentration of major customers

 

The Company derives its revenues from commercial pharmaceutical and biotechnology companies.

 

The commercial revenues are currently from several major pharmaceutical companies and smaller biotechnology and pharmaceutical companies.

 

The Company derived 81.0% of its commercial revenues from four customers during the nine months ended September 30, 2019. During the nine months ended September 30, 2018 the Company derived 71.0% of its commercial revenue from four major customers. The Company continues its attempts to diversify its customer base.

 

8

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Total revenue by customer type are as follows:

  

   Three months ended   Nine months ended 
   September 30, 2019   September 30, 2018   September 30, 2019   September 30, 2018 
                 
Commercial revenue  $3,483,867   $3,007,928   $10,660,330   $10,465,046 
Government grants   115,505    -    305,080    - 
                     
   $3,599,372   $3,007,928   $10,965,410   $10,465,046 

 

Accounts receivable and other receivables

 

The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. As a basis for accurately estimating the likelihood of collection of the Company’s accounts receivable, it considers a number of factors when determining reserves for uncollectable accounts. The Company believes that it uses a reasonably reliable methodology to estimate the collectability of its accounts receivable. The Company reviews its allowances for doubtful accounts on a regular basis. The Company also considers whether the historical economic conditions are comparable to current economic conditions. If the financial condition of its customers or other parties that it has business relations with were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

 

The balance of the receivables provision as at September 30, 2019 and December 31, 2018 was $0. The amount charged to bad debt provision for the three and nine months ended September, 2019 and 2018 was $0.

 

Revenue recognition

 

The Company’s revenue recognition policy is consistent with the requirements of FASB ASC 606, Revenue.

 

The Company has analyzed its revenue transactions pursuant to ASC 606, Revenue, and it has no material impact as a result of the transition from ASC 605 to ASC 606. The Company’s revenues are recognized when control of the promised services are transferred to a customer, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company derives its revenues from the sale of its services, as defined below. The Company applies the following five steps in order to determine the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its revenue transactions:

 

  i. identify the contract with a customer;
  ii. identify the performance obligations in the contract;
  iii. determine the transaction price;
  iv. allocate the transaction price to performance obligations in the contract; and
  v. recognize revenue as the performance obligation is satisfied.

 

Revenue sources consist of commercial revenues, deferred revenue, multi-element collaboration agreements and government grants and contracts.

 

  1) Commercial revenues

 

The Company enters into fixed fee commercial development contracts that are associated with the delivery of feasible research on drug candidates and the development of drug candidates. Revenue under these contracts is generally recognized upon delivery or as the development is performed.

  

  2) Deferred revenue

 

The Company received and will receive certain revenue in advance of services delivered. This revenue is deferred and only recognized when services have been performed in terms of master services agreements entered into with customers, together with their associated Statements of Work.

 

9

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Revenue recognition (continued)

 

  3) Multi-element collaboration agreements

 

The Company has entered into multiple-element collaboration contracts with customers and has determined that the different revenue generating elements embodied in these contracts are separable and there is sufficient evidence of the fair value of each element to account for these contract elements separately. These contracts elements include:

 

  i. Upfront payments

The Company receives upfront revenue payments, generally upon entering into a collaboration agreement, these revenues are recognized over the expected initial contract timeline as outlined in the collaboration agreement.

 

  ii. FTE based research payments

The Company receives ongoing revenue for FTE based time spent on the collaboration projects, this revenue is recognized as the services are rendered.

 

  iii. Development milestones

Revenue contingent upon the achievement of certain agreed upon development milestones is recognized in the period that the development milestone is achieved. The achievement of a development milestone is when the Company’s collaboration partner agrees that the requirements stipulated in the agreement have been met.

 

  iv. Sales based events

Revenue based on the achievement of certain calendar year net sales is recognized in the period that the sales achieved by the Company’s collaboration partner reach the thresholds as laid out in the agreement.

 

  v. Royalties earned

Royalties are earned at varying percentages of net product sales for certain periods as defined in the Company’s collaboration agreements, these royalties are recognized as revenue in the period in which a royalty report is received from the Company’s collaboration partners.

  

  4) Government grants and contracts

 

The Company generally uses the cost-to-cost measure of progress for all its government contracts, unless it believes another measure will produce a more reliable result. The Company believes that the cost-to-cost measure is the best and most reliable performance indicator of progress on its government contracts as all its contract estimates are based on costs that it expects to incur in performing its government contracts and it has not experienced any significant variations on estimated to actual costs to date. Under the cost-to-cost measure of progress, the extent of progress towards completion is based on the ratio of costs incurred-to-date to the total estimated costs at the completion of the government contract. Revenues, including estimated fees or profits are recorded as costs are incurred.

 

When estimates of total costs to be incurred on a contract exceed total estimates of revenue to be earned, a provision for the entire loss on the contract is recorded in the period the loss is determined.

 

Research and development

 

The remuneration of the Company’s research and development staff, materials used in internal research and development activities, and payments made to third parties in connection with collaborative research and development arrangements, are all expensed as incurred. Where the Company makes a payment to a third party to acquire the right to use a product formula which has received regulatory approval, the payment is accounted for as the acquisition of a license or patent and is capitalized as an intangible asset and amortized over the shorter of the license period or the patent life.

 

The amount expensed for unrecovered research costs, included in selling, general and administrative expenses during the three and nine months ended September 30, 2019 was $115,975 and $1,440,851, and for the three and nine months ended September 30, 2018 was $696,823 and $2,232,601, respectively.

 

10

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Net loss per share

 

Basic net loss per share is computed on the basis of the weighted average number of common stock outstanding during the period.

 

Diluted net loss per share is computed on the basis of the weighted average number of common stock and common stock equivalents outstanding. Dilutive securities having an anti-dilutive effect on diluted net income (loss) per share are excluded from the calculation.

 

Dilution is computed by applying the treasury stock method for options and warrants. Under this method, “in-the money” options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Dilution is computed by applying the if-converted method for convertible preferred stocks. Under this method, convertible preferred stock is assumed to be converted at the beginning of the period (or at the time of issuance, if later), and preferred dividends (if any) will be added back to determine income applicable to common stock. The shares issuable upon conversion will be added to weighted average number of common stock outstanding. Conversion will be assumed only if it reduces earnings per share (or increases loss per share).

 

Related parties

 

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions are recorded at fair value of the goods or services exchanged.

 

Derivative liabilities

 

The Company has derivative financial instruments as of September 30, 2019 and December 31, 2018.

 

ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re- measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional, as described.

 

The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date.

 

The Black-Scholes option valuation model was used to estimate the fair value of the warrants. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time, of other comparative securities, equal to the weighted average life of the options.

 

Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument using the effective interest method.

 

11

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2. ACCOUNTING POLICIES AND ESTIMATES (continued)

 

Inventory

 

Inventory consists of consumables utilized in the Company’s research activities. These consumable inventories are valued at the lower of cost or net realizable value.

 

Adoption of Accounting Standards

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), No. 2016-02, Leases (Topic 842) (ASC 842)

 

The amendments in this update establish a comprehensive new lease accounting model. The new standard: (a) clarifies the definition of a lease; (b) requires a dual approach to lease classification similar to current lease classifications; and (c) causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, including a number of optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, an update which provides another transition method, the prospective transition method, which allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new standard on January 1, 2019 using the prospective transition method.

 

The Company has identified all leases and reviewed the leases to determine the impact of ASC 842 on its consolidated financial statements. The Company has elected to apply the practical expedient to certain classes of leases, whereby the separation of components of leases into lease and non-lease components is not required and all of the practical expedients to all leases, which include not reassessing (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The adoption of the new standard resulted in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet on January 1, 2019 of $59,682 and the subsequent amortization of the asset and the lease liability of $59,682. The adoption of ASU 2016-02, as amended, has had no impact on the unaudited condensed consolidated statements of operations or unaudited condensed consolidated statements of cash flows.

 

Recent accounting pronouncements

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)

 

The Amendments in this update reduce the complexity in accounting for income taxes by removing certain exceptions to accounting for income taxes and deferred taxes and simplifying the accounting treatment of franchise taxes, a step up in the tax basis of goodwill as part of business combinations, the allocation of current and deferred tax to a legal entity not subject to tax in its own financial statements, reflecting changes in tax laws or rates in the annual effective rate in interim periods that include the enactment date and minor codification improvements.

 

This ASU is effective for fiscal years and interim periods beginning after December 15, 2020.

 

The effects of this ASU on the Company’s financial statements is not considered to be material.

 

The FASB issued several updates during the period, none of these standards are either applicable to the Company or require adoption at a future date and none are expected to have a material impact on the unaudited condensed consolidated financial statements upon adoption.

 

Reclassification of prior year presentation

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

12

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3. GOING CONCERN

 

As shown in the accompanying unaudited condensed consolidated financial statements, the Company incurred a net loss of $10,857,684 for the nine months ended September 30, 2019 and a net loss of $13,039,313 for the year ended December 31, 2018. As of September 30, 2019, and December 31, 2018 the Company had accumulated deficits of $58,159,983 and $47,021,762, respectively. The Company’s working capital position has changed from a deficit of $1,261,238, including deferred revenue of $1,756,878 as of December 31, 2018, to a deficit of $14,547,979, including Term Loans advanced to the Company of a net $6,834,194 classified as current as these Term loans are under forbearance agreements until March 15, 2020, as disclosed in note 13 and 26 below, and including the current portion of deferred revenue of $2,006,876 as of September 30, 2019. The current portion of deferred revenue includes an upfront payment on a collaboration agreement of $1,666,668. The Company’s working capital is insufficient to meet its short-term cash requirements and fund any future operating losses. These operating losses create an uncertainty about the Company’s ability to continue as a going concern. The Company’s plan, through the acquisition of the assets of Sanofi and Pfizer Research and the continued promotion of its services to existing and potential customers is to generate sufficient revenues to cover its anticipated expenses. The factors mentioned above raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve month period from February 14, 2020, although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes that the revenue to be generated from operations together with additional issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company is economically dependent upon future capital or financing to fund ongoing operations.

 

4. INVENTORY

 

Inventory represents the value of certain consumables utilized in the Company’s biological screening processes. These consumables are purchased in bulk and expensed as they are utilized.

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

   September 30,
2019
  

December 31,

2018

 
         
Prepaid insurance  $69,777   $35,723 
Prepaid maintenance   72,742    73,992 
Prepaid subscriptions   3,751    938 
   $146,270   $110,653 

  

6. INTANGIBLE ASSETS

 

  a. Cell lines and discovery platform

 

The Company has established a core set of technologies for the discovery of drugs that act upon ion channel targets. All of the assets acquired were developed internally and are based upon its ion channel platform and include the following acquired components:

 

  Extensive cell line and plasmid repositories
     
  Technologies including HTS, electrophysiology, informatics, in vitro and in vivo ADME, animal efficacy and safety models.

 

The value placed on these individual components is $5,000,500 for cell lines and $1,450,500 for the discovery platform, no initial value has been ascribed to plasmid repositories due to the commodity nature of these plasmids.

 

The useful life ascribed to the cell lines is indefinite due to the proprietary nature of these internally generated cell lines and will be tested for impairment on a regular basis and the useful life of the acquired discovery platform is expected to be ten years based on the Company’s internal experience on the usefulness of internally generated procedures and protocols used in ion channel drug discovery procedures. The cell lines and discovery platform will be considered for impairment on a regular basis.

 

13

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. INTANGIBLE ASSETS (continued)

 

  b. Trade name and trademarks

 

Pursuant to the terms of the purchase agreement entered into between the Company and Pfizer Research, the name and all rights to the name of Icagen were assigned to the Company. The use of this name, which was the original name of the publicly traded company acquired by Pfizer Research in 2011, has significant value and is a well-known industry name. The value placed on the trade name and trademarks acquired is $637,500. The useful life of the trade name and trademarks is indefinite and will be tested for impairment on a regular basis.

 

  c. Assembled workforce

 

In terms of the purchase agreement entered into between the Company and Pfizer Research, the Company agreed to retain the services of the scientific personnel who have extensive knowledge and experience in ion channel research and services. This workforce was originally acquired by Pfizer Research and prior to that had worked for the original Icagen company. The value placed in the assembled workforce acquired is $282,500, the useful life is expected to be ten years based on the Company’s estimate of the useful life of current knowledge and the rate of evolution within the industry.

 

  d. Patents

 

The patents the Company holds and pending patent applications consist of the following:

 

  Method for Detecting Binding Events Using Micro X-Ray Fluorescence Spectrometry, which includes an issued U.S. patent that is expected to expire in about 2021;
     
  Flow Method and Apparatus for Screening Chemicals Using Micro X-Ray Fluorescence, which includes issued patents in the U.S., Europe, Japan and Singapore, such patents are expected to expire in 2022;
     
  Method and Apparatus for Detecting Chemical Binding, which includes about 10 issued patents in the U.S., Europe, Japan and Singapore; such patents are expected to expire in 2023;
     
  Drug Development and Manufacturing, which includes an issued U.S. patent that is expected to expire in about 2021;
     
  Advanced Drug Development and Manufacturing, which includes about 20 issued foreign patents, in Europe, Japan, and Hong Kong, expected to expire in about 2026, and a pending application in the U.S. which, if issued, is expected to expire between 2021-2026;
     
  Well Plate/Apparatus for Preparing Samples for Measurement by X-Ray Fluorescence Spectrometry, which includes over 15 issued patents in the U.S. Europe, and Japan, which are expected to expire in about 2028, and a pending application in the U.S. which, if issued, is also expected to expire in 2028;
     
  Method and Apparatus for Measuring Protein Post Translational Modification, which includes a patent issued in Japan, which is expected to expire in about 2028 and pending applications in U.S. and Japan, which, if issued, are also expected to expire in about 2028;
     
  Method and Apparatus for Measuring Analyte Transport Across Barriers, which includes 3 issued U.S. patents and issued patents in China and Hong Kong, which are expected to expire in about 2030/2031, and pending applications in U.S., Europe, and China, which, if issued, are also expected to expire in about 2030; and
     
  Method for Analysis Using X-Ray Fluorescence, which includes 4 issued U.S. patents, which is expected to expire in 2031, and a pending U.S. patent application which, if issued, is expected to expire in 2031.

 

14

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. INTANGIBLE ASSETS (continued)

 

Intangible assets consist of the following:

 

   September 30, 2019  

December 31,

2018

 
   Cost   Accumulated amortization and
impairment
  

Net book

value

  

Net book

value

 
Cell lines  $5,153,664   $(153,164)  $5,000,500   $5,000,500 
Discovery platform   1,450,500    (616,463)   834,037    942,825 
Trade names and trademarks   637,500    -    637,500    637,500 
Assembled workforce   282,500    (120,062)   162,438    183,625 
Patents   972,000    (726,290)   245,710    284,473 
   $8,496,164   $(1,615,979)  $6,880,185   $7,048,923 

 

The aggregate amortization expense charged to operations was $56,246 for the three months ended September 30, 2019 and 2018 and $168,738 for the nine months ended September 30, 2019 and 2018.

 

Amortization expense for future periods is summarized as follows:

      
Remainder of 2019   $56,246 
2020    224,984 
2021    224,984 
2022    224,984 
2023 and thereafter    510,987 
Total   $1,242,185 

 

7. PLANT AND EQUIPMENT

 

Plant and equipment consists of the following:

 

  

September 30,

2019

      

December 31,

2018

 
   Cost  

Accumulated depreciation

and impairment

   Net book
value
   Net book
value
 
                 
Laboratory equipment  $3,265,818   $(1,691,978)  $1,573,840   $1,248,268 
Computer software   1,477,117    (1,150,002)   327,115    648,578 
Computer equipment   118,355    (86,036)   32,319    44,234 
Leasehold improvements   75,511    (53,638)   21,873    41,765 
   $4,936,801   $(2,981,654)  $1,955,147   $1,982,845 

 

The aggregate depreciation charge to operations was $323,887 and $364,712 for the three months ended September 30, 2019 and 2018, respectively and $1,151,428 and $1,190,442 for the nine months ended September 30, 2019 and 2018, respectively. The depreciation policies followed by the Company are described in Note 2.

   

8. LEASES

 

Adoption of ASC Topic 842, “Leases”

 

On January 1, 2019, the Company adopted Topic 842 using the modified retrospective method applied to leases that were in place as of January 1, 2019. Results for reporting periods beginning after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 840. The Company’s portfolio of leases contains both finance and operating leases that relate primarily to real estate agreements and office equipment agreements. Substantially all of the value of the Company’s lease portfolio relates to a real estate sub-lease agreement that was entered into in July 2016.

 

Practical Expedients and Elections

 

The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, the Company’s assessment on whether a contract is or contains a lease, and its initial direct costs for any leases that exist prior to adoption of the new standard. The Company also elected to combine lease and non-lease components on the office equipment leases and elected the short-term lease recognition exemption for all leases that qualify.

 

15

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. LEASES (continued)

 

Discount Rate

 

To determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required to estimate a rate of interest that it would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”).

 

Operating leases

 

Property leases

 

The Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the 5/1 ARM rate and applied a premium factor based on the Company’s present financial position and emerging growth status, the Company determined that 6.14% was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

 

The Company entered into a new property lease with effect from April 30, 2019 and determined an appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing options and certain lease-specific circumstances. For the reference rate, the Company used the average of the 5/1 ARM rate including an applied a premium factor based on the Company’s present financial position, and the Company’s current borrowing rate provided by third party lenders, the Company determined that 9.78% was an appropriate incremental borrowing rate to apply to its real-estate operating lease.

 

Office equipment leases

 

The Company determined the appropriate IBR by calculating the rate implicit in the agreement based on the cost of the equipment, if purchased outright, the expected residual value and the term of the lease installments. The interest rate implicit in these agreements ranged from 23% to 50%. The weighted average discount rates for the office equipment operating leases was 43.1%.

 

Finance Leases

 

Laboratory equipment leases

 

The Company has financed several items of laboratory equipment through vendor financing. The appropriate IBR was calculated by using the rates implicit in the agreements based on the cost of the equipment, the finance lease term and the regular installments due.

 

The weighted average discount rates for operating and finance leases are as follows:

 

Operating leases   9.0 %
Finance leases   8.8 %

 

Right of use assets

 

Right of use assets are included in the unaudited condensed consolidated Balance Sheet are as follows:

 

   September 30,
2019
 
     
Non-current assets    
Right of use assets, operating leases, net of amortization  $557,838 
Right of use assets, finance leases, net of depreciation – included in plant and equipment  $617,800 

 

The Company acquired laboratory equipment on January 24, 2019 for a purchase consideration of $613,958 and a two year maintenance contract associated with the equipment of $50,341 in terms of a deferred purchase arrangement. The total amount funded by the vendor was $655,133 repayable in twenty-four equal monthly installments of $29,965.

 

16

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. LEASES (continued)

 

Total Lease Cost

 

Individual components of the total lease cost incurred by the Company is as follows:

 

  

Nine months

ended
September 30,

2019

 
     
Operating lease expense  $156,705 
      
Finance lease expense     
Depreciation of capitalized finance lease assets   88,119 
Interest expense on finance lease liabilities   37,666 
      
Total lease cost  $282,490 

 

Depreciation of assets held under finance leases is included in depreciation expense. Minimum rental payments under operating leases are recognized on a straight-line basis over the term of the lease.

 

Maturity of Leases

 

Finance lease liability

 

The amount of future minimum lease payments under finance leases are as follows:

 

   Amount 
     
Remainder of 2019  $337,862 
2020   378,827 
2021   29,965 
Total undiscounted minimum future lease payments   746,654 
Imputed interest   (64,780)
      
Total finance lease liability  $681,874 
      
Disclosed as:     
Current portion  $564,257 
Non-current portion   117,617 
   $681,874 

 

17

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8. LEASES (continued)

 

Maturity of Leases (continued)

 

Operating lease liability

 

The amount of future minimum lease payments under operating leases are as follows:

 

   Amount 
     
Remainder of 2019  $61,653 
2020   242,166 
2021   247,264 
2022   83,231 
Total undiscounted minimum future lease payments   634,314 
Imputed interest   (73,503)
      
Total operating lease liability  $560,811 
      
Disclosed as:     
Current portion  $192,875 
Non-current portion   367,936 
   $560,811 

 

9. OTHER PAYABLES AND ACCRUED EXPENSES

 

  

September 30,

2019

  

December 31,

2018

 
         
Bonus accrual  $767,863   $508,550 
Payroll liabilities   165,600    275,001 
Severance cost accrual   -    30,541 
Other   484,408    108,365 
   $1,417,871   $922,457 

  

The Company accrues for bonus accruals in anticipation of making payments based on the achievement of pre-determined goals.

 

On September 7, 2018, the Company restructured its management team and streamlined operations at its Tucson Facility, thereby reducing head count by a total of nine people. The Company provided severance packages to these employees based on written agreements entered into. The severance costs are amortized over the severance payment period which expired on January 31, 2019.

 

10. DEFERRED REVENUE

 

Deferred revenue consists of the following:

 

Revenue received in advance from customers

 

Payments received in advance from customers in terms of the MSA agreements entered into with customers, including the MSA agreement, and amendment thereto, entered into with Sanofi on July 15, 2016 and July 15, 2019, respectively, and the up-front payments received from the Company’s collaboration customers. Revenue is recognized on a monthly basis upon agreed rates for the number of employees assigned to certain Sanofi projects and is offset against the payments received from Sanofi in terms of the agreed upon payment schedule, the remaining excess payments received is deferred revenue and is expected to be realized within a 9 month period.

 

18

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10. DEFERRED REVENUE (continued)

 

Upfront payments from license agreement

 

The Company entered into a license agreement with F. Hoffmann-La Roche Ltd. (“Roche”), on December 4, 2018, whereby, in terms of the agreement Roche paid the Company an upfront payment of $5,000,000. This upfront payment is recognized as revenue over the initial contact timeline as outlined in the license agreement.

 

The license agreement entered into with Roche is a multiple-element license agreement that has different revenue generating elements embodied in the agreement. These revenue generating elements include:

 

  i. Upfront payments

 

The Company received an upfront payment of $5,000,000 that will be recognized as revenue over the initial contact timeline as outlined in the license agreement.

 

  ii. FTE based research payments

 

The Company receives ongoing revenue for FTE based time spent on the collaboration projects, this revenue is recognized as the services are rendered.

 

  iii. Development milestones

 

Revenue contingent upon the achievement of certain agreed upon development milestones is recognized in the period that the development milestone is achieved. The achievement of a development milestone is when the Company’s collaboration partner agrees that the requirements stipulated in the agreement have been met.

 

  iv. Sales based events

 

Revenue based on the achievement of certain calendar year net sales is recognized in the period that the sales achieved by the Company’s collaboration partner reach the thresholds as laid out in the agreement.

 

  v. Royalties earned

 

Royalties are earned at varying percentages of net product sales for certain periods as defined in the Company’s collaboration agreements, these royalties are recognized as revenue in the period in which a royalty report is received from the Company’s collaboration partners.

 

The movement in deferred revenue is as follows:

 

  

September 30,

2019

  

December 31,

2018

 
         
Opening balance  $5,090,210   $219,828 
Cash received in advance   4,395,259    9,249,998 
Revenue recognized   (5,395,262)   (4,379,616)
   $4,090,207   $5,090,210 
Disclosed as:          
Current portion  $2,006,876   $1,756,878 
Non-current portion   2,083,331    3,333,332 
   $4,090,207   $5,090,210 

 

11. DEFERRED PURCHASE CONSIDERATION

 

In terms of the Icagen asset purchase agreement entered into with Pfizer Research (NC) on July 1, 2015, the Company has the following deferred purchase price obligations:

 

The Company is obligated to pay additional purchase price consideration calculated at the greater of (i) 10% (ten percent) of gross revenues per quarter (exclusive of revenue paid by Sanofi to Icagen-T and revenue generated by Icagen-T) and (ii) $250,000 per quarter up to an aggregate maximum of $10,000,000. These earn out payments are payable quarterly, 60 days after the completion of each calendar quarter. There are no indications that the Company will not meet the maximum earn out payment.

 

19

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

11. DEFERRED PURCHASE CONSIDERATION (continued)

 

The Company amended its agreement with Pfizer Research (NC), Inc. (“the Second Amendment”), whereby the Company, at its option, may defer payment of any amount exceeding $50,000 of the minimum additional purchase price consideration of $250,000 per quarter until December 31, 2018 such that the Company is only required to pay $50,000 per quarter for the quarters ended March 2017 to December 2018. Deferred purchase consideration bears interest at a rate of 12.5% per annum, which interest is payable quarterly. The deferred purchase consideration in terms of this agreement is payable, together with the deferred purchase consideration for the quarter ended March 31, 2019, as one lump sum. The Second Amendment also provides that if there is an Insolvency Event (as such term is defined in the Second Amendment) prior to the time that Pfizer Research (NC), Inc. has received the Maximum Earn Out Payment, then upon such Insolvency Event, the full amount of any Earn Out Shortfall (the difference between the Maximum Earn Out Payment and the amount of all Earn Out Payments paid to date) shall be due and payable without further notice, demand or presentment for payment. The minimum deferred purchase consideration of $50,000 for the quarters ended March 31, 2017 through December 31, 2018 were paid. The Company is currently negotiating an amendment to the agreement.

 

Deferred purchase consideration is disclosed as follows:

 

  

September 30,

2019

   December 31,
2018
 
Deferred purchase consideration        
Opening balance  $9,754,071   $9,856,458 
Interest due on deferred purchase consideration   160,869    126,576 
Repayment   (182,857)   (228,963)
Closing balance   9,732,083    9,754,071 
           
Present value discount on future payments          
Opening balance   (1,118,261)   (1,417,336)
Imputed interest expense   196,731    299,075 
Closing balance   (921,530)   (1,118,261)
           
Deferred purchase consideration, net  $8,810,553   $8,635,810 
           
Disclosed as follows:          
Short-term portion  $3,100,000   $2,450,000 
Accrued interest   132,083    54,071 
Long-term portion   5,578,470    6,131,739 
Deferred purchase consideration, net  $8,810,553   $8,635,810 

 

12. BRIDGE NOTES PAYABLE

 

On August 13, 2018, the Company closed the first tranche of its note and warrant offering of a maximum of one hundred fifty (150) units and entered into a Securities Purchase Agreement (the “Purchase Agreement”) with four accredited investors, which included a trust of which one member of the Company’s Board of Directors is the trustee and two other members of the Board of Directors (the “Purchasers”), pursuant to which the Company issued to the Purchasers an aggregate of fifty (50) units, at a purchase price of $10,000 per unit, each unit consisting of: (i) the Company’s 10% Subordinated Promissory Note in the principal amount of $10,000 due on the earlier of: (x) the date that is twelve (12) months after its issue date or (y) the Company’s receipt of the proceeds of funding from its next collaboration/partnership (the “Note”) and (ii) a five year warrant to purchase 1,500 shares of common stock of the Company for each $10,000 Note investment of the Company at an exercise price of $3.50 per share (the “Warrant”). An aggregate of $500,000 in principal amount of Notes and Warrants to purchase an aggregate of 75,000 shares of common stock were sold at the closing. The gross cash proceeds to the Company from the sale of the fifty (50) units was $500,000.

 

20

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12. BRIDGE NOTES PAYABLE (continued)

 

The Warrants also contains certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transaction.

 

On December 28, 2018, the Company repaid the principal sum of $200,000 of Bridge notes together with interest thereon of $7,616 owed to three Bridge note holders from the proceeds received from the Roche License agreement entered into on December 4, 2018. The remaining Bridge note holder elected not to be repaid in order to preserve the Company’s cash balances.

 

The movement on bridge notes is as follows:

  

  

September 30,

2019

   December 31,
2018
 
Bridge note liability        
Opening balance  $311,507   $- 
Bridge notes raised   -    500,000 
Interest accrued   22,438    19,123 
Repayment   -    (207,616)
Closing balance   333,945    311,507 
           
Discount on bridge notes          
Opening balance   (45,359)   - 
Fair value of warrants issued   -    (116,485)
Amortization of bridge note discount   45,359    71,126 
Closing balance   -    (45,359)
           
Bridge notes, net  $333,945   $266,148 
           
Disclosed as follows:          
Short-term portion  $300,000   $254,641 
Accrued interest   33,945    11,507 
   $333,945   $266,148 

 

13. TERM LOAN PAYABLE

 

On August 31, 2018, the Company, and its wholly owned subsidiaries, Icagen Corp., Caldera Discovery, Inc., and XRPro Sciences, Inc., (collectively, the “Subsidiaries”) entered into a Credit Agreement and Guaranty (the “Icagen Credit Agreement”) with the banks and other financial institutions from time to time party thereto, as lenders (collectively, the “Icagen Lenders”) and Perceptive Credit Holdings II, LP, a Delaware limited partnership (“Perceptive”), as administrative agent for the Icagen Lenders (in such capacity, the “Administrative Agent”).

 

In addition, on August 31, 2018, Icagen-T, Inc., a Delaware corporation, as borrower (“Icagen-T”), the Company, Icagen Corp., Caldera Discovery, and XRPro Sciences entered into a Credit Agreement and Guaranty (the “Icagen-T Credit Agreement” and together with the Icagen Credit Agreement, the “Credit Agreements”) with the banks and other financial institutions from time to time party thereto, as lenders, and Perceptive, as administrative agent for the lenders (in such capacity, the “Icagen-T Administrative Agent”).

 

The Icagen Credit Agreement provides for a $7,250,000 term loan (the “Icagen Term Loan”), which was drawn in full on August 31, 2018 (the “Closing Date”). The Icagen-T Credit Agreement provides for an $8,000,000 term loan (the “Icagen-T Term Loan” and together with the Icagen Term Loan, the “Term Loans”), which was drawn in full on the Closing Date.

 

The Company and Icagen-T used the proceeds from the respective Term Loans (i) for general working capital purposes, including, without limitation, business development and licensing purposes, (ii) to repay the convertible debt disclosed in note 16 below; and (iii) to pay fees, costs and expenses incurred in connection with the transactions contemplated by the Credit Agreements.

 

21

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. TERM LOAN PAYABLE (continued)

 

Commencing on the last day of each month after August 31, 2020, the Term Loans amortize in an amount equal to 1.0% of the aggregate principal amount of the Term Loans borrowed on the Closing Date.

 

The Term Loans mature on August 31, 2022 (the “Maturity Date”) unless accelerated pursuant to an event of default, as described below. All amounts outstanding under the Term Loans will be due and payable upon the earlier of the Maturity Date or the acceleration of the loans and commitments upon an event of default.

 

Amounts borrowed under the Credit Agreements bear interest at a rate per annum equal to the sum of the greater of: (i) the London Interbank Offered Rate (LIBOR) for one month periods and (ii) two and one-quarter percent (2.25%), plus an applicable margin rate of 9.75% per annum (the “Interest Rate”).  Furthermore, interest is payable on a monthly basis.

 

On August 31, 2018, the Company and Icagen-T each paid a non-refundable closing fee of 2% of the Term Loans (or a total of $305,000) pursuant to the terms of the respective Credit Agreements.

 

Prepayments of the Term Loans (other than certain mandatory prepayments) prior to the Maturity Date are subject to the following prepayment premium based on the aggregate principal amount of the Term Loans as of the date of any such prepayment: (i) on or prior to the first anniversary of the Closing Date, 12% of the aggregate outstanding principal amount of the Term Loan being prepaid, (ii) following the first anniversary or the Closing Date, but on or prior to the second anniversary of the Closing Date, 8% of the aggregate outstanding principal amount of the Term Loan being prepaid, and (iii) at any time after the second anniversary of the Closing Date and on or prior to the third anniversary of the Closing Date, 3% of the aggregate outstanding principal amount of the Term Loan being prepaid.

 

The repayment of the Term Loans and the Company’s and Icagen-T’s other obligations under the Icagen Credit Agreement or Icagen-T Credit Agreement, as applicable, are guaranteed by each of the Company’s subsidiaries (excluding Icagen-T with respect to the Icagen Credit Agreement).

 

Pursuant to the terms and conditions of the Security Agreement, dated August 31, 2018, among the Company, the Subsidiaries (excluding Icagen-T with respect to the Icagen Credit Agreement) and Perceptive (the “Icagen Security Agreement”), the Company’s and the Subsidiaries’ obligations under the Icagen Credit Agreement are secured by (i) a first priority lien on all of the existing and after acquired tangible and intangible assets, including intellectual property, of the Company and the Subsidiaries, and (ii) a pledge of 100% of the Company’s equity interests in the Subsidiaries (excluding Icagen-T with respect to the Icagen Credit Agreement). In addition, pursuant to the terms and conditions of the Security Agreement, dated August 31, 2018, among Icagen-T, the Company, the Subsidiaries and Perceptive (the “Icagen-T Security Agreement”), Icagen-T’s, the Company’s and the Subsidiaries’ obligations under the Icagen-T Credit Agreement are secured by (i) a first priority lien on all of the existing and after acquired tangible and intangible assets, including intellectual property, of the Company and the Subsidiaries other than real estate for which they have a second priority lien, and (ii) a pledge of 100% of the Company’s equity interests in the Subsidiaries.

 

The Credit Agreements contain customary representations, warranties and covenants, including covenants by each of the Company and Icagen-T limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes and acquisitions. The Credit Agreements also contain covenants requiring that the Company and its subsidiaries maintain cash and cash equivalents held in one or more accounts subject to the first priority perfected security interests of the lenders under the Credit Agreements of not less than (a) $1,000,000 following the Closing Date until March 31, 2019, and (b) $1,500,000 at all times thereafter. In addition, the Credit Agreements provide for specified quarterly minimum consolidated net revenue covenants of the Company and its subsidiaries for the trailing twelve month period ended on each such calculation date during the term of the Credit Agreements. The Company is currently in breach of this covenant as discussed in note 15 and 26 below.

 

22

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. TERM LOAN PAYABLE (continued)

 

The Credit Agreements provide for events of default customary for credit facilities of this type, including but not limited to non-payment of principal and interest, defaults on other debt, misrepresentations, breach of covenants, representations and warranties, change of control, insolvency, bankruptcy and the occurrence of a material adverse effect on the Company and its subsidiaries. After the occurrence of an event of default and for so long as it continues, all outstanding obligations under the Credit Agreements accrue interest at the Interest Rate plus 4% per annum. Upon an event of default relating to insolvency, bankruptcy or receivership, the amounts outstanding under the Credit Agreements will become immediately due and payable. Upon the occurrence and continuation of any other event of default, lenders holding a majority of the outstanding loans and commitments may accelerate payment of all obligations and terminate the Lenders’ commitments under the Credit Agreements.

 

On May 15, 2017, the Company and Icagen-T entered into a Securities Purchase Agreement with GPB Debt Holdings II, LLC (“GPB”), pursuant to which (i) the Company issued to GPB a three year Senior Secured Convertible Note maturing on May 15, 2020, bearing interest at the rate of 13% per annum in the aggregate principal amount of $2,000,000 (the “Company Note”); and (ii) Icagen-T issued to GPB a three year Senior Secured Convertible Note maturing on May 15, 2020, bearing interest at the rate of 13% per annum, in the aggregate principal amount of $8,000,000 (the Icagen-T Note and together with the Company Note, the “Convertible Notes”). The Company and Icagen-T, respectively, used a portion of the proceeds from their Term Loans to repay all amounts due (principal, accrued and unpaid interest and other charges) as of the Closing Date under the GPB Senior Secured Convertible Notes. On August 31, 2018, the Company and Icagen-T paid $10,308,333 of the proceeds of the Term Loan to repay the outstanding amounts due to GPB, which satisfied all outstanding amounts due to GPB, terminated the loan facility with GPB and terminated all commitments of GPB to extend credit under the notes and the other transaction documents.

 

In addition, on August 31, 2018, the Company issued to GPB a second amended and restated warrant to purchase 857,143 shares of Common Stock (the “GPB Warrant”), pursuant to which, among other things, GPB was granted piggyback registration rights upon the same terms as the Warrant issued to Perceptive (described below).

 

In connection with the entry of the Credit Agreements, on August 31, 2018, the Company issued to Perceptive, or its registered assigns, a warrant (the “Warrant”) to purchase 723,550 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). The Warrant is exercisable for a period of seven years from the Closing Date and the per-share exercise price of $3.50, subject to certain adjustments as specified in the Warrant (the “Exercise Price”). Upon any exercise of the Warrant, the Exercise Price is payable in cash or, at Perceptive’s option, by withholding a number of shares of Common Stock then issuable upon exercise of the Warrant with an aggregate fair market value equal to the aggregate Exercise Price. The Warrant also contains customary anti-dilution adjustments and price protection.

 

The Company also granted Perceptive customary demand and piggy-back registration rights with respect to the shares of Common Stock issuable upon exercise of the Warrant. At any time commencing nine months following the closing of a Qualifying PO (as defined in the Warrant) if the Company is not qualified to register securities under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to a registration statement on Form S-3 (or any successor form), then upon the request of the holder(s) of at least 51% of the Warrants and/or shares of Common Stock issuable thereunder (the “Majority Holders”), the Company is obligated, among other things, to (i) file a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (the “SEC”) within 90 days following the date on which the request is given for purposes of registering the shares of Common Stock issuable upon exercise of the Warrants, (ii) use its commercially reasonable efforts to have the registration statement declared effective by the SEC as soon as practicable after filing, subject to any cut backs requested by the SEC, and (iii) maintain the registration until all registerable securities may be sold pursuant to Rule 144 under the Securities Act, without restriction as to volume. In addition, at all times after a Qualifying PO, the Company shall use its commercially reasonable efforts to qualify and remain qualified to register securities under the Securities Act pursuant to a registration statement on Form S-3 or any successor form thereto. At any time commencing nine (9) months after such time as the Company shall have qualified for the use of a registration statement on Form S-3, the Majority Holder(s) shall have the right to request registration on Form S-3 or any similar short-form registration. Further, whenever the Company proposes to register any shares of its Common Stock under the Securities Act (with certain exceptions), the Company shall also include in such registration statement, Perceptive’s shares of Common Stock issuable upon exercise of the Warrant, provided that cut backs may apply in certain situations.

 

23

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13. TERM LOAN PAYABLE (continued)

 

In connection with the entry into of the Credit Agreements, on August 31, 2018, each of the holders of the Company’s 10% Subordinated Promissory Note, entered into an Amended and Restated 10% Subordinated Promissory Notes (the “Subordinated Notes”), to clarify that the subordination provisions of the Subordinated Notes that were applicable to the Convertible Notes were applicable to the lenders under the Credit Agreements and Perceptive.

 

In connection with the entry into of the Credit Agreements, effective August 31, 2018 (i) each holder of the Company’s Series C Convertible Redeemable Preferred Stock entered into a Subordination Agreement with the lenders under the Credit Agreement and Perceptive prohibiting declaration of and payment of accrued dividends on the Company’s Series C Convertible Redeemable Preferred Stock until payment in full of all amounts owing under the Credit Agreements and (ii) holders of a majority of the Company’s Series C Convertible Redeemable Preferred Stock effected an amendment to the Securities Purchase Agreements executed by the holders of the Company’s Series C Convertible Redeemable Preferred Stock that clarified that references in the Securities Purchase Agreements to the prior lender now included Perceptive and that the registration rights of such holders was subject to approval of each of the prior lender and Perceptive until the shares underlying the warrants to each had been sold or registered on a registration statement that had been declared effective by the Securities and Exchange Commission.

 

The Company is not in compliance with the financial covenants and the affirmative covenants of the Term Loan. In order to temporarily stop the event of default and prevent the Creditor from taking legal action and foreclosing on the assets of the Company, on August 27, 2019, the Company, and its wholly owned subsidiaries, Icagen Corp., Caldera Discovery, Inc., and XRPro Sciences, Inc., (collectively, the “Subsidiaries”) and Icagen-T, Inc, entered into Forbearance Agreements and First Amendments to Credit Agreements and Guarantees (the “Forbearance Agreements”) with the Icagen Lenders and Perceptive as Administrative Agent for the Icagen Lenders.

 

Icagen Inc has subsequently entered into further Forbearance and second and third amendments to the Credit Agreements and Guarantees, as discussed in note 26 below, thereby temporarily stopping an event of default until March 15, 2020, unless other events of default are triggered.

 

Icagen-T has subsequently entered into further Forbearance and second and third amendments to the Credit Agreements and Guarantees, as discussed in note 26 below, thereby temporarily stopping an event of default until October 15, 2020, unless other events of default are triggered.

 

As of September 30, 2019, the Icagen Inc. term loan has been classified as current in terms of the Icagen Inc. Forbearance Agreements.

 

The movement on the term loans is as follows:

 

  

September 30,

2019

   December 31,
2018
 
Term Loan        
Opening balance  $15,408,897   $- 
Term loan issued   -    15,250,000 
Interest accrued   1,408,503    627,330 
Repayments   (1,414,900)   (468,433)
Closing balance   15,402,500    15,408,897 
           
Debt discount          
Opening balance   (2,544,304)   - 
Debt issuance costs   5,319    (1,006,944)
Fair value of warrants   -    (1,746,065)
Amortization of debt discount   1,426,917    208,705 
Closing balance   (1,112,068)   (2,544,304)
Term Loan, net  $14,290,432   $12,864,593 
           
Disclosed as follows:          
Short-term portion  $

6,834,194

   $- 
Accrued interest   152,500    158,897 
Long-term portion   

7,303,738

    12,705,696 
   $14,290,432   $12,864,593 

 

Subsequent to September 30, 2019, the Company paid the accrued interest of $152,500.

 

24

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

14. SUBORDINATED PROMISSORY NOTES PAYABLE

 

On August 26, 2019, in terms of Security Purchase Agreements entered into with a director and a related party (“SBN Holders”), the Company entered issued Subordinated Promissory Notes (SBN’s”) in the aggregate principal amount of $500,000. The SBN’s earn Payment in Kind (“PIK”) interest at a rate of 15% per annum based on a 360 day year and matures on February 28, 2023. The Company issued the SBN Holders 142,855 shares of Series C Preferred Stock and seven year warrants exercisable for 142,855 shares of common stock at an exercise price of $3.50 per share, expiring on August 26, 2026.

 

The SBN’s are subordinated in right of payment in all respects to (a) the Credit Agreements dated as of August 31, 2018, among the Company, its Subsidiaries and Icagen-T, Inc and the Icagen Lenders and Perceptive, as administrative agent and (b) any additional loans made by Perceptive to the Company, its subsidiaries and Icagen-T, Inc., as such Credit Agreements may be modified, amended or restated in their entirety or otherwise from time to time. If any payment in any form with respect to this note is collected or received by payee (other than any payment of PIK interest not paid in cash), such payment shall be held by payee in trust for the benefit of the Creditors under the credit agreements and shall forthwith be paid over to Perceptive, in its capacity as administrative agent under each Credit Agreement, to be credited and applied against the obligations due to the creditors under such Credit Agreements, but without affecting, impairing or limiting in any manner the liability of the Company under any other provision of this note.

 

The movement on the subordinated promissory notes is as follows:

 

   September 30,
2019
 
Promissory notes payable    
Opening balance  $- 
Promissory notes issued   500,000 
Interest accrued   10,000 
Repayments   - 
Closing balance   510,000 
      
Debt discount     
Opening balance   - 
Value of series C Preferred stock allocated to debt discount   (500,000)
Amortization of debt discount   13,651 
Closing balance   (486,349)
      
Promissory notes, net  $23,651 
      
Disclosed as follows:     
Accrued interest  $10,000 
Long-term portion   13,651 
   $23,651 

 

25

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15. SHORT-TERM LOAN PAYABLE

 

The Company is not in compliance with the financial covenants and the affirmative covenants of the Term Loan (Note 13 above) entered into on August 31, 2018. In order to temporarily stop the event of default and prevent the Creditor from taking legal action and foreclosing on the assets of the Company, on August 27, 2019, the Company, and its wholly owned subsidiaries, Icagen Corp., Caldera Discovery, Inc., and XRPro Sciences, Inc., (collectively, the “Subsidiaries”) and Icagen-T, Inc, entered into Forbearance Agreements and First Amendments to Credit Agreements and Guarantees (the “Forbearance Agreements”) with the Icagen Lenders and Perceptive as Administrative Agent for the Icagen Lenders.

 

The Forbearance Agreements provided for an additional advance to Icagen-T of $2,000,000 (“Additional Advance”). The Additional Advance earns payment in kind (“PIK”) interest at 15% per annum, compounded monthly and matures on June 30, 2020. In addition, the Company paid a commitment fee of 2% ($40,000) on the Additional Advance and is obligated to pay an exit fee of 5% ($100,000) upon prepayment or maturity of the Additional Advance.

 

The following conditions precedent were met prior to entering into the Forbearance Agreements:

 

1.An additional advance of $500,000 was received by the Company in terms of Subordinated Promissory Notes (Note 14 above).
2.The Company issued the Creditor an additional 599,991 shares of Series C Stock and an additional 599,991 Warrants at an exercise price of $3.50 per share, issued concurrently with the conclusion of the Forbearance Agreements.

 

The Forbearance Agreements provide for a Standstill Termination which ended on December 31, 2019, thereby allowing the Creditor to accelerate the obligations and take any necessary action under the Term loan as disclosed in Note 13 above.

 

As long as the Additional Advance is outstanding the Company agreed to the following additional covenants:

 

1.To provide weekly cash flows to the Creditor.
2.To negotiate the termination of the Sanofi Master Service Agreement prior to January 31, 2020.
3.To dispose of the Tucson real property prior to February 28, 2020.
4.Raise an additional $2,500,000 of Series C Stock prior to November 30, 2019.

 

The Company was unable to comply with covenants 2 through 4 above and entered into a second and third forbearance agreements, see the Subsequent events note 26, below.

 

The movement on the term loans is as follows:

 

  

September 30,

2019

 
Term Loan    
Opening balance  $- 
Term loan issued   2,000,000 
PIK Interest accrued   28,375 
Repayments   - 
Closing balance   2,028,375 
      
Debt discount     
Opening balance   - 
Value of series C Preferred stock allocated to debt discount   (2,000,000)
Amortization of debt discount   220,779 
Closing balance   (1,779,221)
      
Imputed interest on exit fee     
Opening balance   - 
Imputed interest expense   10,804 
Closing balance   10,804 
      
Short-term Loan, net  $259,958 

 

26

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

16. CONVERTIBLE LOAN PAYABLE

 

On May 15, 2017, the Company, and its wholly owned subsidiary, Icagen-T, Inc. (“Icagen-T”), entered into a Securities Purchase Agreement (“Securities Purchase Agreement”), pursuant to which (i) the Company issued to GPB the Company Note which was a three year Senior Secured Convertible Note, which was to mature on May 15, 2020, and bore interest at the rate of 13% per annum, in the aggregate principal amount of $2,000,000 for cash proceeds of $1,920,000 after an original issue discount of $80,000, before deal related expenses; and (ii) Icagen-T issued to the Purchaser the Icagen-T Note which was a three year Senior Secured Convertible Note (“Icagen-T Note”), which was to mature on May 15, 2020, and bore interest at the rate of 13% per annum, in the aggregate principal amount of $8,000,000 for cash proceeds of $7,680,000 after an original issue discount of $320,000, before transaction related expenses. The convertible Notes were each convertible into shares of common stock at a conversion price of $3.50 per share.

 

In addition, any time after issuance, so long as no Event of Default had occurred and/or is continuing, each of the Company and Icagen-T, had the right to redeem all or part of each Convertible Note then outstanding, with a minimum prepayment amount of $500,000, at any time upon five (5) business days’ notice to GPB by paying an amount in cash equal to: a range between 101% and 103% of the Conversion Amount being redeemed if paid in full and if an Event of Default had occurred and is continuing GPB had the right to require the Company to redeem the Conversion Amount for an amount of cash equal to a range between 116% and 118% of the Conversion Amount being redeemed. The “Conversion Amount” was defined as the sum of (a) the portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made, (b) all accrued and unpaid Interest with respect to such portion of such principal, (c) all accrued and unpaid late charges with respect to such portion of such principal and such Interest, if any, and (d) all other amounts due hereunder.

 

The Convertible Notes contained certain covenants, such as restrictions on the incurrence of indebtedness, the existence of liens, the payment of restricted payments, redemptions, the payment of cash dividends and the transfer of assets. If the Company failed to timely deliver the shares underlying the Notes, it would be subject to certain buy-in provisions.

 

In addition, pursuant to the Securities Purchase Agreement, the Company and Icagen-T had agreed to provide certain registration rights if Rule 144 under the Securities Act, is unavailable, for the Warrant Shares.

 

In connection with the Convertible Notes, the Company issued a warrant (the “Purchaser Warrant”) to purchase up to 857,143 shares of common stock at an exercise price of $3.50 per share, subject to applicable adjustments. The Purchaser Warrant expires on May 15, 2022.

 

In addition, subject to limited exceptions, a holder of the Purchaser Warrant would not have the right to exercise any portion of the Purchaser Warrant if such holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to its conversion (the “Beneficial Ownership Limitation”). A holder of the Purchaser Warrant could adjust the Beneficial Ownership Limitation upon not less than 61 days’ prior notice to the Company, provided that such Beneficial Ownership Limitation in no event could exceed 9.99%.

 

The Purchaser Warrant also contained certain anti-dilution provisions that applied in connection with any stock split, stock dividend, stock combination, recapitalization and, while the Convertible Notes were outstanding the provisions also applied to issuances of securities at prices below the conversion price or similar transactions.

 

If, at the time a holder exercises the Purchaser Warrant, there is no effective registration statement available for an issuance of the shares underlying the Purchaser Warrant to the holder, then in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such exercise (either in whole or in part) the net number of shares of the Company’s common stock determined according to a formula set forth in the Purchaser Warrant. If the Company fails to timely deliver the shares underlying the Purchaser Warrants, it will be subject to certain buy-in provisions.

 

27

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

16. CONVERTIBLE LOAN PAYABLE (continued)

 

The Purchaser Warrant also provides that the Company will not enter into or be party to a Fundamental Transaction (as defined in the Purchaser Warrant) unless (i) the Successor Entity (as defined in the Purchaser Warrant) assumes in writing all of the obligations of the Company under the Purchaser Warrant and the other Transaction Documents (as defined in the Securities Purchase Agreement) pursuant to written agreements in form and substance satisfactory to the Purchaser, including agreements to deliver to the Purchaser in exchange for the Purchaser Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Purchaser Warrant; (ii) the Company or the Successor Entity (as the case may be) agrees at the election of the Company or the Successor Entity (as the case may be) to purchase the Purchaser Warrant from the Purchaser by paying to the Purchaser cash in an amount equal to the Black Scholes Value (as defined in the Purchaser Warrant); or (iii) the Purchaser, at its election, requires the Company or the Successor Entity (as the case may be) to purchase the Purchaser Warrant from the Purchaser by paying to the Purchaser cash in an amount equal to the Black Scholes Value.

 

The Company Note was secured by a security interest in all of the existing and future assets of the Company and the domestic subsidiaries, other than Icagen-T, including a pledge of all of the capital stock of each of the Domestic Subsidiaries, other than Icagen-T, subject to existing security interests, for the benefit of GPB, to secure the Company obligations under the Company Note, as evidenced by (i) a security and pledge agreement, and (ii) a guaranty executed by each Domestic Subsidiary, other than Icagen-T, pursuant to which the domestic subsidiaries, other than Icagen-T, guaranteed all obligations of the Company under the Transaction Documents.

 

The Icagen-T Note was secured by a security interest in all of the existing and future assets of the Company, Icagen-T and the other Domestic Subsidiaries, including a pledge of all of the capital stock of each of the Domestic Subsidiaries, other than Icagen-T, subject to existing security interests, for the benefit of GPB, to secure Icagen-T’s obligations under the Icagen-T Note, as evidenced by (i) a security and pledge agreement, and (ii) a guaranty executed by the Company and each Domestic Subsidiary, other than Icagen-T, pursuant to which the Company and the Domestic Subsidiaries, other than Icagen-T, guaranteed all of the obligations of Icagen-T under the Transaction Documents.

 

In addition, the Company and Icagen-T entered into a Subordinated Deed of Trust, Assignment of Rents, Fixture Filing and Security Agreement with the trustee named therein and GPB as beneficiary, securing all of Icagen-T’s obligations to GPB by a senior priority security interest in the Property/Facilities, which was subordinated only to a Deed of Trust entered into with Sanofi.

 

Upon an Event of Default, GPB could, among other things, collect or take possession of the Company collateral or Icagen-T collateral, as the case may be, proceed with the foreclosure of the security interest in the collateral or sell, lease or dispose of the collateral. Each of the Subsidiaries had also guaranteed all of the Company’s obligations under the Company Note pursuant to the terms of the Company Guaranty and the Icagen-T Guaranty.

 

On August 31, 2018 the Company raised an aggregate of $15,250,000 in principal amount of term loans from Perceptive (note 13 above) and exercised its right to redeem the convertible notes in the principal amount of $10,000,000 that had been issued in May 2017 by the payment of the aggregate principal outstanding amount of $10,000,000, plus accrued interest thereon of $108,333 and an early redemption cash payment of $200,000. The Company recorded a net gain on extinguishment of $495,783 of convertible debt, related accrued interest, derivative liability, unamortized discount and early redemption cash payment during the year ended December 31, 2018.

 

28

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  

16. CONVERTIBLE LOAN PAYABLE (continued)

 

The movement on convertible debt is as follows:

 

   December 31,
2018
 
Convertible debt    
Opening balance  $10,108,333 
Interest accrued   866,667 
Early settlement penalty   200,000 
Repayments   (11,175,000)
Closing balance   - 
      
Debt discount     
Opening balance   (4,138,206)
Amortization of debt discount   950,163 
Release of debt discount on extinguishment of convertible debt   3,188,043 
Closing balance   - 
      
Convertible debt, net  $- 

 

17. DERIVATIVE LIABILITY

 

The Purchaser Warrants issued to the note holders, disclosed in note 16 above, had variable priced conversion rights which could adjust whenever new securities were issued at prices lower than the current exercise price of the Purchaser Warrants issued to note holders as well as a possible cash settlement option upon the happening of a fundamental event. This gave rise to a derivative financial liability, which was initially valued upon the issue of the Purchaser Warrants using a Black-Scholes valuation model. The Purchaser Warrants issued in connection with the Convertible Notes were valued at $1,448,629.

 

Between April 2018 and August 2018 the Company closed four tranches of the Series C Preferred units, discussed in note 18 below. Each Preferred Series C unit includes warrants exercisable over 28,571 shares of common stock at an initial exercise price of $3.50 per share subject to anti-dilution pricing adjustments and a cash settlement option upon the happening of a fundamental event. This gave rise to a derivative financial liability which was initially valued using a Black Scholes valuation model at $1,858,663.

 

On August 31, 2018, in connection with the entry into the Credit Agreements described in note 13 above, the Company issued to Perceptive, or its registered assigns, a warrant to purchase 723,550 shares of the Company’s common stock, par value $0.001 per share. The warrant is exercisable for a period of seven years from August 31, 2018 and the per-share exercise price is $3.50, subject to certain adjustments as specified in the warrant (the “Exercise Price”). Upon any exercise of the Warrant, the Exercise Price is payable in cash or, at the holder’s option, by withholding a number of shares of Common Stock then issuable upon exercise of the Warrant with an aggregate fair market value equal to the aggregate Exercise Price. The Warrant also contains customary anti-dilution adjustments and price protection. The pricing adjustments stipulated in the warrant give rise to a derivative liability which was initially valued using a Black Scholes valuation model at $1,746,065.

 

On August 26, 2019, in connection with the entry into the promissory notes described in note 14 above, the Company issued to a director and a related party, warrants to purchase 142,855 shares of the Company’s common stock, par value $0.001 per share. The warrant is exercisable for a period of seven years from August 26, 2019 and the per-share exercise price is $3.50, subject to certain adjustments as specified in the warrant (the “Exercise Price”). Upon any exercise of the Warrant, the Exercise Price is payable in cash or, at the holder’s option, by withholding a number of shares of Common Stock then issuable upon exercise of the Warrant with an aggregate fair market value equal to the aggregate Exercise Price. The Warrant also contains customary anti-dilution adjustments and price protection. The pricing adjustments stipulated in the warrant give rise to a derivative liability which was initially valued using a Black Scholes valuation model at $320,622.

 

29

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17. DERIVATIVE LIABILITY (continued)

  

On August 27, 2019, in connection with the entry into the Forbearance Agreements and First Amendments to Credit Agreements and Guarantees described in note 15 above, the Company issued to Perceptive, warrants to purchase 599,991 shares of the Company’s common stock, par value $0.001 per share. The warrant is exercisable for a period of seven years from August 27, 2019 and the per-share exercise price is $3.50, subject to certain adjustments as specified in the warrant (the “Exercise Price”). Upon any exercise of the Warrant, the Exercise Price is payable in cash or, at the holder’s option, by withholding a number of shares of Common Stock then issuable upon exercise of the Warrant with an aggregate fair market value equal to the aggregate Exercise Price. The Warrant also contains customary anti-dilution adjustments and price protection. The pricing adjustments stipulated in the warrant give rise to a derivative liability which was initially valued using a Black Scholes valuation model at $1,346,313.

 

The following assumptions were used in the Black-Scholes valuation model:

 

   

Nine months

ended
September 30,

2019

 
       
Calculated stock price   $ 3.50  
Risk free interest rate     1.5 to 2.3 %
Valuation period     2.6 to 7.0 years  
expected volatility of underlying stock     60.1% to 82.2 %
Expected dividend rate     0 %

 

The movement in derivative liability is as follows:

 

   September 30,
2019
   December 31,
2018
 
         
Opening balance  $5,178,598   $4,168,964 
Derivative liability on warrants issued to promissory note holders, term loan note holders and series C preferred stockholders   1,666,935    3,604,728 
Extinguishment of derivative liability on convertible debt   -    (3,890,826)
Mark-to-market adjustment   (841,053)   1,295,732 
Closing balance  $6,004,480   $5,178,598 

 

30

 

  

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18. PREFERRED STOCK

 

Preferred Stock consists of 10,000,000 authorized preferred shares of $0.001 par value each, of which 400,000 are designated as Series A 8% convertible redeemable preferred shares of $0.001 each, 3,000,000 are designated as Series B convertible preferred shares of $0.001 each, and 2,242,857 are designated as Series C convertible redeemable preferred shares of $0.001 each with the remaining 4,357,143 preferred shares remaining undesignated.

 

Series A 8% convertible, redeemable preferred stock (“Series A Stock”)

Series A Stock consists of 400,000 designated shares of $0.001 par value each, 0 shares issued and outstanding as of September 30, 2019 and December 31, 2018.

 

Series B convertible preferred stock (“Series B Stock”)

Series B Stock consists of 3,000,000 designated shares of $0.001 each, 0 shares outstanding as of September 30, 2019 and December 31, 2018.

 

Series C convertible, redeemable preferred stock (“Series C Stock”)

Series C Stock consists of 2,242,857 authorized shares of $0.001 each, of which 1,542,835 and 799,989 shares are issued and outstanding as of September 30, 2019 and December 31, 2018, respectively.

 

On April 3, 2018, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware establishing the Series C Stock which entitles each holder of Series C Stock to a cumulative dividend at the rate of 12.0% per annum, payable quarterly in arrears.

 

The Company had offered on a best efforts basis up to a maximum of forty (40) units and a minimum of ten (10) units, at a purchase price of $100,000 per unit (“Series C Unit”), each unit consisting of 28,571 shares of Series C Stock, par value $0.001 per share and a seven year Warrant to acquire 28,571 shares of the Company’s common stock, par value, $0.001 per share, at an exercise price of $3.50 per share.

 

On August 27, 2019, the Company filed a Certificate of Increase of Series C Convertible Redeemable Preferred Stock with the Secretary of State of Delaware increasing the number of authorized Series C Stock to 2,242,857 authorized shares from 1,142,856 shares. Simultaneously with the filing of the Certificate of Increase of Series C Convertible Redeemable Preferred Stock, the Company issued 142,855 shares of Series C Stock to a director and a related party and a further 599,991 shares of Series C Stock to Perceptive.

 

The Series C Stock ranks senior to the shares of the Company’s common stock, and any other class or series of stock issued by the Company with respect to dividend rights, redemption rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of its affairs. Holders of Series C Stock are entitled to a cumulative dividend at the rate of 12.0% per annum, as set forth in the Certificate of Designation of Series C Stock. The Series C Stock is convertible at the option of the holders at any time into such number of shares of common stock as shall be equal to the gross proceeds received on the issuance of the Series C Stock plus any accrued and unpaid dividends on such share of Series C Stock (the “Accreted Value”) divided by the conversion price, which initially is $3.50 per share, subject to certain customary anti-dilution adjustments. In addition, the Series C Stock automatically converts into shares of the Company’s common stock based upon the then effective conversion price upon the (i) closing of a sale of shares of common stock to the public in a Qualifying Public Offering (as defined below) or a reverse merger into a publicly reporting company that has its common stock listed or quoted and traded on a Trading Market (as such term is defined in the Certificate of Designation) or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of at least seventy-five percent (75%) of the outstanding shares of Series C Stock (the “Requisite Holders”) (the time of such closing or the date and time specified of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Date”).  A “Qualifying Public Offering” is defined as the first firm commitment underwritten public offering by the Company on or following the initial issuance date of the Series C Stock in which shares of common stock are sold for its account solely for cash to the public resulting in proceeds to it and/or its subsidiary, Icagen-T, Inc. of no less than $8,000,000 (after deduction only of underwriter discounts and commissions) and where the shares of common stock registered under the Securities Act of 1933, as amended, and sold in such public offering are simultaneously listed and commence trading on a Trading Market (as such term is defined in the Certificate of Designation)

 

31

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18. PREFERRED STOCK (continued)

 

Series C convertible, redeemable preferred stock (“Series C Stock”) (continued)

 

In the event of any liquidation, dissolution or winding-up of the Company, holders of the Series C Stock shall be entitled to a preference on liquidation equal to $5.25 per share of Series C Stock plus all accrued and unpaid dividends.

 

Each holder of Series C Stock has the right to cast the number of votes equal to three times the number of shares into which the Series C Stock is convertible and the Series C holders as a group, has the right to elect one director on the Company’s Board of Directors. The Company cannot take the following actions without the approval of the Requisite Holders and the consent of its Board of Directors, including the Series C Stock director: (i) liquidate, dissolve or wind up its business, (ii) amend its Certificate of Incorporation or Bylaws, (iii) create any new class of stock unless it ranks junior to the Series C Stock with respect to dividends and liquidation, (iv) amend or alter any class of stock pari passu with the Series C Stock to make it senior with respect to dividends and liquidation, (v) purchase or redeem any other shares of its stock, or (vi) increase the size of its Board of Directors.

 

Upon the occurrence of a Cash Liquidity Event, the holders of the Series C Stock can require the Company to redeem their shares of Series C Stock for a price per share equal to $5.25 subject to adjustments. In addition, the Company has the right to redeem the shares at any time for a price per share equal to $5.25 subject to adjustments. A “Cash Liquidity Event” is defined as the closing of any sale, lease or licensing transaction relating to a single asset or multiple assets other than in the ordinary course of the Company’s business, including, but not limited to a sale of a building, sale of biological assets or other upfront payments, resulting in aggregate gross proceeds received by the Company at closing or closings in a transaction or transactions during any twelve (12) month period in excess of $40,000,000.

 

During the three months ended September 30, 2019 and 2018, the Company had accrued dividends of $113,918 and $80,548, respectively and for the nine months ended September 30, 2019 and 2018, the Company has accrued dividends of $280,537 and $140,088, respectively on the Series C Stock.

 

19. COMMON STOCK

 

Common stock consists of 50,000,000 authorized shares of $0.001 each, 6,720,107 shares issued and 6,393,107 shares outstanding as of September 30, 2019 and December 31, 2018.

 

20. WARRANTS

 

Between April 2018 and August 2018, the Company closed on four tranches of 28 Series C Units for gross proceeds of $2,800,000, resulting in the issuance of warrants to purchase 799,989 shares of common stock at an initial exercise price of $3.50 per share. These warrants were initially valued at $1,858,663 using a Black Scholes pricing model.

 

In terms of the Company’s bridge note offering on August 13, 2018, the Company closed the first tranche of its note and warrant offering of an aggregate of fifty (50) units, at a purchase price of $10,000 per unit, each unit included a five year warrant to purchase 1,500 shares of common stock of the Company at an exercise price of $3.50 per share, resulting in the issuance of warrants to purchase 75,000 shares of common stock. The warrants also contain certain anti-dilution provisions that apply in connection with any stock split, stock dividend, stock combination, recapitalization or similar transaction. These warrants were valued at $116,485 using a Black Scholes pricing model.

 

32

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   

20. WARRANTS (continued)

 

In connection with the entry of the Credit Agreements, on August 31, 2018, the Company issued a warrant to purchase 723,550 shares of the Company’s common stock. The warrant is exercisable for a period of seven years at an exercise price of $3.50 per share, subject to certain adjustments as specified in the warrant. Upon any exercise of the Warrant, the Exercise Price is payable in cash or, at the warrant holders option, by withholding a number of shares of Common Stock then issuable upon exercise of the warrant with an aggregate fair market value equal to the aggregate Exercise Price. The warrant also contains customary anti-dilution adjustments and price protection. These warrants were valued at $1,746,065 using a Black Scholes pricing model.

 

In connection with the entry of the SBN’s and the Forbearance Agreements disclosed in note 14 and 15 above, on August 26, 2019 and August 27, 2019, respectively, the Company issued warrants to purchase 142,855 and 599,991 shares of common stock. The warrants are exercisable for a period of seven years at an exercise price of $3.50 per share, subject to certain adjustments as specified in the warrants. Upon any exercise of the warrants, the Exercise Price is payable in cash or, at the warrant holders option, by withholding a number of shares of Common Stock then issuable upon exercise of the warrant with an aggregate fair market value equal to the aggregate Exercise Price. The warrants also contain- customary anti-dilution adjustments and price protection. These warrants were valued at $1,666,935 using a Black Scholes pricing model.

 

A summary of the Company’s warrant activity during the period January 1, 2018 to September 30, 2019 is as follows:

 

   Number of shares   Exercise
price
per share
  

Weighted
average
exercise

price

 
             
Outstanding January 1, 2018   3,179,784   $ 3.50 to $4.20   $3.50 
Granted   1,598,539    3.50    3.50 
Forfeited/cancelled   (75,000)   4.20    4.20 
Exercised   -    -    - 
Outstanding December 31, 2018   4,703,323    3.50 to 3.85    3.51 
Granted   742,846    3.50    3.50 
Forfeited/cancelled   -    -    - 
Exercised   -    -    - 
Outstanding September 30, 2019   5,446,169   $3.50 to $3.85   $3.51 

 

The following table summarizes warrants outstanding and exercisable as of September 30, 2019:

 

      Warrants outstanding     Warrants exercisable  
Exercise price    

Number of

shares

   

Weighted
average
remaining

years

   

Weighted
average
exercise

price

   

Number of

shares

   

Weighted
average
exercise

price

 
                                 
$ 3.50       5,302,768       3.41               5,302,768          
$ 3.85       143,401       0.75               143,401          
          5,446,169       3.34     $ 3.51       5,446,169     $ 3.51  

 

The Warrants outstanding at September 30, 2019 have an intrinsic value of $0.

 

33

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

21. STOCK OPTIONS

 

In October 2005, the board of directors adopted the Caldera Pharmaceuticals, Inc. 2005 Stock Option Plan (the “Plan”), which permitted awards of incentive and nonqualified stock options and other forms of incentive compensation to employees and non- employees such as directors and consultants. The Board had set aside 1,500,000 shares of common stock for issuance upon exercise of grants made under the Plan. Options granted under the Plan vest either immediately or over a period of up to two years, and expire 1 year to 10 years from the grant date. In terms of the Plan agreement, the plan expired during October 2015, ten years after its adoption, therefore there are no further options available under this plan for future grants.

 

On December 9, 2015, the board of directors approved the 2015 Stock Incentive Plan which was approved by the Company’s stockholders exercising approximately 50.2% of the Company’s voting power. The plan became effective on March 26, 2016, 20 days following the mailing of an information statement to the Company’s stockholders.

 

The 2015 Stock Incentive Plan (“the 2015 Plan”) provides the directors, officers, employees and consultants of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ or service of the Company, to acquire a proprietary interest in the long-term success of the Company and to reward the performance of individuals in fulfilling long-term corporate objectives. The Board initially set aside 800,000 shares of common stock for issuance upon exercise of grants made under the Plan and increased the number of shares available under the plan by a further 800,000 shares of common stock during 2016 to a total of 1,600,000 shares of common stock. Options granted under the Plan vest either immediately or over a period of time, determined at the grant date and will expire over a period of time, determined at the grant date.

 

On December 4, 2018, the board of directors approved the 2018 Stock Incentive Plan which was approved by the Company’s stockholders exercising approximately 51.5% of the voting power. The plan became effective on December 31, 2018, 20 days after the mailing of an information statement to the Company’s stockholders.

 

The 2018 Stock Incentive Plan (“the 2018 Plan”) provides the directors, officers, employees and consultants of the Company with appropriate incentives and rewards to encourage them to enter into and continue in the employ or service of the Company, to acquire a proprietary interest in the long-term success of the Company and to reward the performance of individuals in fulfilling long-term corporate objectives. The board of directors set aside 2,000,000 shares of common stock for issuance upon exercise of grants made under the 2018 Plan. Options granted under the 2018 Plan vest either immediately or over a period of time, determined at the grant date and will expire over a period of time, determined at the grant date.

 

On April 30, 2019, the Company granted ten-year options exercisable for 628,883 shares of common stock, at an exercise price of $3.50 per share, under the 2018 Plan. Included in the grant are ten-year options exercisable for 154,616 and 75,267 shares of common stock, at an exercise price of $3.50 per share, with immediate vesting, granted to the Company’s Chief Executive Officer and the Company’s Chief Scientific Officer, respectively. The remaining options exercisable for 399,000 shares of common stock were issued to employees of the Company vesting over a three year period.

 

Options exercisable for 72,986 and 113,946 shares of common stock for the nine months ended September 30, 2019 and the year ended December 31, 2018 expired and were cancelled.

 

34

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

21. STOCK OPTIONS (continued)

 

A summary of all of the Company’s option activity during the period January 1, 2018 to September 30, 2019 is as follows:

 

    Number of shares    

Exercise

price per share

   

Weighted

average

exercise

price

 
                   
Outstanding January 1, 2018     1,419,959     0.40 to $11.42     $ 3.59  
Granted     1,005,000       3.50       3.50  
Forfeited/cancelled     (113,946 )     3.50       (3.50 )
Exercised     -       -       -  
Outstanding December 31, 2018     2,311,013        0.40 to 11.42       3.55  
Granted     628,883       3.50       3.50  
Forfeited/cancelled     (72,986 )     3.50 to 5.00       3.71  
Exercised     -       -       -  
Outstanding September 30, 2019     2,866,910      $ 0.40 to $11.42     $ 3.54  

 

The following tables summarize information about stock options outstanding as of September 30, 2019:

 

      Options outstanding     Options exercisable  
Exercise price    

Number of

shares

   

Weighted

average

remaining

years

   

Weighted
average
exercise

price

   

Number of

shares

   

Weighted

average

exercise

price

 
                                             
$ 0.40       15,000       2.84               15,000          
$ 3.00       312,500       3.71               312,500          
$ 3.50       2,396,119       8.60               1,468,022          
$ 4.00       8,791       0.53               8,791          
$ 5.00       118,500       1.63               118,500          
$ 11.42       16,000       2.18               16,000          
          2,866,910       7.44     $ 3.54       1,938,813     $ 3.55  

 

The weighted-average grant-date fair values of options granted during the nine months ended September 30, 2019 was $1,661,524 ($2.64 per share) and for the year ended December 31, 2018 was $2,801,944 ($2.79 per share). As of September 30, 2019, there were unvested options to purchase 928,097 shares of common stock. Total expected unrecognized compensation cost related to such unvested options is $2,338,897 which is expected to be recognized over a period of 31 months.

 

Stock option-based compensation expense totaled $329,424 and $151,713 for the three months ended September 30, 2019 and 2018, respectively, and $1,531,528 and $457,333 for the nine months ended September 30, 2019 and 2018, respectively.

 

Stock options outstanding as of September 30, 2019 as disclosed in the above table, have an intrinsic value of $202,750.

 

35

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

    

22. INTEREST EXPENSE

 

Interest expense consists of the following:

 

  

Three months

ended

September 30,

2019

  

Three months

ended

September 30,

2018

   Nine months
ended
September 30,
2019
  

Nine months

ended

September 30,

2018

 
                 
Imputed interest  $(76,381)  $(74,769)  $(207,535)  $(224,307)
Warrant and Series C Preferred stock valuation charge   (1,766,904)   -    (1,766,904)   - 
Debt discount   (1,350,987)   (323,398)   (1,706,706)   (1,017,408)
Interest expense   (589,574)   (417,071)   (1,668,365)   (1,123,916)
Other   242    -    -    (539)
   $(3,783,604)  $(815,238)  $(5,349,510)  $(2,366,170)

 

23. NET LOSS PER COMMON SHARE

 

Basic loss per share is based on the weighted-average number of common shares outstanding during each period. Diluted loss per share is based on basic shares as determined above, plus the incremental shares that would be issued upon the assumed exercise of “in-the- money” stock options and warrants using the treasury stock method and the inclusion of all convertible securities, including preferred stock and convertible notes, assuming these securities were converted at the beginning of the period or at the time of issuance, if later. The computation of diluted net loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share.

 

 For the three months and nine months ended September 30, 2019 and 2018, the following options, warrants and convertible loans were excluded from the computation of diluted loss per share as the result of the computation was anti-dilutive:

 

  

Three and

nine months

ended

September 30,

2019

  

Three and

nine months

ended

September 30,

2018

 
         
Stock options   2,866,910    1,322,681 
Warrants   5,446,169    4,703,323 
Convertible securities   1,542,835    799,988 
    9,855,914    6,825,992 

 

36

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

24. RELATED PARTIES

 

Richard Cunningham

On April 30, 2019, the Company issued ten year options exercisable over 154,616 shares of common stock at an exercise price of $3.50 per share, with immediate vesting.

 

Douglas Krafte

On April 30, 2019, the Company issued ten year options exercisable over 75,267 shares of common stock at an exercise price of $3.50 per share, with immediate vesting.

 

Michael Taglich

On August 26, 2019, the Company issued a $250,000 Subordinated Promissory Note (“SBN”) to Mr. Michael Taglich. The SBN earn Payment in Kind (“PIK”) interest at a rate of 15% per annum based on a 360 day year and matures on February 28, 2023. In conjunction with the issuance of the SBN, the Company issued Mr. Michael Taglich 71,428 shares of Series C Preferred Stock and seven year warrants exercisable for 71,428 shares of common stock at an exercise price of $3.50 per share, expiring on August 26, 2026.

 

Robert Taglich

On August 26, 2019, the Company issued a $250,000 Subordinated Promissory Note (“SBN”) to Mr. Robert Taglich. The SBN earn Payment in Kind (“PIK”) interest at a rate of 15% per annum based on a 360 day year and matures on February 28, 2023. In conjunction with the issuance of the SBN, the Company issued Mr. Robert Taglich 71,427 shares of Series C Preferred Stock and seven year warrants exercisable for 71,427 shares of common stock at an exercise price of $3.50 per share, expiring on August 26, 2026.

 

25. COMMITMENTS AND CONTINGENCIES

 

As a result of the agreements that the Company entered into with Pfizer Research (NC), the Company is obligated to; (i) make additional payments in terms of the Asset Purchase and Collaboration Agreement that it entered into on June 26, 2015 with Pfizer including beginning in 2017, a quarterly earn out payment (the “Earn Out Payment”) of 10% of revenue earned during the quarter, with a minimum payment of $250,000 per quarter, up to a maximum aggregate payment of $10,000,000, such minimum being reduced to $50,000 for the quarters ending March 2017 to December 2018 and the difference between $250,000 or the quarterly amount paid and the actual calculation of deferred purchase consideration at 10% of gross revenue per quarter is being deferred and paid as one lump sum with the payment being made the quarter ended March 31, 2019, bearing interest at 12.5% per annum, which interest is payable quarterly. The earn out payments are currently being renegotiated with Pfizer Research (NC).

 

On June 19, 2017, the Company entered into a four-year employment agreement with Douglas Krafte, Ph.D., pursuant to which Dr. Krafte is entitled to an annual base salary of $285,000 and will be eligible for annual discretionary performance bonus payments of up to 35% of his base salary payable in cash, which bonus, if any, will be awarded in the sole and absolute discretion of the Company’s board of directors and the compensation committee of the board of directors. Dr. Krafte continues to be engaged as the Company’s Chief Scientific Officer. On November 20, 2018, the Company approved an amendment to the Company’s employment agreement with Dr. Krafte, increasing his annual salary to Two Hundred Ninety Five Thousand Dollars ($295,000) and increasing his target bonus to up to 50% of his base salary.

 

On November 20, 2018, the Company approved an amendment to the Company’s employment agreement with Mr. Cunningham, increasing his annual salary to Three Hundred Seventy Five Thousand Dollars ($375,000). Mr. Cunningham continues to be the Company’s Chief Executive Officer.

 

37

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

25. COMMITMENTS AND CONTINGENCIES (continued)

 

On August 31, 2018, the Company, and its subsidiaries other than Icagen-T, Inc., entered into a Credit Agreement (the “Icagen Credit Agreement”) with such financial institutions from time to time a party thereto as lender, and Perceptive Credit Holdings II, LP, (the “Purchaser”), and Icagen-T entered into a Credit Agreement with the Purchaser (the “Icagen-T Credit Agreement” and together with the Icagen Credit Agreement, the “Credit Agreements”) pursuant to which the Purchaser advanced to the Company and Icagen-T, Inc., the aggregate principal sum of $15,250,000 pursuant to four year senior secured term loans, maturing on August 31, 2022, bearing interest at the rate of one month Libor plus 9.75%, with a minimum rate of 12% per annum (the “Term Loans”). The Term Loans amortize commencing on the last day of each month after August 31, 2020 at an amount equal to $152,500 (1.0% of the aggregate principal amount of $15,250,000).

 

On August 26, 2019, the Company issued Subordinated Promissory Notes (SBN’s”) in the aggregate principal amount of $500,000. The SBN’s earn Payment in Kind (“PIK”) interest at a rate of 15% per annum based on a 360 day year and matures on February 28, 2023.

 

On August 27, 2019, a Forbearance Agreement and First Amendment to the Icagen Credit Agreement and a Forbearance Agreement and First Amendment to the Icagen-T Credit Agreement were entered into, pursuant to which the Purchaser advanced to Icagen-T, Inc., the aggregate principal sum of $2,000,000 maturing on June 30, 2020, bearing PIK interest at the rate of 15% per annum, compounded monthly. The Company is also obligated to pay an exit fee of 5% ($100,000) on prepayment or maturity of the advance.

   

26. SUBSEQUENT EVENTS

 

The Company is not in compliance with the financial covenants and the affirmative covenants of the Credit Agreements and certain affirmative covenants set forth therein. Because the Company and its wholly-owned subsidiaries were in default, on August 27, 2019, a Forbearance Agreement and First Amendment to the Icagen Credit Agreements and a Forbearance Agreement and First Amendment to the Icagen-T Credit Agreement were entered into with the Purchaser (collectively, the “First Forbearance Agreements”) in order to temporarily stop the Purchaser from taking legal action to exercise its rights and remedies on the Term Loans until December 31, 2019 (Note 13, 15 and 25 above). In order to temporarily stop the event of default and prevent the Creditor from taking legal action and foreclosing on the assets of the Company, on January 13, 2020, a Forbearance Agreement and Second Amendment to the Icagen Credit Agreement and a Forbearance Agreement and Second Amendment to the Icagen-T Credit Agreement, was entered into (the “Second Forbearance Agreements”) with the Purchaser on January 13, 2020.

 

The Second Forbearance Agreements provided for an additional advance to Icagen-T of $1,000,000 (“Additional Advance”). The Additional Advance earns PIK interest at 15% per annum, compounded monthly and matures on June 30, 2020. In addition, the Company paid a commitment fee of 4% ($40,000) on the Additional Advance and is obligated to pay an exit fee of 5% ($50,000) upon prepayment or maturity of the Additional Advance.

 

The following condition precedent were met prior to entering into the Second Forbearance Agreements:

 

 The Company issued the Creditor an additional 1,900,000 shares of Series C Stock.

 

The Forbearance Agreements provide for a Standstill Termination which ends on January 31, 2020, thereby allowing the Creditor to accelerate the obligations and take any necessary action under the Term loan as disclosed in Note 13 above.

 

38

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

26. SUBSEQUENT EVENTS (continued)

 

The Company agreed to take the following actions under the Second Forbearance Agreements, the failure to do so would constitute events of default under the Term Loans:

 

  Sell the North Carolina Assets on or before February 15, 2020. In the event that the Loan Parties fail to achieve a sale of the North Carolina Business on or before February 15, 2020, then the Company shall issue an additional 600,000 Series C Preferred Stock to the Administrative Agent;
     
  Sell the Tucson facility on or before February 28, 2020, provided, that upon the sale of the North Carolina Business, the deadline for causing the sale is extended to July 15, 2020;

 

  Retain a real estate broker on or before March 31, 2020 to sell the Tucson facility that is owned by Icagen-T, Inc.; and

 

  Upon receipt of funds from the sale of the North Carolina Assets, make mandatory prepayments of the Term Loans in the aggregate amount of the lesser of: (i) the entire outstanding obligations owed to the Creditor which includes the Term Loan to Icagen-T, Inc. that the Corporation has guaranteed, and (ii) the net proceeds received from the sale of the Assets.

 

On February 12, 2020, a Forbearance Agreement and Third Amendment to the Icagen Credit Agreement and a Forbearance Agreement and Third Amendment to the Icagen-T Credit Agreement was entered into with the Purchaser (collectively, the “Third Forbearance Agreements”) in order to temporarily stop the Purchaser from taking legal action to exercise its rights and remedies under the Credit Agreements. The Purchaser has agreed, under the Icagen Inc., Third Forbearance Agreements, to cease any collection procedures under the loan agreements until the earlier of March 15, 2020, and under the Icagen-T, Inc., Third Forbearance Agreements, to cease any collection procedures under the loan agreements until the earlier of October 15, 2020 or in each of the above Forbearance Agreements, the occurrence of any one or more of the following events: (a) any Default or Event of Default under the Credit Agreements, in each case other than the existing defaults; (b) any failure by a loan party for any reason to comply with any term, condition, or provision contained in the Third Forbearance Agreements; (c) any representation made by a loan party in the Third Forbearance Agreements or pursuant to them that proves to be incorrect or misleading in any material respect when made; or (d) any Material Adverse Effect (as defined in the Credit Agreements) shall occur as determined in good faith by the Creditor. If any one of the above events occurs, that will be deemed a default under the Credit Agreements and the Creditor will again be permitted to take legal action to foreclose on the Term Loans.

 

The Company agreed to take the following actions under the Third Forbearance Agreements, the failure to do so would constitute events of default under the Term Loans:

 

  Sell the North Carolina Assets on or before March 15, 2020 and if not sold by March 15, 2020 then the Corporation must issue to the Creditor an additional 600,000 shares of Series C Preferred Stock;
     

Retain a real estate broker to sell the Tucson Facility that is owned by Icagen-T, Inc. on or before July 16, 2020; and

 

 

Upon receipt of funds from the sale of the North Carolina Assets, including funds received in connection with any earn out, make mandatory prepayments of the Term Loans in the aggregate amount of the lesser of: (i) the entire outstanding obligations owed to the Creditor which includes the Term Loan to Icagen-T, Inc. that the Corporation has guaranteed, and (ii) the net proceeds received from the sale of the Assets provided, however, that $5.45 million may be retained for working capital purposes after payment in full of amounts owed to the Purchaser under the Icagen Credit Agreement.

 

In addition, under the Third Forbearance Agreement to the Icagen-T Credit Agreement, Icagen-T has agreed to sell the Tucson Facility on or before August 15, 2020, for proceeds greater than $20,000,000.

 

39

 

 

ICAGEN, INC.

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

26. SUBSEQUENT EVENTS (continued)

 

On January 13, 2020, the Company by written consent of the majority of its stockholders resolved to increase the designated number of Series C Convertible Redeemable Preferred Stock (“Series C Stock”) from 2,242,857 shares to 4,742,857 shares. Immediately after this resolution, the Company issued Perceptive 1,900,000 shares of Series C Stock in terms of the Second Forbearance agreements above.

 

On February 11, 2020, the Company, and its wholly-owned subsidiaries Icagen Corp., XRPro Sciences, Inc., and Caldera Discovery, Inc. (collectively, the “Sellers”) entered into an Asset Purchase Agreement (“APA”) with Adjacent Acquisition Co, LLC (“Buyer”), a subsidiary of Ligand Pharmaceuticals, Inc. (“Ligand”), for the sale to Buyer of all of the Seller’s assets that are located in its Durham, North Carolina facility. Those assets include, but are not limited to, our research and development operations focused on ion channels and transporters, High Throughput Screening and lead optimization technology, assay development and x-ray fluorescence-based assays (the “Asset Sale”). These assets represent a significant portion of the assets of the Company. The proceeds of the sale will be used to pay 100% of the principal, plus an early settlement penalty of 8%, of the Icagen Inc. Term Loan owed to the Purchaser and any transaction costs. The net proceeds received after a $5.45 million working capital allowance, will be used to repay a portion of the principal of the Icagen-T Term Loan, plus an early settlement penalty of 8% on that portion of the Icagen-T loan prepaid, which Term Loans are currently in default but are subject to forbearance conditioned upon the closing of the Asset Sale.

 

Buyer will pay to the Company a base consideration of $15.0 million subject to a working capital adjustment (“base consideration”) and less: (x) the indemnity escrow of $1.25 million to be held in a bank (“Indemnity Escrow”), an estimated $8.3 million to be paid directly to the Purchaser whose loans to the Company are currently in default by the Company. In addition, Buyer will assume certain liabilities of the Company, including but not limited to, certain contracts, including those related to the assets being transferred, net negative working capital and the accrued but unpaid time off for employees of the North Carolina Facility that are hired by Buyer. After the payment to the Purchaser, Icagen Inc will no longer have any indebtedness under its Term Loan and Icagen-T will continue to owe the Purchaser the principal balance of approximately $10.8 million, which are guaranteed by the Sellers, that the Company anticipates repaying in full after the sale of the Tucson Facility.

 

The Company and Buyer have also agreed to an earn out whereby Buyer could pay future consideration to the Company of up to $25 million upon the achievement of certain “milestones” by the North Carolina Facility, including but not limited to, up-front payments on collaboration agreements.

 

Other than disclosed above, the Company has evaluated subsequent events through the date of the unaudited condensed consolidated financial statements were available to be issued and has concluded that no such events or transactions took place that would require disclosure herein.

 

40

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission on April 12, 2019. In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

 

Overview and financial condition

 

Icagen is a drug discovery company with a focus in Neuroscience and Rare Disease. The Icagen platform is unique as it integrates our current state of the art drug discovery engine along with an artificial intelligence (AI) computational platform that enables an accelerated path to drug discovery.

 

Our business model is focused on research collaborations and partnerships with large pharmaceutical and biotechnology companies and foundations who we partner with to support the discovery and development of innovative pharmaceuticals. These revenue-generating partnerships provide current funding while our co-owned pipeline of drug candidates provides the potential of additional significant long-term upside through milestone and royalty payments in new partnerships. The development and commercialization expense of these assets is being partially funded by our partners. In addition, the Company also retains a CRO-based fee-for-service revenue stream as a component of the business model.

 

For the past three years, a significant portion of our revenue has been derived from our operations as a partner research organization providing integrated drug discovery services with unique expertise in the field of ion channel, transporter, neuroscience and rare disease targets while also covering many other classes of drug discovery targets and therapeutic areas. Our customers are pharmaceutical and biotechnology companies to whom we offer our industry-leading scientific expertise and technologies to aid in their determination of which molecules to advance into late stage preclinical studies and ultimately clinical trials. The core of our offering is the discovery of pre-clinical drug candidates (PDC’s), which are lead molecules (Leads) that are selected to enter into in-vivo studies during the pre-clinical phase of drug discovery. We offer a full complement of pre-clinical drug discovery services which include; assay development technologies (including high throughput fluorescence, manual and automated electrophysiology and radiotracer flux assays), cell line generation, high-throughput and ultra-high-throughput screening, medicinal chemistry, computational chemistry and custom assay services to our customers. Our capabilities also include molecular biology and the use of complex functional assays, electrophysiology, bioanalytics and pharmacology. We believe that this integrated set of capabilities enhances our ability to help our customers identify drug candidates.

 

More recently, we have begun to focus on partnership and collaboration opportunities with third parties, and we have entered into two such collaborations that provide us with an opportunity to derive revenue not only from our standard fees for integrated early discovery services but also from future milestone and royalty revenue from product candidates that may be developed and commercialized with our aid. We have developed an in-house portfolio of assets targeting different indications that we believe would be ideal candidates for partnership opportunities.

 

Since inception, we have financed our operations primarily through private sales of our securities, including convertible debt and term loans, settlement of legal matters and revenue we generate from the services we provide and upfront payments received from collaborations. We have not generated sufficient revenue to meet our operating needs and have incurred significant debt in order to meet such needs, which debt is currently in default. As a result of the term loans (the “Term Loans’) that were entered into on August 31, 2018, pursuant to Credit Agreements with such financial institutions from time to time party thereto as lender, and Perceptive Credit Holdings II, LP, (the “Creditor”), and additional loans made pursuant to amendments to the Credit Agreements, we have outstanding debt owed to the Creditor in the principal amount of $18,250,000 and we have unsecured notes in the principal amount of $800,000 outstanding. We are not in compliance with the financial covenants and the affirmative covenants of the Term Loan and have entered into forbearance agreements with the Purchaser in order to temporarily stop the event of default and prevent the Creditor from taking legal action and foreclosing on our assets and the assets of our subsidiaries. The forbearance agreements which are described in more detail below require that we sell our assets that are located in its Durham, North Carolina facility by March 15, 2020 and that we sell the facility located in Tucson by August 15, 2020.

 

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Subsequent to our acquisition of certain assets from Pfizer and Sanofi, a substantial portion of our revenue has been derived from our operations as a partner research organization from two commercial customers. We have also entered into Master Services Agreements (“MSA”) with other various pharmaceutical companies where we have agreed to perform certain services for them.

 

For the three and nine months ended September 30, 2019, 97.2% of our revenue was derived from commercial revenue and 2.8% was derived from government revenue. For the year ended December 31, 2018, 100% of our revenue was derived from commercial revenues. For the year ended December 31, 2017, 56.2% of our revenue was derived from commercial revenues, 42.4% was derived from deferred subsidy revenue and 1.4% was generated from Government revenue. Despite generating funds from commercial customers and collaborations/partnerships, we continue to experience losses and during 2018 raised money from the issuance of our Series C Preferred Stock and Term Loan and $5,000,000 in up-front fee that we received from Roche, in 2019, we raised funds from our Term Loans and our Subordinated Notes in order to fund our operations. We believe that our existing cash and cash equivalents, and the $2,800,000 that we raised from our sale of shares of Series C Preferred Stock, the $500,000 that we raised from the sale of our Subordinated Notes and the $17,250,000 that we raised from the sale of the Term Loans, of which $10,200,000 was used to repay our convertible debt, will not be sufficient to meet our anticipated cash needs for the next twelve months. We will need to generate additional revenue from operations and/or obtain additional financing to pursue our business strategy, to respond to new competitive pressures or to take advantage of opportunities that may arise. These factors raise substantial doubt of our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2018 with respect to this uncertainty.

 

Prior to our acquisition of the Icagen assets, substantially all of our revenue was derived from government grants related to the use of our XRpro technology. To date, we had been granted twenty-two grants and contracts from United States governmental agencies; of which nine were granted from the Department of Defense and thirteen were granted from the National Institutes of Health. We currently have one grant still active with the NIH.

 

As a result of the agreements that we entered into with Pfizer Research (NC) we have incurred significant obligations including the obligation: (i) make additional payments in terms of the Asset Purchase and Collaboration Agreement that we entered into on June 26, 2015 with Pfizer including beginning in 2017, a quarterly earn out payment (the “Earn Out Payment”) of 10% of revenue earned during the quarter, with a minimum payment of $250,000 per quarter, up to a maximum aggregate payment of $10,000,000, such minimum being reduced to $50,000 for the quarters ending March 2017 to December 2018 and the difference between $250,000 or the quarterly amount paid and the actual calculation of deferred purchase consideration at 10% of gross revenue per quarter was deferred, bearing interest at 12.5% per annum, which interest is payable quarterly. We are currently renegotiating the earn out payments with Pfizer Research NC.

 

Discussions with respect to our operations included herein include the operations of our operating subsidiaries, Icagen Corp and Icagen-T, Inc. We have another two subsidiary companies, Caldera Discovery Inc. and XRpro Sciences Inc., which have always been dormant.

 

RECENT DEVELOPMENTS

 

Sale of North Carolina Business

 

On February 11, 2020, we, and our wholly-owned subsidiaries Icagen Corp., XRPro Sciences, Inc., and Caldera Discovery, Inc. (collectively, the “Sellers”) entered into an Asset Purchase Agreement (the “APA”) with Adjacent Acquisition Co., LLC (“Buyer”), a subsidiary of Ligand Pharmaceuticals, Inc., a Delaware corporation (“Ligand”), for the sale to Buyer of all of the Seller’s assets that are located in its Durham, North Carolina facility (the “Assets”). Those assets include, but are not limited to, our research and development operations focused on ion channels and transporters, High Throughput Screening and lead optimization technology, assay development and x-ray fluorescence-based assays (the “Asset Sale”). These Assets represent a significant portion of our assets. The proceeds of the sale will be used to pay the Term Loans owed to the Purchaser, which loans are currently in default but are subject to forbearance until March 15, 2020, as described below, provided that no new default occurs before such date.

 

The APA provides that Buyer will pay to us a base consideration of $15.0 million subject to a working capital adjustment (“base consideration”) and less: (x) the indemnity escrow of $1.25 million to be held in a bank (“Indemnity Escrow”), (y) approximately $8.3 million to be paid directly to the lender whose Term Loans are currently in default. In addition, Buyer will assume certain liabilities of ours, including but not limited to, certain contracts, including those related to the assets being transferred, net negative working capital and the accrued but unpaid time off for employees of the North Carolina Facility and Tucson Facility that are hired by Buyer.

 

The Company and Buyer have also agreed to an earn out whereby Buyer could pay future consideration to the Company of up to $25 million upon the hitting of certain “milestones” by the North Carolina Facility, including but not limited to, up-front payments on collaboration agreements. It is anticipated that any the future earn out payments will be used primarily to repay the Term Loans that are currently in default and subject to forbearance.

 

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We have: (i) made certain usual and customary representations and warranties in the APA, with noted exceptions, to Buyer in connection with the Asset Sale including providing Buyer, subject to a confidentiality agreement, with non-public information regarding the financial condition, results of operations, cash flows and projections relating to the business of the North Carolina Facility, (ii) agreed not to market the noted assets to another party, and to terminate certain affiliate agreements; (iii) released Buyer for any claims that we may have against Buyer relating to the assets sold that arise prior to the closing date; (iv) agreed to change our corporate name and any subsidiary with a similar name after the closing; (v) agreed not to compete with Buyer for the later of (x) five years after the last payment to us under the Earn out, or (y) the fifth anniversary of the closing date (except our directors and officers are subject only to a one year restriction); (vi) agreed not to solicit or employ any of its employees who are hired by Buyer or any of its former customers, vendors licensees, licensors or suppliers; (vii) agreed not to disclose any proprietary information of the North Carolina Facility.

 

Our representations and warranties will survive for one year after the closing date, although certain representations and warranties will survive until December 31, 2027 and its covenants will survive until they are fully performed. We have agreed to indemnify Buyer for any material breach thereof, which indemnity will be limited as follows: (i) no single breaches under $15,000 will be claimable; (ii) no breaches will be indemnified until the total amount of all damages (as defined in the APA) exceeds $150,000 plus 1% of the payments made under the earn out (the “Basket Amount”). Once the total amount of such damages exceeds the Basket Amount, then Buyer will be entitled to be indemnified and held harmless against and compensated and reimbursed for the entire amount of such damages, and not merely the portion of such damages exceeding the Basket Amount. The indemnity will be enforced against the Indemnity Escrow with any deficiency claimable against us up to the limit of the total base consideration and the amounts paid under the earn out net of any insurance recoveries. Any escrow not paid to Buyer at the end of the escrow period will be paid to us by the bank holding such funds.

 

The APA may be terminated: (i) by the parties by mutual agreement; (ii) by us or Buyer if it has not closed by April 10, 2020; (ii) by us or Buyer if there is a breach of the APA by us prior to the closing; (iii) by Buyer if there has occurred a material adverse event to us prior to the closing; (iv) by Buyer if there is a governmental order or other action restraining or prohibiting the closing; (v) by us or Buyer if our stockholders fail to approve the APA; or (vi) by Buyer, if we sell the assets to another buyer. If we fail to obtain stockholder approval or sells the Assets to another buyer at a time when an offer by another buyer has been publicly disclosed, we will be obligated to pay Buyer a termination fee of $1,000,000.

 

The obligations of Buyer to close the APA are subject to certain conditions that must be satisfied or waived by Buyer on or before the closing date, including but not limited to: (i) our representations and warranties set forth in the APA must be true and correct in all material respects; (ii) we and our subsidiaries must have performed all of their covenants in the APA in all material respects; (iii) all liens on the Assets to be sold to Buyer must have been released; (iv) no law is in existence, and there are no legal proceedings, that would make the closing of the Asset Sale illegal or would prohibit the closing; (iv) at least 90% of the employees of the North Carolina Facility have accepted offers of employment from Buyer; and (v) we have completed the restructuring of its obligations with the Purchaser to the satisfaction of Buyer.

 

The obligation of us and our subsidiaries to close the APA are subject to certain conditions that must be satisfied or waived by us on or before the closing date, including but not limited to: (i) the representations and warranties of Buyer set forth in the APA must be true and correct in all material respects; (ii) Buyer must have performed all of its covenants in the APA in all material respects; and (iii) no law is in existence, and there are no legal proceedings, that would make the closing of the Agreement illegal or would prohibit the closing.

 

The closing of the Asset Sale is to occur after the date that is 20 days after the mailing of an Information Statement on Schedule 14C to our stockholders.

 

The foregoing description of the terms of the APA, does not purport to be complete and is qualified in its entirety by reference to the full text of the APA, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and the related Support and Voting Agreement, a copy which is filed as Exhibit 10.2 to this to this Quarterly Report on Form 10-Q.

 

Forbearance Agreements

 

First Forbearance Agreement

 

As stated above we are not in compliance with the financial covenants and the affirmative covenants of the Term Loan. In order to temporarily stop the event of default and prevent the Creditor from taking legal action and foreclosing on our assets, on August 27, 2019, a Forbearance Agreement and First Amendment to the Icagen Credit Agreement and a Forbearance Agreement and First Amendment to the Icagen-T Credit Agreement (collectively, the “First Forbearance Agreements”) were entered into, pursuant to which the Creditor advanced to Icagen-T, Inc., the aggregate principal sum of $2,000,000 maturing on June 30, 2020, bearing Payment In Kind (“PIK”) interest at the rate of 15% per annum, compounded monthly. We are also obligated to pay an exit fee of 5% ($100,000) on prepayment or maturity of the advance. Pursuant to the First Forbearance Agreements we issued to the Creditor warrants to purchase 599,991 shares of our common stock and 599,991 shares of our Series C Preferred Stock.

 

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Second Forbearance Agreements

 

On January 13, 2020, a Forbearance Agreement and Second Amendment to the Icagen Credit Agreement and a Forbearance Agreement and Second Amendment to the Icagen-T Credit Agreement, was entered into (the “Second Forbearance Agreements”) with the Creditor. The Second Forbearance Agreements provided for an additional advance to Icagen-T of $1,000,000 (“Additional Advance”). The Additional Advance earns PIK interest at 15% per annum, compounded monthly and matures on June 30, 2020. In addition, the Company paid a commitment fee of 4% ($40,000) on the Additional Advance and is obligated to pay an exit fee of 5% ($50,000) upon prepayment or maturity of the Additional Advance. Pursuant to the Second Forbearance Agreements we issued to the Creditor 1,900,000 shares of our Series C Preferred Stock.

 

The Second Forbearance Agreements provided for a Standstill Termination until January 31, 2020.

 

We have agreed to take the following actions under the Second Forbearance Agreements, the failure to do so would constitute events of default under the Term Loans:

 

  Sell the North Carolina Assets on or before February 15, 2020. In the event that the Loan Parties fail to achieve a sale of the North Carolina Business on or before February 15, 2020, then the Company shall issue an additional 600,000 Series C Preferred Stock to the Administrative Agent;

 

  Sell the Tucson facility on or before February 28, 2020, provided, that upon the sale of the North Carolina Business, the deadline for causing the sale is extended to July 15, 2020;

 

  Retain a real estate broker to sell the Tucson facility that is owned by Icagen-T, Inc. on or before March 31, 2020; and

 

  Upon receipt of funds from the sale of the North Carolina Assets, make mandatory prepayments of the Term Loans in the aggregate amount of the lesser of: (i) the entire outstanding obligations owed to the Creditor which includes the Term Loan to Icagen-T, Inc. that the Corporation has guaranteed, and (ii) the net proceeds received from the sale of the Assets.

 

Third Forbearance Agreements

 

On February 12, 2020, a Forbearance Agreement and Third Amendment to the Icagen Credit Agreement and a Forbearance Agreement and Third Amendment to the Icagen-T Credit Agreement was entered into with the Creditor (collectively, the “Third Forbearance Agreements”) in order to temporarily stop the Creditor from taking legal action to exercise its rights and remedies under the Credit Agreements. The Creditor has agreed, under the Icagen Third Forbearance Agreement, to cease any collection procedures under the loan agreements until the earlier of March 15, 2020 and under the Icagen-T Third Forbearance Agreement, to cease any collection procedures under the loan agreements until the earlier of October 15, 2020 or, under both the Icagen and Icagen-T Forbearance Agreements, the occurrence of any one or more of the following events: (a) any Default or Event of Default under the Credit Agreements, in each case other than the existing defaults; (b) any failure by a loan party for any reason to comply with any term, condition, or provision contained in the Third Forbearance Agreements; (c) any representation made by a loan party in the Third Forbearance Agreements or pursuant to them that proves to be incorrect or misleading in any material respect when made; or (d) any Material Adverse Effect (as defined in the Credit Agreements) shall occur as determined in good faith by the Creditor. If any one of the above events occurs, that will be deemed a default under the Credit Agreements and the Creditor will again be permitted to take legal action to foreclose on the Term Loans.

 

We have agreed to take the following actions under the Third Forbearance Agreements, the failure to do so would constitute events of default under the Term Loans:

 

  Sell the North Carolina Assets on or before March 15, 2020 and if not sold by March 15, 2020 then the Corporation must issue to the Creditor an additional 600,000 shares of Series C Preferred Stock;

 

Retain a real estate broker to sell the Tucson Facility that is owned by Icagen-T, Inc. on or before July 16, 2020; and

 

 

Upon receipt of funds from the sale of the Assets, including funds received in connection with any earn out, make mandatory prepayments of the Term Loans in the aggregate amount of the lesser of: (i) the entire outstanding obligations owed to the Creditor which includes the Term Loan to Icagen-T, Inc. that the Corporation has guaranteed, and (ii) the net proceeds received from the sale of the Assets, provided, however, that $5.45 million may be retained for working capital purposes after payment in full of amounts owed to the Purchaser under the Icagen Credit Agreement.

 

In addition, under the Third Forbearance Agreement to the Icagen-T Credit Agreement, Icagen-T has agreed to sell the Tucson Facility on or before August 15, 2020 for proceeds of greater than $20,000,000.

 

The foregoing descriptions of the terms of the First Forbearance Agreements, the Second Forbearance Agreements and the Third forbearance Agreements do not purport to be complete and are qualified in their entirety by reference to the full text of each, copies of which are filed as Exhibits 4.1, 4.2, 4.3, 4.4, 4.5 and 4.6, respectively to this Quarterly Report on Form 10-Q.

 

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Results of Operations for the three months ended September 30, 2019 and the three months ended September 30, 2018

 

Revenues

 

Revenues were $3,599,372 and $3,007,928 for the three months ended September 30, 2019 and 2018, respectively, representing an increase of $591,444 or 19.7%. The increase in revenue over the prior year is due to the recognition of deferred revenue and FTE fees on the Roche Collaboration agreement during the current period.

 

Government revenue was $115,505 and $0, representing 3.2% and 0% of total revenue, respectively for the three months ended September 30, 2019 and 2018, respectively.

 

We continue to market our services to several pharmaceutical and biotechnology companies with a bias towards collaborative drug discovery arrangements. We believe that we have a comprehensive product offering and substantial credibility to offer a full range of products including the advantages and value propositions of the XRpro® technology. While we are optimistic about our prospects, there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for us to be profitable.

 

Cost of sales

 

Cost of sales was $3,109,302 and $1,377,571 for the three months ended September 30, 2019 and 2018, respectively, an increase of $1,731,731 or 125.7%. Cost of sales is primarily comprised of direct expenses related to providing our services to our customers. These direct expenses include salary expenses directly related to our statements of work and research contracts including those of our scientific personnel, recoverable expenses incurred on contracts, the cost of outside consultants, and direct materials used on our contracts.

 

  The salary expense included in cost of sales sold for the three months ended September 30, 2019 and 2018, respectively was $1,849,098 and $358,365, an increase of $1,490,733 or 416.0%. The increase is primarily due to the number of scientific people allocated to the Roche contract and the CFF contract during the current period and the reversal of bonus accrual of approximately $1,394,500 in the prior period. For additional information regarding salary expense reference is made to the discussion of total salary expense in Selling, general and administrative expenses below.

 

  The laboratory supplies and direct materials included in cost of sales for the three months ended September 30, 2019 and 2018, respectively was $948,137 and $871,381, an increase of $76,756 or 8.8%, the increase is primarily due to the collaboration agreement entered into with Roche during December 2018.

 

  Outside contractors’ cost included in cost of sales sold for the three months ended September 2019 and 2018, respectively, amounted to $312,067 and $147,825 an increase of $164,242 or 111.1% which is due to an increase in outside contractor costs utilized on internal research projects and additional work performed on the CFF and Roche collaboration agreements.

 

Gross profit

 

Gross profit was $490,070 and $1,630,357 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $1,140,287 or 69.9%. The decrease in gross profit is primarily due to the increase in cost of sales due to increased salary expenses related to revenue generated from the new collaboration projects and the release of accrued bonuses in the prior period.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses was $2,123,830 and $2,382,648 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $258,818 or 10.9%.

 

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The major expenses making up selling, general and administrative expenses included the following:

 

   Three months ended
September 30,
   Increase/   Percentage 
   2019   2018   (decrease)   change 
                 
Marketing and selling expenses  $4,943   $9,183   $(4,240)   (46.2)%
Payroll expense   451,607    399,792    51,815    13.0%
Research and development salaries   115,975    696,823    (580,848)   (83.4)%
Directors fees   55,000    55,000    -    -%
Stock option compensation expense   329,424    151,713    177,711    117.1%
Legal fees   103,259    28,976    74,283    256.4%
Consulting fees   176,688    118,633    58,055    48.9%
Facilities expense   660,623    607,342    53,281    8.8%
Travel expenditure   45,434    57,982    (12,548)   (21.6)%
Other expenses   180,877    257,204    (76,327)   (29.7)%
   $2,123,830   $2,382,648   $(258,818)   (10.9)%

 

The decrease in marketing expenditure over the prior period is primarily due a change in strategy with less reliance placed on developing a comprehensive Contract Research Organization (“CRO”) business model and focusing on collaborative agreements with specific customers, therefore less marketing effort was required during the current period.

 

Total salary expenses are allocated to the various expense categories detailed below depending on the level of activity of our employees on our commercial projects, internal research and development expenses and administrative activities. An increase in activity on projects will result in an increase in salary expense charged to cost of sales with a corresponding decrease in salary expense charged to research and development. A comparison of salary expenses is presented below.

 

Total salary expenditure for the three months ended September 30, 2019 and 2018, respectively is included in the following expense categories:

 

   Three months ended
September 30,
   Increase/   Percentage 
   2019   2018   (decrease)   change 
                 
Cost of sales  $1,849,098   $358,365   $1,490,733    416.0%
Selling, general and administrative expenses   451,607    399,792    51,815    13.0%
Research and development salaries   115,975    696,823    (580,848)   (83.4)%
   $2,416,680   $1,454,980   $961,700    66.1%

 

The increase in total salary expenditure of $961,700 or 66.1% is primarily due to the reversal of bonus accruals in the prior period of approximately $1,394,500. After factoring in the bonus accrual reversal, the overall salary expenditure decreased by $432,848, primarily due to the restructure of the Tucson management team and the streamlining of our operations.

 

The payroll expense charged to cost of sales increased by $1,490,733, primarily due to the reversal of the bonus accrual in the prior period, the bulk of which was for laboratory employees, after taking the bonus accrual reversal into account, the slight increase in payroll expenses was due to the shift in allocation of salaries expenditure to cost of sales as more resources are allocated to the Roche and CFF collaboration projects.

 

The payroll expense charged to Selling, general and administrative expenses increased by $51,815 or 13.0%, primarily due to the reduction in the bonus provision in the prior period, as discussed above.

 

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The research and development salaries decreased by $580,848 or 83.4% primarily due to the increased allocation of salary expenditure to costs of sales as more resources are allocated to the CFF and Roche collaboration projects and the streamlining of operations at our Tucson facility by the reduction in scientific staff.

 

Directors’ cash fees remained the same as the prior year, with no increase in directors’ headcount and with approved fees retained at prior year levels.

 

The stock option compensation charge increased by $177,711 or 117.1%. The charge for each period is dependent upon the number of options granted, any new options issued, the value of the options and the vesting schedule of these options. During 2019 we issued an additional 628,883 options to purchase shares of common stock to our employees. These options resulted in an increased expense in the current period as 229,883 of these options vested immediately with the balance vesting over a period of thirty six months.

 

Legal fees increased by $74,283 or 256.4%. The increase is primarily due to an increase in our general corporate legal fees incurred on the negotiations of the debt amendments which took place during the current period.

 

The increase in consulting fees of $58,055 or 48.9% is primarily due to the increase in technical consulting and management fees of scientific experts.

 

Facilities expense increased by $53,281 or 8.8%, primarily due to the increase in rental expenditure at our Durham facility.

 

Travel expenditure decreased by $12,548 or 21.6% primarily due to reduced travel incurred by our management and senior leadership teams between sites.

 

Other expenses represent various individually insignificant expenses which have decreased by an overall $76,327 primarily related to the reduction in staff at our Tucson facility and our efforts to reduce overall expenditure.

 

Depreciation and Amortization

 

Depreciation expense was $323,887 and $364,712 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $40,825 or 11.2%. The depreciation expense is primarily made up of depreciation of our laboratory equipment and software licensing, which makes up the majority of our capital assets. The decrease is attributable to the evaluation of our software licenses, several of which we did not renew and the reduction in the number of licenses purchased due to the reduction in headcount.

 

Amortization expense was $56,246 for the three months ended September 30, 2019 and 2018.

 

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Other income

 

Other income was $878 and $118,834 for the three months ended September 30, 2019 and 2018, respectively, a decrease of $117,956 or 99.3%. Other income consisted of proceeds received from assets disposed of by an agent on our behalf. Other income in the prior period was for non-revenue pass through costs charged to our customers in the prior year.

 

Interest expense

 

Interest expense was $3,783,604 and $815,238 for the three months ended September 30, 2019 and 2018, respectively, an increase of $2,968,366 or 364.1%.

 

The interest expense consists of the following;

 

  Imputed interest cost of $76,381 and $74,769 for the three months ended September 30, 2019 and 2018, respectively, an increase of $1,612, the imputed interest is based on the length of time to repay the Pfizer deferred purchase consideration based on our future revenue projections and minimum payments we are required to make and the accrual of the short term loan exit fee we are required to make.

 

  Warrant and Series C stock valuation charge of $1,766,904 and $0 for the three months ended September 30, 2019 and 2018, respectively, an increase of $1,766,904, the charge relates to the value of the warrants and the excess of the series C stock over the value of the debt issued to the subordinated promissory note holders and the short term note holders during the current period. The value of the warrants was determined using a Black Scholes valuation model.

 

  The amortization of debt discount of $1,350,987 and $323,981 for the three months ended September 30, 2019 and 2018, respectively, an increase of $1,027,006 or 317.0%, The increase is primarily due to; (i) an acceleration of the amortization of the debt discount on the term loans of $944,504 due to the anticipated repayment date of these loans as specified in the Forbearance Agreements; and (ii) the amortization of discount associated with the Series C Stock issued in conjunction with the subordinated promissory notes and the short term note advanced by perceptive during the current period.

 

  Interest expense of $589,574 and $417,071 for the three months ended September 30, 2019 and 2018, respectively, an increase of $172,503 or 41.4%, the increase is primarily due to the increase in borrowing from $10,000,000 in 2018 to $17,250,000 in 2019, the interest due on bridge notes, subordinated promissory notes and the interest incurred on the Pfizer deferred purchase consideration;

 

  Other interest was $(242) and $0 for the three months ended September 30, 2019 and 2018, respectively.

  

Derivative liability movement

 

Derivative liability movement was a gain of $129,033 and a loss of $(300,665) for the three months ended September 30, 2019 and 2018, respectively, a net movement of $429,698. The credit during the current period represents the mark to market of the derivative liability calculated on the warrants issued with the prior period convertible debt and the Series C Preferred stock warrants, with possible cash settlement upon the occurrence of a fundamental event.

 

Net loss

 

Net loss was $5,707,586 and $2,247,059 for the three months ended September 30, 2019 and 2018, respectively, an increase of $3,460,527 or 154.0%. The increase in net loss is attributable to the reduction in gross profit, primarily due to the allocation of salary expenditure to collaboration projects and the increase in interest expense due primarily to the acceleration of the amortization of the debt discount on the Term loan and the charge incurred on the value of the Series C warrants and Series C stock issued during the period, offset by the reduction in selling, general and administrative expenses and the net reduction in derivative liability movements.

 

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Preferred stock dividends

 

Preferred stock dividends was $113,918 and $80,548 for the three months ended September 30, 2019 and 2018, respectively. The increase is attributable to the increase in the number of Series C Stock issued in conjunction with the subordinated promissory notes and the short term notes payable.

 

Net loss available to common stockholders

 

The net loss available to common stockholders was $5,821,504 and $2,327,607 for the three months ended September 30, 2019 and 2018, respectively, an increase of $3,493,897 or 150.1%. This is due to the reasons discussed above.

 

Results of Operations for the nine months ended September 30, 2019 and the nine months ended September 30, 2018.

 

Revenue

 

We had revenue totaling $10,965,410 and $10,465,046 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $500,364 or 4.8%. Revenue includes services revenue of $10,660,330 (representing 97.2% of total revenue) and $10,465,046 (representing 100% of total revenue) for the nine months ended September 30, 2019 and 2018, respectively, an increase of $195,284 or 1.9%. Government revenue was $305,080 and $0 (representing 2.8% and 0% of total revenue, respectively) for the nine months ended September 30, 2019 and 2018, respectively.

 

We continue to market our services to several pharmaceutical and biotechnology companies. We believe that we now have a comprehensive product offering and substantial credibility to offer a full range of products including our proprietary XRPro® technology. While we are optimistic about our prospects, there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for us to be profitable.

 

Cost of sales

 

Cost of sales totaled $8,078,648 and $6,898,815 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $1,179,833 or 17.1%. Cost of sales is primarily comprised of direct expenses related to providing our services to our customers. These direct expenses include salary expenses directly related to our statements of work and research contracts including those of our scientific personnel, recoverable expenses incurred on contracts, the cost of outside consultants, and direct materials used on our contracts.

 

  The salary expense included in cost of sales for the nine months ended September 30, 2019 and 2018 respectively was $4,644,398 and $3,661,117, an increase of $983,281 or 26.9%. The increase is primarily due to the reduction in the bonus accrual and the increase in the number of laboratory staff working on our collaboration projects, as discussed under total salary expense in Selling, general and administrative expenses below.

 

  The laboratory supplies and direct materials included in cost of sales for the nine months ended September 30, 2019 and 2018, amounted to $2,708,253 and $2,863,535 a decrease of $155,282 or 5.4%, which decrease is primarily due to the reduction in usage of expensive consumables on current business, these consumables expenses are generally passed through to our customers at low margins.  

 

  Outside contractors’ cost included in cost of sales for nine months ended September 30, 2019 and 2018, respectively, amounted to $725,996 and $374,163 an increase of $351,833 or 94.0% which is due primarily to outsourced labor on certain of our collaboration projects where we do not have the expertise to perform the work efficiently.

 

Gross profit

 

Gross profit amounted to $2,886,762 and $3,566,231 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $679,469 or 19.1%, primarily due to the reversal of the bonus accrual in the prior period, as discussed in cost of sales above.

 

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Selling, general and administrative expenses

 

Selling, general and administrative expenses was $7,878,300 and $8,023,292 for the nine months ended September 30, 2019 and 2018, respectively, a decrease of $144,992 or 1.8%.

 

The major expenses making up selling, general and administrative expenses included the following:

 

   Nine months ended
September 30,
   Increase/   Percentage 
   2019   2018   (decrease)   change 
                 
Marketing and selling expenses  $18,096   $55,734   $(37,638)   (67.5)%
Payroll expense   1,341,830    1,773,439    (431,609)   (24.3)%
Research and development salaries   1,440,851    2,232,601    (791,750)   (35.5)%
Directors fees   165,000    165,000    -    -%
Stock option compensation charge   1,531,528    457,333    1,074,195    234.9%
Legal fees   265,763    260,175    5,588    2.1%
Consulting fees   452,833    382,942    69,891    18.3%
Facilities expense   1,784,103    1,874,330    (90,227)   (4.8)%
Travel expenditure   185,694    106,535    79,159    74.3%
Other   692,602    715,203    (22,601)   (3.2)%
   $7,878,300   $8,023,292   $(144,992)   (1.8)%

  

 The decrease in marketing expenditure over the prior period is primarily due a change in strategy with less reliance placed on developing a comprehensive CRO business model, therefore less marketing effort was required during the current period.

 

Total payroll expenses are allocated to the various expense categories detailed below:

 

   Nine months ended
September 30,
  Increase/  Percentage
   2019  2018  (decrease)  change
             
Cost of sales  $4,644,398   $3,661,117   $983,281    26.9%
Selling, general and administrative expenses   1,341,830    1,773,439    (431,609)   (24.3)%
Research and development salaries   1,440,851    2,232,601    (791,750)   (13.7)%
   $7,427,079   $7,667,157   $(240,078)   (3.1)%

 

The decrease in total payroll expenditure of $240,078 is primarily due to the restructure of our Tucson management team and the streamlining of our operations. Included in the prior period was a reversal of a bonus accrual of $1,394,500, after factoring this into account, salary expenditure decreased by approximately $1,614,500 over the prior period.

 

The payroll expense charged to cost of sales increased by $983,281, primarily due to the reversal of the bonus accrual in the prior period, the bulk of which was for laboratory employees, after taking the bonus accrual reversal into account, the slight increase in payroll expenses was due to the shift in allocation of salaries expenditure to cost of sales as more resources are allocated to the Roche and CFF collaboration projects.

 

The payroll expense charged to Selling, general and administrative expenses decreased by $431,609, primarily due to the restructure of our Tucson management team and the reduction in the bonus provision in the prior period, as discussed above.

 

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The research and development salaries decreased by $791,750 primarily due to the increased allocation of salary expenditure to costs of sales as more resources are allocated to the CFF and Roche collaboration projects and the streamlining of operations at our Tucson facility by the reduction in scientific staff.

 

Directors’ cash fees remained the same as the prior year, with no increase in directors’ headcount and with approved fees retained at prior year levels.